Thursday, October 9, 2008

mr. answer man and the financial faqs

No, that is not the name of a rock band.

Today I’m here to answer frequently asked questions (FAQs). Many people seek advice, knowledge and insight from me concerning financial matters. I am a professor of economics who never took a course on financial markets and I am quite often able to play Dave Ramsey DVD’s at 57 Market on Tuesday nights. Despite these credentials, I receive no fees or payments for my advice. Therefore such advice is not only completely unbiased but also unencumbered by any knowledge of how real financial markets actually work.

Let the questions begin.

Q: Before the current meltdown, what was your advice to folks with some savings looking to invest?

A: Very standard stuff: 1) diversify your portfolio between different types of stocks and bonds, 2) if one was over 50, totally investing in stocks was considered aggressive; 3) use indexed mutual funds in different categories of stocks and bonds.

Q: What does aggressive mean in terms of investing?

A: Risky. Highly aggressive means a taking a roll of the dice.

Q: How did these people do who sought the standard advice?

A: Not very well. People tended to take only parts of the standard advice. For example, a couple in their late 50’s put all their money into stocks, going for better returns, rather than mix in some bonds to diversify. They did use indexed mutual funds to diversify among stocks but otherwise felt comfortable pursuing a more aggressive strategy. Then this year the stock market tanked.

Q: What was their reaction?

A: It was my fault.

Q: Do people who are in their 20’s or early 30’s seek advice?

A: Yes, but they tend to totally ignore me. Last year a young man sought my advice. This guy knew nothing absolutely nothing about investing, markets, or anything. I doubt he had ever read anything more sophisticated than Newsweek. He listened politely, thanked me for my advice and then told me, “I feel very comfortable in my ability to judge which companies to invest in.” He sunk his money into a couple of Chinese companies. Within six months the Chinese stock market fell 70%.

Now I don’t mind if people do not take my advice. I even prefer they don’t ask for it in the first place.

Q: What can we learn from these examples?

A: Feeling comfortable is of the utmost importance.

Q: Are you being sarcastic?

A: Yes... No... Well sort of... Sarcasm is the lowest form of humor. I'm shooting somewhat higher. The rest of this post is a ham-fisted attempt at satire. Maybe tongue-in-cheek could describe it? Good satire is like sarcasm only with style and wit, like the Bird & Fortune skit. Bad satire makes the author look like a "I think I'm so much smarter than you but really I'm nowhere near as witty as I think I am" little snot.

Sarcasm, and even the best satire, is often difficult to convey in writing. The tone of voice, facial expression, and body language which help people detect sarcasm or satire is absent.

I'm not that good a writer but I hope I'm achieving more than mere sarcasm.

Q: And what level of achievement might that be?

A: I'm trying to be a smart aleck.

Q: Didn't your mother repeatably tell you that no one likes a smart aleck?

A: Yes. However, I ignored her sage wisdom and now I have no friends.

Let's get back to how to feel comfortable....

Q: So, feeling comfortable is of the utmost importance. Has this conclusion affected how you handle your personal investments?

A: Absolutely. I feel comfortable ignoring the tons of research showing indexed funds beat the returns of the vast majority of funds actively managed by professionals, professionals with teams of highly paid experts whose whole lives are devoted to picking stock winners. I feel comfortable moving around funds, not to pick winners, but to time changes in broad market trends. But then it is easy for me to feel comfortable: I have both a Ph.D., and more importantly, a subscription to the Wall Street Journal.

Q: What is your personal investment strategy?

A: The usual cliché is to “buy low and sell high.” However, I take a very old, often utilized contrarian approach thereby finding opportunities which escape those who follow the conventional wisdom. This approach also allows me to cope and feel comfortable with market volatility.

If one part of the stock market goes down and I lose a lot, I sell so I don’t lose anymore. I then reinvest in parts of the market that have been doing well, parts that have already risen. This contrarian strategy of “sell low and buy high” makes me feel comfortable in that I know I won’t lose anymore in the declining sector and instead I am going with a proven winner. I can then wait until the market goes back up to get back in, feeling comfortable that I have bought quality investments.

I also feel comfortable knowing that I am not being a passive investor. I feel in control rather than a victim of impersonal market forces.

There has been much research showing that over the past one-hundred years this contrarian, sell-low-buy-high approach consistently yields quite stable, although negative, returns. Stable returns are very important since volatility, or instability in the market, makes people feel uncomfortable.

Q: Wouldn’t putting money in a federally insured bank account be stable with better returns?

A: There are pros and cons, and therefore trade-offs that need to be made with any investment decision. On the minus side, returns (interest rates) on bank accounts are very, very low. On the plus side, the returns are positive. This is a difficult trade-off.

However, bank accounts make you a safe, namby-pamby passive investor rather than an aggressive investor. No opportunity for using the brains God gave you. No chance of losing but no chance of lucking out, scoring a big gain.

Not aggressive? No control? Conclusion: No cojones.

Bank accounts are for sissies.

Q: Any suggestions for particular investments given the current market?

A: If you want to feel comfortable, buy gold. Gold has a high price. I was listening to a talk show on AM radio, when during a commercial break Pat Boone was paid to say that now is the best time to buy gold. Gold is the perfect investment trifecta: gold fits the contrarian investment strategy, gold dealers sponsor right-wing nut case radio, and gold is endorsed by Pat Boone.

Q: Thank you RB?

A: You’re welcome. Be blessed.


MexicoAndUs said...

Some of your comments surprise me. I will have to chat with you offline.

nymrsb said...

Are you sure you aren't confusing Dave Barry with Dave Ramsey?

Offspring #3 said...