The Command T.O.C.

John Bogle

Any time John Bogle speaks, it is worth listening. Attached is a great discussion from John Bogle from May of 2009.

Investing Strategy - Asset Allocation and Indexing

It has been said over and over again that index investing, mathematically, has to outperform the group of active investors. But, because of some psychological problem human beings have, that being that we believe we have to do something, anything, to effect an outcome, we continue to ignore the mathematics. 

I am posting this video because I want to stress to my readers, once again, that the value of Asset allocation and indexing cannot be overstated. Don't confuse luck with good investing and even if you are lucky once or twice, chances are over a life time and active investor will end up behind the passive investor. We know, as a group, that has to be true. 

But, I will get a ton of email telling me the anecdotes on how great someone did picking stocks. To which I will remind them I can point to a hundred people or so today who will hit big jackpots in Vegas so why not just go there. 

And, to the point I made on your home in an earlier post, remember, your home is NOT an investment. 

A House is Not An Investment

Over the last 9 years or so, I have tried to tell just about anyone who will listen that homes are not investments. They usually only appreciate a small amount, if any at all, and they certainly do not outperform, in the long run, more liquid investments. Let's take a look at home ownership:

1. Most people do not account for a "liquidity premium" needed when looking at a home investment vs. a CD, stock or bond. With the last three, I can get my money immediately if I need it. With a home it may take months or years so you have to get a "premium" on the home return to equalize the comparison. 
2. Up keep of a home is an enormous expense. When people tell me they "made money" on their home I always ask them to itemize their up keep expenses, their property tax (most is not deductible) and their mortgage interest (most is not deductible). Because most people cannot tell me that number I always wonder how they think they "made money".
3. People generally confuse what is really of financial value in home ownership and that is the land, not the structure. In almost every instance where you have seen home values shoot up in price it is the land that is shooting up, not the home. So, you could have got the same return on an empty lot in one of those "hot" areas as you could have on the home itself. What is even better about the lot is there would have been very few of the expenses I cited above (taxes are much lower, probably don't even need a mortgage so no interest costs, and no up keep costs beyond just a brush cutter every month or so). 

This does not mean I am against home ownership I just tell people it is a "life style" choice and not an investment. Many people I interact with took my advice and are now thanking me (I should charge them a commission) however a few decided not to and they are paying big time.

 Those that bought a house for a lifestyle choice could care less about the housing market. For example, I do take my own advice and I buy for the life style. The housing market is down. So what? I could care less. I am in this house forever so what difference does it make to me. 

Below is a Money Watch Video which essentially explains the same thing. 

Why You Should Ignore Jim Cramer

I posted a while back why I thought Jim Cramer, from the absolutely horrible network CNBC, was a fool. Now, Larry Swedroe, one the greatest investment minds, calls him out again. It is very simple. Jim Cramer makes money by making you trade. He feeds you the drug, watches you inject it, then you come back for more. He makes money selling you the drug not by giving good advice. 

Indeed, as Larry points out, almost all the advice Cramer gives is horrible. 

Jim Cramer and The "CNBC" Crowd Panic on National T.V.

I recently saw a segment on CNBC (Which I watch much like you watch a traveling circus, not for investment advice but more for humor and fun) where Jim Cramer was called out by Dan Solin. He did a great job saying why professional money managers and idiots like Jim Cramer are doing the average investor more harm than good. 

The discussion was about the 401(k) and whether it is a good investment now that many companies have stopped the match. This is a good topic because typically you have poor choices in a 401(k), they have very high fees and will get taxed as personal income when you take money out. 

Anyway, Cramer went absolutely nuts. He came in on the show and was madder than hell which is good. Between his abysmal performance on the Daily Show and now this, he is being called out for what he is: He is nothing more than a huckster in a fancy suit. He does more damage every night to the wealth of America than any one man. 

The video is below.

Bogle Article in New York Times

The New York Times writes a nice article about Jack Bogle's thoughts on professional money managers. Warning, if you are a professional money manager you may not want to read this. 

He also discusses how we are no longer in an ownership society but rather an agency society. Read the article and see what I mean. This is very important for investors. 

Jack Bogle Fights to Alert Us to The Retirement Mess

I have discussed before the next big mess coming in the economy and that is the retirement mess. You have this on two major fronts. First, people are not saving enough (and with the recent economic downturn what they did save is worth a lot less). The facts are that most people will outlive their retirement savings. 

Second, the Federal, State and local governments have created a bloated pension for their workers that they cannot possibly pay off. It is a great scam both on the workers and the tax payers because everyone knows the promises being made now cannot be fulfilled. The pensioners keep the charade going figuring "they [govt] will find a way" and the Government keeps it going to get votes. In a perverse way, term limits on politicians may help this since those people would never be in office long enough to "own" the problem. 

Jack Bogle is now calling out the pending retirement problems. The Government right now is spending a lot of time fighting "last year's war" and very little time looking to the future. But they need to. They need to realize the giant "ponzi scheme" of the Federal Government is about to come crashing down. Madoff is a two bit player compared to what is about to happen. 

For those who want to blame "Washington" (and I am sure the right wing will blame Clinton) you need look no further than your own town hall. Much of this problem is a local and state problem. Don't look to Washington to solve it for you. Next time you see a local fireman or policeman who is "retired" but is still young enough to start a second career ask yourself how this can be?

Just A Sucker's Rally, Says John Mauldin

Just A Sucker's Rally, Says John Mauldin

I agree with this. I just can't see what has possibly changed in the economy since the downturn in the stock market to cause this up tick. Essentially, everything is the same. People are speculating on Government policies and that is a very dangerous game. 

Wait for the fundamentals to come back. Companies need to start making money and consumers have to start spending again. Right now, any "stimulus" is just going to go to paying off the debt of the last 8 years. 

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This Week Could Be Even Worse for Stocks

According to  Marketwatch.com, this week is going to be a big thud for the stock market. The belief is that housing for January will be down another 5% in starts, layoffs will continue and the manufacturing numbers will be abysmal. Just this weekend, the Government shut down 4 more banks and the FDIC Insurance fund could be in trouble. 

The only thing "Good" will be that price deflation may have stalled as the major move downward in energy prices is slowing. 

The key to this economy is to get people spending again. Without that, we are all just farmers "growing our own food". People may spend due to the stimulus but it will be 6 months to a year for that to flow through. So, hang on. My investment advice:

1. As always, stay with index funds. Don't even try to buy individual stocks. You would be better off going to a casino.
2. Weight 75% to Bonds, 25% stocks. But, it is time to start changing this to more 50% stocks. So, if you have done what I have recommended the time to buy stock index funds is now. Do it slowly and through a good dollar cost averaging (DCA) plan.

   The time to start a DCA plan is  when you are close to a bottom. We are probably not at a bottom but we are close enough. Also, an added benefit is that the Vanguard Total Stock Market Index Fund (VTSAX) is yielding 2.91%! So, think of it as a really good CD. Even if it goes nowhere, you earn 2.91% and that, remember, is tax advantaged (Dividends are taxed far less than income on a CD).

3. Keep 1 year expenses in cash. The worst thing that could happen is you have to sell your investments at a fire sale just to stay alive.
4. Clean up your balance sheet. If you have a lot of debt, get rid of it and don't get anymore. This is also a good time to pay off your mortgage.   

Just a few thoughts on the economy.  

The Economic Situation Continues to Deteriorate. Do Not Expect Immediate Recovery

In reviewing this week's news on the economic front, I guess the best thing we can say is that the Dow did not drop another 1,000 points. But, that is about it. From all indications, it appears the credit markets are starting to "thaw" thanks to a good healthy dose of Republican Socialism. 

However, the real story is the "story behind the story" and that is the anemic level of business and spending activity in this economy. 

We are clearly in a recession. Anyone who disputes otherwise is either in denial or continues to believe the George Bush story of "let's go shopping". That was his great advice to the Country after 9/11 but it will not work today. Why? The consumer has spent all the money, all the home equity (whatever there is left) and has strapped his/her credit cards. The consumer, the entity which carried us through the 2000 - 2001 recession is spent; out of "schlitz" as it were. So, what we have seen is that this last quarter, most likely, will be the first quarter where consumer spending had a quarterly decline since fourth quarter of 1991. 

Further, the average net worth of households has decreased incredibly due to home value degradation and equity market problems. According to Northern Trust, net worth of households has decreased significantly and they go on to say:

"The decline in net worth in the third quarter will mark the fourth consecutive quarterly reduction. It is worth noting that during the three quarters ended in June 2008, household net worth has fallen $2.69 trillion compared with a $3.19 trillion decline in net worth during the 2000-2002 period. In other words, the latest three-quarter drop in net worth is a staggering 85% of the reduction in net worth which occurred over a three year period. With projections of additional declines nearly certain, the likely adverse impact on consumer spending in the quarters ahead is most likely to be significant."

Personal disposable income as reported by the federal government is on a major decline when you look at real dollars. Here are the facts looking at month over month changes:

• June 2008:  -2.5%
• July 2008: -1.5% 
• August 2008: -.9% 

At the end of the day, we all knew that this ponzi scheme had to come to an end due to borrowing and living beyond our means. Well, the end is here. Before this turns up we will need to burn through the excesses and the consumer will need to pay down a lot of debt. Once that is paid out, we will then be able to begin growth and move forward. 

My prediction: We will not see big growth until 2010. Read the file below to get more data on the economy.  

File: Download dd101508.pdf