What goes up, comes down, and goes up and down again

The market had a terrific week last week. Now, of course, the question on everybody's mind is, will it keep going up this week.

Is that on your mind? I hope now. You have better things to do. Your job. Your business. Have fun with friends and family. Continue your education. Exercise. Watch a good movie.

Is this heresy? To some people, yes. I advocate that you just not care much what the market does unless it plunges so far that the overall economy is affected a la 1929. If it causes another Great Depression, then of course you should be concerned.

But these daily/weekly/monthly ups and downs just aren't worth the effort people put into tracking them. Even day traders. Last week the market went up big time, but I'm sure that most day traders lost money. And when it goes down, some day traders make money. What matters to all short term traders is how well they guess (or, to be nice, predict) the trends of the stocks or market they trade.

For you and me, we should just be buying up income-producing assets and focus the rest of our minds on living our lives. This of course should include doing well on our jobs, in our careers and in our businesses to increase our incomes so we have more money to invest.

But it doesn't include caring about the short term noise of the market. It goes up, it goes down. Care about your dividend and interest checks.






stock market noise
stock market noise

John Bogle interview

John Bogle started up the Vanguard family of mutual funds, known for their industry-shaking low expenses. I use that adjective "industry-shaking" for good reason -- most mutual fund companies want grab as much of your money as they can get away with. Bogle pioneered funds that take as little as possible, making their profits from volume.

Bogle understands that your longterm investment results are directly related to the price you pay, and keep paying in the form of expenses -- both front-end and back-end loads and annual management expenses. So he kept those down as much as possible. All investors owe him a debt of gratitude, because probably expenses at all mutual fund families are lower than they'd be if he hadn't founded Vanguard.

Bogle also made it easy for investors to simply buy the overall U.S. stock market through Vanguard's pioneering S&P 500 index fund.

This article focuses on Bogle's predictions for the stock market, and doesn't even mention the risks of investing in bonds, but he expects poor overall returns.

In my estimation, all the more reason to invest for income, because there's not going to be large returns from capital gains. The article mentions international diversification at the end, since Bogle apparently shares the general pessimism regarding the U.S. dollar's prospects. However, he doesn't even mention the greatest risk facing the U.S. (and many European) stock markets -- the retirement of baby boomers. What will happen when baby boomers want to sell their stocks for a big profit? Who's going to keep on buying?







John Bogle
John Bogle

A balanced income portfolio

One of the best known income investing "gurus" is Roger Conrad, who edits a free ezine UTILITY AND INCOME, as well as monthly newsletters UTILITY FORECASTER and CANADIAN EDGE, which is about Canadian Royalty Trusts.

So I was interested in his answer at a recent conference about how to have a balanced income portfolio. He favored income investors being in at least 7 or 8 different sectors:

1. Royalty trusts

2. Limited partnerships

3. Real Estate Investment Trusts (REITS)

4. Power and water utilities

5. Telecoms

6. Preferred stocks

7. Regional banks

8. Foreign utilities

9. Super oils (I'm assuming he meant stocks of big oil companies)

10. Selected bonds (with no details given, I'm not sure whether he includes Treasury Inflation Protected Securities

11. Convertibles in growth industries such as defense and mining.

An interesting list that I need to check out more. And he's not included some traditional high dividend payers such as companies with consumer brand names such as Altria and Coca-Cola. I have to wonder why not.

If you want to know more, check out his sites at: UTILITY FORECASTER and CANADIAN EDGE.

balanced income investing portfolio
balanced income investing portfolio

Subprime mortgages stories

If you're at all invested in companies doing subprime mortgages then you should know there's a risk, and you're buying stocks that pay dividends based on consumer goods you shouldn't see any drop in income.

In all the hand-wringing about problems in the subprime mortgage market dragging down stocks in the U.S., I have to wonder what's happening with American Equity Mortgage Company.

This company was started here in St Louis years ago by Ray Vincent and his wife. The importance of their respective roles has been argued at length, but there's no doubt that a lot of consumer awareness of this company was generated by the numerous radio commercials ending with how Ray pronounced the company phone number "ninety-nine, ninety-nine" in a sort of twang.

Years passed, and American Equity Mortgage made a lot of money going after the subprime market through radio commercials, and the Vincents' marriage came apart and wound up in divorce court. That's when Ray's radio voice was silenced, as the couple argued over who should get the money and the company.

That's not to mention the many other interesting aspects to their arguments -- him getting drunk and breaking up furniture, being thrown out of a Vegas casino, custody of their dog, her hiring a security service and then sleeping with the head of the company . . .

But there was a lot of money to split up. Finally, not long ago, their divorce went through. I think Ray got a lot of money but his wife retained control of American Equity Mortgage.

Now Ray's back on the radio with more radio ads and another mortgage company going after the subprime market, and another phone number with the last 4 numbers "ninety-nine, ninety-nine," though I've heard that his ex-wife is suing him over that, claiming it's an American Equity Mortgage. He claims it's a number and she has no right to keep him from saying a particular number, which makes sense to me.

Who says high finance is boring?


subprime mortgage lending
subprime mortgage lending

How does mining gold create new wealth?

Back in the late 1970s when predictions of economic doom and gloom were very popular, I read some of those books lauding the gold standard. In a lot of ways it makes sense to have money back up by some type of universal standard and store of value.

But I kept thinking -- if gold is true wealth, then the only way to create new wealth for the world was simply to mine gold. How did digging more of that yellow metal out of the ground add to the wealth of the world?

How does getting rid of that yellow metal destroy wealth? Does the world's supply of food or industrial capacity change if some gold is sunk to the bottom of the sea as when Spanish galleons were sunk by British ships during the 1700s?

There seems to be no comforting, solid yardstick for financial value. Everything is relative, including currencies. The value of the U.S. dollar can go up today against the Japanese yen but down against the euro. Tomorrow it may be the opposite. It's totally out of our control, but has very real consequences for businesses, consumers and travelers.

Yet as long as people are able to get their needs and desires met, the economy is functioning. And new products and innovations keep expanding our options and therefore our wealth. The real store of value is the "means of production" coupled with the ability to market what's produced to the end consumer. Consumer desires do change, so the challenge for businesses and investors is to keep up with that.



gold standard
gold standard

Company risk is often one person risk

One of the competing theories of history is the conflict between the Great Man theory and Tolstoy's concept as explained in his novel WAR AND PEACE. The Great Man Theory, more popular here in the individualistic West, is that history, or at least much of it, is the result of the actions of individuals, whether for evil such as Hitler or for good such as Lincoln. Tolstoy maintained the opposite, that such leaders were simply the people who saw a parade and jumped in front of it. According to Tolstoy, tens of thousands of French men just decided to all of a sudden invade Russia, and Napoleon just called himself their commanding general.

However, large scale businesses seem to prove that the Great Man theory is the more correct. Did a whole bunch of computer programmers just all of a sudden decide to move to Redmond Washington, and Bill Gates just jumped in front of them and called himself the CEO of Microsoft? Or did Bill Gates first found Microsoft and then hire those programmers?

Obviously, the second explanation is more reasonable. And there's a clear implication that the fate (and therefore the stock price) of businesses are highly dependent upon one or a few individuals.

This is most obviously true of start up businesses which are usually the result of the vision of one person. Sam Walton and Bill Gates are two prominent examples, but almost every small company depends upon the vision and/or research and/or ideas of a founder or chief scientist.

This is probably more true even of large companies than we recognize. Where would General Electric be now if Jack Welch had never become CEO?

Yes, of course the work of a company is done by thousands or more of its employees, and the contributions of some other few individuals are very important. But it's also true that for maximum effectiveness their efforts must be directed and shaped toward a corporate goal.

McDonald's has good cashiers and bad cashiers, and always has, but its fate does not depend upon any one cashier, and never did. But certainly McDonalds would no longer be in business today if Ray Kroc had died a year after taking the business over. I wonder how many great businesses never got off the ground because their founders died prematurely.

So my point is that much of what is technically termed "company risk" is actually "important person" risk.

This seems to me a serious issue for people who think that they've found a company that's going to make them rich in a few years, whether the stock tip came from their broker, a buddy at work or an investment newsletter or the Internet.

Do you want your financial future to be just one fatal car crash, one heart attack, one untreatable case of pancreatic cancer, one bitter divorce, or mental breakdown away from disaster?

That's why it's important to diversify your investments. It'd be great to get in early on the next Wal-Mart, but none of those investors had a guarantee that Sam Walton would live as long as he did.




important person company risk
important person company risk

Stock tips on the morning radio

This morning I was listening to the Allman and Smash in the Morning radio show on my way to work. That's a talk show generally oriented toward politics (on the conservative side), but they do go off in other directions, and Jamie Allman was talking this morning about how he fails to invest in companies he knows about.

Unfortunately, it was the kind of conversation that feeds people's belief that making money in the stock market is about making quick capital gains.

Jamie started off saying that he should have known to invest in Google at its Initial Public Offering or IPO because he went to some conference for investigative journalists about that time and all of them were using Google. Well, online Google itself was firmly established as the best search engine.

Then Jamie mentioned that way back in 1990 or 1991 he lived next door to a guy who told him once that his brother in Israel or some other Mideastern country was working for a company called Adobe, and Jamie should invest in that. Jamie blew his neighbor off, but now knows that Adobe is a great software company.

So Jamie was lamenting about his lost chances to make money, but added that he didn't lose money either. He just hadn't made any. I think a lot of tech stock investors would like to trade places with him.

Unfortunately, Smash didn't help point this out. He added that he bought MTV a long time ago, then years later sold it to be his house in Chesterfield (a wealthy suburb of the St Louis area).

Ah, if only it were so easy to get good stock tips. We'd all be rich and wouldn't have to work :)

Jamie, read AMERICAN SUCKER by David Denby (lost a million dollars in NASDAQ stocks) and A MATHEMATICIAN LOOKS AT THE STOCK MARKET by John Allen Paulos (lost large amounts on WorldCom) and be glad you haven't lost money.


stock tips
stock tips