Falling into the growth trap

The more I read books advising investors to do the opposite, the more I think that what Dr. Jeremy Siegel described in THE FUTURE FOR INVESTORS as The Growth Trap. That is, because of the promise of greater growth, investors overpay, and therefore getting lesser returns than investors who put their money in relatively cheaper investments. And this is true even if the growth story holds up (which of course it often doesn't, especially in the long run). And this is especially true of investors who are reinvesting dividends along the way, because each time they buy new shares of stock with their dividends, they are getting fewer shares of the growth stock than investors do of the nongrowth stock.

So over time, investors in the more boring stock acquire more and more shares of it, and therefore in the long run are paid more and more in dividends.

This finding is being generally overlooked, since it's counter-intuitive and certainly unsexy. And also goes against the advice of numerous books on investing.

I'm reading a book on REITs and the author writes about how there's a trade-off between REITs that pay higher dividends now and those that retain more of their earnings for future growth. That future growth may or may not come to pass, and REITs should retain enough cash to stay in business, but generally it's therefore better to go with REITs that pay the higher dividends now (as long as they're paying it out of current earnings. If they're dipping into saved cash that's a bad sign.)


Growth Trap
Growth Trap

Latest issue of Barrons

I bought BARRONS yesterday for the first time in ages. It's good to see that Alan Abelson is still going strong, making sarcastic comments in relation to Richard Gere getting burned in effigy for kissing an Indian Bollywood film actress (seems to me that somebody who's so public with his conversion to Buddhism should know better than to kiss an Indian woman in public) and predicting disaster for the stock market even as this issue is predicting the Dow at 13000 soon (probably this week). Plus, there was a column about problems at Fidelity Mutual Funds, which apparently are not delivering the performance they used to do (I'm not a fan of open ended mutual funds) so they're investing more money into research, which is probably useless, and why I'd rather go with Vanguard if I were to put money into an open ended mutual fund -- fewer expenses. They run an annual stock picking contest for students and professors and described this year's winners, though I forget whether they used leverage to make their stock picks, but they were allowed to sell short. And one guy had a big winner by buying a subprime lender than was down way below its book value.



leveraging Barrons
leveraging Barrons

How much time to research investing?

Another way, rarely talked about directly, in which time and investing interact, is simply how much time investors put into their investing.

A large number of the investing books I've read advise readers to continue their education, to stay up on the state of the national and world economy, the leading indicators, to keep reading more and more books on investing, to frequent online investing forums, to read the blogs, the sites and on and on.

If you had the time, you could make learning about investing and the current state of the markets a fulltime job. Heck, it could occupy you 24/7.

If you spare all your time reading annual reports, yet another book about Japanese candlesticks technical analysis and on and on, will you make more money than someone who simply sends a portion of every paycheck into an S & P 500 index fund?

Chances are, you'll make less, because you might feel obligated to actually act on some of the information you're reading, and that will reduce your investing total yield.

And even if you get a little return, long-term, I have to step back and apply a tool of economics -- opportunity cost.

Maybe you would make even more money if you took all that time and energy and money (books and software cost money) you're spending on your investment research, and applied it to a part time business you'd make even more money. Or even if you just worked a part time job instead, you'd probably make more money, which you could then also throw into that S&P 500 Index fund and so make even more money.




investing research
investing research

How much time to invest?

How much time do you have to invest?

That's a very important question for two reasons.

First, because the more time you have, the more you can and should let your earnings compound -- which will give you more money in the long run.

Secondly, because you may have either a lot more or a lot less time than you think, and how you perceive time is more important than actual time.

Here's what I mean -- Based on the first rule, it's obvious that young people should be investing as much money as they can. They have the most actual time to invest.

But most young people don't reach that conclusion. They perceive that because they have a long time before retirement, they can wait to save. I've tried to point out to young people in their 20s what I wish I'd known -- and they just argue with me about how they don't have enough money to save. But they have enough money to buy beer. That immediate sensation is more important to them the long term benefit of investing now.

I know that when they're my age, they're going to look back and be sorry, but they don't perceive that now.

Also, most older people have more time than they usually think. Life expectancies are increasing, and so about 1% of people aged 65 will live to 100. That's 35 years they have. True, 99% will not reach that, but how many know whether they'll be in the 1%. What if they spend all their money before they die?

Also, as medical science advances, life expectancies will continue to increase. Thirty-five years from now, living to 100 may not be exceptional at all. The longer you live, the longer you probably will live.

So most older people think they have less time than they actually do.

Of course, unfortunately, some of us will die a lot younger than we expect or plan for. But that can't be known or predicted, so we should plan for a long life.

This is all important when deciding what to invest in, because all investments are a trade-off between more money now and more money in the future.

investing lengths
investing lengths

Investing risk of debt and inflation

Are we going to have a replay of 1970s-style stagflation? Advisor Stephen Leeb thinks so, according to a recent email I got from him.

For those of you who don't remember, during much of the 1970s the econony did something it's not supposed to -- it had high inflation and high unemployment at the same time. The stock market basically went nowhere. Commodities and real estate greatly rose in price. The whole "get rich quick in real estate" concept began during that period. All but the youngest real estate gurus got their start during that decade.

But personally I think the investing risk of stagflation is low. A lot of those problems are traceable back to the coming of age of the baby boomers. A whole lot of 20 somethings looking for work. That created the high unemployment rate.

I am not going to argue with Mr. Leeb, however, that inflation remains a threat. The decline of the dollar and the rise in the price of oil are both problems for American residents.

Also, I highly agree that there's way too much debt for the good of the American and world economy. Federal government debt could be lower, but business and personal debt is a lot higher.

In case you're wondering, Mr. Leeb believes that the market is going up in the short run. He says the smart money, including Warren Buffett, is buying.

Of course, it's always smart to buy good companies with a long record of paying dividends.


investing risk
investing risk

Currency diversification

I think one of the most difficult aspects of the current monetary system and economics -- and how it affects investing -- is the relativity of the value of currency in relation to other currencies.

You can make 5% on your US dollar investment but still losing spending power because the yen goes up against the US dollar.

In the past, this has not been particularly important for US residents getting a US dollar income. Everything we bought was priced in dollars. We might notice Toyota prices going up and down, but overall, it didn't make any difference unless and until you travelled overseas.

Yet as the world's economies adapt and change, we will all be affected by the relative strength of our own national (or multi-national, in the case of the euro) currencies.

Therefore, everybody should have some source of income from other currencies, and therefore should consider making good investments outside their own country.

Some people in the US advise simply investing in major US corporations that do a lot of business around the globe (Coke is the most recognized brand name in the world. They even have a flair for designing how the name looks in other alphabets -- the Coke logo in Thai looks more impressive than the English version.) And this makes a lot of sense.

However, I favor diversifying your investments in different currencies -- NOT trying to make money from trading the foreign exchange markets (that's madness for a normal person), but simply from hedging your sources of investment income. At a minimum, try to have some Japanese yen, US dollars and euros. Also, British pounds, Australian and Canadian dollars.



foreign exchange investing
foreign exchange investing

Investing in consumer (bad health) companies

Yesterday's post made me think about how the same principle holds true for many of the companies that are high, dependable dividend payers, which is the kind I'm interested in, since I don't want to put my money in fixed investments that are eroded by inflation.

Many of the good dividend payers are companies that sell low-cost consumables -- especially snack food. Hershey, Wrigley, McDonalds and so on. Or Philip Morris (now Altria) which sell cigarettes, which is the ultimate bad health type of consumer stock. When I buy those companies am I responsible for the poor health of the people who eat too many of their products? I don't think so -- even of tobacco companies, as politically incorrect as it is to say so. I've never been a smoker, don't want to be a smoker, hate tobacco smoke, don't like to be around it, and I'm glad for reasonable restrictions on it inside public buildings -- though I've come to hate the fascist reminders in airports about not smoking.

Yet nobody forces anybody to go to McDonalds, eat a chocolate bar or even to smoke a cigarette. When I was a teenager I chose not to smoke, and I've kept up that choice through my adult years. And the information about the health problems associated with smoking have only increased since I was a teenager. So anybody who's a smoking teenager or young adult now is smoking despite 100 times more knowledge of its negative health effects than I had.

So why not buy the stocks of these companies and collect the dividends?


consumer investing
consumer investing