Stock Selection/Market Timing

It is axiomatic that many (probably most) investors believe in stock selection and market timing despite the dearth of evidence . In reality, substantial evidence exists that demonstrates the opposite but huge marketing (along with a good dash of human greed) keep the stock selection myth alive.

We often see individuals that have followed the selection/timing approach for many years before realizing its errancy. In periods like this investors have a tendency to spend inordinate amounts of time chasing performance . This is rarely productive.

We strive to render a couple of "simple" deliverables, diversification and consistency. That is the essence of our refreshing, independent perspective. Investment truths can be hard to find but we strive to communicate these to our clients every day.

The Markets Work...Still

This is a great interview of Professor Gene Fama- (sometimes known as the father of modern asset pricing theory and more particularly the Efficient Market Hypothesis ) in The New Yorker. There have been a number of articles in the financial press of late questioning the veracity of EMH and Fama does a good job fending off the critics.

Dr. Fama discusses the issue (and overused term) of "bubbles" in the early portion of the interview and provides a very interesting perspective. His main point is this term is now thrown around, ex ante, but plenty of investment was being made in these "bubbles" by plenty of smart people.

The best parts of the interview may be towards the end (page 7 in particular) where he repeats the main thesis of EMH- that you can't beat the market (I might add except by chance/luck). The very best dialogue is just after that question where he states" the expected return on stocks is just a price-the price people require to bear the market risk. Like any price,it should vary from time to time. " Vintage Fama and precisely right. Enjoy!

Mutual Fund Inflows

According to industry data, December marked the 5th straight month that mutual fund investors caused net outflows from equity mutual funds. This is interesting since the stock market has been on a tear since early March . Typically, individual investors chase the market as it rises but that does not appear to have been true in 2009. Equity based Exchange Traded Funds (ETF's) also saw net declines in the past year.

There are several ways to interpret this information but it shows how nervous investors continue to be about the markets. Assuming some of the net outflows went into bonds or bond funds (under the illusion that these are "safer" investments) these investors could be very surprised if/when rates rise and the value of these bonds/funds decline. Of course it is possible that much of this money is laying fallow on the sidelines waiting for something to bring them back. Time will tell. It is unfortunate , however, that many investors have capitulated and missed the 65-70% upswing over the past 10 months.

The Value of Perspective

In our work with individual clients we seek to render a "refreshing,independent perspective". It is far too easy today for investors to look at financial decisions in a vacuum without proper consideration of immediate and longer term often unintended consequences. Brokers push stocks, bonds and mutual funds while insurance salespeople peddle annuities . What is usually lacking is a holistic perspective along with a healthy dose of objectivity. That is what we do.

The trademarked consultive wealth management process that we engage clients in (Wealth Rx) is the result of over 28 years of experience . Real (meaning unbiased and holistic) financial planning changes lives . That is our value.

USA,Inc.

The center of the financial universe is no longer New York or London but Washington, D.C. Unprecedented intervention, regulation, taxes and command/control combine to equal a huge amount of uncertainty for individual investors. The overarching assumption is only government can solve our ills. the U.S. government will issue about $2 trillion of new debt this year about 20 times the amount of anticipated aggregate corporate debt for this year. Several states are in very poor financial condition because of the huge mis-match between "fixed" expenses and revenues. Some estimate that the underfunded public pension liabilities could be 4 or 5 times the often cited figure of $400-500 billion. All of this portends difficult decisions ahead .

2009- A Year to Remember

As 2009 ends and 2010 begins let's take a brief look back to see what we need to remember and what we should have learned from this past year. The herd mentality that drove many investors out of the stock market early in 2009 helped us define the difference between investing and speculating. Looking at money fund balances, it is clear many investors have missed the 65% upswing since early March as they wait for "the right time" to invest. Depending on these last 2 trading days the S&P 500 should finish with its best year since 1995.

We also learned that all asset classes including real estate can decline in value. For many folks this reality has been almost unthinkable. The good news is that much of the data suggest a bottoming process may be underway in some regions and at some price points. The bad news is mortgage rates are likely heading up and higher priced homes are still soft . We are roughly at 2003 price levels in most areas of the country.

Looking ahead to 2010 we of course make no predictions but a couple observations might be useful. Looking at Price to Earnings ratios it seems that the now 9 month long rally in equities has somewhat outstripped the underlying earnings. That is, growth in 2010 will likely come from higher earnings not expanding P/E's. One final tidbit. I heard yesterday that a recent study of stock "analysts" predictions provided some helpful information. The study looked back a number of years and covered over 6 million "Buy and Sell" recommendations from these brokerage firm analysts. The conclusion was , in the aggregate, the recommendations followed the market trends in both the up and down directions. In other words...they had no particular predictive value. No surprise here! Happy New Year!

Ideas for Improving the Economy

I fairly recently became aware of the Center for Economic Forecasting at California Lutheran University (with full disclosure my son is an economics major/basketball player there). CERF is headed by Dr. Bill Watkins and just today they released their current 2010 forecast for California and the U.S. This is an excerpt from that report from the VC Star.

The very straightforward prescriptive measures include: 1. Fixing the banks (as I have said here they are not yet sound-the toxic assets largely still remain) ; 2. Lowering the cost of hiring- this seems simple enough but of course politically difficult. High employment costs= lower # of employees...always has/always will; 3. Changing Monetary Policy- they are 100% correct. The so called "carry trade" where banks are making billions for not lending has to be reversed ; 4. Increase Immigration- this is a sensible manner of correcting the huge imbalance that we have in terms of retirees to those actively employed.

Quite good stuff.