Speaking despite having made a lot of money on ARM Holdings in the '90s: this logic of looking one vertical level below the most-hyped companies is not as clever as he seems to think it is ("I work at a hosting company, I have an iPhone and an iPad, a-hah! ARM Holdings!"). It is a 101% certainty that the pro's trading ARM in the market are every bit as well informed as you are, if not more so. Picking stocks is picking stocks; knowing that an iPhone has an ARM chip in it doesn't constitute an edge.
Similarly, having read the Wikipedia page on Contango wouldn't be enough to get me to go up against professional full time oil traders.
Also, aren't commodity ETFs supposed to maximize the risk of trading uninformed against professional shark traders? I didn't follow the hype cycle on this story, but I know it started with "DO NOT BUY COMMODITY ETFs".
I agree that the pro's trading ARM will have already figured out its significance ... however (based on no evidence what-so-ever) there is surely many more people that haven't figured this link out. When/If ARM hits the spotlight in years to come, multitudes of people will be there to bull rush the price. And the people who figured the link out early will benefit.
Knowing that an iPhone has an ARM chip does constitute an edge. Not an edge against everybody, but an edge against most.
The insight you're trying to capitalize on has a direct expression in the market already: it's called the price/earnings ratio. At 95, ARMH has roughly 70% of the heat that OpenTable does, and 270% of the heat that SolarWinds does; those are two of the hottest tech IPOs of the last 18 months or so. It may in general be true that basic knowledge of how stuff works gives you an edge, but here you're overplaying your hand: ARMH isn't a dark horse stock.
There is money to be made trading on "multitudes of people" and their awareness of technology. At least there has been in the past. The best example I can think of is when 3com spun off Palm. On the opening day of trading Palm had a larger market cap than 3com even though 3com still owned 80% of Palm.
The market was demonstrably irrational at the end of the 90's and it's unlikely such extreme situations will happen again, but there's still something there.
EDIT: "Markets can remain irrational longer than you can remain solvent." is a famous aphorism and markets are frequently irrational in ways that you can't necessarily profit from. The difference in 1999-2000 was that the market was actually insane. It was fairly easy to find stock prices that were mathematically impossible. Along with trading opportunities that offered large reward with almost no risk. That's the part that won't happen again.
I disagree. A high PE ratio in general is not a direct expression of my 'insight' in general. However in this case it probably is. Thanks for pointing that out, I hadn't looked at ARM's figures previously.
I guess I was 'overplaying', although I still think that the average Joe Blogg would be yet to realize the 'edge', hence it would still be an advantage making ARMH more of a very light gray horse.
I actually agree with the earlier commenter on this thread who lamented that he was probably going to watch ARMH double while he sat on the sidelines. I've recommended against buying AAPL a bunch of times too and been a poor fortune teller. But that doesn't make the methodology being used to pick ARMH sensible. The market knows ARM powers the iPhone.
You're spot on about commodity ETFs. They are required to buy at a certain time and sell at another time. Actually they're windows but they're well published. As you might be able to guess traders have had a field day with these funds. Most don't even closely track the commodity they're supposed to. Many have lost money while the commodity has gone up.
Spot on. I do mention in the article that the price of ARMH probably takes everything I mention into account already. I fully realize that buying ARMH right now is a gamble. It's one I'm willing to take though (even if just for the fun of it). Someone else more rational might want to stick to index funds. :)
Your entire coverage of this point is a single heavily-hedged sentence at the end of your stock-picking section, followed by "they could have said the same about AAPL", as if the success of the iPhone somehow guaranteed that ARMH would track AAPL (it does not). Also, the word "perhaps". No, not "perhaps". Iron certainty.
Both "index funds" and "ARM" is a gamble because you're advocating investing in them without regard to price. In both cases you're just buying something based on it being popular, not because it makes a good investment.
If you do the math and you are able to calculate your returns, in advance, with some reasonable accuracy, then you're investing.
If you're just buying something without regard to price because it feels good (including index funds) or fits your emotional state- then you're gambling.
I've got no problem with speculation-- which is informed investing in high risk / high reward situations, but that takes even more analysis, not less.
The red flag that I see which tells me that this guy doesn't know what he's doing is his inclusion of a leveraged ETF into a long term (i.e. not day traded) portfolio. Leveraged ETFs are weird and they _do no_ return 2x over a long period of time. I'm not talking about their fees, I'm talking about the fundamentals of how they are put together. These funds attempt to give you 2x every day and they reset every day so that over the course of a week they have tried to double the index's returns 5 times over five separate days. They have not tried to double the index's return over the entire week.
tl;dr Leveraged ETFs are for day-trading not buy and hold investing.
It may be worth taking a quick trip into why the math of leveraged ETFs doesn't work. The fundamental problem is that they lose more on losses by the underlying investment than they gain on gains by the underlying investment.
Suppose that the underlying investment starts priced at 100, jumps 25% on Monday to 125, then on Tuesday drops 20% back to 100.00. It ended as it began with no gain or loss.
What did our 2x ETF do? It began at 100, ended Monday at 100 + 50% = 150.00, then ended Tuesday at 150.00 - 40% = 90. It lost a big chunk of value relative to its completely unchanged underlying investment.
Burton Malkiel (author of "A Random Walk Down Wall Street"), the guy who popularized index investing, doesn't condemn individual stock picking. He is fine with it, and he does it himself, provided you have a pool of safer investments in index funds to back you up in case you fail. Which is basically what I'm recommending.
Malkiel says that picking a few stocks is fine as long as the core of your portfolio is indexed. The majority of your exposure to equities is in a single stock, and it's an extremely-hyped tech stock.
No! You don't get off so easily - you have publicly recommended an investment strategy that allocates 15% (15%!) to a vehicle that you didn't understand and was completely innappropriate.
"switch your recommendation" ??? This is like suggesting a bank use memcached for transactional data, and when called on it, just casually walking it back and saying that maybe Oracle is more appropriate.
It's fantastic that you are getting involved with planning your finances, but you have a lot to learn before giving advice.
:EDIT - This may seem harsh, but I don't believe you have gone through the pain of giving someone investing advice and having it really substantially costing them. I have, and it's very painful. And it could have been worse for me because in that situation the person was young enough to recover and it wasn't a substantial amount of money. Imagine losing an older, retired person a substantial portion of their nest egg with bad advice and consigning them to a lower standard of living for the rest of their life.
I have been investing my own money in stocks, funds, and to a small extent, options for about a decade. I participate of message boards, read books, and participate in stock picking competitions. I still don't feel qualified to give good financial advice. YMMV.
Come on. We're all adults here. It's not like every Grandpa and Gramma on penny pensions would've taken the advice of Joe Random Blogger.
We need to stop treating investing as if people who aren't professionally on a trading floor are basically handling spent fuel rods while rollerskating naked passed Mt. Vesuvius. It's putting money down on a hunch, however educated or ignorant or risky or safe. There is no sure thing. It's either "slow money" or "gambling". There's n+1 bloggers doling out endless advice on everything from where to buy a home to how to haggle for a car. No one is going to look at one data point and say "you know what? That random-ass person makes sense. I'm cleaning out my accounts right now putting it all on ARMH!"
Also, "I still don't feel qualified to give good financial advice" is a bit disingenuous when you, in just a paragraph above it, said you used to.
In other words, let's not obsess over the very things that Jim Cramer does with panic-button sound effects and sweaty, dancing evangelism on a nightly basis. It's all advice, we're all aware. Take it with a grain of salt, etc.
I think you have frustrations with people other than me. I manage my own money, and clearly stated that I think it's fantastic that the original poster is managing his own. More people should do it.
I warned against giving financial advice because I had a bad experience doing it. I fail to see how that's disingenuous, consider it trying to help someone else learn from my mistakes. Making mistakes with your own money is fine, making mistakes with someone elses' is an awful feeling that I would just as soon help others avoid. The thing about investing success is that it makes a person cocky and more prone to offer advice at the the worst possible time, when their performance is most likely to regress to the mean.
You are ignoring an important point of mine - that the advice being offered here is terrible. He thought he was going to buy a leveraged oil fund and get double beta, when he was actually buying a day trading tool that tries to offer double beta on a daily basis. It's not the same as buying USO on margin. Anyone that holds UCO over the long term is almost assured of underperformance. That is a fundamental mistake, not nitpicking. And 5% is a larg-ish position in a concentrated porfolio, this was a 15% weighting. Don't get me started on the ARMH selection (well criticized elsewhere) and the age inappropriate / poorly timed 55% bond position.
Finally, it's not like I cherrypicked a random blog to criticize - this person wrote about it and submitted it to HN. I don't have time to police the internet, but this was inviting feedback, and mine is critical.
But that's my point. It wasn't that his advice wasn't wrongheaded or flat ignorant, it was your reaction.
"Oh, No! You have no _right_ to change your mind!" It's a blog post. It has as much legitimacy and authority over marketplaces as the entire CNBC network, i.e. none at all. Time and again, we see people on these so-called business networks doling out terribly wrong advice that, if followed, would cost you dearly, even in the short term (e.g., Jim Cramer's infamous "long on Bear Stearns" rant only a week before it went out of business). Cramer is a guy that's been a hedge fund manager and stock prognosticator for as long as some of us on HN (not me, mind you) have been alive and for some reason is just as stunningly ignorant of future events in the market as a market newbie.
This is the world that we live in now. We'll all just have to accept the fact that there are people who document everything that is going on in their minds, whether it's what they ate for lunch to their forex trading strategy to their insistence on voting for only old white Protestant men. Nothing OP did was immoral or illegal. It was content. Information, no matter how right or wrong, wants to be free. And, you're free to opine on it, and I on yours.
Of course the poster has a right to change his mind. I said I wasn't letting him off the hook so easily. Totally different things, and I agree with you completely on your point while standing by my original one.
Going long on a 2x leveraged oil ETF for the long term IS a surefire bet, just a very bad one.
Going long via a normal oil ETF for the long term is still quite questionable.
What the above poster is saying is - you're doing something with real consequences and, by writing about it you could hurt not just yourself but other people too.
Learn from his mistakes and given you are patently insufficiently informed to do this, don't do it. Given all you're trying to do is implement Scott Adams and NNT's advice why not just link to their articles and leave it at that. Why do you feel the need to pontificate to the world about this subject?
The author starts off well, makes an important point about stock picking never being better then a random walk and then.... picks stocks. Pure genius!
It shows you in a true, completely unintentional way, how so many people get sucked into this even when they trying as hard as they can NOT to get suckered like everyone else.
Dilbert's strategy is essentially a bet on the global economy minus Europe. Since Europe is a part of the global economy, I'm guessing +/- Europe doesn't make much of a difference.
The author's investment is a complex bet on individual stocks, commodities, and more commodities. It's just amazing how unaware smart people can be when they are outsmarting themselves.
Actually the portfolio is bonds, an index fund, and only a small fraction in a commodity and one stock. You could argue that I should keep the individual stock out of it. But the rest of your argument is just straw man.
Long term, the price of oil is capped by the cost of converting coal to diesel. Last I saw, this price is around $70-100 per barrel. Coal to diesel is horrible for the environment (twice the CO2 emissions of burning regular petroleum), but the unfortunate fact of life is that both China and the US (two biggest energy consumers) have essentially infinite supplies of coal (1000+ years at current production levels). The US will not enact a Carbon tax in the near future because 1/2 of Americans believe stuff that is false (CO2 does not lead to global warming). The only thing preventing large scale coals to liquids development are the huge capital costs involved and the reluctance of banks to take the risk that the price of oil will drop below the magic number ($70 per barrel).
I read in New Scientist a couple of years ago that Peak Coal has happened as well. Original article behind paywall. Its referred to in wikipedia article here http://en.wikipedia.org/wiki/Peak_coal
You're betting on oil going up two days after Argentina announced that it has certified 100 billion more barrels of oil as proven reserves, giving them more reserves than Saudi Arabia. And Brazil is getting ready to announce that they also have more reserves than Saudi Arabia. In other words, they've pushed the "run out of oil" date out by 10 years, and they're not the only ones certifying new reserves.
I think you've got "Black Swan" backwards. Everybody believes we're running out of oil, and it is priced accordingly. But there are lots of "black swan" type events that can come out of left field to either massively increase the supply of oil or decrease the demand.
You say that alternatives are "unlikely", but that's the whole point of the Black Swan book -- "unlikely" is much more likely than most people think it is.
IMO, the real "black swan" bet is against oil, not on it.
What the price of oil does and what you think it will do are often two completely separate things.
One quick point-- Argentina might have more reserves than Saudi, but how much does it cost to pull it out of the ground? 60 years ago Saudi just stuck a straw in the ground to pull out its resources, but now most extractions require the equivalent of a small space station just to get started. Brazil is facing the same issue with its deepwater reserves, and I'd expect Argentina to have similar obstacles.
"What the price of oil does and what you think it will do are often two completely separate things."
Very true. A true Taleb style black swan investment would be to bet on both $30 oil and on $300 oil, and bet against $100 oil. Except that there are a lot of people betting on $300 oil, making that bet exceptionally expensive, so Taleb probably wouldn't bet on it.
"how much does it cost to pull it out of the ground?"
A lot less than $90, the current price of oil. In Argentina's case much of the cost is in refinement, since their oil is very heavy. If my memory serves me correctly, Argentinian oil becomes profitable at about $30 a barrel. Brazilian deepwater reserves do require the equivalent of space stations to extract, but hundreds of billions of barrels of oil is a pretty nice incentive to make that investment...
While I agree with his suggestion to just save yourself time, grief, and money by going with index funds rather than managed funds or stock picking, there are some nitpicks:
- "[Bonds] are not 100% safe, as their value can plummet if the issuing institution goes bust. You can mitigate the risk by investing in bonds from a varied pool of ‘reliable’ institutions (such as governments)."
Bonds have many types of risk; the strength of the bond issuer is only one of them. The more common risk is interest rate risk, where you buy a bond that pays 1%, then interest rates rise to 3%, and you have to sell your bond at a loss to make it match the new 3% offerings. This affects ALL bonds, not just the "safe" ones. However, you can mitigate this risk by buying bonds with a shorter duration (ie ones that pay out within a couple years rather than a couple decades).
- ETFs
ETFs are a useful counterpart to normal index funds, but keep in mind that they are not quite the same. For example, unless you're getting free trades at eg Vanguard or Wells Fargo, each time you buy or sell ETF shares will cost you a fee, so it's best to buy them only if you intend to keep them at least for several years. Another notable difference is that ETFs are repriced constantly throughout the trading day, whereas mutual funds are repriced only once a trading day at the closing bell.
- Investing in Startups
If you already work in the tech industry, keep in mind that investing in your own industry ties both your income and your savings to that industry, so if the industry sinks, you're in danger of losing both simultaneously. This also applies to owning stock in your own company. Not saying don't do it, but just keep this in mind.
If you're really just looking for simple, sound information on where to reasonably store your savings, I recommend reading the Bogleheads Wiki at http://www.bogleheads.org/wiki/Main_Page, and/or a book named "The Random Walk Guide to Investing". If you have questions, bogleheads.org also has a very good forum.
Investing is actually quite simple, and is only made to look complicated by those who would rather you hand your money to them instead.
Funny you should mention "The Random Walk Guide to Investing". Towards the end of that book the author mentions Scott Adams himself, and ends up basically saying "what he said". I think the book adds very little to what you can get from Scott's article (or mine), besides perhaps some tax advice and common sense stuff (pay off your credit card bills).
Given that Scott's article recommends a 100% stock allocation to everyone >= 10 years from retirement with half of that in emerging markets (which only represent a small percentage of the total stock market), I take his advice with a large grain of salt.
Keep in mind this is also the guy who thought ISDN would win the broadband wars.
I'm not sure having 55% invested in bonds after one of the biggest runups in bonds in recent history is a good idea. What happens when the Fed eventually stops buying Treasury bonds? What happens when states and municipalities start going under (currently states can't declare bankruptcy but if you think the US Government is going to let California, Illinois, New Jersey et. al go under, you're crazy)? I think bond holders will be forced to take a hair cut.
The OP also seems to not fully understand why precious metals and commodities have had just a big run up, namely the possible end to our current fiat monetary system. As long as the Fed continues to try to increase liquidity through Treasury buying, precious metals are likely to see increased demand.
Good point about bonds. I was thinking of splitting that 55%-60% between bonds and something even safer (money market?). I haven't found anything easy to invest in that currently gives returns above inflation. Any suggestions?
I do understand the risk to the monetary system. That's why I'm advocating diversifying into precious metals and commodities as well. That's something that seems rarely mentioned in investment advice, but ETFs make it relatively easy now.
If you're worried about interest rate risk, a short term bond fund will mitigate that risk. Also keep in mind that a 'market crash' for bonds is only a ~10-15% drop.
Wait a minute, you're worried that bonds have had a big run up in prices and are now overvalued, yet you want to get into precious metals?
I think the reasons for the bond run up and precious metals run up are different. At the risk of oversimplifying, the appreciation in bonds is due to a flight to safety and the US Fed instituting a pretty substantial bond buying program to keep interest rates down. Eventually those factors will correct and bonds will follow.
Precious metals have increased because investors no longer believe that paper currency is a reliable store of wealth along with a huge increase in the Fed balance sheet. Also, there is some evidence that large US banks have conspired to keep the metals market artificially constrained, especially the silver market. While precious metals have had a huge runup, the fundamentals are still strong for future appreciation (large Fed balance sheet for the foreseeable future, unstable monetary policies) and therefore, I don't see the risk to the downside in the metals.
> the appreciation in bonds is due to a flight to safety
> Precious metals have increased because investors no longer believe that paper currency is a reliable store of wealth
Isn't that also a flight to safety, then? Not an identical variety of safety, but both seem to be driven by the same move-your-wealth-somewhere-safe sentiment that the financial crisis induced; some people picked U.S. treasuries, other people picked gold or copper or whatever. It's possible that one of those flights will be longer-lasting, though, if that's what you're predicting.
Gold prices in particular are also very dependent on central bank policy, because a large portion of the current value of gold is dependent on large quantities being held out of the market by central banks. It's close to fiat money in that sense, in that its value is dependent on central-bank policy propping it up. I'd be willing to grant that the policy risk is lower, though: while Federal Reserve action could tank either treasury prices or gold prices, the likelihood of the Federal Reserve tanking treasury prices is probably higher. But if it decided to sell of any significant portion of its 9,000 tons of gold to raise revenue...
I've had a thought recently that bonds are quirky in that - unlike other investments - they behave like a utility. I've just seen that expressed in your comment.
You didn't say you were chasing a particular return, but that you were chasing safety. Bonds have a special property in that they combine being very flexible and are considered to be very safe. I think this creates a demand for them due to that combination, rather than due to their return on investment.
I don't see the evidence that they are that safe. Certainly, history shows many examples of governments which have spiraled into debt and inflated or defaulted.
But so long as there's a population that acts along this logic, it would seem that bonds will function as a nice, flexible store of value.
> ETFs make it relatively easy now.
I suspect some of them are vulnerable to the same flaws as the financial system. For example, some ETFs don't keep physical holdings of the asset they represent, and have positions that are exposed to counterparty risk. For example, I read about an ETF that allowed people to borrow its stock for shorting.
If I was investing in that sort of ETF, I'd be concerned about upside. Holding commodities can be nice in a black swan event. But ETFs with counterparty risk may themselves fall over at such a time.
This brings us back to the original "point" of precious metals. They are small enough and valuable enough to hold physically. You don't need to buy a gold ETF, you can buy actual gold.
And this is not just in case of a "black swan" event, it is a counter to the very high rates of inflation we're seeing.
You're right that ETFs have counter party risk, holding physical gold or platinum has little risk. (You can hold it in a safe deposit box, or in a very small cardboard box well hidden in your house and have pretty good surety that no thief will ever find it. Even $100,000 in platinum is very compact.)
I don't know much about finance, but this article seems to beg an obvious question -
Sure, Wall Street emulates a random walk. Savvy investors will not try to pick stocks, but recognize the random nature of the market and invest accordingly. Fine.
But then he puts down the "self-proclaimed experts" who believe the market is not random, behave as if it is not, and would have you believe the same.
Isn't it only because of those experts in competition with eachother that the market can be seemingly random? The market approximates a perfect market only because of all the people/algorithms constantly eagle-eyed for an over or under-valued stock. Ironically, if everyone acted as if the market were random, the market would become less perfect, and it would then become stupid not to look at the real factors behind stock prices.
I think you're completely right. Market efficiency is the opposite of a self-fulfilling prophecy. The more people believe it, the less efficient the market.
A paper I read once: somebody had a market simulation with a bunch of agents looking at fundamentals. He got a nice smooth market that approximated the "real" prices pretty closely.
Then he changed it and made the agents attempt to predict each others' actions. The whole market turned chaotic, unpredictably swinging up and down.
Hm. I'm kind of surprised that that outcome was even in doubt. Any algorithm based on externals is going to be more stable than a self-referential algorithm, simply because self-referential algorithms are extremely prone to feedback loops.
I agree it's not too surprising. What's more surprising is that efficient-market theorists ignore the fact that so many traders in the market are using the self-referential algorithm.
Don't confuse a great company with a great investment. The crux of the matter is to find stocks that are priced below their value. Which he argues professional analysts can't do. But somehow amateurs are supposed to be able to do this.
I wouldn't bet on it. How many people on HN would recommend investing in MSFT? Close to none. And yet Microsoft is still unrivaled cash machine of tech world.
This strategy of splitting into extremely low and high risk investments makes little sense to me.
Knowing that some sector is high volatility doesn't help you "prepare for black swan events". Okay, some of these stocks may go off like a rocket. But you don't know which one/ones. So you're still just getting whatever the expected value is, so you may as well just be buying the index (unless you have a particular utility curve that over-values a critical mass of money, eg to start a business).
Let's say you're gambling on rolls of a die. You pay $1 per roll, and on 6 you get $6, on 1-5 you get $1.50. How often should you guess 6? I hope you'd answer "never". Okay. Now ignore the payoffs, and just try to pick correctly as many rolls as possible. How often should you pick 6 for this goal? People want to say 1/6th here, when the answer is, again, "never".
I think this investment strategy falls into a similar trap. You know that there are these stocks that have a low probability of massive success. This feels like information, so you want to throw some money on them. But all the probability of success can tell you is what their expected value is, since you dont know which one will succeed, just as you dont know which roll of the die to bet 6 on.
Really like the little logos in the text, next to the links. Hate the way chrome cold-loads them a good few hundred milliseconds before the fonts, and I just see a load of icons floating in white emptiness before the text appears.
Despite some flaws, I like the overall investment thesis. Traditional portfolio theory would say that 70% "safe" stocks (say, blue chips) plus 30% bonds is about the same as 50% "risky" stocks (say, small caps or emerging markets) plus 50% bonds. Assume for the sake of argument that the math works out, and that the two portfolios have the same expected return.
But those portfolios are only equal if you believe the future will look a lot like the past. If you take black swans into account, the portfolio with the higher "safe" allocation is preferable. If Peak Oil or Nuke War or Famine drives stocks down by 90% for several decades, the 70/30 portfolio leaves you with 37% of your wealth, while the 50/50 portfolio leaves you with 55%.
My black swan portfolio would look like this:
* 25% bonds (US treasuries)
* 25% tips (inflation-protected bonds)
* 25% US small cap value stocks
* 25% international small cap value stocks
I'd consider adding in precious metals if they weren't so hot right now.
55% Bonds: This gives me a nice 3% per year and keeps me safe in case all the other stuff crashes.
It's not safe to assume bond markets can't crash. You may keep your 3% but total value can get cut if the interest rate rises.
I just checked their holdings of BND [http://bit.ly/fSlaO3], and they've got a good amount of money tied up in US Gov't Housing based GSE's. I don't think they will get zerohedged like many think, but there is extreme tail risk in these positions. You could also say the same about the bond holdings and if we get inflation and rates rise, it's not going to be that great of a bet, but then you're getting into macro trades, which clearly are useless since the market takes a random walk anyway.
I didn't know you could invest in ARM stock. Some time ago I tried, but I couldn't find them, so I just assumed they are not publicly traded.
These are the kinds of problems you have as a complete noob in the stock market.
I still remember my first stock trading game, where I wanted to buy Sharp (the ones who build flatscreens - this was in the year 2000). I ended up "buying" a company called "Sharp" that produces furniture.
Admittedly, it can be difficult to figure out a company symbol. But, I would expect you to be clued in before you bought it going through a due diligence processes.
1. Does the balance sheet make sense? Do industry and manufacturing companies have a lot of money tied up in capital expenses?
2. Most online finance websites show related companies. Does other technology and TV manufactures show up on the list? Do their competitors?
3. Does the price seem right? Are you trying to buy a hot new stock for $20 or $30 dollars a share, when no recent split occurred? Is the price <$10?
As you research the company and dig in, I would expect SOMETHING to make you say, "that can't be right" along the way.
The progression in your list of 'safety net' investments is 1) Cash 2) Savings accounts 3) Certificates of deposit
4) Bonds. That last step is a doozy. Considered this coursely, BND is perhaps appropriate. But it is hardly 'safe'. I think Taleb's idea of safe is more oriented toward catastrophic events. Think LTCM, Asian crisis, S&L, unregulated derivatives.
Well, T-Bills, of course. Short term, so that you don't get stuck when interest rates rise. TIPS are another thought.
You're dismissing lots of conservative/safe alternatives because they don't yield much. But that's today. Next year, 5 years, 20 years, who knows? Today, maybe the best thing is to sit back and wait for better conditions, versus take on risk.
Overall, I thought your discussion of "why invest" was too brief. You don't actually need to invest/gamble your money. Just save it (T-Bills, etc) and work to make enough.
If you've got a pile, why invest? What's the possible use of doubling the size of your pile? Can't buy any more stuff. But if you lose half your pile, it might seriously hurt.
As the next guy mentioned, I'm also not sure about BND - or bonds in particular - as a good safety net right now.
With the U.S. as heavilty-leveraged as it is now, if the past is any indicator, we're headed for inflation. For the same reasons that we got into this situation in the first place (people buying more home than they could actually afford). Look at the debt-to-income ratio of the country (deficit-to-GDP), and it's a parallel story to the housing boom.
That being said, at current valuations, are even precious metals safe? Who's to say?
I'd be interested in looking for an ETF that trades in TIPS - while the return is almost certainly less, the security offered by it is almost certainly more.
Otherwise, you and I see pretty much eye-to-eye, except I'm more heavily invested in stocks right now (mostly because lots of people over the past few years have been running the opposite way - another Buffett-ism). Nice post!
> In the scenario that I envision, where oil prices start to go up, and finally everybody agrees they will keep going up, futures dated further in the… future will be more expensive. Each time the fund has to roll over, it has to pay extra to switch to futurer futures. These costs can significantly eat at your returns.
The writer confuses buying bonds with trading in bonds. When you buy a bond, you are guaranteed a fixed percentage rate if you hold it to maturity. When you trade in bonds, you will discover that the bond market can be just as volatile as the stock market.
He also misunderstands Taleb's advice, at least as I understand it, about how to use the small percentage of your money you set aside for gambling. In short, you don't want to bet on probabilities of success, you want to bet against the probability that trees will grow to the sky. Or put another way, you want to be in a position to profit when all around you are losing their shirts.
But, the 2x leveraged fund is a Bad Idea. These just don't make sense or do what you think beyond the 1-day horizon. If you want a long-term leveraged bet on oil, one better way is to buy a long-term call option ("LEAP") on an ETF. That will work a lot better than the 2x fund. Not saying you really want a long-term levered bet on oil, but if you did, the option is a better approach.
That's a really hideous portfolio assembled from two public figures not known for individual investing. Taleb is a great writer and thinker, but he's a trader and the guy in the article says specifically he's a passive investor. Scott Adams is an interesting guy and index funds are a good idea, but 50% US/ 50% emerging equities is a really undiversified portfolio for an individual. I think he should read a bit more about investing from an individual investor perspective. I'd start with William Bernstein's brilliant "The Four Pillars of Investing".
You are contradicting yourself. You start by saying that fund managers and stock pickers do no better than random (and you are right), but then go ahead and start picking stocks and funds!
Investing in commodities futures gives me the willies, but if you're going that route anyway, also look into rare earth metals (or anything that goes into solid-state electronics besides silicon and copper, really) and phosphorus.
On the chance that we never move over to Thorium-fueled nuclear reactors, Uranium futures might be interesting as well. I'd really, really hate to have to take delivery of that stuff, though. >_<
A good article, but personally I'm concerned that your "safe picks" such as government bonds/ sovereign debt might be exactly the kind of black swan Taleb is talking about. He doesn't seem to be such a fan on US monetary policy: http://www.youtube.com/watch?v=YyHnPkXZYNI
BND is not really that safe. I've owned it for the past 2 years or so. There are occasional price swings (likely caused by interest rate speculation, but not sure) that can knock out months of dividend income gains. I would say that more diversity than just BND is needed for the bonds allocation.
In my opinion, Fixed income investments like Bonds & CDs are incredibly risky in our current economic climate. If interest rates rise or inflation increases then these investments can loose a great deal of their value. Also there is always a risk of default.
Be wary of any advice to buy ARMH merely on the fact that ARM chips are widely used.
ARMH doesn't make money on the chips, but the designs - take a look at their business model before you decide that is something that will cause the price to grow significantly long term.
The concept behind the article is good, but his actual investment portfolio is pretty questionable.
Basically, there are 5 main factors you need to be aware of in investing:
1) Compound interest: An investment making small gains over a long period of time will do amazingly well. Thus, start saving early, and far in advance of any expected draws.
2) Diversification: I was going to say mean-reversion on individual stocks, or portfolios reducing risk, but I'm not sure what the dominant factor really is. Suffice it to say, all eggs in one basket bad, and there are a lot of logical falacies borne of trying to predict the future.
3) Stacked deck; not a level playing field: There is one consistent winner in any casino: the house. If you're investing as if it's betting, the winners will be those charging you to play (commissions, spreads) and better-informed counterparties. You want minimal fees, and minimal number of transactions, and to participate in big, liquid markets with openly displayed prices.
4) Psychological costs of investing: this isn't your job. In order to hedge against wild swings, you need a very large amount of money relative to the size of your investments, and if you're spending your time and energy managing investments, you're probably taking away from either making money through your profession or enjoying life.
5) Don't leave money on the table: take advantage of any 401k matching, etc. you can, even if you just put money into cash or treasuries. This is literally free money.
In the end, a strategy which encourages you to buy ARMH because the iPhone is cool is probably suboptimal for most investors.
What I want in my investing is for it to be relatively automatic, well balanced, and low stress. While I do make individual stock purchases sometimes (BP, or a list of companies I really like and would love to buy on dips when P/E is proper), I generally believe in investing primarily in low-fee no-load mutual funds. The key is that fees (expense ratio) are as low as possible, and that the overall mix of funds gives you the best asset allocation. Hint: most ETFs actually are really expensive relative to the underlying assets; the premium for exchange-traded liquidity is huge. Combine that with buy and hold/compounding and the low fees are a big win. Another way to save is to use tax-advantaged accounts like roth or regular 401k or IRA to hold investment assets.
You can worry about things at the level of "how much risk do I want", "how much can I afford to save each month", and then just plug things into relatively standard portfolios.
I try to have this low-risk investment portfolio, coupled (as Taleb suggests) with a high-risk high-return slice (my startup, and hopefully at some point angel investments and LP status in some great funds). I do agree with him that the middle ground of risk is a really bad place to be; go with safety (in terms of diversification across a bunch of safe assets) and then focus your risk in areas where you have expertise and insight.
It's a shame most of the "target retirement date" mutual funds are actually high expense and kind of scammy; in theory they would be ideal.
The US Reserve Bank currently has a target cash rate of 0-0.25%, whereas the RBA has it set to 4.25%. Correspondingly, the interest rates on bank bonds and savings accounts are much lower in the US than Australia.
This difference is also one of the reasons for the high value of the Australian dollar compared to the USD.
While it might seem obvious that the OP should just open a foreign savings account, the practical hassles associated with that and the risk of loss due to foreign exchange probably make it less worthwhile than investing in companies that have some aspect of their growth tied to the Australian economy.
So the ASX is mostly those big companies, but what about the other index funds, such as the small caps?
That and I speculate that investing in Australian index funds would be similar to investing in China more directly, given how tightly coupled the economies seem to be getting.
> So the ASX is mostly those big companies, but what about the other index funds, such as the small caps?
If you're prepared for the low liquidity and high risk, be my guest.
> That and I speculate that investing in Australian index funds would be similar to investing in China more directly, given how tightly coupled the economies seem to be getting.
It is if you invest in Rio Tinto and BHP. The main tradeoff is that the Australian market is regulated by officials are probably less likely to be corrupt. Plus, if you're not Australian, a different currency risk profile.
Some people do the Australian investment trade quite well. It used to be done mostly by Japanese investors, who borrowed money in Japan at low Japanese interest rates (~0.5%) and then bought US or Australian bonds at ~5%.
So I think the author could do with reading "The long and the short of it" by John Kay. Might help him understand how NNT did what he did.
The extra takeaway is that portfolio construction should be about finding investments that will probably all in the long term give an above inflation return (else what's the point) but, and this is the key. The investments should have low (ideally negative) correlation.
This means you look carefully at the underlying wealth generating machine you plan on investing in to check it's sound, and you consider scenarios to check you're actually diverse. A common strategy is to invest largely in an index of blue chips and have a risky pool of small caps. This hardly helps you at all since a recession is bad for both (and you're most likely to lose your job and need your savings when they're low).
So what does that give us:
* 55% short term US Gov Bonds
* 15% US Short term small caps
* 15% Precious metal ETF
* 15% Oil ETF.
First up, fundamentals - the USG is currently upto it's eyeballs in debt with no obvious political will to cut spending and raise taxes. The debt is all USD denominated so they may well inflate, but they could also default - either way bad for us. You might say 'but my liabilities are all in USD!' but personally if the standard of living in my country drops everyone around me being poor too is going to be scant comfort.
US short term small caps, the US has very pro business labour laws and taxes, it's got lots of well educated workers, whilst there has been a big run up in stocks lately (hello there QE) we're not trying to time the market and can clearly see where the fundamental wealth is generated.
Precious metal ETF - This ETF holds physical gold, silver, platinum and palladium in London and Zurich under custody of JP Morgan it charges a .6% fee. Precious metals have been a store of value for ages. Whilst there's been a big run up lately we're basically betting on bad news and there's obviously still the potential for more bad news. However since we don't hold it ourself we're hoping for bad but not catastrophic news.
Oil ETF - this ones based on short term oil futures and run by DB proshares. It seems to track oil better than some others although it will naturally under-perform the underlying commodity. Oil gets used everywhere. However simply holding oil is not owning a productive asset, this is a bet on future oil shortage not an investment. Personally I agree that shortages and inflation are likely to drive the price of oil higher but it's still a bet.
So that's individual fundamentals, now we look at correlation of these 4 assets. With 55% in a single bond fund any problem with that investment is very bad news. If the fund suffers from fraud, or some of the bonds default (or look like defaulting) you'll lose a large chunk of your savings.
Then we have exposure to the US. A significant slowdown in US economic activity is bad for the price of oil, bad for US taxes (and thus bond default chances) and very bad for US stocks. 85% of the portfolio could get creamed in this scenario. Theoretically GLTR could help us here but we also have to worry in this scenario if JP Morgan will survive. Even if they do other non-physical gold ETFs may not and will our ETF suddenly be under-priced due to perceived risk?
Whilst the concepts in the article are useful, as others have pointed out the portfolio seems to be an excellent example of how smart people can get tripped up in this environment.
Stock picking does work. You just have to pick stocks wisely. Looking at the recommendations of "financial experts" is not stock picking. What is the basis of these so-called "experts"? The fact that they are stock salesman. Do you let a used car dealer advise you on which used car to buy? OR do you do your own research?
To further that analogy, this article is saying that because used car salesmen advise you to buy cars that benefit them more than you, you should just give up on picking a car and instead just drive whatever car you're assigned by some entity made up of used car salesman! You may be driving a clunker, but at least you didn't have to think about it.
Stock picking works. And not just for Warren Buffett. Using someone else's "hot tip" is not stock picking. But analyzing the economics of the situation, both macro and micro, and the particulars of a given company will let you predict the return you'll get from a given company.
You know how to know whether an investment program is rational or not? If it considers prices. A given stock may be a fantastic company, but it may be over priced.
When you see people talking completely independant of any price analysis (as they do in this article and the comments) they are essentially debating on whether red or black is going to come up on the roulette wheel. If you don't have the price of the asset as a core feature of any analysis you're just gambling.
Commodities are probably the best investment going right now, and for one simple reason: we are in the age of inflation. So, not only will their prices be going up because of inflation, but because people will be piling into them to avoid inflation.
Don't take my word on it, though. This is not a hot tip. Learn enough economics to be able to analyze the world.
Similarly, having read the Wikipedia page on Contango wouldn't be enough to get me to go up against professional full time oil traders.
Also, aren't commodity ETFs supposed to maximize the risk of trading uninformed against professional shark traders? I didn't follow the hype cycle on this story, but I know it started with "DO NOT BUY COMMODITY ETFs".