Income investing is becoming a more popular subject. I just found another hardcover book devoted to it in the bookstore today -- Income Investing Today by Richard Lehman. I've got it on order from Amazon and can't wait to read.
Obviously there are many people looking for an alternative place to put their money besides a passbook account in a bank or chasing "growth" stocks that often don't grow - or which soon pop like a balloon.
My only concern is that, from flipping through it, it's obvious that he comes from a fixed income background -- although he prefers to avoid that phrase -- and so focuses on various securities besides dividend-paying stocks. This puts your portfolio at risk from inflation.
Still, it takes dividend-paying stocks years to catch up and then surpass the higher fixed income securities, and money in the present and near-term is worth more than a money in later years.
Income Investing Today
Income Investing Today
Tuesday, June 19, 2007
Sunday, June 17, 2007
Asset allocation period for rebalancing advice is poort
However, something about the how-to information on asset allocation in both books disturbed me even more than one writer wanting to see patterns in short-term random results.
The advice about rebalancing.
Both of them say that after a period of time you should rebalance your portfolio, selling the assets which have most risen in price and buying more of the assets which have risen the least (or fallen!).
There is no clear cut consensus on how often you should do this, nor even any guidelines. The books mention periods of one year, quarterly, monthly and even weekly -- but leave it up to the reader.
This seems to me an incredible weakness, for several reasons:
1. Using a short period means you have little opportunity to take advantage of long term trends. For example, if you'd started an asset allocation program in 1995 would it have made much sense to sell off all your stocks in 1996? That bull market ran through March 2000.
Also, bear markets can go on for a long time. Some asset allocation programs contain gold. If you'd started an asset allocation program in 1981, your portfolio would by now consist almost entirely of gold . . . how happy would you be about that?
2. If your accounts are not tax-sheltered, you're realizing taxable capital gains, so part of your portfolio's gains are going to the government.
Even tax-sheltered accounts will have increased transaction costs. Brokerages like to rebalance client accounts every quarter. I wonder why they do it so often?
Seems to me that a poor asset allocation program is little better than an HYIP con game.
asset allocation rebalancing flaws
asset allocation rebalancing flaws
The advice about rebalancing.
Both of them say that after a period of time you should rebalance your portfolio, selling the assets which have most risen in price and buying more of the assets which have risen the least (or fallen!).
There is no clear cut consensus on how often you should do this, nor even any guidelines. The books mention periods of one year, quarterly, monthly and even weekly -- but leave it up to the reader.
This seems to me an incredible weakness, for several reasons:
1. Using a short period means you have little opportunity to take advantage of long term trends. For example, if you'd started an asset allocation program in 1995 would it have made much sense to sell off all your stocks in 1996? That bull market ran through March 2000.
Also, bear markets can go on for a long time. Some asset allocation programs contain gold. If you'd started an asset allocation program in 1981, your portfolio would by now consist almost entirely of gold . . . how happy would you be about that?
2. If your accounts are not tax-sheltered, you're realizing taxable capital gains, so part of your portfolio's gains are going to the government.
Even tax-sheltered accounts will have increased transaction costs. Brokerages like to rebalance client accounts every quarter. I wonder why they do it so often?
Seems to me that a poor asset allocation program is little better than an HYIP con game.
asset allocation rebalancing flaws
asset allocation rebalancing flaws
Asset allocation assets exhibit random covariance
Recently I read several books on asset allocation. This is not a full review of them, but I did notice several disturbing points.
One of the books wrote a lot about the variance between difference types of assets, such as stock and bonds. This variance is a critical point for asset allocation, because the theory behind it, Modern Portfolio Theory, comes from Harry Markowitz's work showing that overall portfolio risk is reduced by holding assets that don't go up and down in tandem.
Anyway, the book went on at length about how tricky this is, because the variance of stocks and bonds changes over time, and came up with different variances over 3 year periods in the past.
I had one of those flashes -- and it goes like this.
The stock market moves in a random walk.
The bond market moves in a random walk.
Therefore, whether stocks and bond prices go in different directions through various 3 years periods is . . . ta! da! --
Random.
I mean, at any given moment either market go only be going up, down or sideways. Therefore, sometimes they'll go in the same direction, sometimes they won't.
Yet this book wants you to adjust your allocation periodically on the basis of these random moves.
Look, the whole idea is that you're reducing risk because these two markets both are random, but can go in different directions. But it's obvious that sometimes they'll go in the same direction.
If you want uniformity, put your money in a passbook savings account in a bank.
asset allocation illusion
asset allocation illusion
One of the books wrote a lot about the variance between difference types of assets, such as stock and bonds. This variance is a critical point for asset allocation, because the theory behind it, Modern Portfolio Theory, comes from Harry Markowitz's work showing that overall portfolio risk is reduced by holding assets that don't go up and down in tandem.
Anyway, the book went on at length about how tricky this is, because the variance of stocks and bonds changes over time, and came up with different variances over 3 year periods in the past.
I had one of those flashes -- and it goes like this.
The stock market moves in a random walk.
The bond market moves in a random walk.
Therefore, whether stocks and bond prices go in different directions through various 3 years periods is . . . ta! da! --
Random.
I mean, at any given moment either market go only be going up, down or sideways. Therefore, sometimes they'll go in the same direction, sometimes they won't.
Yet this book wants you to adjust your allocation periodically on the basis of these random moves.
Look, the whole idea is that you're reducing risk because these two markets both are random, but can go in different directions. But it's obvious that sometimes they'll go in the same direction.
If you want uniformity, put your money in a passbook savings account in a bank.
asset allocation illusion
asset allocation illusion
Tuesday, June 12, 2007
No level playing field for individual investors aiming for capital gains
Last night I began re-reading CAPITAL IDEAS by Peter Bernstein and suddenly he gave away an important clue about why individual investors such as you and I are at a disadvantage when it comes to trying to beat the stock market.
He mentioned how much the market's volume has gone from being transactions by individual investors to transactions by funds - pension funds, mutual funds, endowment funds and charitable funds. And he casually mentioned how these were tax-free -- that is, free of all capital gains taxes. He repeated this again a page or two later.
The proverbial light bulb went off over my head. No capital gains taxes! Say what?
I don't know about you, but I never knew that before. To tell the truth, I'd never thought about these funds paying capital gains taxes. I just assumed they did.
I can understand why the government allows them to sell securities without paying capital gains taxes, but it still puts you and I at a significant disadvantage relative to these institutions, when you and I try to compete as stock pickers.
We have to pay capital gains taxes. That's a significant drag on the long term performance of any person buying and selling stock. It's why Warren Buffett's favorite holding period is "forever."
So by not having to pay it, these institutions are making decisions free of a major constraint that we face.
This is a major factor in the stock market -- and nobody's talking or writing about it.
So it's one more good reason why we should be investing for income, not capital gains. Because if we play the buy stocks now so they'll go up and we sell them at a profit game, we're competing against major institutions and fund managers who not only have tremendously more resources (including their time) than we have -- but they don't have to pay capital gains taxes, as we do.
Don't pay capital gains taxes, yet enjoy a cash return from your investments -- buy securities for income, and never sell them.
capital gains disadvantage
capital gains disadvantage
He mentioned how much the market's volume has gone from being transactions by individual investors to transactions by funds - pension funds, mutual funds, endowment funds and charitable funds. And he casually mentioned how these were tax-free -- that is, free of all capital gains taxes. He repeated this again a page or two later.
The proverbial light bulb went off over my head. No capital gains taxes! Say what?
I don't know about you, but I never knew that before. To tell the truth, I'd never thought about these funds paying capital gains taxes. I just assumed they did.
I can understand why the government allows them to sell securities without paying capital gains taxes, but it still puts you and I at a significant disadvantage relative to these institutions, when you and I try to compete as stock pickers.
We have to pay capital gains taxes. That's a significant drag on the long term performance of any person buying and selling stock. It's why Warren Buffett's favorite holding period is "forever."
So by not having to pay it, these institutions are making decisions free of a major constraint that we face.
This is a major factor in the stock market -- and nobody's talking or writing about it.
So it's one more good reason why we should be investing for income, not capital gains. Because if we play the buy stocks now so they'll go up and we sell them at a profit game, we're competing against major institutions and fund managers who not only have tremendously more resources (including their time) than we have -- but they don't have to pay capital gains taxes, as we do.
Don't pay capital gains taxes, yet enjoy a cash return from your investments -- buy securities for income, and never sell them.
capital gains disadvantage
capital gains disadvantage
Sunday, June 10, 2007
Stocking picking PQ randomly distributed?
Somewhere earlier in this blog or in an article, I speculated that the great investing success of Peter Lynch, Warren Buffett, John Templeton and a handful of others is not due to them being lucky stock pickers/coin flippers (as the Efficient Market Theory would have to claim), but neither does their success refute the Efficient Market Theory.
According to EMT, it's extremely difficult to beat the market on a long term basis -- but not necessarily.
I speculated that the ability to beat the market long term was made up of a number of personal qualities which were distributed randomly through the human population. So, quite by randomness, those individuals were born with and had the opportunity to develop the qualities that made them able to beat the market.
Therefore, the ability to beat the market still adheres among money managers, pension fund managers and mutual fund managers to a normal distribution, where only a small percentage do in fact beat the market long term.
Yet it's not due to luck in stock picking, but "luck" in the sense they were born with the ability (or, most likely, combination of abilities).
Anyway, in reading CAPITAL IDEAS by Peter Bernstein, he says something to the same effect, calling this beat the market long term ability "Performance Quotient" or PQ and speculates that only a tiny percentage of the population has the genius-level PQ.
He brings up an idea I didn't think of -- that most people with PQ do not manage money for others. They prefer to keep their talent (which still has to be coupled with hard work, just as people with high I.Q.s still have to work hard to come up with genius level ideas) and their investing results to themselves.
I'm not so sure of that -- successful money managers can make a lot of money by managing other people's money. Yet it's also true that the most successful managers are probably just as good or better at selling themselves than at their long term results. And many people with a high PQ may not be good at selling themselves -- it's a separate talent, after all.
Yet Warren Buffett started out forming a limited partnership with friends and relatives.
So who knows -- it's one thing to have a high PQ. It's another thing to have enough money to invest with it so that you can get rich.
Stock Picking
Stock Picking
According to EMT, it's extremely difficult to beat the market on a long term basis -- but not necessarily.
I speculated that the ability to beat the market long term was made up of a number of personal qualities which were distributed randomly through the human population. So, quite by randomness, those individuals were born with and had the opportunity to develop the qualities that made them able to beat the market.
Therefore, the ability to beat the market still adheres among money managers, pension fund managers and mutual fund managers to a normal distribution, where only a small percentage do in fact beat the market long term.
Yet it's not due to luck in stock picking, but "luck" in the sense they were born with the ability (or, most likely, combination of abilities).
Anyway, in reading CAPITAL IDEAS by Peter Bernstein, he says something to the same effect, calling this beat the market long term ability "Performance Quotient" or PQ and speculates that only a tiny percentage of the population has the genius-level PQ.
He brings up an idea I didn't think of -- that most people with PQ do not manage money for others. They prefer to keep their talent (which still has to be coupled with hard work, just as people with high I.Q.s still have to work hard to come up with genius level ideas) and their investing results to themselves.
I'm not so sure of that -- successful money managers can make a lot of money by managing other people's money. Yet it's also true that the most successful managers are probably just as good or better at selling themselves than at their long term results. And many people with a high PQ may not be good at selling themselves -- it's a separate talent, after all.
Yet Warren Buffett started out forming a limited partnership with friends and relatives.
So who knows -- it's one thing to have a high PQ. It's another thing to have enough money to invest with it so that you can get rich.
Stock Picking
Stock Picking
Friday, June 8, 2007
Profit taking is dis-respecting capital gains - good!
According to the news, stock investors have spent the last few days "taking profits." Years ago I read a sour comment by a trader that they wished they were taking profits, but in reality was simply trying to get out at less of a loss.
Still, since the overall market did reach record highs early this week, I'm sure that many people did have profitable positions.
So if holding onto stocks for long-term capital gains the optimum procedure, why do the traders who know the market best always rush to convert their capital gains to cash? Could it be they value cash in their hands today more than the nebulous prospect of future capital gains -- capital gains which exist only on paper and which could go up in smoke tomorrow.
$7 trillion in capital gains vanished in March 2000. Today's Dow record could turn into the high water mark of a flood -- a record, but the water's receded. Capital gains come and go.
profit taking
profit taking
Still, since the overall market did reach record highs early this week, I'm sure that many people did have profitable positions.
So if holding onto stocks for long-term capital gains the optimum procedure, why do the traders who know the market best always rush to convert their capital gains to cash? Could it be they value cash in their hands today more than the nebulous prospect of future capital gains -- capital gains which exist only on paper and which could go up in smoke tomorrow.
$7 trillion in capital gains vanished in March 2000. Today's Dow record could turn into the high water mark of a flood -- a record, but the water's receded. Capital gains come and go.
profit taking
profit taking
Thursday, June 7, 2007
Harry Dent's latest bubble boom predictions
I just got through skimming the latest update from Harry Dent. Dent is the demographer/forecaster who uses demographic information to make stock market predictions, and has an enviable record of calling bulls and bears not based on company info, but on where in the lifestyle spending cycle the baby boom generation is.
In his most recent book, THE NEXT BUBBLE BOOM he predicts that the downturn from 2000-2002 would be followed by another bull market that would dwarf what we saw in the late 1990s -- with the Dow reaching 32,000 to 40,000 by 2010!
What's he saying now? I'll give you a hint - he's found another long-term cycle, the Geopolitical Cycle, which also affects results. And a look at today's headlines make it clear it's not boosting stock market results, although we're having a bull market despite the world's problems.
Dent still calls for a boom but has modifies its extent - and you better know when to get out. Because he's still calling for it to be followed by a long, extended bear market until 2022.
To check out the report, go to:
Harry Dent latest bubble boom report
Dent new forecasts
Dent new forecasts
In his most recent book, THE NEXT BUBBLE BOOM he predicts that the downturn from 2000-2002 would be followed by another bull market that would dwarf what we saw in the late 1990s -- with the Dow reaching 32,000 to 40,000 by 2010!
What's he saying now? I'll give you a hint - he's found another long-term cycle, the Geopolitical Cycle, which also affects results. And a look at today's headlines make it clear it's not boosting stock market results, although we're having a bull market despite the world's problems.
Dent still calls for a boom but has modifies its extent - and you better know when to get out. Because he's still calling for it to be followed by a long, extended bear market until 2022.
To check out the report, go to:
Harry Dent latest bubble boom report
Dent new forecasts
Dent new forecasts
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