Create a Portfolio You Don't Have to Babysit

Great Q&A starting @ 42 min. Very insightful

Published on 14 Jun 2012
In this special one-hour presentation, Morningstar director of personal finance Christine Benz and ETF expert Mike Rawson discuss how to build a low-maintenance, hands-free portfolio that will help you reach your financial goals.

Note to viewers: Filmed in late April 2012, this Morningstar presentation was part of Money Smart Week, a series of free classes and activities organized by the Federal Reserve Bank of Chicago and designed to help consumers better manage their personal finances. Morningstar is a Money Smart Week partner.

Download the presentation slides here:
http://im.mstar.com/im/moneysmartweek_presentation.pdf

John C. Bogle - The Battle for the Soul of Capitalism

Dean Lawrence R Velvel interviews John C. Bogle, founder of the Vanguard Group, Inc. and president of the Bogle Financial Markets Research Center, about his book The Battle for the Soul of Capitalism. Bogle analyses what went wrong in corporate america, from pension plans to corporate profits to mutual funds to stock options to corporate greed.


2 markets:  Business market and the Expectation market

@ 34.30 min - Owner capitalism is now transformed into a pathological mutant form where the managers have taken far too large a proportion of the share of the profits.  Today financial institutions own 68% of all stocks; they are traders and speculators mainly, playing in the expectation market.

@ 49.30 min - Costs of mutual funds.

@ 53 min - The magic of compounding returns.  The tyranny of compounding costs.  The tyranny of compounding costs overwhelmed the magic of compounding returns.  Get rid of costs and emotions.

Mr. John Bogle speaks on many issues related to investing. Don's listen to history.

Lange-Bogle 1: Investment vs. Speculation
Published on 4 Feb 2013
Noted IRA expert and estate planning attorney, James Lange, interviews Vanguard Group founder, John Bogle. Here, Jim discusses Mr. Bogle's history as a leader in the financial world and delves into a discussion of his newest book, The Clash of the Cultures: Investment vs. Speculation. Mr. Bogle explains his definitions of investment and speculation and tells us why he feels only one of these path creates wealth.


Lange-Bogle 2: Speculation - A Loser's Game
IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the cultures of investment and speculation. Investment is about long-term wealth creation by investing in the growth of corporations. The culture of speculation is akin to betting, and in John Bogle's perspective, the house always wins!



Lange-Bogle 3: What Hurts the Everyday Investor Now
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, go over the hard facts. Of the 33 trillion dollars that change hands every year in the markets, only 250 billion of it can be characterized as true investing. John Bogle speaks plainly about the mess Wall Street is in, and the role speculation has played in getting it there.



Lange-Bogle 4: Conflict of Interest in Our Broken System
John Bogle, founder of Vanguard, shares with Attorney and CPA Jim Lange, where he feels the system is broken and how we find ourselves in our current speculative culture. There is a critical conflict of interest that prevents our money managers, agents, and financial institutions from being true fiduciaries. Who is looking out for the interests of the shareholders?



Lange-Bogle 5: The 10 Gatekeepers of our Financial System
Noted IRA expert and estate planning attorney, James Lange and John Bogle, founder of Vanguard, discuss Bogle's broad indictment of the gatekeepers of our financial system in his newest book, "The Clash of the Cultures: Investment vs. Speculation." The gatekeepers of our system, according to Bogle, are more interested in the current price of stock, the speculative aspect of it, rather than the support of thriving companies and creation of long-term wealth for shareholders.



Lange-Bogle 6: The Cause of the Recession and How to Fix It
John Bogle, founder and former CEO of Vanguard, talks to Attorney and CPA, Jim Lange, about the terrible fraud perpetrated by mortgage companies and how the severed link between the borrower and the lender sent our economy into a tail spin. If Bogle were Czar, he would pass a federal statute eliminating conflicts of interest and demanding fiduciary duty of money managers.



Lange-Bogle 7: The Need for Full Disclosure
IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the need for an industry standard for full disclosure of not only potential conflicts of interest, but also the true cost of unreasonable fees and commissions. John Bogle feels that fees are often underestimated and if the public truly understood the costs of the investment choices they made, the world would be a different place in which to live and invest.



Lange-Bogle 8: "Don't do something, just stand there!"
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, talk about the history of success in indexing and how the passive strategy behind "Bogle's Folly" (the Vanguard 500 Index) went from foolishness to genius with decades of proven results. Active managers do not beat their benchmarks a strong majority of the time. Owning all the companies and holding them forever has been proven a winning strategy and, in Bogle's opinion, is the only way of being a true investor.



Lange-Bogle 9: Time is Your Friend, Impulse is Your Enemy.
James Lange, CPA/Attorney and host of The Lange Money Hour and John Bogle, founder of Vanguard, talk about the importance of not relying on past performance to predict future results and the miracle of compounding interest. Like the Law of Gravity, Reversion to the Mean is an eternal rule. What goes up must go down, even in the stock markets. Time is your friend (the miracle of compounding pays off hugely). Focus on the long term. Resist the impulse during periods of adversity and fear.



Lange-Bogle 10: Simple Rules for Investment Success
Noted IRA expert and estate planning attorney, James Lange and John Bogle, founder of Vanguard, go over a few of the "10 Simple Rules" laid out in Bogle's newest book, The Clash of the Cultures: Investment vs. Speculation. These are some new twists on classic Bogle investment advice, or "Bogleisms," including: "Buy Right and Hold Tight," "The Bagel and the Donut," "Forget the Needle, Buy the Haystack," and "Minimize the Croupiers Take." Beware of your market returns being overwhelmed by the tyranny of long term compounding of your costs.



Lange-Bogle 11: There is No Escaping Risk
Less volatility doesn't mean less risk. It means different risk. IRA expert and best-selling author, Jim Lange and John Bogle, founder of Vanguard, discuss the dangers of ignoring inflation risk. Many retired people do not want to incur any risk, but there is no escaping it. Over time inflation eats away at the value and purchasing power of your money. John Bogle explains that you need to incur some volatility and investment risk in order to build a retirement fund.

Lange-Bogle 12: Beware of Fighting the Last War

In this video, John Bogle, founder of Vanguard and CPA, attorney and best-selling author Jim Lange, review some of the investment wisdom imparted in Bogle's most recent book, The Clash of the Cultures: Investment vs. Speculation. Mr. Bogle warns us not to listen to history! As interesting as it may be, where investment is concerned, it doesn't repeat itself. The founder of Vanguard also suggests something you may not expect... throw your statements away and don't ever look at them!  Fox versus hedgehog.  The foxes know a lot of things but the hedgehogs know only ONE great thing.



James Lange Talks to John Bogle
John Bogle, founder of The Vanguard Group, tells James Lange his most important piece of advice for investors.

John Bogle: Keep Investing

2 Oct 2008

The founder and former CEO of Vanguard talks to Morningstar's Christine Benz about why to stay the course amid the financial crisis.

A sharp market decline is bad for sellers but it is very good for buyers.

Wealth, fame and power. One should re-define what success should be other than these.

Burton Malkiel: How to Invest

12 Feb 2010

Princeton economist Burton Malkiel says simplicity is key to a successful portfolio. He discusses emerging markets, index funds, and more with Eric Schurenberg.

Burton Malkiel: Timeless Lessons for Investors

1.  Buy and Hold.  Don't time the market

He started his talk by tackling the issue :  "In the light of the 2008 Global Financial Crisis when the market dropped almost 50%, is buy and hold is now dead?"
The best days in the market that gave the best returns were usually the few days that leaped from the bottom of the market.
Don't try to time the market.  It is dangerous.  You can't do it and you will make mistakes.

2.  Dollar Cost Averaging

You make more likely to make more money in a volatile time than a steadily rising market, but this is not always the case.  Of course, if you know the market is going to be steadily rising, you will make more money if you invest a lump sum at the beginning..

3.  Rebalance your portfolio.

He advises rebalancing your portfolio once yearly, example, 60% stock and 40% bond target and rebalancing in January every year.  In a volatile market, rebalancing reduces the volatility and may also increase the return of your portfolio.  In a rising market, rebalancing will reduce the volatiltiy and may reduce the return of your portfolio slightly.

4.  Diversification

In 2008 and early 2009, there were few places to hide.  Many people opined that diversification doesn't work anymore.
Diversification works when the asset classes are not correlated.  Though many asset classes are now more correlated, you can still diversify, example, buying emerging markets and bonds.  How do you access China?  Why not through index funds? (@39 min)

5.  Costs matter

The lower the costs charged by the purveyor of the investment service, the better and the more is left for you.  "You get what you don't pay for!"  Cost you pay is the one thing you can control and you may increase your return by up to 2% per year just by ensuing the cost is low.  He advocates index funds.  Stock market is a zero sum game and costs of mutual funds of >1% shift the distribution of the stock market to that of a negative sum game.  90% of professional managed mutual funds are beaten by the index benchmark.  In his study of mutual funds over many years, less than 5 mutual funds have beaten the market by 2% or more ( @ 29 min).  Buy the index funds.  "It is like searching for the needle in the haystack.  Buy the haystack instead.".
Two-third of bond active managers are beaten by bond-index funds.  His advice is that the core of your portfolio should be in low cost index funds. (You can have more leeway in a satellite portfolio too.)


Q&A:
@ 43 min   Lump sum investing early or Dollar Cost Averaging when you have a big sum of money to invest.
Potential regret of getting into the high of the market.  Reduction in volatility.  Might not always be optimal.  At least some of this big sum of money should still put into the market in dollar cost averaging manner. Can you advise how long to spread this dollar cost averaging?  Depends on the returns from the alternative investments.  Spread your investing over a shorter period now, since the alternative investment return (interest rate)  is low.

@ 48 min.  Missing the 10 best days or missing the 10 worst days.  Some bias in presentation.

@50.30 min.  Corporate governance.

@53 min.  Dividend yield stocks of Warren Buffett.  Buffett is really the needle in the haystack.  Vanguard REIT - a good diversifier.

@1.04.50 min.  How would you invest $1 million?

@1.08.30 min.  What are the target percentages people of various ages should save?  Answer:  MORE.  If you start early, you may have to save a lot due to the compounding effect.  Those who did not save early, probably need to save a lot more to catch up (20% or more).  The opportunity cost of not saving $1 in your 20s might be $10 or $15 when you are in your 50s.






Uploaded on 1 Jun 2010
Dr. Burton G. Malkiel, the Chemical Bank Chairman's Professor of Economics at Princeton University, is the author of the widely read investment book, A Random Walk Down Wall Street. He has also authored several other books, including the recently published The Elements of Investing.

Dr. Malkiel has long held professorships in economics at Princeton, where he was also chairman of the Economics Department. He also served as the dean of the Yale School of Management and William S. Beinecke Professor of Management Studies. Dr. Malkiel is a past president of the American Finance Association and the International Atlantic Economic Association, and a past appointee to the President's Council of Economic Advisors. He continues to serve on several corporate and investment management boards.

Making Good Investment Decisions

HOLT - Making Good Investment Decisions

Uploaded on 29 Nov 2010

HOLT gives you the best perspective for making more confident investment decisions. Its flexible platform, which has been evolving for over 25 years, provides an objective view of over 20,000 companies around the world. HOLT lets you survey a company's entire capital structure and identify key drivers of value that others miss. 

https://www.credit-suisse.com/investment_banking/holt/en/index.jsp

E-learning

• by Credit Suisse 
• 21 videos

Our e-learning videos provide insight on the HOLT platform and methodology, give tips on management topics and explain broader economic issues.

http://www.youtube.com/playlist?list=PLE57332290C644C39

Importance of being Financially Educated. How To Be Wealthy And Why 95% Never Will Be

"You will never be wealthy working for someone else at a job - EVER!"

Once you have knowledge, you can seized opportunities when they come along, because you can recognize them.

Become an Entrepreneur. As an entrepreneur, you gain time freedom and financial freedom.

The broker buy stuff
The middle class buy liabilities
The rich buy assets that create passive cash flows which can then be reinvested to increase these passive cash flows further.  This is the wealth creation formula.
You cannot find these passive cash generating opportunities unless you are open to hearing about them.  Once you find them, you have to see which fits you and then act.







Published on 27 Aug 2013
How to become wealthy without a college degree
artwest.hubpages.com › ... › Financial Advice and Tips‎
Dec 3, 2012 - Many people think you must have a college degree to get rich, that is not necessarily true. Here is how you can get wealthy without a college ...
These Are The 20 Best Jobs That Don't Require a College Degree ...
www.theblaze.com/.../these-are-the-20-be­st-jobs-that-dont-require-a-coll...‎
May 18, 2012 - To be clear, no one is saying that a college degree is completely useless. .... What do most rich people do ? ..... positions and then realizing compared to the debt I am in, and the jobs that those without college degrees can get, ...
Six Figures, No College Degree
six-figures-no-degree.blogspot.com/‎
She has managed to reach a six figure salary without a college degree. ... Whatever the reason, don't become a cubicle-sitter unless you are not looking to .... Tens of millions, rich and poor, worked together at Elks Lodges and Rotary Clubs.
10 Best Jobs You Can Get Without a College Degree-Kiplinger
www.kiplinger.com/...10...get-without-a-­college-degree/index.html‎
To identify the ten best jobs you can get without a college degree, we focused on two critical factors: salary and job growth.
Skip college, make money fast: 10 high-paying jobs that don't ...
www.dailyfinance.com/.../skip-college-ma­ke-money-fast-10-high-payin...‎
Aug 11, 2010 - In a lot of ways, college is a great idea, for personal well-being, ... Either way, careers abound that allow you to make money without a degree.
Can I become rich without college degree? - Yahoo! Answers India
in.answers.yahoo.com › All Categories › Business & Finance › Investing‎
May 25, 2011 - We're all born with a sure path to being a millionaire, that of simply saving as much of our salary as we can and investing it in a simple no load, low ...
How to Become Rich Without a College Degree - PRLog
www.prlog.org/11358854-making-money-with­out-degree-how-to-beco...‎
Mar 9, 2011 - Making Money Without Degree - How to Become Rich Without a College Degree. Let's face the fact. Not everyone will be able to graduate with ...
19 Great Jobs Without A College Degree - Wealth Pilgrim
wealthpilgrim.com/19-great-jobs-without-­a-college-degree-and-...‎
by Neal Frankle - in 592 Google+ circles
You can find a great job without having a college degree. Here are 19 examples...and a clear path on how to score one.
The 15 Richest People Who Didn't Graduate From College ...
www.businessinsider.com/the-15-richest-p­eople-without-college...‎
by Leah Goldman - in 103 Google+ circles
Nov 29, 2010 - A bulky paycheck comes after a college degree for most, but not for ... or just plain luck, these 15 people are billionaires with no bachelor's ...

Seven Top Investment Ideas for 2014

• Investing: Q&A

By: Cushla Sherlock

Published: February 11, 2014

As the global economy continues its recovery, Credit Suisse’s top investment ideas focus on carefully selected themes which aim to help you generate more bang for your buck in 2014. 

Idea 1: Europe’s Recovery

Rationale: Europe’s recovery is slowly gathering pace and Credit Suisse anticipates an acceleration in earnings growth in 2014. Valuations are more attractive than in the US.

Investment implications: Buy (or overweight) European stocks. Among countries, Credit Suisse currently favors Germany given its operating leverage towards a recovery. For higher-risk investors: Europe-wide small and mid-cap stocks, cyclicals and selected banks on low valuations. For lower-risk investors: Dividend-yielding stocks offer potentially lower risk with higher yields than fixed income markets.

Idea 2: Seeking Equity Alpha

Rationale: Equities are the preferred asset class for 2014. After a good performance in 2013, the market recovery is set for a new phase in which active style, sector, country and stock selection can generate superior returns, noting that within both US and European stock markets, correlations among equities have fallen markedly.

Investment implications: Choose sectors, styles, countries and individual stocks based on prevailing market dynamics; cyclicals and momentum stocks from the IT and capital goods sectors are recommended.

Idea 3: Emerging Markets Reloaded

Rationale: During 2014 Credit Suisse expects that most emerging markets will benefit from a cyclical upswing supported by export opportunities to the developed markets. Emerging market trend growth rates remain above those of developed markets (albeit lower than before) and could further re-accelerate with structural reforms. Deficits still a source of volatility.

Investment implications: Gain exposure to export-led, growth-sensitive countries, such as Taiwan, and also look for those where the potential for successful structural reforms is not yet fully discounted. Compelling valuations can still be found (for example, China) where long term fundamentals – like consumption, urbanization, export potential – remain key investment drivers. Take a position in companies that benefit from emerging market cyclical recovery.

Idea 4: Fixed Income in a World of Rising Yields

Rationale: The need to obtain reasonable fixed income returns at a time when duration is unattractive since yields may rise on an economic recovery and tapering, and credit spreads are low.

Investment implications: Focus on short-duration assets in areas where value still exists, like corporate senior loans (usually held via a fund), bank subordinated debt, bank CoCos, corporate hybrids and distressed debt. Credit spreads on high yield and floating rate debt are near historic lows but limited amounts of such debt from strong issuers can be included in an overall portfolio. Avoid overvalued assets such as bank senior debt.

Idea 5: Forex as the Fed Tapers

Rationale: With tapering, the USD is set to strengthen against some currencies, like the JPY, and trade at the stronger end of the range against others, for example the EUR. In portfolios, a USD long position offers diversification in times of stress.

Investment implications: Buy USD/JPY, spot or forward. Opportunistically sell EUR/USD near the top of the range. Within emerging markets, sell currencies of deficit countries against those of surplus countries and of reformers.

Idea 6: Cash-Rich Companies

Rationale: Corporate cash piles remain near multi-year highs. Rising CEO confidence levels and pressure from shareholders to invest in growth or return cash bodes well for M&A activity.

Investment implications: Moderate risk-appetite investors should favor companies with a strong free cash flow and the ability to buy back shares. Investors with higher risk-appetite should prefer companies that are the potential targets of industry consolidation or which will benefit from asset disposals through restructurings.

Idea 7: China Reform Reaccelerates

Rationale: The Third Plenary Session of China’s Central Committee announced a clear direction for structural reforms, with accelerated product and financial market liberalization which should accelerate economic rebalancing, from exports and investment towards consumption. Concrete measures are expected in the coming months.

Investment implications: Stock selection is key. Gain exposure to global, regional and domestic firms that can benefit from China’s structural reforms with a focus on the private companies, services sectors and winners from economic rebalancing towards consumption. CNY and CNH (Chinese Offshore Yuan) remain our top emerging market currency ideas and are expected to sustain gradual appreciation in the course of exchange-rate reform.

http://www.thefinancialist.com/seven-top-investment-ideas-for-2014/

Characteristics of Great Investors

Thomas Barrack, Founder, Chairman, CEO, Colony Capital gives the keynote address to the Principal Investment Conference. Recorded: February 13, 2008

Burton Malkiel on his book - A Random Walk down Wall Street

A stock in the short run is essentially unpredictable.
A stock in the long run is essentially predictable (long run = decades).

A Random Walk Down Wall Street - HOW THE PROS PLAY THE BIGGEST GAME IN TOWN

A Random Walk Down Wall Street 

Investment Management
 

Chapter 6

Technical and Fundamental Analysis 

PART II – HOW THE PROS PLAY THE BIGGEST GAME IN TOWN

Part II of A Random Walk Down Wall Street concentrates on how professional work the investments game…and then how academics have concluded that the professionals aren’t worth the money you pay for them.

“…the profession of high finance is certainly one of the most generously compensated. ”  

• The stock market in the late 1990’s and early 2000’s has become “ one of the biggest games in town.”
• Players in the game are among the most highly paid people in society
• Academics study the work and results of professionals and draw conclusions about their effectiveness…academics study markets and prices and draw conclusions about their behaviour…efficiency…and espouse new theories to explain what is going on.
• This chapter introduces you to the ‘two schools of thought’ in the investments game…chartists or technicians who try to predict the future studying past trends in graphs of stock prices…and fundamental analysts who try to estimate a current intrinsic value (or inherent worth) of a stock based upon forecasts of the future in terms of cash flows, discount rates, growth rates, etc.

Technical Versus Fundamental Analysis 

• Technical analysis “is the method of predicting the appropriate time to buy or sell a stock used by those believing in the castle-in-the-air view of stock pricing.”

• Fundamental analysis “is the technique of applying the tenets of the firm-foundation theory to the selection of individual stocks.

Technical Analysis 

• Chartists study both the past movements of common stock prices and trading volume for a clue to the direction of future change.

UNDERLYING ASSUMPTION

• That the market is only 10 percent logical and 90 percent psychological
• The key to the game is to anticipate how other people play the game.
• Chartists hope that careful study of past behaviour will shed light on what the crowd is likely to do in the future.

Fundamental Analysis 

• Fundamental analysts seek to determine an issue’s proper value.
• Value is determined through forecasts for growth, dividend payout, interest rates and risk.
• The goal is to identify undervalued securities that can be purchases prior to their rise to the proper value…or short sale of overvalued securities prior to their fall to their proper value.

UNDERLYING ASSUMPTION

• That the market is only 90 percent logical and 10 percent psychological
• The key to the game is to be a superior analyst capable of identifying unrealized value…that eventually be discovered by the street.

What Can Charts Tell You? 

Principles of Technical Analysis:

• A chart showing past prices and volume of trading contains all of the information that a security analyst needs to know.
• Prices tend to move in trends (moving market prices have ‘momentum’ and stocks at rest tend to remain at rest.)  Trends tend to continue until something happens to change the supply-demand balance.

Chartist Vocabulary 

• Double bottoms
• Breakthrough
• Violating the lows
• Firmed-up
• Big play
• Ascending peaks
• Buying climax
• Head and shoulders

• Areas of support
• Areas of resistance

The Rationale for Charting 

“…we can never hope to know “why” the market behaves as it does, we can only aspire to understand “how.””

Magee, ‘Technical Analysis of Stock Trends’ 

Possible explanations for why trends might tend to perpetuate themselves:

• Crowd psychology causes people to lose their individual sense of what is right and wrong.  Crowd behaviour can be predicted.
• Information asymmetry ( there may be unequal access to fundamental information about a company)…hence the people ‘in the know’  move first causing prices to change…and then slowly the rest of the market begins to join in allowing the price to show momentum.

Further Rationale for charting 

• Chartists claim the public remembers what price they paid for a stock…and make decisions with respect to that point of reference….
• This gives rise to “resistance areas”  and “support levels”

Why Might Charting Fail to Work? 

1. Chartists react only to price trends…so the trend must be established first, before they will act…with sharp reversals…they will miss most of the opportunities.
2. Chartist techniques are self-defeating…in that if a chartist makes money with a ‘system’  then others will attempt to copy this…no buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.
3. Traders try to anticipate technical signals…and tend to buy before, not after, it breaks through.
4. The market is driven by highly motivated, self-interested individuals making it a highly efficient mechanism…if some people know that the stock price will go to $40 tomorrow…it will go to $40 today.  (Prices may adjust so quickly to new information as to make the whole process of technical analysis a futile exercise.)

From Chartist to Technician 

• Chartists was the term applied to people who used stock charts in the past…with the advent of computer databases, computer statistical analysis programs and graphical user interfaces…chartists have now ‘morphed’  into technicians…
• Technicians are able to convert stock price and trading volume data into a wide variety of forms and analyze this information…for example:
• 200 day moving averages
• Relative strength indicators
• Primary, secondary and tertiary waves, etc.

The Technique of Fundamental Analysis 

• The fundamentalist strives to be relatively immune to the optimism and pessimism of the crowd.
• The fundamental analyst believes there is an intrinsic value (or inherent worth) and that the price may occasionally not be equal to that…the fundamental analysts believes, however, that eventually the market will become ‘efficient’  to the mistake and that the price will move to the intrinsic value (achieve equilibrium).
• The fundamental analyst believes that there are key factors that influence the value of a stock…dividends, growth, risk and the level of interest rates.
• The higher the risk…the lower the p/e (price earnings) multiple.

Why Might Fundamental Analysis Fail to Work? 

1. The information (data) and analysis might be incorrect.
2. The security analyst’s estimate of ‘value’ might be faulty
3. The market may not correct its mistake.

Using Fundamental and Technical Analysis Together 

• Rule 1 – Buy only companies that are expected to have above average earnings growth for five or more years.
• Rule 2 – Never pay more for a stock that its firm foundation value
• Rule 3 – Look for stocks whose stories of anticipated growth are of the kind on which investors can build castles in the air.

Key Lessons Learned 

• Understand that there are two radically different schools of thought followed by professionals in the investment industry…and be able to recognize those in each camp through their words and actions

“the market hasn’t discounted the recent growth in earnings in the stock price as yet” 

“the stock price will encounter a zone of resistance at the $20 level”
 

Key Lessons Learned 

• Understand the there are two radically different schools of thought followed by professionals in the investment industry…and be able to recognize those in each camp through their words and actions

“the market hasn’t discounted the recent growth in earnings in the stock price as yet” (fundamental analyst) 

“the stock price will encounter a zone of resistance at the $20 level” (technical analyst) 

http://webcache.googleusercontent.com/search?q=cache:http://foba.lakeheadu.ca/hartviksen/3059/rwdw6.ppt

http://www.powershow.com/view1/b8703-ZDc1Z/A_Random_Walk_Down_Wall_Street_powerpoint_ppt_presentation

A Random Walk Down Wall Street - PowerPoint PPT Presentation

Markets can be irrational for some time but eventually correct any irrationality ... to Roger Ibbotson, who has spent a lifetime measuring returns, more than 90% of ... – PowerPoint PPT presentation

Overview of Finance

Finance is about the EFFICIENT use of Money

• For economies
• For firms
• For individuals

Finance is not the same thing as Accounting.

• Finance is a subset of economics, applying economic tools to the financial information.
• Primary function of Accounting is record keeping.
• Finance = Analysis + Decision Making (Not Record Keeping)
• Finance is Forward Looking

Two Pillars of Finance

1.  RISK

2.  RETURN

Risk and Return combine to make Value.

Value is the dollar amount that reflects both the risk and the return of the investment opportunity.

Three big areas of finance

1.  Financial Markets
- Focuses on how financial markets and institutions affect the economy.
2.  Business or Corporate Finance
- Focuses on the tools businesses should use to make good decisions.
3.  Investments
- Focuses on the financial decisions that most directly affect individuals.


Major Areas of Business Finance

1.  Financial Analysis and Planning
- Focuses on figuring out what is happening in the firm and forecasting the future
2.  Working Capital Management
- Focuses on management of short-term assets and liabilities.
3.  Capital Budgeting
- Focuses on how the firm decides what assets to buy (what investments to make).
3.  Capital Structure
- Focuses on how the firm finances its operations

Risk and Time

Click here for an enlarged version: http://www.norstad.org/finance/risk-and-time.gif

A Better Bar Chart Showing Risk Over Time

This chart shows the growth of a $1000 investment in a random walk model of the S&P 500 stock market index over time horizons ranging from 1 to 40 years. It pretty much speaks for itself, I hope - that was the intention, anyway.

The chart clearly shows the dramatic increasing uncertainty of an S&P 500 stock investment as time horizon increases. 
-  For example, at 40 years, the chart gives only a 2 in 3 chance that the ending value will be somewhere between $14,000 and $166,000.
-  This is an enormous range of possible outcomes, and there's a significant 1 in 3 chance that the actual ending value will be below or above the range! You can't get much more uncertain than this.

As long as we're talking about risk, let's consider a really bad case. If instead of investing our $1000 in the S&P 500, we put it in a bank earning 6% interest, after 40 years we'd have $10,286.
-  This is 1.26 standard deviations below the median ending value of the S&P 500 investment.
-  The probability of ending up below this point is 10%. In other words, even over a very long 40 year time horizon, we still have about a 1 in 10 chance of ending up with less money than if we had put it in the bank!

Look at the median curve - the top of the purple rectangles, and follow it with your eye as time increases. You see the typical geometric growth you get with the magic of compounding.
-  Imagine the chart if all we drew was that curve, so we were illustrating only the median growth curve without showing the other possible outcomes and their ranges.
-  It would paint quite a different picture, wouldn't it? When you're doing financial planning, it's extremely important to look at both return and risk.

There's one problem with this chart. It involves a phenomenon called "reversion to mean." Some (but not all) academics and other experts believe that over long periods of time financial markets which have done better than usual in the past tend to do worse than usual in the future, and vice-versa. The effect of this phenomenon on the pure random walk model we've used to draw the chart is to decrease somewhat the standard deviations at longer time horizons. The net result is that the dramatic widening of the spread of possible outcomes shown in the chart is not as pronounced. -  The +1 standard deviation ending values (the tops of the bars) come down quite a bit, and the -1 standard deviation ending values come up a little bit. 

-  The phenomenon is not, however, anywhere near so pronounced as to actually make the +1 and -1 standard deviation curves get closer together over time. 

-  The basic conclusion that the uncertainty of the ending values increases with time does not change.

http://www.norstad.org/finance/risk-and-time.html

The Random Walk Guide to Investing: Ten Rules for Financial Success

In 1973, Burton Malkiel published A Random Walk Down Wall Street, in which he argued that a blindfolded monkey could pick stocks as well as a professional investor. Though I bought a copy of Random Walk for $3.99 at the local Goodwill last year, I haven’t read it. It looks dense. I know it’s written for the layman, but it still seems rather academic.

In 2003, Malkiel published The Random Walk Guide to Investing, “a book of less than 200 pages in length that boils down the time-tested advice from Random Walk into an investment guide that [is] completely accessible for a reader who knows nothing about the securities markets and who hates numbers.”

Several patient GRS-readers have been recommending this book for the past year. When I stayed home sick yesterday, I finally found time to read it. I’m impressed. Malkiel has produced an easy-to-read straightforward investment guide that I’m happy to recommend to anyone. His philosophy matches my own:

The advice in this book is both simple and realistic. There is no magic potion in the investment world because the truth is that one doesn’t exist. There is no quick road to riches. And if someone promises you a path to overnight riches, cover your ears and close your pocketbook. If an investment idea seems too good to be true, it is too good to be true. What I offer are ten simple, time-tested rules that can build wealth and provide retirement security. Think of the rules as the proven way to get rich slowly.

Malkiel’s rules are familiar. We’ve discussed most of them here before:

1. Start saving now, not later. Don’t worry about whether the market is high or low — just begin investing. “Trust in time rather than timing,” Malkiel writes. “The secret to getting rich slowly (but surely) is the miracle of compound interest.”
2. Keep a steady course. “The most important driver in the growth of your assets is how much you save,” writes Malkiel, “and saving requires discipline.” To develop discipline, the author recommends that you learn to pay yourself first (invest before anything else, even paying bills), implement a budget, change spending habits, and pay off debt.
3. Don’t be caught empty-handed. Malkiel recommends that readers open an emergency fund. He doesn’t specify how much should be set aside, but he does cover a variety of places to put the cash: money market accounts, certificates of deposit, and online savings accounts. He also recommends purchasing term life insurance.
4. Stiff the tax collector. Make the most of tax-advantaged savings: Open an Individual Retirement Account, contribute to your company’s retirement plan, take advantage of tax-free savings for your child’s education, buy your home rather than rent. All of these things help to reduce the bite that taxes take out of your money.
5. Match your asset mix to your investment personality. Based on your risk tolerance and your investment horizon, choose the best mix of cash, bonds, stocks, and real estate. (Malkiel encourages investors to buy each of these through mutual funds.)
6. Never forget that diversity reduces adversity. Don’t just buy stocks — buy stocks, bonds, and other investments classes. Within each category, diversify further. And don’t just buy one stock — buy mutual funds of many stocks. (Malkiel makes his case with the stark example of a 58-year-old Enron employee who had a $2.5 million 401k — of Enron stock. When Enron went bust, the employee not only lost her job, but her retirement savings vanished completely.) Finally, the author recommends “diversification over time” — making investments at regular intervals using dollar-cost averaging.
7. Pay yourself, not the piper. Interest and fees are drags on your wealth. “Paying off credit card debt is the best investment you will ever make.” Avoid expensive mutual funds. “The only factor reliably linked to future mutual fund performance is the expense ratio charged by the fund.” In fact, the author advises that costs matter for all financial products.
8. Bow to the wisdom of the market. “No one can time the market,” Malkiel says. It’s too unpredictable. Professional money managers can’t beat the market, financial magazines can’t beat the market — nobody can beat the market on a regular basis. The best way to earn consistent gains is to invest in broad-based index funds. It’s boring, but it works.
9. Back proven winners. After Malkiel has preached the virtues of index funds, presumably converting the reader to his religion, he spends a chapter suggesting possible index funds and asset allocations.
10. Don’t be your own worst enemy. Malkiel concludes by admonishing readers to stay the course, warning them against faulty thinking. He discusses the sort of money mistakes I’ve mentioned before: overconfidence, herd behavior, loss aversion, and the sunk-cost fallacy.

Ultimately, Malkiel’s advice can be stated in a few short sentences: Eliminate debt. Establish an emergency fund. Begin making regular investments to a diversified portfolio of index funds. Be patient. But the simplicity of his message does not detract from its value. The Random Walk Guide to Investing is an excellent book because it sticks to the basics:

• It’s short.
• It’s written in plain English — there’s no jargon.
• It’s easy to understand — concepts are simplified so the average person can grasp them.
• It’s filled with great advice.

This book refers often to other books to bolster its arguments, and includes quotes from financial professionals like John Bogle and Warren Buffett. Though the advice may seem elementary, it’s advice that works. If you want to invest but don’t know where to start, pick up The Random Walk Guide to Investing at your local library.

http://www.getrichslowly.org/blog/2007/12/18/the-random-walk-guide-to-investing-ten-rules-for-financial-success/


Malkiel is a proponent of the Efficient-Market Hypothesis. The idea is that markets have in them all the information they need to perform efficiently and an individual investor will not be able to outperform them consistently. 

The Best And Worst Thing About Investing

A lot of new investors assume that managing money is like golf — where Tiger Woods whips the amateur who steps out on the course with him 100 times out of 100.

But it’s not like that at all.

In investing, unlike golf, the amateur can crush the pro for an appreciable period of time. That’s one of the most wonderful things about the game and one of the most frustrating things about the game, all at once.

In addition, the professional golfer gets to keep his trophies and wins regardless of the subsequent decline in his skills. In contrast, the professional investor’s average or below-average years will dilute the benefit of his “winning” years as mean reversion knocks his lifetime track record back down to earth. Peter Lynch must have known this when he retired in 1990 at the top of his game — he left the magic intact before reality and probability could strip him of it.

Randomness and Time team up to take almost all of us down, one way or the other.

Here are three charts from a recent presentation from Towers Watson on equity investing that show this phenomenon graphically (emphasis mine):

Past performance in particular can sound a plausible basis upon which to form an opinion. This is because we are programmed to recognize patterns in nature and to extrapolate what we believe we have observed. However, studies have shown that there is a high degree of randomness in relative investment returns and that to be statistically significant, a performance record should be intact for nearly 15 years. Few investors meet this criterion. Fewer still meet this requirement and have not experienced other changes which have a direct impact on future performance, such as staff turnover or growth in assets under management which can affect portfolio construction. Consequently, we strongly believe that — considered in isolation – past performance is a poor basis for assessing investment skill.

Josh here — in other words…

Excess returns can show up anywhere, in any portfolio, and are randomly achieved in aggregate:

eVestment Alliance, Towers Watson

Any schmuck can hang with the pros, for a long time, and beat a skilled investor for years before his information disadvantage becomes apparent. And the skilled managers are very capable of underperformance as well, Towers Watson notes that even Warren Buffett recorded two three-year rolling periods of negative relative-performance, despite his 45-year marathon track record of outperformance: 

eVestment Alliance, Towers Watson

And finally, we are all, in the end, victims of our own success. Identifying a manager with durable skill and a sustainable investing process only assures one thing — that others will discover that manager as well and pour their dollars in. And then, like hearing your favorite indie band on Top 40 Radio, you’re totally grossed out and uncomfortable. And with good reason – your alpha is now dust in the wind. Nothing ruins an outperforming investor or an indie rock band like mass appeal:

eVestment Alliance, Towers Watson

After seeing these charts and this evidence of futility, you might be asking yourself the following: If anyone can win and anyone can lose at any time in the markets, why bother trying at all?

Fair question. But I submit to you that successful investing is a lifetime pursuit, and in the end, it’s the pursuit itself that offers the rewards along the way. The destination was never the thing — most of us aren’t meant to end up as Peter Lynch or Warren Buffett. No, it was what you learned on the way there that made all the difference. As the poet C.P. Cavafy reminds us:

Ithaka gave you the marvelous journey.
Without her you would not have set out.

A lifetime of outperforming the markets is unattainable for most. But a lifetime of self-improvement and the acquisition of skill and knowledge — that’s available for anyone who’s willing to go for it.

Read more: http://www.thereformedbroker.com/2014/02/17/the-best-and-worst-thing-about-investing/#ixzz2uCOyFn8G

Change in Debt by Borrower Age (auto loans, student loans, credit card and mortgage debts)

A couple of things stand out. First, overall growth in debt remains considerably more muted in 2013 than it was in 2006, with the exception of auto loans, where 2013 data continued to reflect the strong growth we have been seeing since mid-2011, and student loans. (In the case of student loans, the percentage growth has moderated since 2006, but since the outstanding balance has doubled, the lower percentage growth is associated with comparable dollar increases.) Mortgage and home equity line of credit (HELOC) balances, in particular, grew much more slowly in 2013 than in 2006. Second, for all loan types and in both years, balance increases were mainly driven by younger age groups. Again, though, student loans are an exception: even older student loan borrowers continue to increase their borrowing.

The next two charts break down the same data, this time by Equifax risk score (or credit score) groups.

On the credit score breakdown we see stark differences in patterns for mortgages and HELOCs between the 2013 and 2006 cohorts. Notably, in 2013, balances fell for the lowest credit score borrowers—the result of charge-offs from previous foreclosures—while all groups, even those with subprime credit scores, increased their mortgage balances in 2006. Now, the modest mortgage balance increases we see are mainly coming from high credit score borrowers.

A similar picture emerges for credit card balances. Note, though, that credit card balances for subprime borrowers were falling in 2006, again mostly due to charge-offs, making the increased mortgage balance for that group in 2006 seem all the more remarkable.

There’s been a tremendous amount of attention to the growth of student loans in recent years, and these charts indicate some of the reason why. First, student loans grew the most of any debt product in both periods (in percentage terms). Second, the growth in educational debt, like that of auto loans, is concentrated among the lower and middle credit score groups.

But auto and student loans have been growing for some time, while overall debt continued to fall. In 2013, the increased credit card and mortgage debt among the young and the riskless led to a turnaround in the trajectory of overall debt.

For a more detailed look at net borrowing by age and credit score in 2006 and 2013, please take a look at our interactive graphic.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

http://economistsview.typepad.com/

A Guide to Investing by Age