George Morgan's Blog, page 28
June 12, 2013
Indexing And Diversification
At one time or another everybody’s mother has told them not to put all their eggs in one basket. Unfortunately, when it comes to the use of index funds, people incorrectly identified the basket and believe that they need to have more than one fund. The technical term for this discussion is diversification and there is scientific evidence on how to achieve it. Diversification is about minimizing the risk that one of the stocks in a portfolio will go bankrupt and cause serious damage to t...
June 11, 2013
Indexing And Market Timing
Market timing is the way that the conventional wisdom thinks that successful investing is achieved. On a macro scale, market timing it involves getting out of the market when you think the market is going to go down and then getting back in when you think it’s going to go up. Another approach is doing the same buying and selling activity for individual stocks. The problem is human beings are very poor at predicting the short-term movement of the market. The way this works for individuals is t...
June 10, 2013
Indexing And Stock Picking, Part Two
The stock market is not a static institution; rather it is a constantly changing organism with many diverse players and the interaction between these diverse players changes on a regular basis. Like it or not, indexing in the form of mutual funds and exchange traded funds impacts the effectiveness of the individual investor to time the market by trading individual stocks. When institutions and individuals buy or sell an index vehicle they are buying or selling all of the stocks in a par...
June 8, 2013
Denial Is Not A River
The issue of index funds has both an intellectual and emotional component. For the purposes of this discussion I am excluding 401(k) accounts. Almost unanimously, all of the financial advisors I have spoken to agree that for 401(k) accounts, index funds make sense. The emotional component of this discussion is the implication that individual stock picking is no longer a viable option. There are many seasoned financial professionals that are unable or unwilling to see that the market is evolvi...
June 7, 2013
MUST READ!!
On the front page of today’s Wall Street Journal there is a story about Omaha’s second famous investor, Wally Weitz. The headline does an excellent job of explaining what the article is all about. It reads; “An Old School Stock Picker Struggles With Index Craze.” For over three decades Mr. Weitz has run a value mutual fund based upon an investment style that relies on Ben Graham’s 1940’s classic “The Intelligent Investor.” During the last three Mr. Weitz’s fund has minimally outperformed the...
June 6, 2013
One Size Does Not Fit All
Every financial advisor I know has an investment philosophy and they tend to paint every account with that brush. I have written a great deal about the inability of mutual funds to outperform the market in the long run. I have also written extensively about using index funds because they are inexpensive and track the market. This may cause some of my readers to think that I believe investors should never buy mutual funds. That is definitely not the case. Every individual is just that an indiv...
June 5, 2013
New Money Market Rules
About 99% of all American investors have money in a money market mutual fund. Investors treat them like a savings account and don’t expect the $1 share price to fluctuate. However, during the financial subprime financial crisis there were several money market funds whose share price sank below $1.00. At that point the government stepped in and offered insurance to protect the industry against a run on deposits. Today the Securities and Exchange Commission voted to modify the rules for money m...
June 4, 2013
A Non-market Forecast
In my mind most market forecasts are not worth the time it takes to read them. Having said that, I am going to make a sort of market forecast. During the last 18 months the market has experienced significant gains. These gains occurred in an economic and political environment that provided sizable headwinds. Like rip Van Winkle, we woke up one morning and realized what had happened. I’ve experienced this several times before. I am not going to say that we’re in another major bull market, but...
June 3, 2013
Emotion Alert
In order to be a successful 401(k) investor, you must have discipline. If you don’t have discipline you will be tempted to respond to media hype that will cause you to make mistakes. We are entering a period where the media and investment professionals are starting to chip away at your resolve to do nothing. When you do nothing, they don’t get paid. I have seen it happen many times. It begins where if a period of factoids about where the market has been and where it is about to go. In the sho...
June 1, 2013
Not All Fees Are Created Equal
During the past several weeks I have been visiting with members of the Financial ServicesIndustry, many of whom I have known for decades. My objective was to understand their business model in order to stay current on all elements of the financial marketplace. It has been over two years since I left the business and I was certain that changes had occurred. Most investment professionals no longer refer to themselves as brokers, but rather as advisers. In retrospect this probably is a more apt...
