Several misconceptions in this articles, quite typical ones actually:
1) "I can’t imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work"
You did work. You worked, exchanged your product for money, and saved it. But other people did work too. So you took your money, in effect lowered the capital cost of other people's enterprises (unless you bought in the primary market), and in return have a chance of participating in their venture's success (if). Those who are more discerning in their allocations earn higher average returns on their capital. It's not alchemy, it's capitalism! Whether the assets are fairly valued or not is a totally different question.
2) " Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? [...] If you don’t, you’re not an investor, you’re a speculator"
Quoted like this, wrong! THe crucial condition is that you did an independent valuation of the asset and came up with a higher value. The price itself doesn't tell you anything other than what other people think or feel.
3) "An out-of-print guide to value investing, it sells for as much as $2,500 per copy on the Web."
Just for the record, these are collector's editions. If anyone is simply interested in the material (which is not all that original, btw) it floats as free PDF, just google it.
In general, I find it fascinating that people like to think that there is someone out there with their best interests at heart. Where does this come from? Where is their independence and responsibility? Balthasar Gracian, a Jesuit priest from the 18th (?) century, put it thus: You don't count on the kindness or gratitude of people but on their self-interest.
Hmmm... I don't really like this comment and the fact that it's being upvoted.
Regarding 1) Why are you going on over 6 sentences to explain that capital (just like labor) commands a return on investment in the marketplace, while the simple message being delivered is that in fact there is a perceived anomaly going on with these exceptional capital growth rates. If the system, of how the Fed hands out money to banks and creates the incentive for a false bubble, is the problem at hand, then an answer citing a lesson in capital markets is not helpful.
Regarding 2) Again, I don't like this short-sighted smack-down. Actually, I like this quote. Well, if I buy an asset (own it) then I have made an implicit judgement to how I assess the value of the stock. So thereby the fluctuation compared against this base value does very well matter to me.
Regarding 3) In a time of failure of capital markets the answer to the problem voiced here seems to be "self-interest". Again, a short-sighted smack-down with a resolve that sounds catchy. The answer to this whole financial mess does not lie in the private sector, for capital markets, as they have shown, are quite narrow-minded. Bad oversight has led to this. The solution lies in looking at long-term effective regulation, which goes beyond the perspective that narrow-minded self-interest can deliver. The Chicago school of thought in Economics truly has suffered in 2008.
Sorry, reading the article again... the point is valid, that blind belief in non-educated financial advisors (basically the equivalent of used-cars salesmen) or profit-motivated pros is deadly.
Sorry if I ranted but I went on for "over 6 sentences" because I am sensitive to this cliche of investors/speculators as nonproductive blood suckers. It was one of the images that was used in a certain historical catastrophe where I live (Germany). It's also a very popular image today, risking throwing the baby (capitalism) out with the bathwater (corruption, greed, ...).
Regarding 2, I also like the quote. But the article misquotes it by leaving out the crucial part: independent valuation, based on economic fundamentals. I think you overestimate people's "implicit judgement". Many if not most people buy because the price recently went up, and vice versa, without reference to fundamentals or doing their homework. Leaving out the valuation part makes it read as if Klarman was simply inverting the trend-followers. But not so, the point was doing independent research and acting only when price deviates sufficiently far from one's own judgment.
How ironic, I've lived a long time in Germany. Didn't expect a pure pro-market comment to come from there, which doesn't mean that there is anything wrong with a pro-market view (just to clarify). The historical context is interesting; in other countries speculators are pursued often with more vigor.
Even more ironic, that after the downer the Chicago school of thought (Economics) received in 2008, the President's economic and intellectual team is, well, from Chicago.
Ultimately there is an economy of trust, and most people are poor economists. I share your regard for Gracian, despite being lamentably bad at such calculus. The best advice I ever received is to associate with successful people (however you define success) and be helpful when given the opportunity.
Owning your failures is always more satisfying than trying to assign them to someone else; sharing credit for your success is always more attractive than trying to hoard it. This kind of wealth is independent of your bank balance.
I thought this was an entertaining piece, probably very familiar to many.
My maxim has always been : I don't to hire a financial advisor who I can actually afford.
You either need to educate yourself on what you're doing or stay out of the market. I know a guy who is paid to give advice to retirees looking to buy funds by a main street bank: he's paid on commission and has very little idea about what is going on. He dresses in a suit and sits in a little office and hands out shiny brochures, but as far as I can tell, he has less money than me, so there's no way I would ever take his advice. Most of these people would warn against investing $5,000 in your brother's startup, but would happily recommend purchasing AIG stock, even now.
It's my take on the old 'I don't want to be a member of any club that will accept me as a member'
i invest my own money, have had success even through this down market, and i only follow one simple rule: i invest only in what i personally understand.
i learn about a company, see that they're a good investment, understand what my money is buying, and then decide on whether to invest or not. if i can't figure out where my money is going or what its doing, i don't invest. simple.
i refuse to put it into a black box or have any black magics performed on it.
This is very closely along the lines of what I have been thinking a lot about lately regarding investing. You are basically betting that a company will not go bankrupt (when the stock is worthless..). The rest of the price fluctuations are just people's opinions. If I buy stock in companies I know nothing about, how can I possibly predict how well they are doing against the competition and why they are not going to go bankrupt.
I think there is a place in an investment bank for quantitative analysis, but not for the regular investor. Most of the formulas they give are pretty shoddy anyway.
When I have money to invest I will probably buy a big ol' index fund, which is like betting on the US economy, which will (hopefully) always be doing well. I might also then invest in a few companies that I know, understand, and really like.
I clicked the link and read a lively piece written by someone unfortunately burned by his own ignorance of the financial markets.
There's no such thing as a lottery ticket with guaranteed winnings, yet that's what millions of people throw their money away believing.
The truth is that your 401K and other investments are driven by you, not your broker (who owes you nothing morally), and you have to tend them as a gardener with a farmer's almanac under his arm.
It takes more than the simple expectation of wealth to make your -earnings- work for you when you are sleeping.
People spend more time laboring over Amazon user reviews of LCD televisions than understanding what retirement planning really means.
Everytime I hear about a 60 year old losing their 401(k) because of the stock market crash I refuse to feel for them. Why were they so equity-heavy at that age when having cash/fixed income assets would be safer? They either didn't know or didn't care but either way it was their money to control and they didn't.
I have to admit that articles like the above make me feel somewhat better about my failure to accumulate any significant financial assets over the last 20 years. Not having enough salted away is somewhat worrying, but if I'd watched it evaporate I'd be going long on assault rifles right now.
A microcosm of what is wrong with our financial system.
The growth of real value, in terms of goods produced, materials harvested, and knowledge created has absolutely no correlation or bearing upon the systems that get to determine the distribution of capital above a strictly consumer level. Thus, investments are made illusory, despite them being closer to actual growth in value, and trading, for no other purpose than to collect fees, becomes the primary activity. Any player not large enough to collect fees is funneled into a loser's game.
Were we all not caged within the giants' houses, I would say the only sane course would be for everyone to take their ball, go home, and let the behemoths feast upon each other until they starve; go to a barter system, let the markets burn. Rebuild them such that anyone that does become too successful must fall, as opposed to not being allowed to fail.
Broker != Investment advisor, by the way. This article has made the rounds I see, finally winding up here.
I'm also not an investment advisor, but let me give you guys a tip before the [dead] tag appears. Equities are finished. Money flows made the bubbles and money flows will unmake them. A whole generation of retirees will liquidate in order to survive and that means lower and lower prices. Just stick your cash in short-term bond funds. Unless you're a gambler.
I disagree with point made in the article, that Americans are more tolerant to insecurity than europeans.
There in my point several points that have to be made.
1. America has horrible mass media, that does not even talk
about real issues, what is going on in the country.
2. Americans overall have not seen so many horrible things that Europe during it is own history - there is simply no collective idea what big problems may look like.
There are many other reasons, but majority of people here I beleive are Americans, I am not going to insult them.
I don't think that the article meant that Americans feel less insecurity than the Europeans. I think that statement should be understood in the context of the author's reaction to his situation: his self-described passivity.
In my experience, it is the case in many European countries that when there is perceived financial insecurity, or other threat to material well-being (eg. welfare changes), the insecurity people feel quickly turns into anger and then political protest - strikes, demonstrations etc.
The US, and to a lesser extent the UK, people engage in a lot of expression of all the same emotions in the media, but due to cultural differences that does not translate into the kind of civic protest seen on the old continent. Hence the populace in the US can be perceived as more tolerant.
1) "I can’t imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work"
You did work. You worked, exchanged your product for money, and saved it. But other people did work too. So you took your money, in effect lowered the capital cost of other people's enterprises (unless you bought in the primary market), and in return have a chance of participating in their venture's success (if). Those who are more discerning in their allocations earn higher average returns on their capital. It's not alchemy, it's capitalism! Whether the assets are fairly valued or not is a totally different question.
2) " Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? [...] If you don’t, you’re not an investor, you’re a speculator"
Quoted like this, wrong! THe crucial condition is that you did an independent valuation of the asset and came up with a higher value. The price itself doesn't tell you anything other than what other people think or feel.
3) "An out-of-print guide to value investing, it sells for as much as $2,500 per copy on the Web."
Just for the record, these are collector's editions. If anyone is simply interested in the material (which is not all that original, btw) it floats as free PDF, just google it.
In general, I find it fascinating that people like to think that there is someone out there with their best interests at heart. Where does this come from? Where is their independence and responsibility? Balthasar Gracian, a Jesuit priest from the 18th (?) century, put it thus: You don't count on the kindness or gratitude of people but on their self-interest.