Tumblelog by Soup.io
Newer posts are loading.
You are at the newest post.
Click here to check if anything new just came in.

May 03 2015


Ahoy, Polloi

Back in the early days of my investing career in the late '90s, I used to have pretty much all my money in index funds. When I started working on Wall Street, I had a separate pile that I used to speculate on individual stocks, but I still kept the bulk of my wealth in index funds.

In 2008, I lost a boatload of money in those index funds while my trading account, where I'd gone to mostly cash, was much less affected.

After that, I lost my taste for index funds. I called Vanguard, closed the account, and the company mailed a check to my house. I was glad to be rid of it, though at the time I didn't really understand why.

Here's Why

Index fund promoters like Jack Bogle and Burton Malkiel believe in efficient markets (I don't, as I wrote here). They believe you can't beat the index, so you might as well be the index, and you should get exposure to the index by dollar-cost averaging--like, by sending $300 checks to Vanguard every two weeks.

You buy when the market goes up. You buy when the market goes down.

It's important to have the discipline to buy when the market goes down, but most people find that difficult because they freak out when the market drops. In practice, nobody does dollar-cost averaging properly, except for one guy I knew in the Coast Guard who bought all the way down in 2000 and in 2008. He's a retired military guy and a millionaire, demonstrating that dollar-cost averaging works... if you don't chicken out.

But everyone chickens out.

Now, this assumes that markets always go up. You wouldn't want to dollar-cost average a prolonged bear market.

That's an interesting question, right? In the US, stocks have always gone up. But elsewhere in the world, dollar-cost averaging would have gotten you in big trouble.


Civilizations rise, but they also fall from time to time. I don't think we should naïvely assume that US stocks will go up throughout our lifetimes. They might not! I can think of a million reasons why they won't.

Some people argue that you have to think bigger and consider other markets and other asset classes outside of local stocks--like bonds, real estate, international stocks, and commodities. If you own the entire universe of investable assets, then you get the "market return," a concept familiar to people who have studied portfolio theory.

But even that can get you in trouble. In 2008, everything--and I mean everything--went down, except for US Treasury bonds... and cash. There was nowhere to hide.

But It's Cheap

The expense ratio on the Vanguard 500 Index Fund Admiral Shares (VFIAX) is five basis points. Five! If you invest $100,000, they only charge you $50 a year. Incredible.

And depending on the year, index funds do outperform most active managers.

Seems like a no-brainer, right? Well, not so fast... there are two things to consider:

Active managers can go to cash. There's a lot more pressure on portfolio managers to stay fully invested these days, but they do have the latitude to go to cash, which helps cushion against losses on the way down.

Nobody can take the drawdowns (except my Coast Guard friend). Everyone puked their index funds on the lows in 2009. Everybody. Then they bought back in with the index 100% higher.

The press beats up on hedge funds for underperforming the SP 500 in bull markets and for their crappy performance in bear markets, but if you invest in an absolute-return vehicle, it's unlikely that you're going to have a 60% drawdown (as the stock market did in 2008-2009). Rich people tend to be a little pickier about losing money--they want to hang on to what they have.

I don't know many rich people who are heavily invested in index funds. I don't think I know any who are Vanguard customers.

Look at the Forbes list of billionaires. I'd bet the left arm of my firstborn son that not one of them made a billion investing in index funds.


Think about this. If you invest in an index fund, you invest in all the stocks--the good ones and the bad ones.

But why would you want to invest in the bad ones?

Hedge fund manager Stanley Druckenmiller had a private speaking gig in South Florida, the contents of which were leaked to the press. Druckenmiller made some not-so-nice comments about the Fed, which is what the stupid reporters picked up on, but he also talked about his investment philosophy, which was far more interesting.

If the best investor in the world tells you what his investment philosophy is, you should pay attention.

So Druckenmiller said he doesn't believe in diversification. In fact, he tries to achieve the opposite of diversification--placing all his eggs in one basket. This he did with the pound sterling years ago, to great effect.

If you're really convinced of something, why make it just 5, 10, or 20% of your portfolio? Go big. Make it 100% of your portfolio.

Of course, this sounds very scary to the index fund investor because he doesn't know what to go big on.

So, as a rule of thumb: if you don't know anything about investing, you invest in index funds, and you make the market return, which has been 6-8% historically. That's the tax you pay for being a dumbass.

If you know what you're doing[1], you should have a very concentrated portfolio. You should try to make infinity.

For what it's worth, I have about 20 securities in my portfolio, but most of it is taken up by three or four positions. It's very concentrated.

Many people think trading is all about buying the lows and selling the highs. That's the hallmark of a true piker. The entry and exit points are unimportant--it's the size of the position that counts.

Last week I talked about my China trade. It's a great trade, but guess what--I'm too small! Position sizing can take a lifetime to learn.

So index funds have their place, I suppose, but if this newsletter landed in your inbox, you probably have some interest in the markets above and beyond just passively writing checks to an index fund (and you might also be interested in Bull's Eye Investor).

I think some people have this idea that if they invest in index funds, they have somehow absolved themselves of responsibility--that they will get their 6-8%.

They might not. That was a painful lesson for people to learn in 2008.

Bear markets have a way of sorting things out. Next time we have one, watch Vanguard's assets. Stocks may be for the long run, but when the going gets tough, the tough send in redemption orders.


[1] Very few people know what they are doing.

The article Ahoy, Polloi was originally published at mauldineconomics.com.

Related podcast interview:

John Butler on Excessive Leverage, Shadow Banking, Europe and China


April 27 2015


Barcelona, Real Madrid Kept Apart in Champions League Semifinals

The marquee matchups of the European soccer season will pit Barcelona against Bayern Munich and Real Madrid against Juventus for a spot in the final of the UEFA Champions League.

The four semifinalists have 21 European Cup and Champions League titles between them, putting this among the most decorated final fours in the competition's history.

Barcelona is in the semis for the seventh time in the past eight years after missing out last season. Bayern is back for the fourth year in a row. But the main intrigue will revolve around Bayern manager Pep Guardiola.

He was the architect of Barcelona's brilliance from 2008 to 2012, picking up 14 major trophies including the Champions League twice. Guardiola moved to Germany in 2013 after a one-year sabbatical in New York.

During his playing career for La Blaugrana, Guardiola was also teammates with current Barça manager Luis Enrique, who is in his first season in charge. The two men have said all the right things about each other during the Champions League, although there were professional differences between them while Guardiola ran the club and Enrique managed the B side.

In the other semifinal, defending champion Real Madrid will likely start as a favorite against the top side in Italy, Juventus. Neither club particularly lit up their respective quarterfinals. But one goal over two legs was enough for each of them to advance. (Real squeezed past Atletico Madrid 1-0 on aggregate on Wednesday as Juventus held off Monaco by the same score.)

Juve is only the second Italian team to reach this stage since AC Milan won the competition in 2007. The other was Jose Mourinho's Inter, the tournament winner in 2010.

The semifinal first legs will be played on May 5 and 6 with the return legs a week later. The final will be in Berlin on June 6.

In the Europa League semifinal draw, held just before the Champions League's, the two remaining teams from Italy avoided each other. Napoli, managed by Rafa Benitez who lifted the trophy with Chelsea, will face Dnipro Dnipropetrovsk of Ukraine. Fiorentina, meanwhile, was paired with Sevilla.

For the latest sports coverage,


March 28 2015


How To Be A More Effective Trader Using Economic Calenders

One of my preferred tools to use when trading binary options or investing in basic for that matter is understood as the financial calendar. Today, we'll discuss what it is, where to get it, and how to utilize it to end up being a better binary options trader.

What Is The Economic Calendar

Economic calendars are calendars that provide us an idea of what we can expect on any certain day in the market. Any time there's a prepared news event surrounding around an economy, a possession, or even a product, that occasion will be anticipated through one financial calendar or another.

Where To Get An Economic Calendar

That's one of my preferred realities about these cool devices; they're readily available practically anywhere, and most of them are free. All you need to do is browse Google for "Economic Calendars". Aside from the conventional all including economic calendars, some outlets are likewise beginning to release market certain economic calendars. For that reason, if you need to know what's marchesing on in the BioTech space in the coming days, weeks, or months, simply change your search to "BioTech Economic Calendars" and you'll discover several!

Ways to Use Economic Calendars To Increase Binary Options Trading Profits?

Economic binary options calendars are best utilized when employing the trend trading method. The procedure is reasonably just. The trader makes use of the financial calendar to find the news, tracks the trend, and makes use of the trend for profits. Right here's a quick step by step guide to the procedure ...

Step # 1: Finding The Trend-- Open up your favorite economic calendar and search for an event that is associated with a possession you follow or one that you're at least knowledgeable about. Free your calendar to ensure that you'll be readily available to catch the trend once you find the event.

Step # 2: Open Your Candlestick Chart-- At least 10 minutes before the news breaks, open your candlestick chart to aid you in tracking the trend.

Step # 3: Hang around For The Trend To Show Itself-- Wait for a period of 5 minutes after the occasion happens. For the very first few minutes of this wait period, the asset will certainly probably be unpredictable as investors choose whether they such as the news. However, after 5 minutes, a clear trend will certainly appear and you'll be ready for your trade.

Step # 4: Pull in Your Trade-- Once you know which way the asset is moving, it's time to exploit the trend for profits. Simply make your trade based on where the information suggests the asset will certainly go.

Reality Examples

Economic Trends - Non-farm payroll information plays a significant function in economic movement in the United States in addition to the United States currency in contrast to practically any other currency on the planet. By pinpointing the regular monthly date and time that these reports come out, investors can make use of trends in currency pairs associated with the United States Dollar's rise or fall based on the information supplied.

Stocks Trends-- One bit of news that causes major movement in stocks is making reports. When making reports are positive, stocks trend upward. They trend downward when reports are negative. For that reason, by tracking making reports on economic calendars, it ends up being easy to pinpoint trends in stocks on a quarterly basis as earning reports become available.

Concluding Thoughts

When it concerns binary options trading, one of the most productive tools a trader can have in their tool box is a financial calendar. We hope this information will certainly help you become more profitable in your trades!

Aside from the conventional all including economic calendars, some outlets are also beginning to publish market certain economic calendars. Economic calendars are best utilized when utilizing the trend trading method. The trader makes use of the financial calendar to find the news, tracks the trend, and exploits the trend for revenues. Right here's a fast step by step guide to the procedure ...

Older posts are this way If this message doesn't go away, click anywhere on the page to continue loading posts.
Could not load more posts
Maybe Soup is currently being updated? I'll try again automatically in a few seconds...
Just a second, loading more posts...
You've reached the end.

Don't be the product, buy the product!