April 19, 2011
How Much Experience is Enough?
The Investment View from Prescott, Arizona
It has been said that a wise man learns from his mistakes, but I have found it a lot less expensive to let someone else make the mistakes and learn from them.
As we realize when we grow older, experience can provide tremendous insights that beginners just won’t have. This is true for investing as well as life in general.
Technical analysis is the use of charts and graphs to analyze pricing patterns. If it can be said that a picture is worth 1,000 words, then a chart is worth 1,000 numbers.
Interpreting the huge volume of data represented in charts is something that one won’t become proficient at just by reading a book or taking a class. In fact, a little knowledge can be a dangerous thing for investors. It takes a lot of experience to get good at it.
When you hire a money manager you are buying their experience. Buying a lot of it usually doesn’t cost any more than hiring a rookie who doesn’t have much of it, and by hiring experience you have a much better chance of having your nest egg come out in tact when the market throws you its next curve.
But, how much experience is enough to really master something?
In the college classes I taught on Advanced Investment Analysis I advised students to look at lots and lots of charts to develop a feel for them. I average hundreds of charts per day, and to make it doable I have software that creates short-lists of likely candidates, then generates the charts and automatically scrolls through them. This allows me to plow through a huge volume of data in a short amount of time.
Hundreds of charts a day times 5 days a week means 1,000 to 2,000 charts a week for a serious technical analyst. That adds up to 50,000 to 100,000 charts a year. I have been actively managing investments since 1994, and using charts since 1999. Doing the math tells you that I have looked at somewhere around a million charts in my career – maybe more. Enough that I can now easily recognize investments gathering strength or ones losing momentum.
As an example of how experience works, let’s discuss the great American investment creed of buy low, sell high. If you were to take it literally you would never buy something with a high price. Yet, the one trait that the biggest winning investments all share is that they frequently set new daily high prices as they go up, sometimes 100 times in a year. If you want to seek out the big winners, buying an investment at a new high is one clue, yet text-book investing would have you overlooking this important angle.
The stock market has lost 50% of its value twice in the past decade. A rookie may have a Pollyanna attitude, hoping that the worst is now behind us. However, history strongly suggests that the next 10 years will bring 2 or 3 or 4 more of these stomach churning declines.
Remember, in investing, hope is a four-letter word.
When the next crash happens, who do you want advising you on your investments, a seasoned pro who recognizes problems coming and who has valuable insights, or a financial product salesman with no real track record?
So, don’t be fooled into settling for a rookie money manager, or anything close to that. Demand an active management track record that began before the 2000-03 bear market so you can gage the manager’s skill in turbulent markets.
So, to answer the question of “how much experience is enough to master something?”, I don’t think you can ever get enough. Masters never quit learning.
Slice of Life
I was able to see my son, Matt, at school in Hollywood last week as I breezed through on the way to a conference in Marina Del Rey. He is in his third quarter at Musician’s Institute pursuing a degree in music performance. Matt is a drummer, and a good one. Every day he walks to school down Hollywood’s sidewalk of stars, so he is right in the thick of the entertainment business. Matt says he likes school, but hates Hollywood life. I have a lot to be grateful for.
The two day conference was put on by the American Association of Professional Technical Analysts and was very intense, very technical. From the 140 members of APTA, there have been over 60 books written about investing. It is a stimulating crowd and I will certainly be going to more of their conferences in the future.
Electronic or Paper?
We are slowly moving away from paper-based reporting for those of you who prefer to not waste the paper.
Electronic statements from National Financial are already available for you online, and they are posted online about a week before you would get them in the mail. Statements may be downloaded onto your computer or viewed online.
National Financial Services also allows clients to choose to stop receiving the traditional snail-mailed paper statements each month and use just the electronic versions.
If you would prefer to halt paper statement delivery, please contact the office at 778-4000 and we will send you instructions on how to access your account online and make the election to turn off paper statements.
Signup Now for Vidalia Onions
The Yavapai County Shrine Club supports the 22 Shriner’s Children’s Hospitals around the country. These hospitals care for children with orthopedic conditions, burns, spinal cord injuries and cleft lip and palate all at no cost to the parents. This is a wonderful charity.
If you ever enconter a child that needs care, please remember to call me and I will be happy to help the child’s parents get in touch with a Shrine Hospital intake specialist.
One of the several fundraisers that we have during the year for the Shrine Hospitals is selling Vidalia Onions.
Sweet, sweet Vidalia onions will be available in 10 lb bags in early May, but they go fast, so if you would like me to save some, please call the office and leave your name with Sheri or Yvette and how many bags you want. We will call you when they come in.
And the onions make great gifts for friends and neighbors. (hint, hint)
Mental Floss
Q: A mute person goes into a shop and wants to buy a toothbrush. By imitating the action of brushing his teeth he successfully expresses himself to the shopkeeper and the purchase is done. Next, a blind man comes into the shop who wants to buy a pair of sunglasses; how does he indicate what he wants?
A: He opens his mouth and asks for it.
How’s The Market Doing?
As of April 17, 2011, interest rates on 10-Year Treasury notes are right where they were 4 months ago despite the fact that the US government is doing a lot of new borrowing by selling bonds, which normally pushes interest rates up to attract enough bond buyers.
The feds need to sell $1.3 Trillion of new bonds to pay for this year’s excess spending in Washington (the deficit). That is a lot of bonds. A record amount, in fact, yet interest rates have not budged.
So, who is buying all Treasuries these days?
Not China – they are experiencing a tight-money policy and are actually selling Treasuries according to the Wall Street Journal.
Whatever money Japan used to put into Treasuries will likely be directed into rebuilding after the earthquake there.
And, Europe needs to bail out Greece, Ireland, Portugal and maybe other countries as well, so more and more of their money is staying at home.
That leaves us to buy our own bonds. But, that hardly makes sense does it – borrowing from ourselves?
Yet that is exactly what the Federal Reserve is doing, buying about $100 billion of our own Treasury bonds each month. Notice how that adds up to just about the same amount as the annual federal deficit.
And what are the Feds using to buy these bonds? Money that they “print”, to use a last-century term.
Why don’t they just skip the Treasury bond sales and just print the $1.3 Trillion they need to pay for the deficit spending? Because that is part of the political smoke and mirrors of the issue.
This whole process is called “monetizing the debt”, and according to all of the text books that leads nowhere but to inflation.
We are seeing inflation creeping into our lives – 2.7% in the past year according to the government statistics. “Roaring in” might be a better term if you do unusual things like buying food and gasoline, which are not counted in the government math.
If you think gasoline and food prices are only going up at 2.7% per year I have a bridge I want to sell you.
What’s Going On In Your Portfolio?
To protect against rising inflation, both our Flexible Income* and Careful Growth* portfolios are carrying 25-30% in gold and silver.
Oddly enough, the oil stocks that had been working so well for us this spring hit their protective “stop-loss” prices and have been sold over the past few weeks, increasing cash levels in the Careful Growth* model to around 50%.
The oil stock’s sell-off surprised me since oil should do well in inflationary times, but perhaps with the prospects for a middle east oil disruption looking less likely, some of the speculative demand is tapering off.
Waiting to understand why something is happening can be a very expensive luxury in this business. I don’t wait to move your money to safety until the reasoning is obvious, I just recognize that prices are deteriorating and react to that fact early on, before a price decline gets out of hand. I’ll worry about why it all happened later. Right now I’m into protecting your money.
Since the stock market is still below where it was two months ago, and looking a little “toppy” at this writing on April 17th, I will wait for the market to give us more clues about the direction it wants to go before committing more of our cash to growth stocks.
Flexible Income* is about 90% invested right now and performing well.
Our Spotlight Strategy
Careful Growth Strategy strives to outperform the U.S. stock market while
taking only a fraction of the risk.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable; however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
