Getting Investment Advice from Piggington

[Doofrat]

Cabinboy,

I thought you were serious about the 6 month comparison, reading it now, I can hear the sarcasm being clicked on prior to the statement.

You bring up some good points about the four principals, and people that don’t have the attitude as well as the knowledge of these (at least the first three) might be successful for a period of time, but get wacked later.

Personally, I like reading the posts from everybody because you have nothing to lose, and you might learn something, but like you pointed out, you have to take everything with a grain of salt and not rely on a blog poster for investment advice.

[poorgradstudent]

Great post Cabinboy.

People’s investment strategies should differ by their goals, lifestage, risk tolerance, and income level. Some people have extremely low risk tolerance (All cash). Others have very high (Gold! Gold! Gold is the answer!)

Generally, it’s hard to go wrong with a diversified portfolio held for the long term.

[technovelist]

Some people have extremely low risk tolerance (All cash). Others have very high (Gold! Gold! Gold is the answer!)

It depends on your definition of “risk”. I have low risk tolerance, but one risk I am very concerned about is hyperinflation. For this reason, I have relatively little “cash” (Federal Reserve Units that can be multiplied endlessly almost without cost to the issuer), preferring gold (actual money that cannot be inflated by governments).

[powayseller]

Many investing professionals try to steer you into load mutual fund products, because they are paid a commission based on the amount of money you invest. They would do you an immense service if they suggested no-load index funds, but why would they – no commission there, so they fail to let you know you have only a 30% chance of beating the index . Index fund investing beats the pants off actively managed mutual funds. I’ve sure had my fill of bad self-serving investing professionals from our company’s 401(k) plan, life insurance salespeople, and dozens of popular Wall Street propaganda books.

cabinboy, where do you suggest people go for their investment advice? A thread recently where privatebanker argued for the services of a CFP seemed to go nowhere, as he never did give the proof I requested that CFPs know any more than the rest of us, or help their clients achieve any better returns.

cabinboy, how did the average American do following your 4-step plan when they were buying up homes to flip? Or just buying a house at the top of the market with an Option ARM because their tax guy said it would save them on their taxes? How well off is the average investor who followed this 4-step plan?

If someone asked me where to go for basic investment advice or help in setting up a lifetime financial plan, I would suggest Rich Toscano. I’d make sure I had a professional to assist me with my taxes (CPA) and trust (probate attorney). I’d make sure I had all my insurance needs covered (disability, life, health, perhaps long-term care), some cash in the bank and a line of credit for emergencies. Then I would go to piggington to exchange ideas with other smart folks about how to invest the money I’ve saved, because the stuff coming from Wall Street helps the mutual fund managers get rich, but is of little use to me.

[cabinboy]

Powayseller,

From everything I’ve read and heard about Rich, he does indeed seem like the kind of person one could feel confident about using as a financial advisor. Rich clearly has a passion and intellectual curiosity about the field of economics and investing that the typical CFP doesn’t seem to have.

As far as where one should go for investment advice, I suppose it would depend on that person’s level of interest and the amount of time they want to spend managing their portfolio and gaining insights that might be helpful. I view money management and effective trading as a life long skill that is really worth knowing, so I like getting elbow deep in the stuff. Those who don’t want to get elbows deep are likely best off finding a CFP they trust to guide them.

I love the Blog phenomenon. Blogs consolidate relevant news and information on a subject in a way that has not been seen before. Piggington has clearly emerged as the best thinking person’s blog on the housing bubble, with many people delivering their careful thoughts on the subject that go beyond the news and the simple observation that many people are going to get screwed. It’s fantastic!

I do think that one has to keep in mind that since Blogs typically only serve as sources of consolidated news, they tend to focus on the reactions of major cyclic information announcements (the stuff that makes the papers).
So, avid readers of Blogs are continuously bombarded by interpretations of monthly and quarterly data in a manner that has not occurred in the past.

Now, many would say that this increase in information will naturally lead to better investment decisions. Or will it? Who knows? The greater availability of consolidated news will certainly increase the average person’s understanding of medium trend fundamentals, but will that necessarily lead to better investment decisions? Maybe, maybe not. That type of data and analysis is just one piece of the puzzle.

What’s another piece? Recall the posts and thoughts of ChrisJ, someone who is an active and apparently successful trader. He is someone that looks at trends one would find in an investor almanac and manipulates his positions accordingly. A sound strategy, with clear historical precedent.

There are many other pieces as well, and one of the things someone attempting to manage their own wealth needs to always ask themselves is whether they are seeing all the pieces that compose the whole puzzle.

What types of information do I think are underepresented in the Blogosphere? Personal accounts of successful investment managers (different from economists!). More are beginning to emerge. One that I like is http://www.dailyspeculations.com/. Victor Niederhoffer has made and lost and remade more money than 99.9999% of us will ever see. I like balancing my daily Roubini with someone who is much more applied and optimistic and observes the world through a lens of confidence constructed from a historical record of fairytale success and devastating failure.

[socalarm]

this is my investment guru

[cabinboy]

Powayseller, I realize I did not address your comment:

“cabinboy, how did the average American do following your 4-step plan when they were buying up homes to flip? Or just buying a house at the top of the market with an Option ARM because their tax guy said it would save them on their taxes? How well off is the average investor who followed this 4-step plan?”

The average investor who was doing this was not following a solid, comprehensive plan (at least those that were utlizing high margin mortgage instuments based on *very little* cash in pocket). Many were completely ignoring a chief risk in housing: the potential lack of liquidity. These investors were obviously inspired by their (correct) belief that the near term likelihood that housing prices would increase far exceeded 50%. However, even prior to 2005, leading indicators were beginning to suggest that this probability was starting to level off in some of the “canary in the gold-mine” markets like San Diego. At that point, housing’s well established potential for illiquidity pushed the risk-reward ratio away from housing speculation. Folks more savy than the average flipper perceived this change (for example, Rich and Ben).

With obvious booms occuring in China and India, commodities became a safer choice. There’s been all sorts of ways to profit. You don’t have to just buy copper or steel or gold. For example, given the average American’s seemingly high tolerance for risk and obvious comfort with doing things on margin, they could have made an absolute killing on various commodity supported carry trades in the FOREX market (a market with infinite liquidity at any trade sizes relvant to the average Joe). People have taken risks in housing that dwarf the standard risks in FOREX (with no stop-loss!!), but the avaerage flipper had no concept that this was the case. Folks more savy than the average flipper perceived this, and have been rewarded accordingly without getting any paint under their fingernails or granite countertop dust in their lungs!

By now you can probably tell that my philosophy is that anyone who wants to beat the performances of general indexes needs to know how to profit (or at least not lose) in a variety of markets. I may be right, I may be wrong, but this is precisely what hedge funds do. Hedge funds that do not suffer catastrophic failure typically beat index funds over time. Catastophic hedge fund failures typically occur because inherent risks were underappreciated or mischaracterized, not because a specific market was entered at an improper time.

[(former)FormerSanDiegan]

Ummm thats 105%.

Josh – That’s why I said it gives you a 5% head start 🙂

[(former)FormerSanDiegan]

Now the question is the same as I asked people in 1999: how will you know when to get out of the market? If you can ride it to the top and then get out before it drops, you will have done better than I. (“I” is correct grammar here)

I would argue that a long-term diversified portfolio (though boring and not interesting from a blog-reading standpoint) is far better than trying to prognosticate.

I actually have had funds continuously in the market since about 1994. I did not get out in 1999 or 2000 or 2001, and have been putting retirement funds in at a level of 20-25% of my income since 2000. I donlt think that you need to get out at a top if you are diversified and have a long-time horizon. Having 20% in cash in 2000-2002 turned out to dampen the downdraft for me to about 15% of my portfolio by 2003. This was more than made up by the run we’ve had since 2003. As long as you do not put all your eggs in one hot basket and guess wrong (gold in 1981, cash in 1995, tech stocks in 1999, real estate in 2005) you will do fine.

Boring, but effective.

Disclaimer: I am not a broker, a shill for any financial services company or an aspiring financial advisor. I am a statistically informed, fiscally thrifty engineer.

[qcomer]

“Now the question is the same as I asked people in 1999: how will you know when to get out of the market?”

Actually it’s pretty simple if you remove the element of human emotion from it. The best way to remove human emotion/greed/fear from buying/selling is to automate it. So do your research and put stops based on your research. These stops differ from stock to stock and sector to sector, so I cannot give any rule of thumb numbers. No matter what happens, don’t touch these stops once you have put them in place. In most cases, I have been able to ride the rally pretty successfully, up or down. BTW, I have the same question for you Poway. How do you know when to get in the market?

I agree with the general message of cb. Most averga joe investors out there don’t have the amount of time needed to time the markets and don’t have the skill or knowledge to do that either. The safer way then is diversification, risk managemnt and dollar cost averaging for the long run.

[DaCounselor]

In 24 years of investing I have learned one great truth: I cannot pick the bottom or top of any particular investment device. I’ve gotten pretty close a few times, but been way off to my detriment as well. A missed call here or there can become very costly. I have to admit that I do chuckle at those who believe that they can consistently time markets. I just don’t know anybody who has done it effectively over great spans of time. If some “system” exists that can achieve such a great feat, make no mistake we would know about it. Moves do need to be made over time, but the more moves one makes the greater the odds of stepping on a landmine and, as they say, “blowing yourself up”.

Very few professional investors beat the market year after year. It just doesn’t happen. The stats are what they are.

[powayseller]

Nobody can beat the market. That’s why index fund investing is the best way, I think, to be in the market. Right now though, with risk free CD earning 5.5%, you don’t even need to risk the market going into a recession. In my 20 years of investing, this time has been the easiest to decide to get out of the market. I have never been so sure of a recession. Even in 1999 I didn’t realize the stock market bubble bursting would cause a recession. Thanks god to blogs for educating me. However, whether to be invested in precious metals or euros, that is a question not even the pros are guaranteed to get right. If the dollar does indeed keep losing its value, then we will regret listening to the pros who told us to dollar cost average.

[Wiley]

Hey PS,
Not to be argumentative, but if your getting 5.5% there has to be some risk. What are these CD’s invested in?

[qcomer]

PS,
If dollar does lose value drastically then the worst affected asset will be cash/CDs. When currency loses value, it results in assets demanding more currency to compensate for the decrease in its value. However, I think we may have already seen most part of that scenario pass by us in last 4-5 years when dollar slumped 35%-40% and asset prices rose up in response (Gold/RealEstate). The stage ahead of us should be a deflationary period assuming we have strong Fed policies. If that is the case then I agree with you that cash will be king in that period.

I am interested to learn, how dollar cost averaging is a bad idea in the face of a losing dollar, as I didn’t think about this from devaluing currency point of view. To me, dollar cost averaging is simply a mathematical tool, a smoothing low pass filter technique to minimize/filter out short term volatility for long term, in cyclical markets. You can apply it to buy gold/euros/stocks or anything. The basic assumption there is that you cannot time markets over long spans of time and so you choose to buy at an average between peak and trough. In the long term, that average keeps moving up with markets. Appreciate your input.

Also, when do you plan to to get off from your CDs and enter the markets with all the cash? What if the markets don’t come down or maybe don’t come down by as much as you expect or maybe come down much more than what you expected?

[powayseller]

Wiley, CDs are insured by FDIC. Most banks are now paying over 5%. CDs are certificate of deposit, so they are just bank deposits that you have to commit for a period of time, 3 months to 5 years. I have 3 month CDs.

Dollar cost averaging makes sense, but not if we are buying overpriced stocks. My plan now is to be in cash until the recession gets in full swing, and then to look for signs of an economic recovery. Once wages and consumer spending picks up again, probably in the middle of the recession, is the time I plan to enter the stock market. Of course I could be wrong, and the markets could behave different. However, I am more worried about losing out on a gold or euro rally than I am about losing on long term increases in the stock market.

Most of my investing years, I’ve struggled to make sense of where to put my money. Which asset class will perform better? This is the first time in my life, where I have great clarity about a housing-led recession. I doubt that I will have this much clarity about investing ever again. After 2007, I will be struggling once again, wondering what will happen next.

[Author]

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