Saturday, March 03, 2007

The stock market 
This week's correction didn't come as a huge surprise for me. Over the past few months, I had been thinking that equities had gotten ahead of themselves. Yes, I think the economy's on pretty good footing. The problem is that when the whole universe of investors thinks the economy's on pretty good footing, they bid stocks up to prices that can only be sustained when the economy's on GREAT footing.

So here's what I wrote on December 22nd:

...The expansion seems to be getting a little long in the tooth. I'm not bearish, but I think the economy will not continue to expand at the pace it has. I have moved some money from the Vanguard Total Stock Market index into a large-cap growth and income fund -- effectively selling a modest number of small- and mid-caps, which are more sensitive to slowing economies, as well as selling a few no-dividend large-cap growth stocks.

The bet I'm effectively making is that if the economy slows, dividends will play a comparatively greater role in future returns - as compared to earnings growth - than they had previously.

I'm also building a small margin of safety, as I see potential short-term losses in equities as greater than my expectations for economic growth this year.

P/E's seem fairly reasonable to me, still. Not cheap, but not psycho crazy, either.

Fair weather ahead, with a few scattered squalls.

Unloaded some REIT ballast, with foreclosures peaking up in key markets.

Trimming sails slightly.

I'd enjoy hearing your best guesses.

My track record, like most, is mixed. I called the boom in emerging stocks accurately and rode it with real money in 2003 and 2004. But I left emerging markets too soon, and left a lot of gains on the table.

Lightened up on small-caps a year too soon as well, and counting. But I'd rather be too cautious than too crazy.

No, I did not buy bonds. Indeed, I had redeemed some short-term bonds I had bought through a Vanguard fund at the end of the year in order to harvest some tax losses (which I can write off against ordinary income, so long as I didn't buy the same thing back within 30 days).

Actually, I didn't have any brilliant ideas on where to go with new investment money. Bond yields are not terribly attractive to me right now, although short-term yields are improving (which was why I could redeem some of them at a loss, alas).

Oil and gas seems awash in dumb money. Still some dumb money running around in real estate, though it's better than it was.

My own money is still mostly indexed, all long equities (I will be snapping up some bonds very soon just a bit, because I don't want to be THIS long on equities), and with a substantial tilt towards value approaches.

I had managed to sidestep the most severe pummelings, but still lost a few points overall - just less than the S&P 500 lost, and certainly less than I would have lost had I stayed as long in international stocks as I had been.

In other news, I've been reading Benjamin Graham's "The Intelligent Investor" lately.

I am suspicious of investing guru books, because the vast majority of them suck ass. But if you do read one, read the updated edition, with the commentary by Jason Zweig.

The prose is a bit dry and understated, but the ideas are incisive and brilliant.

I like general personal finance books a little bit better - they provide useful information on tax vehicles and retirement planning and college planning, that's a separate issue from security and fund selection.

In my opinion, most lay investors should confine themselves to just a few books on investing:

The Intelligent Investor, by Benjamin Graham
Intelligent Asset Allocation, by William Bernstein
Common Sense on Mutual Funds, by John C. Bogle (whom I've actually met. Good man.)
A Random Walk Down Wall Street, by Burton Malkiel.

ONLY THEN would I consider someone in a position to reasonably assess the spate of investment books written by people like Jim Cramer (whom I like but wouldn't invest with), Laura Langemeier, Robert Kiyosaki, etc.

Indeed, I think Langemeier's a twit who's confused brains with a bull market in Oil and Gas and real estate.

Case in point -- I flipped open her book the other day and read a passage on how Roth IRAs let you invest money tax deferred. No they don't. Money in a Roth IRA has already been taxed!!!!

(Not true for deployed servicemen and women. If you get the chance to invest in an IRA with tax-free combat zone money, you have reached the acme of investing. Nirvana, baby!!!)

By the way, if anyone has any tales of investment advisors putting deployed servicemen into traditional IRAs rather than Roths, I'd love to hear the specifics!

Splash, out


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