Small Investing Insights

Yes, You Can Predict the Future It’s election time here in the U.S. and we now know the next president is going to be Barack Obama. I can’t think of any other event in which, people nationwide, engage in predicting the future. Who’s going to win, who’s going to lose? The polls say this, the polls say that. Well, we all know that when it comes to elections, it’s anybody’s guess. But when it comes to investing, let me tell you a way how you can predict the future. Behind every stock you buy is a management team who collects a paycheck and receives a bonus based on a compensation plan. As publicly traded companies, these pay plans are public for any investor to read and the details are found in an SEC document called Form DEF 14A, short for Definitive Proxy Statement, otherwise known as the “proxy”. Compensation drives behavior. So if you tell me how you’re paid, I’ll tell you how you’ll act. One of the biggest disconnects between investors and the executives who run the companies you invest in, is something called an “agency problem”. Basically, it refers to the issue of alignment – how do I know the management
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Two in One If you live on the East coast, then you know that the big celebration in the spring is in DC where the cherry blossoms bloom. This year the city celebrates 100 years of the gift of the cherry trees from Japan. The opening ceremony was on March 25th but no one told that to the cherry blossoms which had pretty much left town by then. Rumor has it that the Japanese ambassador was praying for snow to slow them down. But forces of nature being what they are, all he could do was joke that coinciding the timing, though nice, would be like having Christmas and your birthday rolled into one. Better to baloney-slice out the celebrations. You may be nodding your head in agreement. Think about those sorry souls whose birthdays fall on Christmas and how they will forever be gypped of presents! Yes, most of us feel it is best to spread out the cheer; however, when we invest, don’t we pray for Christmas and our birthday on the same day? When we buy a stock, we want all the good news to happen immediately. Sure there is a real opportunity cost to money. We want to cash
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March – it’s when the madness begins. There’s an anxious anticipation in the air of what’s about to unfold in the months ahead. There’s a gleeful giddiness that you just can’t ignore. And that wild and wide eyed look? I see it in my mom’s eyes each March. She makes US college basketball fans look sedate. Yes I’m talking about gardeners, that nutty joyful bunch who each spring jump with delight when they see the beginning blooms of the bulbs planted last fall.  The apple fell pretty far from the tree when it comes to gardening, green thumb I am not. But I like to think that investing for the long term is a lot like gardening. We plant our investments months, even years in advance expecting that come spring the bulb grows up to be that rich ruby red tulip advertised on the packaging. There’s the daily tending to the garden, making sure the soil is replenished and the plants are watered. Also, the pulling out of the inevitable weeds that mange to creep in (hey, no one’s perfect and when it comes to investing you just want more right calls than wrong ones) and if you’ve followed your
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I’m a sucker for to-do lists (Remember The Milk – best iPhone app ever) and the start of every new year has me writing down ideas and tasks at break-neck speed. Truth be told, I have a love-hate relationship with my lists. I love the potential they represent but hate the pain involved to get them done. And when I think about pain, I can’t help but reflect on the past few years in the market. But in this new year, talk about a rally! January was a huge positive month across the board for all the major indices. Sure, unemployment numbers didn’t get worse and manufacturing figures got better. The European Central Bank is still working on a bail out though most investors think that Greece will default. So why the huge move? I think it’s like the feeling I get when I look at my to-do lists. There’s giddiness about the eventual gain despite the ongoing pain. Over the last few years, we’ve seen a “deleveraging” going on in the market (i.e., defaults). Whether it’s a never-to-be repaid credit card bill, mortgage payment or government bond, bad debt is making its way out of the system. A big reason for the market volatility. But for all its short-term outlook shortcomings, the market is a great discounter of already-known news. This is what investors mean when they say things like “Oh,
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By Christine Song of Small Investing Insights October was what I call a “straight up” month – the market soared over 10%. October also happened to be my birthday month so it was quite a gift this rally. Now don’t get me wrong, I’ll take positive returns any day of the week. You can’t buy birthday cake with relative performance. But while it’s great to see your stocks go up, not all positive performance is created equal – are your stocks rallying for the right reasons? When I ask this question, I’m often met with an “are you kidding me?” look – do you need a right reason? Just be happy your stocks are going up, thankyouverymuch. However knowing why your stocks are going up when the market takes off will protect you on the downside when the market turns south. These “straight up” months are often called “junk rallies”. Yes junk as in lower quality and these riskier stocks tend to lead the charge. In October, investors (a moody bunch) decided that the world wasn’t going to end (Greece got bailed out – hooray!) and when investors feel better about the future, they take on more risk. So they went
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By Christine Song of Small Investing Insights Over the last three months in which the market was down almost 14%, these words of Socrates are probably the best advice any financial advisor could give. On a macro level there was a lot going on: US growth got revised downward, US debt got downgraded and the Europeans dithered on a bail out for Greece. But for the majority of investors, on a micro level there was only one thing happening: the emotional brain kicked in and they ran for the exits. When prices go down, do you happily stock up or fearfully sell? People who want to be in the stock market will go through a financial checklist which is basically asking themselves how much money do they have to invest. But what about going through an emotional check list? Knowing your emotional makeup is as important as knowing how much you have to invest. When it comes to investing, your emotional make up is reflected in your attitude towards money. For example, I never buy anything full price and only buy when things are on sale. So how I spend my money extends into how I invest which is with a
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By Christine Song of Small Investing Insights “It was the best of times, it was the worst of times….” If Charles Dickens were an investor, you’d think he was writing about the market performance in June. For the first half of the month, the market sold off with the Russell 2500 benchmark index down almost 8% by mid-month. The second half of the month the market rallied and though the Russell 2500 ended the month down 2.20%, it had clawed its way out of a deep hole in just fifteen days. Where else could all this drama be coming from but from Greece? Its government’s ability to make/not make interest payments on the debt owned by foreign investors had the market on edge. During straight up and down market moves, money managers will often talk about how they’ve reassessed/repositioned their portfolio, how they scooped up stocks at fire-sale prices or sold stocks at the top at rich valuations. But when the market’s making such big moves especially in a downward direction, knowing who’s in the portfolio can be as important as knowing what’s in the portfolio. Does the portfolio manager eat her own cooking? Does she have skin in the game?
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By Christine Song of www.smallinvestinginsights.com I’ve been out of school for years now but June always elicits an eagerness about the summer and summertime travel. Now if you’re fortunate to find yourself travelling abroad, I hope the only unpleasant part of your trip will be when you’ve got to exchange money. The dollar just ain’t what it used to be. As many of you know, the US government has been busy buying bonds from banks to jump start the economy. The idea is that banks use this money to lend out. This increases spending and as demand for things increase, prices go up and we have inflation. Now the problem is that when you have inflation, the real value of your dollar goes down and so the dollar “depreciates”, which takes me back to summertime travel and the J-Curve or what I call the “things will get worse, before they get better” curve. The J-Curve is just that, a graphed curve in the shape of the letter J. In the world of economics, this curve refers to a country’s balance of trade (i.e., does it export more stuff than it imports). As the value of the dollar relative to other currencies
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By Christine of Small Cap Investing Most of America was shocked last month by the announcement. No, not that the U.S. government debt got downgraded to “negative”. But that Pia got voted off American Idol. The votes came in (or in her case, they didn’t) and the public had spoken. I too, was among the millions with dropped jaw. How could this be? Clearly she has the strongest voice. How could the voters be so dumb??? Then it struck me how similar that show is to the stock market. As an investor, every day I experience a form of Idol, but instead of watching beautiful young people sing, I watch stocks sink or soar. Benjamin Graham, the father of value investing, described it best when he said in the short run, the stock market is like a voting machine – tallying up which companies are popular or unpopular. Every day, investors cast their votes for what they “like” and the stock price reflects the actions of millions of people who buy or sell based on a feeling. But Graham also noted that in the long run, the market is like a weighing machine – assessing the substance of a company. In
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