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In the
New your Times yesterday, there was a report on Morningstar Inc.’s
biggest conference ever, in terms of attendees and marquee names on stage.
Some 1,600 individual investors, financial planners and money managers
gathered in Chicago last week to listen to the best and the brightest,
including Pimco chief investment strategist Bill Gross and BlackRock chief
executive Larry Fink talk about the pressing financial issues of the day.
The mood
has changed a bit from last year, when the money managers all seemed flush
with stocks they expected to do “great” in the future; this year,
optimism was muted, and most of the money managers were reduced to a list of
names they thought were “good.”
While the report stated that it is common
knowledge that Greece will default. I see this as a game of
“Brinksmanship.” Brinksmanship is a very dangerous game being
played out in many venues. It is like a grown up game of
“chicken” but it is being played with live ammo. Will the Greeks
receive a bailout? Yes, as the clock strikes twelve. The same scenario will
play out with the debt ceiling, in the Middle East and other scenarios. What
these “professional politicians” don’t know or don’t
care about is that they are hurting real live red blooded people.
Regarding
this conference, I will spare you the details of the speeches, the occasional
stock tip, and the inner workings of various portfolio management strategies.
What I won’t spare you are the
questions that arose through the various sessions. More telling was that these experts
are nervous. They are nervous and uncertain about the direction of the
market. As I have often written the market can deal with bad news, although
it would rather it be good news. However, what the market cannot deal with is
uncertainty. Think back to days before 9/11. I’m not saying that it was
re-runs of “Father Knows Best” but there was a feeling of
certainty. Maybe we were all living with blinders on or looking through rose
colored glasses but we felt that tomorrow we would wake up, go to work and
take care of our family. Sadly, 9/11 was a rude awakening. At once we were
aware that the world had changed and not for the better. Life as we knew it
would never be the same again. I’m not trying to be morbid but I do
think each and every one of us should be asking ourselves about own portfolio
and money-management style because I don’t see things getting better
any time soon. I just see the “powers that be” kicking the can
down the road because to upset the apple cart will mean they will not get
re-elected. It would mean that they would have to make some very difficult
choices and I don’t believe that they will do that if it means they
will lose even one vote.
Here are
the questions that I thought every investor should be asking themselves now.
Take a look, and then answer the questions honestly for yourself.
1. Which
markets do I invest in, and which should I avoid?
There are a lot of ways to invest. My in-law
Nat is an economist and he tells me almost every day that I am crazy. The
only way to invest is to buy the Vanguard S&P Fund (VFINX). As you may
recall, yesterday I wrote that “dividend reinvestment over time is the
most powerful tool an investor has.” For individual investors, however,
the key to any investment is certainly the thesis behind it. As you may
recall in yesterdays letter I termed this speculation. Please refer to
yesterdays post if you want to reread my description of speculation. Suffice
it to say that in times as uncertain as now, there is probably nothing as
important as knowing what you are comfortable owning through the turbulence,
and what makes you nauseous.
2. Which
markets do I know well enough to invest in on my own?
There will always be some great investment
ideas that someone might hang their hat on but there’s a difference
between loving a story and making it work for you. So if you get excited about the
economic future of, say, Brazil, you need to decide if you want to invest
specifically in that market, or whether you want to get your exposure through
something more diversified, such as a fund that focuses on the BRIC nations
(Brazil, Russia, India and China). Moreover, if you are the type of investor
who wants to do it yourself, you must truly you believe you can do better
than a pro, who theoretically, at least, has the resources to diversify
widely and minimize pain if one investment decision goes wrong.
3. Does my
asset allocation reflect my age and my thinking about the long haul?
Every analyst I have ever spoken to has said
that one of the big problems they see today is people coming in with a
portfolio which is not "age appropriate." A long-term strategy
means having investment goals and finding ways to achieve them. That said, many
investors are a bit too happy with what has worked for them recently, at the
expense of protecting themselves from the eventual turning of the market in
favor of a different strategy. As Gerald Loeb taught us “the market
only discounts a holding once.” Some investors in their 40s and 50s
have been so scared of the recent market moves that they have backed away
from stocks, which can be a problem if they live into their 80s or 90s.
Conversely, some senior investors are still investing as if they were in their
work / accumulation years, a problem if the market tumbles and they
don’t have time to recover.
4. How much
confidence do I really have in my mutual funds?
Click here to read
a pretty tough report card given by Morningstar rating a myriad of funds.
This information should spur every investor to examine their funds, listing
the reasons why they think a fund will meet their expectations going forward,
and how or why it could come up short. Without the strong belief that a fund
will do what it’s supposed to, it could be time for a change.
5. What
investments keeps me up at night?
Every money manager has their own answer for
that question, but the truth is that we are all preparing for the worst in
some way. Individual investors should do the same. You don’t need to be
a weatherman to know which way the wind is blowing. “Black Swans”
are all around us and you don’t need me to tell you that. Whether it is
debt woes in Europe, the economy in China, the potential for renewed
terrorist activity or something else, we all need to look carefully at what
scares us, and how we will respond if these nightmares are tomorrow’s
headlines.
In conclusion, worrying about these potential
events without thinking about the appropriate response, if they become real,
means you are likely to lose both sleep and money and that is also capital
– Emotional Capital.
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