MORE PARAPROSDOKIANS

How it is one careless match can start a forest fire, but it takes a whole box to start a campfire?

Dolphins are so smart that within a few weeks of captivity, they can train people to stand on the very edge of the pool and throw those fish.

I discovered I scream the same way whether I'm about to be devoured by a great white shark or if a piece of seaweed touches my foot.

Some cause happiness wherever they go. Others whenever they go.

I always take life with a grain of salt, plus a slice of lemon, and a shot of tequila.

Some people hear voices. Some see invisible people. Others have no imagination whatsoever.

(In case you missed my earlier NewsLetter, a paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected.)

LOTS OF BASKETS

No question the markets have been scary and whenever that happens you’ll read about the value of diversification. The good news is, it works. It may not work day-to-day but over economic cycles, it works. Still, most investors do not really understand what a real diversified portfolio looks like so I did a quick and dirty evaluation of E&K’s typical investment portfolio and found:

o Stock positions in well over 12,000 different companies.

o The largest single position was Exxon at about 0.8% in an all equity allocation or less than ½% in a 40/60 portfolio.

o Companies based in over 40 different countries

 

Again, no guarantee but it’s unlikely that all of these companies will go bankrupt together.

HOT DOG!

These ads popped up when I went to Yahoo Finance. A fortune overnight and being able to afford anything I want sounds pretty good. I was just wondering, if the promoters can help me get filthy rich overnight, why on earth are they spending money on Yahoo to promote their services? Why not keep the secrets to themselves and get really filthy rich on their own? I guess they’re just charitably inclined. Right.

IF YOU WEREN’T PARANOID BEFORE, YOU SHOULD BE NOW!!

Big Brother is Watching. My tech guru buddy Rick sent me this:

http://www.gigapixel.com/image/gigapan-canucks-g7.html

It’s an aerial photo of about a gazillion people crammed over a number of city blocks in Vancouver. You can zero in on any one specific single face. The clarity is unbelievable. Put your cursor anywhere in the crowd and double-click a couple of times.

This is how the police can now identify rioters and trouble makers using high definition advanced technology. Don’t think of hiding yourself amongst thousands; ain’t gonna happen. You can be easily detected and identified.

ENGLISH IS EASY – NOT!

From my friend Ed:

The bandage was wound around the wound.

The farm was used to produce produce.

He could lead if he would get the lead out.

Since there is no time like the present, he thought it was time to present the present

When shot at, the dove dove into the bushes.

The insurance was invalid for the invalid.

The buck does funny things when the does are present.

To help with planting, the farmer taught his sow to sow.

The wind was too strong to wind the sail.

How can I intimate this to my most intimate friend?

 

I’VE WARNED YOU

I know how tempting it is to believe that you can actively invest based on the news headlines and talking head gurus; however, 70+ years of U.S. market history demonstrates over and over the fallacy of that belief. We had a great example just last month. For most of November the headlines daily warned that the end of the world was nigh and investors bailed from the market in droves. Here are the headlines from the Wall Street Journal.

Monday November 7

Old Debts Dog Europe’s Banks

Lenders Slower Than Their U.S. Counterparts to Shed Risky Mortgage Assets

Thursday November 10

Italy Fears Rattle World’s Investors

Global Markets Slide as Turmoil Fuels Anxiety Crisis Could Ricochet Across Atlantic,

Endanger Common Currency

Monday November 14

Euro Risk Hit Banks

Questions About Hedges Fester as Firms Detail Exposure

Wednesday November 16

Turmoil Spreads in Europe

Bond Market Selloff Hits Nations Seen as Healthy, Raising Specter of Contagion

Wednesday November 30.

American Lands in Bankruptcy

Pretty scary, right? What happened next? In less than one week the market was up almost 7% and I’m not suggesting that the good news will continue in the short term, just that investing requires a long term commitment to the market. To earn market returns you need to be in the market.

STATISTICS (AND REALITY)

The problem with trying to time the market is that if you miss periods like the end of November your long term returns may be decimated. A study looking at the 20 year period between 1987 and 2007 found that a fully invested portfolio would have earned 11.5% annually over the 5,296 days the market was open. The poor investor who missed only 10 of the best days (out of 5,296!) would have seen their annual return drop to 8%. That’s a 30% reduction in return for missing 0.2% of the days!!

And pity the poor investors who missed the 40 best days (0.8%) as their annual return was a paltry 1.3%. Still, that was better than the real loser who missed 70 best days (1.3%) as their return was an annualized -3.6%.

And why on earth would an investor miss those good days? It turns out that our recent experience is not abnormal. In fact, it’s quite normal. Like last month, good market periods come when least expected. Another study looked at the 10 year period from August 1997 to August 2007 and found 70% of the best days occurred within 2 weeks of a worst day and 100% of the best days that occurred within 6 months of a worst day.

The moral, market timing sounds good but no one has ever successfully done it and most investors have lost significant capital trying. The only winners are the marketers touting the Siren Song of market timing. Ask yourself; if someone could really market time, why would they waste their time telling you about it? Why not just go get rich on their own?

HIND SIGHT

Need more examples of why guru chasing may be dangerous to your financial health? Smart Money’s 20/20 did an interesting piece on Buyer’s Remorse. As an example they posted the returns for the past decade of a number of big-name, conventional wisdom winner stocks compared to real winners:

And, with credit for honesty, Morningstar listed a number of its picks from last year and concluded it was a mixed bag. Their global selection, Evermore Global Value lost 7.02% vs. the World Index’s +2.42%.

I FEEL BETTER

In my last NewsLetter I wrote about China acting like a global economic blob taking over the world. Well shortly after sending my musings along, I read a paper from the San Francisco Fed, "The U.S. Content of 'Made in China'" Michael DeWitt, a practitioner and partner with Atlanta based Smith & Howard Wealth Management, and the person who introduced me to the paper, noted that one of the main points of the Fed paper is China may not be as dominant as we think.

Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending; only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%.

Expressed in dollar amounts, that means that of the $276 billion spent by consumers in 2010 on goods "Made in China" (or 2.7% of total consumer spending of $10,245 billion), only about $123 billion (0r 1.2% of consumer spending) reflects the contribution of Chinese content, and the other $153 billion (or 1.5% of consumer spending) actually goes to American companies and workers for value added in the U.S. from transportation, distribution, marketing, wholesale and retail activities. For those goods "Made in the USA" with parts imported from China, the contribution of the Chinese content represents only 0.7% of total consumer spending.

 

GOOD BLOG

We have lots of intelligent thoughtful clients and some graciously share their thoughts with all of us via a blog. One terrific example is Bob Kronish’s blog at

http://bobkronish.blogspot.com/. Here’s an excerpt from a recent entry:

“Who You Gonna Believe?

It’s interesting to note that there are some quotes from years ago that are just as valid today as they were when originated. One such is from the 1933 movie Duck Soup that starred the zany Marx Brothers. Although sometimes attributed to Groucho, it was Chico who said, “Well, who you gonna believe, me or your own eyes?” Essentially, this is the question that the mutual fund industry has asked investors since its inception. It is also its marketing strategy.

Mutual fund marketers promote the dubious benefits of investing in managed mutual funds despite empirical evidence to the contrary. Why do I say “dubious benefits?” Almost 10 years ago, I wrote in this column, “Think about this: The collective investments of all stock market investors perform equal to the market averages. After all, the stock market average performance is the result of the total of all investors’ actions. However, there are expenses associated with the investing process, therefore, after deducting these costs from the overall average; the results attained by individual investors must be lower than the average itself.”

The article continued, “Here is what John Bogle of Vanguard has to say about the costs of mutual funds: ‘In the world of mutual funds, costs are extremely large. The annual expense ratio of the median equity fund is now 1.6 percent and rising. Transaction costs are difficult to quantify with precision, but at the high portfolio turnover rates of the past decade (80% plus), an estimate of 0.5 percent to 1.0 percent hardly seems excessive. ‘All in’ costs, then, can be conservatively estimated at upwards of 2.0 percent per year.’” (This is still true.)

I then pointed out: “As a result, in order to beat the market, an investor must first exceed the market’s performance by at least 2.0 percent. If you invest in managed mutual funds, what is the likelihood of achieving that goal? Consider that numerous studies have shown that over the long term, the average mutual fund manager under performs the market. Why then would you believe that you could do better than a professional who has a huge staff and almost infinite information sources, yet still generates poor results?”

 

SUCH A BARGAIN

For that special person in your life. A new Vertu smartphone. Average price is $6,800 but for the really fancy model expect to pay up to $17,000. I guess it’s the sapphire crystal screen that kicks the price up.

BET YOU DIDN’T KNOW

According to American Way, Fletcher Davis from Athens, Texas introduced the world to the first real hamburger at the 1904 St. Louis World’s Fair. The story went on to say that Uncle Fletch also served fried potatoes made from a recipe he borrowed from a friend in Paris, Texas. Turns out a reporter for the New York Tribune who wrote a story about this new food grouping was clueless about Texas geography and his article included a reference to the yummy side of French fried potatoes.

NEAT STUFF

From Martina. If you’re looking to make airline reservations and want some cool help, check out www.hipmunk.com. Enter your itinerary and the system will provide you with all of the possible connections across all airlines. Below is an example I ran for a trip from Miami to San Francisco.

And, if you’re a serious biker and want to bike the Alps or just wondered what the Goddard Pass might look like before you start, take a look at http://www.cyclingthealps.com(not very impressive, is it?)

Finally, looking for a store that carries your favorite brand (i.e., label)? Head to the label finder at http://www.thelabelfinder.com. With a listing of almost 15,000 labels you’ll quickly locate (if it exists) a store in your neighborhood that carries the brand. Or, looking for a great hotel? Check out http://www.oyster.com for detailed pictures.

LITTLE WHITE BALL

If you didn’t get a chance to play in our charity golf tournament, here’s your chance to vicariously share the fun. http://youtu.be/vTEwltcB9Uk

WHO'S WHO

GREAT TRUTHS

I hate to sound so jaundiced about politicians (of all parties), but I am. So, the following humorous observations sent to me by my friend Ed really resonated with me.

Suppose you were an idiot. And suppose you were a member of Congress. But then I repeat myself. - Mark Twain

Giving money and power to government is like giving whiskey and car keys to teenage boys.-- P.J. O'Rourke, Civil Libertarian

I don't make jokes. I just watch the government and report the facts. - Will Rogers

No man's life, liberty, or property is safe while the legislature is in session. - Mark Twain

What this country needs are more unemployed politicians. - Edward Langley, Artist

COMING SOON

If you or someone in your family will soon be facing college tuition bills, according to Money Magazine, you’ll have better tools to make that decision. It seems that beginning in October all colleges must provide online calculators to assist you in estimating the college bill. You can find the info at www.cnmoney.com/collegecosts. Given that the percentage of students borrowing for college has risen from 34% in 1977 to 65% in 2000, this is no small issue.

RED CHINA??

That’s yesterday’s story. Decanter magazine reports that the Chinese government just approved a wine investment fund. Poised to invest approximately $150 million over the next five years primarily in Bordeaux and Burgundy, the fund is open to corporate investors at about $1.4 million and individuals at $140 thousand.

LOOKIN’ GOOD

Of the five states with the most CFP’s, Texas ranks #2 and Florida is #3 (California is #1, New York #4 and Illinois #5).

SPEAKING OF HOME

Coral Gables is home to more than 135 international corporate giants (a majority are Latin American or regional headquarters) and more than 20 consular and trade offices.

DON’T MAKE EM LIKE THEY USE TO

I don’t think these are the only things that have changed over the decades. In the future we’re not likely to see many Hedda Bekkers who at 102 is still a practicing psychotherapist in Los Angeles and Mazerine Wingate, at 101 a 40 year postal service veteran who still puts in four hours a day six days a week at the Lexington park, Md. Branch.

WISE WORDS

My friend, Boston practitioner Marc Freedman included the following quote by Condoleezza Rice, Former Secretary of State in his newsletter. Politics aside, I thought she was right on point.

"Today's headlines and history are rarely the same."

As I mused about earlier, words to keep in mind for anyone thinking about making significant investment changes based on the daily headlines.

FOR OLD FOGGIES

More reminices from 1955 courtesy of Dr. Fields.

Did you see where some baseball player just signed a contract for $50,000 a year just to play baseball?! It wouldn’t surprise me if someday they’ll be making more than the President.

Did you hear the post office is thinking about charging 7 cents just to mail a letter?!

The drive-in restaurant is convenient in mice weather, but I seriously doubt thay will ever catch on.

If they raise minimum wage to $1.00, nobody will be able to hire outside help at the store.

I’ll tell you one thing, if things keep going the way they are, it’s going to be impossible to buy groceries for $10.00.

No one can afford to be sick anymore. At $15.00 a day in the hospital, it’s too rich for my blood.

Thank goodness I won’t live to see the day when the Government takes half our income in taxes. I sometimes wonder if we are electing the best people to government.

It won’t be long before young couples are going to hire someone to watch their kids so they can both work.

MORE WORDS OF WISDOM

More insightful commentary from the sage of Omaha:

“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two years”.

“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

 

And next time you hear someone criticize “buy and hold” ask them why Warren Buffet seems so clueless.

“Inactivity strikes us as intelligent behavior. Neither we, nor most business managers, would dream of feverishly trading highly profitable subsidiaries because a small move in the discount rate was predicted or because some Wall Street pundit reversed his view on the market. We keep most of major holdings with a till death do us part attitude.”

As always, I hope you’ve enjoyed this issue; I enjoyed putting it together. Also as always, if you’re short of night time reading, you can find prior issues on our web site and if you know someone who would like to be added to our NewsLetter email list, drop a note to martinaschramm@evensky.com or have them sign up at http://www.evensky.com/.

Everyone at E&K wishes you and yours a Wonderful Holiday and a Happy and Healthy New Year.

 

 

(C) Evensky & Katz

www.evenskykatz.com