“It ain’t no thang”, and losing it [money] won’t kill you, I know this to be true because I’d already be dead a few instances ago? Now that’s not to say you won’t wish you were dead for a couple seconds, but you’ll see your way through, I know you can, you will – you have no choice right? Life’s like that. I have lived at borrowed places a couple times, once sleeping in the back of a stagecoach wagon on the streets of West Hollyweird, L.A. I’ve been poor more than once, and out of money probably a half dozen times. Nothing like running out of money, it’s a real wake up call, and the greatest of life’s lessons can be learned from it.
On to Another Life
In another life I went through a ton of higher education in order to quantify this and quantify that [as a money manager] only to realize that all these financial targets(?) they never stay the same – never sit still past a single contemplation. Nope they move around just like people and their minds, our finances mimic us, always a moving target. Given that knowledge how much does someone need to retire comfortably? The answer will be different for everyone. A ton of questions need to be answered to get anywhere close but again it’s a moving target. However, I will say if you’re contemplating this there are some things for you to realize, be aware of, and know. For example, there are things that will never change, let’s identify a couple of those.
In an ever changing world I believe there’s real value to be had by identifying factors in dollar denominated assets that will never change. First, don’t be embarrassed if you weren’t privy to what I’m about to say. Once a corporation goes public with a stock offering the price of that stock has no bounds up or down, except that it could trade for nothing one day. And most public corporations will from time to time conduct “stock buybacks”, purchasing their own shares on the public markets. Corporations hold their own shares in their treasury accounts for things like employee incentive programs, or even when they see an advantage to reducing the number of shares in the float as a way of boosting their earnings per share numbers. Happens quite often. Here’s the second thing that everyone should understand before investing in the stock market, it’s an auction market and nothing but an auction market. Say that over three times in your head just to make sure you comprehend what I’m saying. This goes for today, tomorrow and everyday afterward. Pure equity plays have no assigned values instead “Price discovery” on a equity investment is fluid, happening everyday the market is open for trading. It even takes place before and after hours for firms that have the ability to place trades prior to the open and after the close. Most institutions conduct trades before and after hours regularly which is why when a stock you’re holding has an earnings miss or some other news [like the CEO was caught banging his secretary] it could open the next morning at a huge loss to you, on paper anyway. Hence you had no time to get out beforehand had you wanted to at the [now] old price.
In general, stocks are long-term instruments and should be treated accordingly. Your time horizon [for equity exposure] should be at least 5 years, preferably 10+ years out, especially when you don’t know what you’re doing. No guarantees, again it’s an auction market and about anything you can possibly imagine will happen to lift or lower values in financial markets whether they are open or [even] when they’re closed. Still, most of us will not have a better option for building long-term wealth and security than the U.S. stock and bond markets. Thinking of throwing in the towel instead? You do have a few other options, you could stay poor and die at your desk at work I suppose, or you could win the lottery right? Though the previous option doesn’t hold much appeal for most of us.
Diversification Makes Sense
Long before you knew anything about the subject, a man named Harry Markowitz appeared on the scene winning a Nobel Prize for his doctoral thesis on portfolio diversification. Harry’s concept demonstrated that by finding an optimal mix of assets and combining them inside a portfolio [over time] results in lowering price volatility and can even create more optimal investment returns. His idea forever changed the landscape on investing and [I believe] eventually led to the proliferation of indexing that we are witnessing today. Markowitz’s work which he titled, “Optimal Portfolio Theory” identified the flaws in placing large bets on only a couple of horses within equity markets: how that can result in a low probability of success, and won’t work toward achieving the financial goals for the majority of us. I say let company founders take on concentrated risk, let them have about all of it in fact. Many will win as they should reap the rewards of their hard work, but many more will lose. My argument here is I don’t need to take on that level of risk and most of you don’t either. Like the last thing I want to think about when I’m about to tee off on a golf course is whether or not some techy with a high school education is going to make a good decision to preserve his company’s stock price that I happen to hold a gargantuan investment in. Over concentrated portfolios are not for me folks, screw that!
Alternative Courses of Action
You’re probably thinking, “he’s about to advise me to buy one of [about] everything, real estate, limited partnerships, stocks, a commodity or two…” Wrong! Besides having a place to live I’m very much against additional investments in real estate. Why? The carry cost is way too high, especially in high property tax states, my home state of Texas being one of them. If you’re buying homes to rent out, even if you own them outright, [no mortgage debt you’re paying interest on], guess what? Look at this – property taxes are between 1.5-2.5%/year, utilities run .5-.75%/year, maintenance will run .5-1.0%/year and property insurance is now between 1.5-2.5%/year, all that multiplied by the annual valuation of that property. Add all that up, let’s say you own a rent house that’s worth $500k, you’re definitely paying between 4-6%/year annually in these costs, which equates to what around $20 to $30,000 per year, just to hold onto that property? Get the fuck out, are you insane? You could park that amount with a competent money manager who will charge you only 1-1.5%/year, filled with holdings that offer you full and immediate liquidity. Get your head on straight! Let those coming over here walking around in turbans and robes and smelling like curry get involved in terrible decisions like these. Also keep in mind that if you’re paying mortgage interest on that rental property your carry cost is much higher than my example above. Don’t get me started on Limited Partnerships, with having to file a K-1 return and never seeing much of anything to show for an initial outlay? I’m not into double whammy’s, when single whammy “got-you’s” are quite enough, thank you.
Market Timing
I would be amiss not to mention this topic. If you’re trying to build wealth this is not something you want to get involved in. What is and what is not “market timing”? Well believe it or not buying a lottery ticket is a form of “timing” and most of us can see how that works out after spending a few thousand on those over a period of many years with nothing to show for it. All option trades involve timing. Plus anyone who cannot identify as an “investor” is timing the market, or at least timing the securities they are in. My advice is leave market timing to those that have very short-term time horizons, those who are unable to commit capital over extended periods of time. Timing securities is very tempting to do even for investors who need long-term returns to reach their goals. I have found that “market timers” primarily fall into two groups of people – the super-wealthy and the very poor. Let’s be in the middle of these groups instead. Stay away from believing that timing anything can work out for you over long periods of time because it won’t.
Things to Place High Value On
Liquidity
Not enough is said about the concept of liquidity. Most people, if you asked them, don’t even understand the concept and for that reason don’t think much about it when they put their money down. Liquidity is as important or maybe even more important than price itself! If an investment costs you a chunk just to turn into cash you can spend, that is not a liquid investment. So what types of instruments are we talking about? Real estate, Certificates of deposit, Limited Partnership interests, all annuities, stocks listed on the pink sheets, cash value life insurance policies, and interests in privately held companies are just some examples of illiquid investments. That’s not to say whether or not you’re money is working for you inside these investments, but rather to say that you will not be able to turn these investments into cash quickly, nor free of charge.
Broad market participation
Here’s another aspect of utmost importance I’d like to cover when considering any investment opportunity. Avoid thinly traded stocks if you prize sleeping at night. Stocks that have very small daily trading volumes are not where you’re going to find many winners. Can some small publicly held companies turn into household names one day? Yes, it can happen but it is rarer than you think, and it’s always been super rare. Also, how much time do you have to spend analyzing the financial performance of 100’s or even 1,000’s of individual company stocks, their leadership, and their prospects for the future? I’ve taken this approach before in the past and spent a ton of my personal time with little upside. Usually I was right but many times I’ve also been wrong. Most people don’t possess the motivation to do serious “digging in the weeds” research unless they’re involved in managing portfolios for investors. My advice is don’t embark on anything unless it’s absolutely necessary for you to succeed and this my friends I would place in the category of unnecessary for most in reaching financial goals… read on for a better way.
So Where’s [Most] the Money?
The market capitalization of the entire S&P 500 index is around $58 trillion dollars. The U.S. bond market capitalization is about the same, a little less than $60 trillion dollars across most of the different types of debt. The total market capitalization of the Dow Jones Industrials is around $20 trillion dollars. These numbers move around a bit but it’s plain and simple folks, that’s where the vast majority of invested money is held. Why are we concerned about this fact? This is how you’re going to get your money back when the market falls. If you’re invested in very thinly traded stuff and the bottom falls out, guess what? Your stuff isn’t coming back as these behemoth major market averages make their full recovery. Get it now? Do not stray far from the herd…
The majority of any portfolio [in my opinion] should be overweight in high quality names, [preferably major indexes] where there’s a ton of institutional positioning going on daily. In this way you can make certain that the two bases are covered, liquidity along with broad market support. One can drill down from there and get more specific using index products that are dialed into individual sectors which allows one to overweight or underweight a group of stocks. On fixed income, you can purchase individual bonds or even bond indexes that contain some individual themes, it’s out there just be cognizant of the fees charged when taking a position in a bond fund. Index products, whether equity or fixed income, are traditionally very low cost products to hold so fees are usually not an issue, but always check anyway.
And Stay the Course
Unless you’re holding very low quality stuff, anyone managing money will tell you that patience is your friend, it’s key. Make certain each investment you decide upon is compatible with your individual circumstance, times horizon for income or cash needs, etc. For an investment to add value means more than just selling something for a profit. I think you’ll agree that liquidity and broad market participation [in other words “high quality”] will be of equal importance to you in reaching your financial goals.
