ITA Wealth Management

Michael Lewis, author of Liar’s Poker, has written a most interesting article on the sub-prime mess and and some of the reasons for the current market decline.  The End is a must read.

Lowell Herr

Photograph: Temporary location for statue.

Yesterday’s 411.3 point decline was further evidence investors are coming to the conclusion - nobody is in charge.  This president has showered, zipped up his gym bag and is about to board the bus.  Unfortunately, it is still 68 days before the bus heads for Crawford, Texas.  What remains is a legacy of cavalier spending, budget busting policies, and a shredded Constitution.  This economic and moral morass leaves the rest of us to figure out how to manage our investments and keep our lives together.

After listening to Henry Paulson yesterday, and several times over the past weeks, I’ve come to the conclusion he too has no clue what to do.  To think that he is in charge of dispersing 700 billion dollars is frightening.  Confidence in this kind of “leadership” is zip - zero, and the daily market decline is a record of how investors are voting.

I join the vast majority of Americans who feel we will be better off in four years.  Actually, we will be better off in 68 days, but no pollster is asking that question.

Since we cannot “check out” as the president has done, what is the plan going forward.

Suggestions for moving forward

• Slowly add to investments on market declines.  Pay attention to the moving averages on StockCharts. If you are not comfortable investing in a falling market, wait for the 26-Day EMA to move from below to above the 52-Day EMA.  You may even want to increase the number of days for these EMAs.
• Check on your asset classes to see if they are in balance. Rebalance if necessary.
• This is gut check time to see if you have the proper asset allocation plan.  Review the allocation percentages if there is discomfort with the current plan.
• Great patience is required in these difficult times. Remember 1929-1945 and 1969-1982?  We may well be in for another market drought.
• Consider dividend generating investments.
• Discipline yourself to save regularly, even though it seems like the end of the world is close at hand.  It isn’t.
• I expect purchases over the next year will pay off handsomely in ten years.

Photograph: Sculpture in Budapest, Hungary.  The photograph reflects how U.S. investors are feeling in this bear market.

This video parody on the housing bubble says it all.  View and enjoy.

http://www.youtube.com/watch?v=bNmcf4Y3lGM&eurl=http://www.bubbleinfo.com/

Photograph: Stadium where Hitler held his rallies. Nuremberg, Germany

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Photograph: Bicycles and canals everywhere in Amsterdam, Holland.  Note the sign indicating a child needs to hold the hand of an adult.  This is to prevent the child from dwadling in front of a fast moving bicycle.

Nearly six years have passed since the initial debate between two individuals over whether a portfolio based on individual stock selection can double in five years.  To attain this performance level a portfolio must generate an annual return of 14.9%.  For several weeks the debate was mainly between the developer of a software program Take $tock and a college professor from Michigan.

The discussion/debate went something like this.  The professor argued how difficult it is to outperform an index such as the S&P 500 while the software developer contended that following his program, an investor could double their money in five years.  Those are two very different standards as the S&P 500 does not have a historical record of doubling in five years.  To double in five years requires an annualized return of 14.9% and the long-term performance of the market is  closer to 9%.  The current bear market has now lowered that percentage.  So we had two positions.  1) Follow the guidelines of Take $tock and you can double your money in five years.  2) It is difficult to outperform the S&P 500 let alone double your money in five years.

How to settle the debate was a challenge I was interested in so I offered to invest a non-trivial amount of money using the principles laid out by T$.  If the portfolio did not double in five years, the software developer would pay me $100 and if it did double, I would pay him $100.  This is a wager I was interested in losing as I knew I could well afford the $100 if the portfolio doubled in five years.

One needs to know a little about the software program, Take $tock.  The software will rank a stock using three standards, Quality, Mood, and Price.  1) Many parameters are involved in determining Quality and I will not go into them.  Suffice it to say, the program does identify high quality stocks.  2) A “mood indicator” identifies if the current P/E near its historical P/E value.  3) Price is the third factor and the software uses a detailed calculation to see if the stock is properly priced.

These three indicators are color coded green, yellow, and red.  An “all green” stock is preferred.  Note:  When one is using the program, it is possible to override some of the parameters.  In this wager, the agreement was to not do so unless special permission was granted by the software developer.  The argument was - follow the conservative guidelines of T$ to see how well it performs over a five-year period.

The wager agreement permitted purchase of stocks that only had an “all green” rating and to sell the stock if the Quality Rating dropped into the red zone.  Otherwise, I was to hold the stock even if its Quality Rating moved into the yellow zone.  The portfolio was fully populated on October 31, 2003 so that became the starting date.  The wager ended on October 31, 2008.

The data for all transactions is still available on Bivio. I don’t know how long this information will be available.

Did the ICLWager Portfolio double in five years?  Not even close as it managed an IRR value of 1.9% while the VTSMX benchmark ended with an IRR of 0.7%.  The portfolio did outperform an appropriate benchmark, a rather remarkable result considering most mutual fund managers are not able to do this in any give year let alone a five-year run.  However, the portfolio fell short of the wager goal, that of doubling in five years.  If anyone has questions, I will try to answer then for you.

Photograph:  Sculpture in Amsterdam, Holland

We just returned from an extended vacation in Europe so expect to see images from that part of the world over the next several weeks.  The stock market was convulsing while we were absent, so it was a good time to be away from the computer lest one begin to make poor decisions.

Over the next several weeks I will be updating portfolios on the Premium Content side of the blog. It will be interesting to see how the different portfolios are performing as I was hands-off during this erratic period. It appears as if we may have seen the bottom of the market as the volatility is somewhat reduced.  With the election now over, perhaps we will return to what one may classify as a normal market.

Photograph:  One of the few remaining windmills in Amsterdam, Holland.

One investment site I would bookmark is “Seeking Alpha.”  I’ve referenced specific articles on this site before, but it is a strong investment site that covers a wide array of investment material.

Photograph:  TV and Radio tower in Portland, OR

Don’t waste money on frivolous items that will be of little or no use in six months. Instead, pay yourself first.  Build a bank account even if it means saving as little as a dollar a month.  Get in the habit of saving rather than spending.

Do not use credit cards unless you are able to pay off the balance each month.  If you do not have this type of discipline, then pay only in cash.  Credit card debt is a slope that will lead to financial destruction.  Just don’t use them.

Lowell Herr

Photograph: There is nothing quite like a good drink of water after a “dirt bath.”

I have yet to integrate the Microsoft “Solver” with Quantext Portfolio Planner (QPP), but would like to make this move as a future advancement.  If any reader has made the “Solver” work with QPP, I would like to know about it.

Photograph:  Mt. St. Helens and Mt. Ranier off the left shoulder.  Taken from Council Crest, Portland, OR

Click on this link for a wealth of material.  Consider these articles as an important part of your investment education.  I find most of the articles on Seeking Alpha as valuable.  Take time to read the Asset Allocation articles.

In articles such as this one, you will see output that comes from the QPP software.

Photograph:  Prescott Hotel, San Fransciso, CA