Sunday night at around 6pm another firefighter and I responded to a call for an unattended fire that someone had going in a barrel. When we arrived, he was in the house and came out a few minutes later. I asked him to put out the fire, he asked me to cite an ordinance requiring him to do so and I said there was no ordinance just that I was asking him to do so. We have had a fire going a few miles away that threatens an evacuation, point being conditions for a fire are much worse than normal for November and this guy did not care.
Ultimately he declined my request on the basis that he knows what he's doing. Actually he does not know what he is doing but there was no convincing him.
There is a parallel here to investing. The fire starter was way too overconfident in his knowledge and ability. Plenty of people are too overconfident in their investment knowledge and ability.
All of the quirky strategy ideas that I employ (and write about) are predicated on my being wrong and that I have more to learn.
To me certain mistakes are forgivable and certain ones are not. The best example here is how much weighting goes to hot parts of the market. China is probably the hottest part of the market. While I don't own China anymore on a widespread basis I would not fault anyone who does, even if it crashed tomorrow. Owning a possibly overheated sector that blows up is forgivable. Allocating 20% to such a segment after a monster run with the expectation that "I'll know when to get out" or "I can handle a dip" drifts into the realm of unforgivable.
Overconfidence leads to all sorts of problems in many aspects of life. I read signs of overconfidence in comments on the blog, commentary from other writers (fair enough for anyone to tell me that I am overconfident) and it is one of those things where there is no telling them, no saving them from themselves.
Investing can be very simple, especially when you manage your own money and there is no one you need to report to at quarter end. Just stay diversified and do not make big bets, that's it. If your idea about how to diversify produces a result below what you expect (some people don't need to keep up with the market, remember) for too long you need to make a change.
How do you diversify? Own all sectors, own other asset classes (not just stocks) and own foreign. You already know this. Have a simple game plan, have discipline to a strategy (I believe every strategy I have ever written about to be very simple) and just as important you need to buy a Trader's Almanac (or equivalent) so you understand how the market works.
I get no compensation, not even a free book lol, for repeatedly mentioning the Trader's Almanac.
Wikinvest Wire
27 comments:
Good reminder.(for me)
If all of the "honchos" at the big financial institutions remembered this before diving into CDOs, etc., we'd probably be looking at a better future. The probablme is that their hubris seems to be disconnected from their personal wealth.
My more limited hubris is DIRECTLY connected to my more limited wealth. So today I will re-look over my assumptions about my securities and weightings. Thanks.
speaking of hubris...
being zero weight to china is lunacy...
sure, it may be volatile, and may have had a run up, but ZERO weight?
Roger, stick to firefighting....
Roger,
Sage advice, as usual. Especially for those of us who are retired and can't afford to make big bets on hot sectors and then go up in flames. Diversification and simplicity is the key to a long, happy retirement for me.
Good post, Roger. I think that your regular contact with average Joes in the firefighting arena keeps you
grounded in reality that many of my broker friends don't seem to have as they are traveling to Boston,
or Chicago and back, dealing mainly with other brokers or adivsors.
Your candor in admitting errors, and strategic
readjustments in portfolio analysis is refreshing.
I went on MSN Money today and saw an article about how important it is to get out of energy now since it is bound to be overbought. Then, right below that, they had their Stock Scouter top ten picks of the week, and 8 of the 10 were energy stocks! Go figure.
Just a thought on Canada as our 51st state which
also serves as a proxy for foreign investment since it has a different currency.
Comparing FICDX, EWC (both Canuck funds heavy in financials, energy and commodities), with the
Broad Market Vanguard fund VTSMX, EFA, SPY, DIA, and IWM, the Canadian funds beat all of those others and any combination of them in 1,2,5, and 10 year comparisons, by hefty amounts. Secondly, the Canadian banks just demolish the large US banks (C, BAC, etc.) over the same time frames.
Given its major investiments in the US economy, a stable currency with an excellent financial system, and commodities enough for the next century including water, I am convinced that being heavily overweighted in Canada is a reasonable call. Somebody talk me out of this. Thanks, Scoot
how do you quantify heavily overweighted?
RIght now i am:
Energy 15%
US Equities 20%
Bonds 10%
Cash 10%
SE Asia ex-Japan 5%
Dev. Markets 5%
Europe 5%
Canada 5%
GLD 10%
Industrials 10%
SKF 2%
Moo 3%
Increasing my Canadian position to 15% would
be my thought, and would also siginficantly increase my financial exposure.
Any thoughts appreciated. Scoot
Roger,
CNN had the headline/crawler: oil prices higher due to lower expected equity prices. Can you explain the rationale? Is a lower dollar the mediating factor? Where's the connection? thx...going to finally get that almanac.
Do you get the almanac year by year? Is the 2007 version good for a few years?
15% is a lot more than I have in any single country (ex-us).
As far as the CNN headline--it kind of does not make sense to me. I can;t recall a time when oil and equities had that kind of relationship.
Generally oil could go up in response to a weaker dollar and I could see where oil going up could dictate the dollar but they way it appears to be framed from your comment seems odd to me. Maybe they are missing a comma or somthing??
I'm not sure every year is crucial for the Almanac. for most folks every 2-3 years would be enough in the context i mean.
Maybe the price of oil is not really going up. Its just adjusting for the failures of our dollar. Its all a conspiracy....the fed should not exist. What right do they have in controlling the worth of my hard labor.
that is a salient point, that I tried to make in my answer, the headline, as relayed seems odd though.
Do you do any call writing on stocks you own? I have with some success and little knowledge on the subject. I just looked at a chart that shows:
TheoValue OpenInterest Delta Gamma Rho Theta Vega Action
I don't understand most of this. Can you suggest what is most important to know for covered calls?
call writing is a valid strategy. I don't really do any call writing these days.
the most important caveat would be not to write calls to excess. pulling in an extra percenatge point or three every now and then is a good trade but it seems that when people get too into they end up selling a lot of stock 15% below the market.
"but you could just roll up" would be the logical response but then you are trying to find the best way out of a far from ideal situation.
The other idea I mentioned when I do write about this is that if you are a 500 share buyer write just one or two calls.
Rog baby,
China up nearly 100% this year...
How do you reap the benefits of diversification with ZERO allocated to China?
Your advice is horrible.
Dear anonymous 8:36,1:39,
Go start a fire in a barrel and stick your head in.
Dear Hecklers Anonymous:
I just read an article on CBS Financial that Warren Buffet's Hathaway holdings invested 500 million in Petro China back in I believe 2003. They made 3.5 billion and recently sold completely out of it. I also read somewhere that a pundit believes that the stock is going to $400 a share.
So is Buffet a moron too? You know there are some people that learned something back in the spring of 2000 concerning the tech craze. A few more astute fund managers pulled out of tech stocks in 1999 and some even earlier than that.
I'm quite sure you would have been right there calling them idiots like so many others that lost their shirts.
How do you know whether or not Roger and his clients didn't already make good money out of China and now believe that the price levels there are too high?
Perhaps it's better now to take some money off the table and wait to get back in when the bubble bursts. Happy investing...and good luck.
Jack S
I suppose it would have been unneighborly to bitch slap the fellow, huh? And of course when he sets the woods a-fire..... To be fair, though, if there was not an ordinance or a county/state-wide ban, he probably was within his rights. Our state and county both issue these types of bans to prevent such stupidity.
Regarding hecklers--they throw tomatos and contribute not a thing. How's that for added value. I chalk it up to d-swinging--though in general the person engaging in such behavior probably has little to swing around; accordingly, must compensate by be a d-head.
Forgive my crassness, but I so tire of such silly behavior.
It's all good. Roger's got a new house in Hawaii, paid for in part, by hecklers!
I agree, Almanac is a must read every few years. And there's a pretty good textbook out by Hirsch, too. "The Almanac Investor."
Agree, China is in the Greater Fool area. As long as there are greater fools to buy after you do, you're okay.
I'm leary of overseas investing. A lot of the appreciation is due to a falling dollar. What if the dollar reversed trend?
the dollar go up? that could never happen.
seriously, the idea of moderation can be useful here also exposure to different types of companies, service/commodity, deficit/surplus, export heavy/import heavy high yielder/low yielder and so on can hlep mitigate a dollar rally somewhat, not completely.
countries not companies; my bad
To Steve Scoot,
Personally, I might be a bit careful with Canada at this point (I'm Canadian, and write The Confused Capitalist blog).
Firstly, since April 2002 our currency has run up from $0.62 to $1.08 - this accounts for 74% of any Canadian/US return over that period.
Secondly, our stocks have had a pretty good run over that period - our banks are now priced at PEs of around 15 or so. Higher than most US banks.
Obviously, energy has done well - but don't forget the move in oil from ten years ago or so is from $20 US per barrel, to what, ~$90 today.
Between those two components, which form a large part of those ETFs, is the best part mostly behind us? I'd say - probably. Not that there can't be some further increase, but expecting the same as the past five or ten years is pretty unrealistic, I think.
The real fly in the ointment is the $USD, which I believe is in for a long period of weakness at best.
I'd think that moving to investments denominated in some other currency might be good, I just don't know how heavily I overweight Canada, if I were an American.
Good luck
Jay Walker
The Confused Capitalist
PS Good posting Roger ... great "common sense", which is often a little too uncommon.
With the (C)$ tonight above 1.09 in US value, many people claim that the Canadian economy will soon hit a ceiling of around 1.10 before cutting back to lower trading values; this will happen, I am told as soon as some large exporters start reporting ever greater losses. I am wondering if there is any chance the government via the Bank of Canada (C)$ might decide to peg the looney at a viable level?
Peg oh my heart, lalalala
Thanks for all of the comments on Canada. Only time will tell, but answer just these few questions:
1. Which country has more natural resources/commodities and is a stable and friendly democracy, with financial institutions on as sound a footing, perhaps more, than our own?
2. Will Canada (and any other commodity exporters) llkely be doing more or less exporting to all of those
emerging and frontier markets? For how long?
3. In terms of stable foreign markets, other than
Austraia, and a handful of Western European countries, where better to invest in foreign companies without worrying about the next coup d'etat?
4. If global warming continues, who will be in the best position to be a water exporter?
On another note, how many out there are reducing their equity exposure in general right now, and about what percentage will your cash positions be in between now and the end of the year?
Thanks, Scoot (currently sharing my little Arizona town with many Canucks).
For Steve Scoot,
I hear a bit of "self-convincing" going on in your analysis.
You asked to be "talked out of it", but when someone with direct and immediate knowledge offers some perspective, your response (although compelling) seemed tinged with some justification of what you had already decided to do.
I had (and still have) any number of good reasons to be short US equities since February, but the justifications didn't cover the shorts! My advice: be wary of the emotion "I'd rather be right."
I think Roger's general advice to assume he's wrong (and act anyway) and the title of this thread should be kept in mind.
Especially if you're in fast markets without stops!
Rick
Scoot,
I agree with the comment preceding it. Water exports aren't going to happen - the Canadian government that does that will be out of office for a generation - and they all know it ...
JW
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