Individual Investing is Becoming Increasingly Difficult

Individual Investing is Becoming Increasingly Difficult

Individual Investing is Becoming Increasingly Difficult

I am glad I began investing 20+ years ago.  If I were considering starting now, I would likely not do it.  Why?

1) Too much data.  There are too many factors to consider in investing. That there is a wealth of data to consider is certain, but what are the right factors to look at?

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2) Crowded.  More people and firms are investing.  The competition is higher.

3) There are more games in trading.  Makes it a lot harder to get good executions.  The low costs of transaction have created monsters.

4) ETFs affect the market as a whole.  They allow average people to speculate on broad trends, without telling most of them that they are noise traders, and are getting taken for a ride.  Dollar-weighted returns are far less than that for buy-and-holders in ETFs.  The traders are getting creamed.

5) Social media leads to groupthink, which lowers overall returns, at least for those that get there late.

6) ETFs allow investors to play well outside their circle of competence.  Beyond that, some ETFs don’t always do what they promise because of the derivatives that they use, roll, etc.

7) We are in a macroeconomic environment where we are delevering.  That is not the best environment for making money.

In general, I think most individual investors are cows for the institutions to milk.  But there are a few ways to immunize  yourself from this:

a) Hold very short or very long.  I lean toward the latter.  Don’t give up quickly on your investment ideas.  Buy and hold for years, not months.  Ignore the chatter, and read the data from the company and trusted third parties.

b) Use a value bias, and focus on companies where there is a margin of safety.  Buy the shares of companies with lesser growth prospects, that are selling cheaply.  Who cares if earnings aren’t growing if the earnings yield is over 15%.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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