A10, Stock Trader Dude

Oh dear, get Couric off the air. I’ve noticed a peculiar thing ever since CBS hired her for the evening news, she can’t stop stating the obvious. It seems to irritate more than help deliver the news.

Although I don’t watch television, whenever I visit the neighbor in the evening he always has the news program on. I’ve been telling the neighbor that I don’t see how she adds to the news program, anybody can read the news to you, and furthermore she seems annoying by repeating whatever the CBS news theme is at the moment, then she may speak with someone else and ask a question that doesn’t even need to be asked. CBS is wasting reporting time. When the DJIA rose approximately 359 points, she reported that the Fed reduced interest rates to as low as zero percent. She turned to her colleague and said something like: And with the Dow rising 350 plus points today, Wall Street is pretty happy about that news, right?

Recently the neighbor said that he has now noticed that Couric doesn’t do much but read the news and comment about the obvious, but he said she gets $16 million to do it. Wall Street is happy with the news? Come on, the DJIA would need to rise 3,000 points to show a meaningful change and the DJIA would need to go to 15,000 to illustrate a shift in perception.

“The news isn’t her thing.”

I asked a girl about her take on Couric’s performance on the news program and the girl said Couric did fine as a morning talk show person before going into news and that the news isn’t her thing. I spoke with a lady who said she saw Couric having lunch and told her she was doing a good job. I couldn’t figure out what she was talking about, good at what?

Example: News without News videos

Update: 2011

Wishes have been answered, Couric has been removed from CBS evening news!

In an interview several years ago Mark Cuban called the stock market a ponzi scheme. At first I wasn’t comfortable with that that label but it does fit because in order for prices in the stock market to continually rise you need fresh buyers. What I realized about Mark is that he has a keen insight into interdependent relationships. What may seem complex, as in, the stock market, can be reduced to a scheme, although a pyramid may be a better description than ponzi. And if you have studied the major players in the game who made fortunes a hundred years ago or earlier from trading in stocks, it is evident that those early proficient players did not consider the stock market a long-term game or part of one’s long-term savings. It merely was a means to execute strategy. 

Furthermore, the Madoff ponzi scheme is a form of the market itself – it is an efficient way to access capital (legal and moral considerations aside), and the spectacular success of Madoff is that he knows exactly why his approach builds success, if any of his investments substantially gain in value his fund can pay off his investors without using money from other investors. If you are in the investment business you know that this occurs, however in Madoff’s case the sheer size of the fund and losses is amazing. The most important consideration for those with wealth is to have people watching the people who are watching your money.

The stock market is not a place for most folks to put money to get rich because in bad times you lose and in good times the average investor makes a small return. When you lose money on your investment fund, all those great advertisements that lured you with the presumption that you will compound your way to wealth go out the window – the ability to come back from a large loss requires very high rates of return for consecutive years. And when economic conditions are poor, or if market conditions are perceived to be poor for many years due to a lack of earnings improvement the market continues to value your holdings for very little and your capital is tied up in waiting to breakeven. But that is not investing, that is hoping. 

When the golden eggs run out is an article in the December 6^th 2008 issue of the Economist that states a few important points to consider:The stockmarket’s decline this year has been so steep that it has erased all the gains made in the rally from 2003 to 2007. In late November, the S&P 500 index dipped to its lowest level in 11 years.An American who puts $100 a month for the past ten years into the average equity fund would have accumulated just $10, 932 – $1,068 less than he invested. Even a balanced fund (one that mixes government bonds and equities) would have lost money. A European who invested a flat amount every month for the past decade would have lost almost 25% of his money.The average diversified American equity fund is down 41% for the year. 

Let me make my point: Long-term stock market investing is not a guarantee of wealth, it is a game of chance, and when played properly, with the understanding that it is simply a game of making money by being able to sell what you paid for at a higher price you can focus on a better approach that has a chance to produce wealth. The stock market requires fresh buyers, without people willing to pay more for your holdings the game leaves behind those who hang on to their holdings and values the holdings for less and less, if and until new buyers come along. The most important consideration in the wealth creation game is not the investment – it is the approach. At some point your holdings may reach an unsustainable high value, and that luck should be cashed in. The dotcom bubble was about quick wealth, and once the bubble burst there hasn’t been the same kind of chances for quick and relatively safe risk-taking to accumulate wealth. The people that bought a little of a few different tech stocks missed the main chance of the wealth game, those investors needed to load up and be ready to dump their holdings before the tech bubble burst or as the market was valuing their holdings for less while the market was shifting downward. As long as there was a flood of buyers coming into the game and in particular focusing on tech stocks, a fortune could be made, but it is a relatively short-term approach with long-term beneficial results if you were able to play the game correctly. When stock market investing was presented to the average person (it was generally a game for the rich up until twenty-five years ago) the media repeated a lot of foolish things, that long-term investing of even ten to twenty-five years will produce good returns and that diversification will prevent catastrophic losses of capital. Investors today see this is not true. 

From the same Economist article: In demographic terms, asset markets could be seen as a pyramid scheme, in which each generation aims to sell their savings to the next. Provided the next generation is larger than the one that preceded it, the savers can sell their assets at higher prices. That was the case for much of the 20^th century. The baby-boomers will upset the pattern. If they retire at 65, they will start offloading their assets in 2011. And even in America, which has fewer demographic problems than in Japan, there are not enough new savers coming along to replace them. 

What I’m saying is cheap stocks tend to get cheaper. You have to understand: Is there any reason someone will pay more for my investment? If nobody wants it, it doesn’t matter that you bought in during an early stage, it only matters when or if other buyers come along to increase the value of the investment. New buyers decide the value. And if earnings aren’t going to considerably improve, there may not be pressing reasons to believe your particular holding will increase in value – long-term investing is only efficient and effective when stock prices are rising. Anything else isn’t helpful. The stock market will continue to slip or can continue to fall until most of the players trying to make money are washed out of the game. I don’t have a reason to believe that this is the bottom. Why are the DJIA and S&P 500 still relatively high if the economic climate is supposedly worse than it’s been in many, many years? The DJIA was around 1000 in 1980, and it had begun 1973 at 1020. And in the bear market of 1973-1974, growth funds lost 46.4% on average, and some funds lost between 25% and 45% in 1973 and then lost a similar amount the following year! Sure, history doesn’t repeat itself in the exact same way, but the idea is clear – you need to decide where you are in terms of your overall accumulated investment capital over the years, figure out a breakeven point and decide on a stop-loss point to protect yourself from losing it. Some investors may not have been productive with the last ten years of investing and now have a roughly ten or eleven percent loss, but cap that loss, because at least you can recover from a ten or eleven percent loss. 

From the same Economist article: For Japanese equity investors, it has not just been a lost decade, it has been a lost quarter-century; the Nikkei 225 average recently touched a 26-year low. 

The investment community got you in, and if you are still holding and hoping you may be overlooking the possibility that your capital went to upping the value of something that perhaps someone else had the foresight to cash out on.

In May 1997 money magazine published a one page article titled Learn from the big bad bear: Four moves that can help you survive the next stock crash.Here was the advice (it didn’t help, and investors now know it doesn’t work after the recent decline):Rein in risk – Don’t buy aggressive growth funds unless you’re willing endure a loss while waiting for a rebound. (The article suggested buying less aggressive growth funds since they lost less in 1973-74, but in 1997 to 1999 the money to be made was in aggressively getting behind momentum stocks; less aggressive growth funds aren’t a solution, those funds also declined severely in 2008)Spread your bets – a balanced portfolio with cash, bonds, and foreign shares (this approach failed as of December 2008 – markets are interrelated, the article didn’t consider that).Don’t panic – By selling into a bear market, you turn your paper losses into real ones… panic sellers miss out on the earliest, biggest gains once stocks rise from the dead. The article ends with: So don’t try to time the market. Just hang on tight, and ride out the bear until it finally turns back into a bull.This is unhelpful guidance. Don’t panic isn’t advice; it’s foolishness. The best way to protect your investment holdings is to sell them as they decline to the break-even point/price you paid. That’s an automatic safety net approach. And if you have to wait for stocks to turn around for sixteen years, for example, to begin to get your money back you didn’t do well. In the December 6th 2008 issue of The Economist, pg. 13, is an article titled “Where have all your savings gone?” that states: Any American who diligently put $100 a month into a domestic equity mutual fund for the past ten years will find his pot worth less than he put into it; a European who did the same has lost a quarter of his money… They should, of course, have got out in 2000, when the global price to earnings ratio was 35; shares look relatively much more attractive now, since the ratio is down to ten. A recent price-earnings analysis shows that, when American price-earnings ratios are low, returns on equities over the next decade average 8%; when they are high, returns average 3%.Three to eight percent returns aren’t going to absorb the full losses for some time (assuming share prices don’t significantly decline further, which happened in 1974 after the severe decline of 1973), and it’s certainly not going to make the average investor wealthy. Selling is more important than buying, unrealized gains aren’t as beneficial as realized gains in a tax-free or tax deferred retirement account. Everybody can tell you when to buy stocks, Money magazine does it all the time, but it doesn’t make anyone rich – that comes from knowing when to sell your holdings. And if owning stocks at the bottom is the best time to buy as the article suggested, then common sense tells you that when prices are going down it is not a favorable time to hold, there’s no advantage. The advantage comes from having sold your investments early and to be able to act to buy when prices are extremely low and due for a rebound. For those people that hold on, they probably won’t have the money or the mental ability to deal with the stress to buy again, even at depressed price levels. When you win and cash out, it’s easier to take another chance on buying stocks because you’re playing with “house” money – your profit, not your original capital.

http://www.metacafe.com/watch/2284863/bear_market_unhelpful_articles_money_magazine_1996_1997/

An article appeared in Money magazine in May 1996 titled How to make money even if the market falls. Typical of analysts and some investors in 1996 was the belief that the market was headed for a correction. The article was not helpful then and is not helpful now – here’s where it goes wrong: 

Recommended reducing lack of diversification by splitting money among a minimum of eight stocks in eight different industries or if the investor didn’t have the capital for that approach to consider a broadly diversified mutual fund – then the article recommended a bunch of losers that lost during 2000 to 2002 and that approach certainly failed in 2008. 

This article was meant to sell a crummy book, none of the twelve advice points actually fulfilled the make money even if the market goes down headline on the cover and the section where the article appeared was simply titled “Investment report: cutting risk” but none of the points actually addressed the real harmful causes of decline, overvaluation, fraud, lack of earnings improvement, global economic slowdown and a potential lack of new players to pour money into the game to continue to raise share prices.

Most investors do not know how to play the game. The people that got out of the stock market ahead of you may have made money, broke even or curbed their losses to a small amount. The people that hang on for the sake of hanging on are not in touch with reality, if you are a buyer of stocks that does not pay a dividend or a mutual fund buyer then stocks are only worth something when they are going up. Other than that, they are pointless for most investors. If you are a person that bets on the decline of a stock price or an index then falling prices are good and serve a purpose. What the financial media didn’t tell you: the game is based on suckers because how can you make money unless there is someone willing to pay more for your holdings than you paid. And there you are, holding onto your crummy stocks or funds and for what, the chance that your holdings will go back up? Who will pay more than you paid? I can’t wait to see the looks on the faces of investors if the Dow Jones Industrial Average goes to around 2,600, where it was in 1987 or to around 1,800 where it was after the October 1987 set back. Of course, it may not decline that much but if it does the people that made money by betting on further declines are going to have one interesting story to tell. Hanging on to stocks for the sake of hanging on doesn’t make for an interesting life. But then again I don’t have to be an expert in the stock market, just skilled in understanding human nature.

In an effort to understand why the stock market has pulled back, I urge you to revisit 1996 for some clarity. The Dow Jones Industrial Average reached 6,000 in November 1996. What people have forgotten is that the top analysts from Morgan Stanley up until that time had been predicting a 1,000-point sell off to occur in the fall. Even then there was concern that stock prices had become inflated and that corporate earnings wouldn’t be strong enough to support higher share prices. What the average investor misses is that now that the economic environment is confirmed to provide lower earnings for the foreseeable future – and if there is no expectation of better earnings, of course share prices fall, remain depressed and can decline further. So, in 1996 when the top analysts believed the economic environment might not be so good they guessed the DJIA would decline to around 4,000 to 5,000. And if those same analysts had today’s information as their economic forecast my guess is that they would have reduced their expectation for the DJIA to 1,000 to 3,000. Here’s part of the commentary that appeared in The Red Herring magazine, January 1997, page 106: 

“The overall feeling that was that the economy was beginning to slow down – which would result in lower corporate earnings – and investors would in turn begin to sell off part of their portfolios. But it hasn’t played out that way.” So what happened? Well for one thing, the market continues to be driven upward by relentless waves of new money washing into equity mutual funds – specifically, a staggering $178 billion in the first nine months of 1996, far beyond the previous full-year record that was set in 1993. 

What you get out of the above paragraph is that two things fueled higher share prices:Although the economic climate was in question, it was not determined to be negative, so investors believed earnings still had a chance for growth and huge sums of new money was flowing into the stock market. In this environment those two elements are gone, earnings growth has disappeared and there is a lack of suckers pouring money into the market. Now it becomes obvious why share prices in the stock game decline – there isn’t any reason to believe that the economic environment will change for the better and get back to the glory days for a very long time. Now, recall that mutual funds promised you wealth by suggesting compounded returns of perhaps eight to fifteen percent and financial advisors preached diversification as a safety mechanism, and that mutual funds spread the risk among various stocks so that your money will be safer. Now you see that is not true. The mutual funds didn’t make you rich over the years and in a downturn the concept of spreading the risk didn’t protect your holdings so your money was still at risk.