This week’s newsletter speaks exactly to what my video above addresses–the elephant in the investment room is Europe.
I highly encourage you to set aside 10 minutes to read this weekend’s newsletter. It goes into greater depth than I can in the 3 to 4 minutes for my video.
Europe is the concern as we enter the dull summer months.
I’m asked periodically what I think of “market timing” or “active management” versus a straight buy and hold philosophy.
My first response is usually to ask for a definition of those terms. While it may be obvious to the person asking the question, if you ask 3 people you’ll get 3 different answers.
In this week’s video, I propose some definitions, but also share that while I think active management is preferable over your traditional buy & hold, market timing is great in theory but hard to execute in the real world.
Click to watch my video.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management and today I want to talk about active management; and what’s the role of that, what’s the place in someone’s portfolio; and frankly can “timing” be done, and done successfully?
Let me just tell you that in a previous life, a different company that I was involved in the late 90’s and early 2000’s, we were known as the market timing firm. And we were extremely successful at that. And so, I know first-hand that market timing, with the right players and in the right environment, can be very successful. However, most people cannot market time on their own. And market timing, traditionally is meant to be when to go in and out of the market, whether it’s short term; meaning a day or two or a week or even longer term; month, quarter or year; going between stocks and bonds and cash, etc. whether that’s with mutual funds, etc. That’s kind of a traditional discussion of market timing. You know, I think that those that can successfully market time are very small. But I do believe it can be done it’s just very, very difficult. And it is extremely difficult for an individual investor to do it on their own, on their own portfolio. I use an example, whenever I need some legal work done, if I try to do it myself, I’m not going to be successful. Does that mean that legal work is not successful? No. I have to go to a lawyer, someone who is trained and is unemotional about the particular problem or issue that I might have. But, as Mark Twain said, “A lawyer who represents himself has a fool for a client.” Well, what he’s really saying is a lawyer should not represent himself. So it’s very difficult when you’re emotional about an issue to handle it on your own. That’s why I think a professional adviser makes sense even if that person is doing some market timing.
I do allocations within sectors. And I’m usually almost always invested but I’m trying to weight, kind of tilt, one sector over another; whether it’s large cap, small cap, or mid-cap. What I don’t do is go 100% stock one day and 100% cash the next day, or even week by week. I think that that is a skill that is extremely hard to do and a lot of times it just isn’t very successful. I’m not sure that the environment today is the same environment that it was ten and twenty years ago.
Unfortunately, the statistics out there show that investors who try to time the market on their own are 20% less successful than if they had just done a “buy-and-hold.” (Source: Barry Mendelson, CIMA, CMC EResearch, “Dangers of Market Timing,” 4/29/2008.) And once investors become active, this study that I just read a week or two ago, says that 40% admit that they’re probably too active and that they’ve hurt themselves. (Source: Helen Modly, CFP, CWPA, Focus Wealth Management, Ltd., “How the Wealthy Avoid Behavioral Bias: 7 Strategies,” 2/13/2012.) So, I do, … I’m kind of giving a “waffle-y” answer here; I do believe it’s possible, it is extremely difficult. I believe that a better solution is probably to be well diversified and to tilt particular sectors one way or the other and be very well diversified. I do work with some good managers that I’m very pleased with their particular approach and I’d be happy to talk with you about them and the way that they manage money, not in a market timing situation but in a good active management situation where it’s deciding what are the “tilts” and the “weights” of that particular diversification.
Hopefully this video made sense and clarified things a little bit; either way, give me a call if you’d like to talk about it. I just absolutely love hearing from you and hearing from your friends. So pass it on to someone if you think that they could have some value from this video. 303-747-6455, my name is Mike Brady, here in Boulder, Colorado. You have a wonderful, wonderful week. Thanks! Bye, bye.
It’s important to note, as the table above illustrates, that not every investment has to make money. Limiting the size and number of the losses is important, and if avoiding any kind of loss at any time is your strategy, then you’ll always be on the sidelines.
Risk management is key, and with that it is understanding some investments will do different things at different times, and not all will be winners in each time frame. Keeping your eye on both winners and losers and replacing them when necessary is a standard ingredient in prudent portfolio management.
The first quarter of this year was very forgiving of any errors. We’ve had low volatility, generally positive economic reports, and even Europe has been less in the news than previously.
Watch my video for my thoughts about the 1st quarter, and to find out if I’m still optimistic for the 2nd quarter and rest of the year.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management and I am here in Boulder Colorado, giving you my first quarter review and my second quarter preview.
Absolutely wonderful first quarter; I’m going to throw some of the numbers up on the screen, if you can look at them, looking great. I don’t know the exact numbers because I’m actually doing this on Thursday and the quarter ends tomorrow but I wanted to get this to you as quickly as possible the first week of April. But we have incredibly low volatility right now, so unless something really big happens on Friday, I thought I was safe.
This first quarter, very forgiving of any mistakes, almost every sector was up. Very strong quarter, we have six months that are up, the last six months; October, November, December, January, February, March. If you look at my video, and I’m going to provide a link to my video the first or second week of January, where I look at 2012, I stand behind what I said at that time. Which I believed that there was going to be some volatility for 2012, and I think we still have to see that. We’ve actually had unbelievably low volatility but I also said that I was optimistic about 2012. I believe then, and I believe now, so I’m sticking to my conviction, that the cash, the strength of the corporations of the companies that are out there, and that the PE ratios are low, that the companies are actually undervalued for what…, when they decide to deploy some of that capital back into their businesses, and into research and development and to really move things forward, this will be a very good thing. And increase the valuations from where they currently are.
And so I continue to be optimistic. I mean, I’m asked every once and a while why the volatility is so low right now? I mean, let’s, you know, together just remember when there was 100 point DOW swings all the time, and frankly, all the way up to 4 and 500 point swings. We haven’t seen that this past quarter and in quite some time. It’s my belief that the investors are out there, both professional and you know, kind of household investors, are not really having one conviction, one way or the other that this is a market that they absolutely have to participate in- and so strong on the “buy” side; or those that they absolutely don’t want to be a part of. I think it is somewhat of a low volume, listless market at this particular point.
Now that being said, as we look at the VIX, which is the volatility index, currently, kind of the spot price is very, very low- which is what we’ve seen. But when we start to go out, you know, two, three, four months, there actually is more implied volatility. So the market believes that the volatility will increase in the coming months and that makes sense. We should not be lulled into thinking that just because this last quarter was very low volatility that the next quarter or even the quarter after that will be low volatility.
This is also an election year. Let’s not forget about that. November, the first week of November is, one way or the other, when I say one way or the other, whether you’re a Democrat or Republican, whichever one that you want to win, at least there’s going to be a certainty about who’s going to win, and so that uncertainty starts to go away. And that’s a good thing, I think, for the markets the last quarter of this year, November and December.
But that being said, let’s get back to the second quarter. I think that things will continue to go forward. If I’m wrong, let’s say that I’m absolutely wrong, and the second quarter is negative, that’s one of the reasons we go back to our foundation, some of our basic investing 101, which is to remain diversified. I do believe that each client needs to look for themselves, and I work with my clients to determine, what’s the appropriate allocation of both stock and bonds? Because what I have found is that the thing that I love the most, many times I’m wrong on, the thing that I hate the most, sometimes I’m wrong as well. I remember a quote from Peter Lynch, who made Fidelity Magellan in the 80s extremely famous. He said, “you know I love all my stocks that I buy. That’s why I hold them, is that I like my stocks, I think they’re going to do well. But invariably, on 20% of them, I’m wrong. That’s just the way it is and I just have to learn to live with it.” And so, that’s one of the reasons why we diversify, is while I am optimistic, while you might ask yourself what’s my conviction? Do I believe the United States is the place that I need to invest in, both our companies and kind of stop listening to all the “perma-bears”; you know, people who for the last three years, as the market has basically just done extremely well, are always the naysayers. I mean there’s always something to be negative, if you’re looking for negative. But that’s why you remain diversified. I have my clients that way, I’d be happy to help you out if you’re not one of my clients.
So, anyway, that’s my video this week. I continue to be very pleased with the first quarter. I continue to be optimistic as the year unfolds. And there will be some volatility going forward, probably increased volatility, but you know what, hopefully we’re well prepared for that and I’ve … you know, we’re ready. When it happens we’ve already planned for it. And we’re thinking about it.
So that’s my video, and on a personal note, I usually go to Africa sometime during the year, usually in April. This year I am not going. I’m very pleased that my business is frankly hit a point where it’s really growing. I’m working with my clients, just absolutely having a great time doing that. So many of you have referred people to me and I’m working with them as well. I do some great stuff with two wonderful organizations in Uganda and Rwanda; BeadforLife in Uganda, and Peacemaker Institute doing some assistance with Genocide reconciliation in Rwanda that’s really kind of a humanitarian thing. I’m absolutely moved by the impact that we’re having there but also with BeadforLife in Uganda. It’s an income generation, kind of a women’s empowerment project there in East Africa. And I usually go there as I’m on the board of both those organizations. Perhaps I’ll be able to go later this year but for right now I am here in Boulder, working with my clients and of course, watching things very closely.
Give me a call, 303-747-6455, Mike Brady, Generosity Wealth Management. And I have a couple of disclosures here coming so of course stay tuned for those but you have a wonderful week and let’s all have a great quarter. Thanks! Bye, bye.
In case you’re curious about my video at the beginning of the year, here it is.
Are you a “lane changer”? In traffic, he’s the guy who’s constantly changing lanes, expending a lot of energy but doesn’t really get ahead.
We all know we’re supposed to “buy low and sell high”, but unfortunately your average investor doesn’t do that. When we look at the flows into and out of equity funds we find that people are pouring tons of money in when the markets are high and withdrawing at market bottoms.
Why? By the time people feel comfortable with the direction of the market (investor confidence is increasing), they’re looking at recent past data and many times the “upward movement” has already occurred. A little late. Same deal on market declines.
I happen to believe in active management, but you’ve got to be disciplined and unemotional, and that’s tough to do!
In this week’s video, I expand upon these thoughts and even have some pretty graphs imbedded for you. Watch it please, and don’t be a investment lane changer!!
TRANSCRIPT:
Hi there, Mike Brady with Generosity Wealth Management. And I this week I want to talk about staying the course, OK? About six months ago I did a video about conviction, in which really I asked the question “what do you really believe in?” “What do you really stand for?” What is that line in the stand? And that could be in your own life; that could be in your financial life. It’s really a question that I think could have lots of areas where it’s applicable but right now it’s really about investing.
I’m going to throw a chart up in just a few seconds here, but most people do the wrong thing at the wrong time. And I don’t want you to be that dumb money, I want you to be the smart money. And people always say, “Oh I buy low and sell high.” But frankly most people throw lots of money into funds when it’s at a high, when they feel comfortable, like, “oh, yeah man, the market did so well the last year or two, and I’m going to throw lots of money in…” because they expect it’s going to continue to go up. And they think that the market is actually linear; meaning if it’s gone up, it’s going to continue to go up, or if it’s gone down, it’s going to continue to go down- and that’s just not the case! It goes up, it goes down, it goes sideways! And real people also withdraw money, you know, usually at the bottom. And so this is a good indicator, frankly, when people are taking money out, the contrarian in me, I say, maybe I want to invest in that. That’s a good buying opportunity. Warren Buffet has a famous phrase, “be greedy when others are fearful and fearful when others are greedy.”
And the chart, I’m going to throw it up there right now. You’ll notice, at certain times, I’ve circled them, the market has gone up, that’s the line, and then the bars are the money flows, in and out. And you’ll notice that the bars are the highest when the market is at the highest, which is what you don’t want. And then the, (sorry about that, I just hit my microphone) and then when the market is at a low is when people are taking all their money out- which of course is the exact opposite.
So, have discipline, please. Be the smart money.
I’m happy to help you with that. I talk with my clients all the time and I do these videos and these newsletters to really have good communication, good education, so we can go through this with as little emotion as we can, but of course we’re human. We’re not a bunch of Vulcans running around! But, let’s have our course, we’re at Point A, where are we going to Point B? Let’s go there.
My wife said something the other day at breakfast that I just thought was wonderful, which is, “you know if you’re going down the road, and you’re in traffic, and have you ever noticed that person who’s jumping from one lane to the other, trying to get ahead of everybody else? Well, a lot of time’s they are expending an awful lot of effort and not getting any further.” And it’s so satisfying, frankly, when you’re just sitting there, staying the course, and you just keep passing this guy. Well, I want you to be that person.
So, anyway, 303-747-6455, Mike Brady is my name, I’m the President of Generosity Wealth Management. I serve the Boulder, Denver, Longmont area here in Colorado, but I’m in many different states. Perhaps I’m already registered in your state and have clients in your state, if not, let’s have that conversation. I’m looking to grow my business and I hope to do the best job that I can for you, I really care, I’ll treat you like my family. 303-747-6455. You have a wonderful, wonderful week, thank you, bye bye.