Am I Investing Or Speculating…?
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these
requirements are speculative.”
Benjamin Graham
Essentially, investors are those that invest in things with little risk of permanent capital loss and expected return in the future. As is the case today, many refer to themselves and others as investors when the fact is — they’re really speculators. The most common occurrence of this is in the media.
You’ll hear someone come on T.V. say they are invested in Coca-Cola today — only to find out tomorrow they sold their position an hour after stating it on the air. There’s nothing wrong with it, but that’s speculating folks — not investing.
This is an everyday occurrence and it’s perfectly fine for those that wish to make those decisions. Everyone is free to buy and sell whatever they wish. The only issue is making sure we understand the difference between investing and speculating. Only then will we be able to understand our emotional pain points and make decisions correctly in the face of emotion or fear.
This goes beyond mere semantics. The distinction between investor and speculator is a philosophy which helps plant the seeds to your future success. If an investor does his/her homework correctly, they need not worry about market volatility like speculators or traders.
In fact, this volatility usually provides opportunity to the patient, long-term investor because they’ve already invested in a security with minimal risk and an expected return. As an investor, market volatility to the downside helps to decrease your risk and increase your expected rate of return (all else being equal).
"The stock market is filled with individuals who know the price of everything, but the value of nothing."
Phillip Fischer
DYI Comments:
Currently today equity markets are overvalued. Not just overvalued but greater than all tops except for the Great Insanity of the year 2000! Stocks held or purchased today the best than can be expected over the next 10 years is an estimated average annualized return between 0% to 2%. That of course is before management fee's, trading costs, impact costs, taxation, and inflation. No doubt most holders and buyers at these levels after all costs will end up around -2% to -4% average annual returns. Overpay and you pay dearly with sub par returns or in this case losses.
Currently today equity markets are overvalued. Not just overvalued but greater than all tops except for the Great Insanity of the year 2000! Stocks held or purchased today the best than can be expected over the next 10 years is an estimated average annualized return between 0% to 2%. That of course is before management fee's, trading costs, impact costs, taxation, and inflation. No doubt most holders and buyers at these levels after all costs will end up around -2% to -4% average annual returns. Overpay and you pay dearly with sub par returns or in this case losses.
DYI Continues: Below is DYI's averaging formula as the market is now 100% plus over the average dividend yield going back to 1871. As of May 1, 2015 the current price to dividend was 52 as compared to the average price to dividend of 23. That is (52 -23) / 23 x 100 = 126% above the average. This has thrown us "out of the market!" And for good reason, stocks are insanely priced!
5-1-2015
STOCKS
100 - [100 x ( Curr. PD - Avg. PD / 2 ) ]
________________________________
(Avg. PD x 2 - Avg. PD/2)
% Allocation -17%
-17% x 60 (max. allocation) = 10% short
DYI Continues: Not just equities high grade corporate bonds to a lesser extent, and especially Treasury securities, are very overvalued as well.
DYI Continuing: Bonds as measured by the 10 year Treasury are overvalued. Price to interest average going back to 1871 is 22 compared to currently at a lofty 47 times interest. (47-22) / 22 x 100 = 114% above the average. As we know, to obtain a bargain you need to be below the average. Yields would have to rise above 4.50%. (47-22) /47 x 100 = 53% decline in Treasury prices simply to get back to the average yield! A bargain would require a drop of 60% to 70%! How far we have come in our Fed induced/Boomer savings glut sub atomic low rates.
5-1-15
BONDS
100 - [100 x ( Curr. PI - Avg. PI / 2 ) ]
________________________________
(Avg. PI x 2 - Avg. PI/2)
% Allocation 0%
0% x 60 (max. allocation) = 0%
Real Estate and bonds function very similar when rates drop the price of RE and bonds go up in value and when rates increase bonds drop along with RE. Currently today residential RE based on a national average is overvalued (but no longer insanely priced).
The magical 2.2 housing ratio between median nationwide home prices and household income – Nationwide home prices still inflated by 30 percent based on 50 years of household data.
Currently today the national average is 3.3 times median income to median house price. When that day comes and interest rates begin to normalize (the Fed's will fight it due to budget deficits) RE will decline in price. That decline may not occur nominally but after inflation (real returns) will be negative or flat at best.
A quick side note: Personal finance. If you want to have a fun life don't purchase a house greater than 2.o times your income. Yes, you will have a much smaller house but you will have the money to jazz it up plus the extra dough to save and invest plus monies to have fun with. Aspiring millionaires (those who actually make it) the bulk of them never purchase greater than 1.5 times their income. This leaves a ton of dough to invest and hence over time to become wealthy.
Gold and especially gold mining companies have value despite being a bit pricey as shown by the Dow to gold ratio. The gold mining shares have gone through a massive bear market making this an excellent time to pick up a modest exposure at 15%. The run is not over as yet for gold and the mining shares as we never went all the way to max-optimism for this asset category. So hang onto your hats the ride in precious metals is not finished there is more upside to come.
Market Sentiment
5-1-2015
GOLD
[100 x ( Curr. DG - Avg. DG / 2 ) ]
________________________________
(Avg. DG x 2 - Avg. DG /2)
% Allocation 25%
25% x 60 (max. allocation) = 15%
REIT's have been chased up in price in investor's/speculator's "zeal for yield" With prices so high zeal has left the yield for these shares. Our averaging formula as with the general stock market has "kick us out of REIT's." And for good reason as prices are now way beyond their historical norms. Currently today (43 -12) / 12 x 100 = 258% above the average. Anyone holding or buying at these levels better be prepared for losses. Desperation for yield has driven many to REIT's including our retired seniors. With CD's at the bank at such dismal levels many were spending down their principal at an alarming rate. So off they go looking for alternatives. Many went with REIT's now is the time to sell and wait for improved yields.
5-1-2015
REIT's
100 - [100 x ( Curr. PD - Avg. PD / 2 ) ]
________________________________
(Avg. PD x 2 - Avg. PD/2)
% Allocation 0%
0% x 60 (max. allocation) = 0%
Below are my two model portfolio's. Not much excitement for the Aggressive Portfolio and a little bit of excitement with my Super Max as I have allocated a 10% short position using the Prudent Bear Fund. What has been different is a combination of massive world wide central bank intervention driving down yields to sub atomic levels as many yields are negative in Europe. Add in 1st world Baby Boomer's of approximately 120 million saving money in desperation to fund some sort of retirement prices of securities have bid up - dropping yields.
The Great Wait Continues. How long no one knows for sure as markets may sniff out overvaluation before 1st world Boomer's past their peak savings binge of 2019 - 2021. Could we be in for massive overvalued markets for the next 5 years plus? Who knows??? No one knows and those who say with certainty are really only guessing. What I do know is with prices at these levels sub par returns and most likely losses are baked into the cake.
The Great Wait Continues. How long no one knows for sure as markets may sniff out overvaluation before 1st world Boomer's past their peak savings binge of 2019 - 2021. Could we be in for massive overvalued markets for the next 5 years plus? Who knows??? No one knows and those who say with certainty are really only guessing. What I do know is with prices at these levels sub par returns and most likely losses are baked into the cake.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION
Active Allocation Bands (excluding cash) 0% to 60%
85% - Cash -Short Term Bond Index - VBIRX
15% -Gold- Precious Metals & Mining - VGPMX
0% -Lt. Bonds- Long Term Bond Index - VBLTX
0% -Stocks- Total Stock Market Index - VTSAX
0%-REIT's- REIT Index Fund - VGSLX
[See Disclaimer]
**************
Maximum Aggressive Portfolio
(Super Max)
75% Cash - Hussman Strategic Total Return Fund - HSTRX
15% Gold - Tocqueville Gold Fund - TGDLX
0% Lt. Bonds - Zero Coupon 2025 Fund - BTTRX
10% Stocks - Federated Prudent Bear Fund - BEARX
0% REIT'S - REIT Index Fund - VGSLX
[See Disclaimer]
Typically, when investors desire extraordinary returns, they compromise the integrity of their risk-averse value investing process. And this leads to unwarranted risk and higher probability of risk. The smart investor does not seek extraordinary performance — that’s never the goal.
The goal of the smart investor is to stay within the parameters of a risk averse process.DYI Comment: Rule #1 Don't lose money...Rule #2 Don't forget rule #1.
If this is accomplished, extraordinary returns should be within the realm of possibility over time.
Estimated 10yr return on Stocks
As you’ve probably already noticed, none of these ideas relate to the current stock price or what’s “trending” right now. The underlying business is the main concern of the smart investor — not the stock price. The only time the stock price becomes important in the context of investing, is when an investor compares the valuation of the business to the current stock price.
Investors are well served to ignore the often irrational behavior of the market, even when others are benefiting from these behaviors. You’ll likely be better off in the long run by avoiding this speculative behavior. This is how many great investors were able to consistently avoid speculative bubbles that eventually burst (i.e. tech bubble of 2000, housing bubble of 2007/2008).
It takes determination, courage, and patience to succeed as an investor. To have a reasonable probability of worthwhile returns over the long-term, an investor would do well to investment in situations that are:
1. Fundamentally favorably, and
2. Usually unpopular on Wall Street
Investing is not easy. It’s a simple concept to intellectualize, but it’s difficult to execute if you’re not adhering to a sound, risk-averse process. By sticking to this process, the smart investor can rest easier at night knowing they are likely to be better off in the long run.DYI
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