What's in Your Portfolio

[xoxoxoBruce]

The stock market works the same way as the Para mutual window at the track. A whole bunch of people guessing sets the odds/price, and like the Para mutual window, some walk away with money.

[glatt]

Don't all markets work that way? Everyone is just guessing about everything.

[xoxoxoBruce]

Yes, and everyone should keep that in mind unless they're insider trading.

[Griff]

Hmmm... irrational exuberance anyone?

[tw]

Originally Posted by glatt

Don't all markets work that way? Everyone is just guessing about everything.

Clearly not. We know stock brokers routinely under perform markets. Because they are betting on things that are irrelevant to what is relevant (ie economic activity and a productive economy). The stock market tends to reward those who better understand how markets and economies really work.

We've been through this before. If you want to underperform the market (also called lose money), then be a fool taking advise from a stock broker. Whose only interest is enriching himself while more likely providing bad advise.

These same facts were made woefully obvious in PBS Frontline's The Retirement Gamble. Like most every Fronline broadcast, it is a 'must watch'.

Stock markets serves other purposes. For example, it is a ballpark predictor of future economic conditions. Or in my case, a chance to enrich myself at the expense of stock brokers when I knew of Ford's tremendous increase in value in years before 2007 while stock broker types were foolishly pricing Ford at 5 times less money by doing spread sheet analysis. A chance for the common man to share in the wealth. Since best economies put more of the wealth into the hands of little people rather than the richest.

Markets are a number from which to make decisions when, otherwise, no facts and numbers exist. If working properly, markets also gives all a window or warning about economic activity. This massive recession was due (in part) to massive trading (ie CDO, SIVs, etc) in investments not traded on open markets. Finance people screwing the economy to enrich themselves while not making America stronger by trading under the table - not in open markets. Resulting in a financial shock to all others when it was discovered how much economic activity was being done (all but illegally) under the table. With contracts written to enrich themselves by harming counter-parties. All such investments should be in open markets so that everyone has numbers that (ballpark) describe the economy. And so that all parties to a contract prosper.

Betting on horses is similar. Except the winner of a horse race is not doing anything productive. Betting on horses is how the public predicts what a horse might do. No different than a board game or simulator. We learn by playing (and in theory having fun) at something that has no serious consequences. No different than board games like Monopoly or Risk.

Stock market is not gambling IF one learns what is relevant to stock prices in the long term. Words such as transparency, innovation and productivity apply.

[classicman]

Originally Posted by Lamplighter

...and they say the Dow is a 6-month-out predictor of the US economy

Originally Posted by Griff

Hmmm... irrational exuberance anyone?

Yeh, really. Did they say that 6 months before it crashed, Lamp?

[Lamplighter]

Originally Posted by classicman

Yeh, really. Did they say that 6 months before it crashed, Lamp?

I have no idea if "they said that" back then, but these two pics seem to say it did !

The DJ seems to have started down in '07/'08, and crashed in '08/'09
The US GDP didn't start down til late '08, and bottomed in mid '09

From here.

IRL, I don't follow either the DJ or the GDP

[tw]

Warren Buffet confirmed that stock brokers (including active account managers) tend to be inferior investors. He left this recommendation for his wife. "My advice ... could not be more simple: put 10% of the cash in short term government bonds and 90% in a very low-cost S&P 500 index fund." Inventing using professional assistance has long been proven a bad investment. As PBS's Frontline so accurately demonstrates in The Retirement Gamble.

The Economist recently said same. "Each generation of investors were prepared to believe that the returns achieved by active fund managers were down to skill. Now it is clear that the skills were the result of factors that can be replicated." Those factors are found in index funds where no professional is making decisions.

In simple terms, Exchange Traded Funds or (ETFs) are superior to what any stock broker or financial expert will accomplish. The Economist says why professionals offer poor advice. "Historically, many earned commissions paid by the fund-management company whose products they sold and incorporated in the annual management charge. This system created a conflict of interest, the products that were best for advisers to sell were not necessarily the best products for clients to own. Low-cost trackers did not have the fees to reward advisers, so tended to not be recommended."

Warren Buffet's recommendations are based in similar reasoning. Of course, that should be obvious. "Since fund managers incur costs, the performance of the average fund manager is doomed to lag the index."

Peter Lynch of Fidelity (the best investor for 10 consecutive years) said same. Smarter investors learn about the product rather than spin from finance reports. He cited one example of how he made superior investments. He followed his wife and daughters into the mall. To identify products they preferred. Those were stocks that would increase in value years later. Why would anyone invest in an American shoe company? He watched what they selected. American Shoe was one of his most successful investments.

However, should one decide they are not product savvy, then 70% of the ETFs are provided by three companies: Blackrock, State Street, and Vanguard. Anyone paying 1% or 1.5% management fees wants to be financially raped. Fees should be as much as 0.2%.

Jack Bogle introduced the first index fund for retail investors in 1973. Wall Street professionals scoffed calling it a folly.

The informed investors is best advised to avoid Wall Street professionals who recommended Kodak because Kodak said they would be world leaders in paper printing - when paper was on the way out. Kodak even had no understanding of 3D printing - the future. Most Wall Street professionals knew nothing about its product; only studied the financials. Those professionals repeatedly were the source of folly.

The Economist note a problem with many if not most investors. "a belief that investors can do better than the index by picking a hot fund: money for old hope. ... It is easy to identify those funds with hindsight, but hard to do so in advance."

Only way to beat the market is it identify what makes profits years before profits are realized. That means studying products. And, of course, identifying top management that does not stifle innovation. Since 85% of problems are directly traceable to business school trained top management (ie every GM CEO since the 1960s). As Steve Balmer, a classic business school product, demonstrated by hobbling product development in Microsoft after Bill Gates left.

Smartest investors ignore bean counter types and identify innovators. Otherwise, the next best investment is an ETF. In every case, superior investing means cutting out people trained by business schools. Since bean counters (ie stock brokers) know the purpose of a company is profit - for them, not you.

[Undertoad]

Top performing stocks of 2013

RR Donnelley
Delta
Supervalu
Caesar's Entertainment
Icahn Enterprises
Micron Technology
Best Buy
Rite Aid
Freddie Mac
Fannie Mae

I don't think anyone could pick these by looking at retail performance in a mall. The secret to picking these stocks would have been to find shitty stocks in 2012 that were poised expected to turn around. (Wheeee JC PENNEY 2014!! But if you read that article, you'll read that Best Buy was a mirage...)

I'm not sure Lynch wasn't pulling a fast one on us with that strategy anyway. Most companies are not public-facing enough to know whether they are on the right track with respect to fashion.

Rite Aid has been one of the worst-run companies for a long time. Are they better now?

[tw]

Originally Posted by Undertoad

Rite Aid has been one of the worst-run companies for a long time. Are they better now?

Rite Aid is an interesting company. Management in Harrisburg was operating major fraud over a decade ago. A resulting stock price dropped to $5 about a decade ago. The lady who took over instituted major reforms. Rite Aid purchased JC Penny's drug store company. Refurbished those stores. Then built many new buildings. In Central PA, the only new building in that town might be a Rite Aid. Within a year many stores were abandoned or replaced by another nearby building. Rite Aid stock dropped to well below $2. And has sat there for years. In 2008-9, stock price was so low at to risk delisting (below $1 per share).

I have not seen a new Rite Aid building or store closure for many years. As a result, Rite Aid has stopped losing $500m annually. Last year it actually showed a profit of about $100m. Rite Aid stock that spent a past 7 years at about $1 per share, has suddenly risen to $5. Far below a $60 it once sold for. Management stopping wasting money on boondoogles some years ago. Eventually profits resulted from changes. Suddenly increasing from $1 to $5 per share in one year. Stock prices changed long after management stopped building and abandoning buildings years ago. As usual, the finance reports what happened years ago.

[Big Sarge]

I'll admit my purchase of Manchester United was a huge mistake. I should have known better than buy stock in a silly game that no one really watches

[tw]

Originally Posted by Big Sarge

I'll admit my purchase of Manchester United was a huge mistake.

Expected when an American buys a team that does what he does not understand. When the purchase was only based in a foolish desire only to make profits.

Six premier league teans purchased by Americans becausehot dogs were not yet selling for $10+ and seats for over 50 quid. Their spread sheet analysis saw a future of obscene profits - football be damned.

[Big Sarge]

I wonder if I could trade my Manchester United for partial ownership of the Clippers? Maybe, just maybe, it might be worth a hot dog and a beer.

[tw]

Originally Posted by Big Sarge

I wonder if I could trade my Manchester United for partial ownership of the Clippers?

Now that Malcolm Glazer is gone, there would be many takers for your stock. 85% of all problems can be eliminated by death.