16 August 2014 – The Aleph Blog

The Tip Culture in Amateur Investing

Posted on 16 August 201417 August 2014 by David Merkel

A reader wrote to me and said:

I’m sure a lot of people have already told you but I want to tell you anyway: Your blog is awesome! I came across The Aleph Blog a couple of months ago and I?m very impressed with your content. I particularly like that 4-part article on Using Investment Advice. I am in the financial industry myself and it makes me wish I came up with the kind of ideas that you have on your blog. Awesome stuff!

Keep up the good work,

Many thanks to the reader, and if you want to read that series, it is located here. ?But when I considered what he wrote to me, it made me think, “Why do we have to tell people how to think about investment advice?”

Then it hit me: because people are looking for easy tips to execute. ?After all, when I wrote the 4-piece series, I had?listening to Jim Cramer in mind. ?The ?tip culture? of inexperienced investors don?t want to learn the ideas behind investing, but just want someone to say, ?Buy this.?? There is little if any guarantee that the same pundit?will ever update his opinion.

We see this on the web, in magazines, newsletters, newspapers, etc. ?On rare occasion, I will print one out, and add it to my “delayed research stack” which means I will look at it in 1-3 months. ?I just did my quarterly clean-out a few days ago — anything I add to the stack now will wait until November.

But why read articles like, “Ten Undervalued Large Cap Stocks with Growth Potential,” “Nine Stocks to Buy and Hold Forever,” “Eight Stocks that are Taking Off, Don’t Miss Out,” “Seven Hidden Gens Among Small Caps,” “Six Stocks for Income and Growth,” “Five Energy Stocks that are Poised to Surge,” Four Titanic Stocks that Every Investor Should Own,” “Three Turnaround Stocks with Potential for Large Capital Gains,” “Two Stocks with Breakthrough Technologies,” and “The One Stock that You Should Own for the Next Decade.”

Now, I made those titles up, though the last one was based off a Smart Money article on Intel in late 1999 which came very close to top-ticking ?the market. ?As you can see, Intel still hasn’t made it back to the tech bubble peak.

As I Googled phrases like, “Ten Best Stocks,” it was fascinating to see the range of pitches employed:

Appeals to Buffett (that never gets old)
Best stocks for this year
Favorite stocks of an author, manager or publication
With high dividends
With a low price
In emerging markets
That won’t lose money
That our patented investment screener spat out
For the rest of your life
Etc.

I know that I could get a lot more readers with list articles that tout stocks. ?I don’t do it because most of the articles that you read like that are bogus. ?[I also don’t want the inevitable scad of complaints that come with the territory.) ?So why do such articles?draw readers?

People would rather have false certainty than live in the reality that choosing good investments is difficult. ?Even very good investors hit rough patches where they do not outperform. ?Also, people aren’t comfortable with uncertain horizons for realizing value in investments — article tout holding forever, ten years, one year, but rarely 3-5 years or a market cycle.

The truth is, you can’t tell when a stock will perform, but when it does perform, the results will be lumpy. ?The performance of a stock is rarely smooth. ?During times when the success or failure of a stock idea is realized, the moves are often violent.

Now remember, those who write such articles are looking for media revenue — such articles are sensational, and pander to the desire for easy money. ?But where are the articles telling you to sell ten stocks now? ?(Yes, I know there are some, but they are not so common.) ?Or, where are follow up pieces indicating how well prior picks have done, and whether one should sell, hold, or buy more now?

My main point is this: good amateur investing is like having a part-time job. ?A part-time job, well, takes time. ?Weigh that against other priorities in your life — family, friends, church, public service, fun, etc. ?You may not want a part-time job, and so you can index your investments, or outsource them to a trusted advisor, who hopefully digs up his own ideas, and does not have a consensus, index-like portfolio (If he does, why not index?)

So, avoid tips if you can. ?If you can’t, develop a research discipline, or set them aside like I do, and revisit them when the original reason for buying it is forgotten, and you must evaluate for yourself now. ?The investment that you do not understand why you bought it, you will never know when it is the right time to sell it.

Either learn to evaluate investments on your own, or index your investments, or find a good investment advisor. ?But don’t think that you will do well off of tips.

The Problem with the Phillips Curve

Posted on 16 August 2014 by David Merkel

I remember sitting in my intermediate macroeconomics class at Johns Hopkins, when the Professor was trying to develop the concept of the Phillips Curve, which posits a trade-off between labor unemployment and price inflation, at least in the short run. ?The time was the Fall of 1980, and macroeconomics was trying to catch up with what happened with stagflation, because that was not something that expected would come from their policy recommendations that offered the politicians a free lunch.

This trade-off underlies the concept of the dual mandate of the Federal Reserve, where they are not only to try to restrain price inflation, but also aim for full labor employment. ?I don’t think it is realistic to do this for two reasons.

1) For the theory of the Phillips Curve to work, the central assumption is that price inflation funnels directly into wage inflation. ?This is a questionable assumption, as I will explain below.

2) The FOMC has a hard enough time using monetary policy to restrain or accelerate price inflation.

Why might price inflation vary from wage inflation? ?There are two main reasons in the present: technological improvements that require less labor to produce the same or better output, and an increase in overseas laborers available to produce good or services?outside the US for sale inside the US. ?Notice I am not mentioning immigration, though that might have a small impact on the wages of the lowest-skilled jobs in the short run.

I see both of these factors acting at present, which until our economy adjusts to create more jobs, initially at lower pay than most will want, will restrain the growth in wages, particularly adjusted for inflation.

Now, give Janet Yellen some credit, because she recognizes the weakness of looking at the headline unemployment number as a guide to policy and has broadened out her labor market indicators to reflect that a low U-3 unemployment rate doesn’t mean the labor market is great. ?She looks at the rates of layoffs/firings, job openings, voluntary quitting, hiring, and labor force partipation, among others.
This is similar to what I suggested in a recent post on labor underemployment. ?Payments to labor are a smaller fraction of the economy, and real wages have flatlined.
That said, I don’t think the Fed can succeed here, because the relationship between monetary policy and real wages is nonexistent as far as I can see. ?The Fed is better at inflating assets in an era where the better-off save, than it is in inflating prices, which it more direct effect on than wages.
There is slow but steady pressure for wage rates to equalize globally, slowly but surely. ?Being born in the West is not in itself a ticket to above average wages.

I don’t blame the Fed for the poor labor market conditions; it’s not in their power. ?Maybe we can blame Congress and the Executive Branch for making laws that inhibit hiring and firing, both at the national and state levels. ?We might blame the schools for not taking a more balanced approach to education,?stressing vocational education alongside a strong liberal arts education that includes real science and math. ?Parents, if the school systems don’t do this, if your children will listen to you, get them thinking along these lines.

You are your own best defender with respect to your own employment, so put some thought into alternative work, should you find yourself unemployed. ?Analyze how you can meet the most needs/demands of others and fill those needs/demands, and you will never lack work.

I wish you the best in a tough labor market.