Thursday, February 12, 2009

This Blog Has Moved

This blog has moved to a new address.  The new address is:

In addition to moving, I have also invited my business partner, Tony Hixon, to join me by blogging his thoughts on money and investing.

Please visit the new site and subscribe to our blog.  If you currently subscribe to updates of this blog you must re-subscribe to the new blog to continue to receive updates.  The best way to subscribe is with an RSS reader like Google Reader.  You can also subscribe by email.  To subsribe, just click on the links in this post or visit the new blog and click on the orange subscription icons on the right sidebar.

Tuesday, January 20, 2009

Peter Lynch on Forecasts

"There are 60,000 economists in the US, many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they'd all be millionaires by now.  Last time I checked they were all still working."  -Peter Lynch

Monday, January 12, 2009

My Prediction For 2009

My only prediction for 2009 is that your prediction is wrong.  Yes, that's right. I predict that your prediction won't come true.  

We love predictions.  I can't figure out why because 99% of the predictions I hear never come to be.  About a year ago I was at an event that featured an economic forecast by Brian Wesbury.  I like Brian.  He's informative, optimistic about the future, and he's a great speaker.  His speech was loaded with some intriguing economic insight, but the one point I remember more than anything else was his prediction that the Dow would reach 15,000 by the end of 2008.  You know the rest of the story.

I left that event with some excitement.  Why was I excited?  Because I liked Brian's forecast, and I wanted to believe it was going to happen.  Brian is an expert on the economy, and his forecast was exactly what I wanted to happen.  The problem: we must learn to EXPECT ANYTHING in spite of what we want to see happen.

I often have people ask me what I think will happen.  Their question is usually within the context of a very short time frame (a year or less).  I don't make precise short-term predictions or economic forecasts, because I know I'll be wrong.  Instead, I try to focus on what's knowable and important.  My short term predictions really wouldn't even matter because our firm has a long-term approach to our investment philosophy.

Apparently I'm not the only one who liked Brian.  They have invited him back again this year.  I can't wait to hear his prediciton:)

Thursday, December 11, 2008

Chasing Performance

The end of 2008 is almost here.  For many investors that will be a welcoming event.  I think it's safe to say that most investors will be more than happy to put this year behind us.  

However, this reminds me of something else that is about to happen.  In January, you will start to see the "Best of 2008" lists.  These are the lists that rank the top performing stocks, ETFs, and mutual funds for 2008.  This happens every year.  Investors see these lists in Money, Fortune, SmartMoney, The Wall Street Journal, The USA Today, and so on.  

Mutual fund investors will often compare these top performers with their own mutual fund holdings and get frustrated.  Acting out of emotion, they will sell their current holdings and "chase" performance by buying the funds on the "top performers" list.  Usually, this is a HUGE mistake.  Here's why: More often than not, today's winners will be tomorrow's losers.  

Here is a case in point: Legg Mason Value Trust (LMVTX).  This fund's manager, Bill Miller, spent nearly two decades building a reputation as one of the greatest mutual fund managers ever.  He consistently outperformed the S&P 500 year after year.  Then, in one year, his track record took a major hit.  Here is an excerpt from an article in yesterday's Wall Street Journal profiling the fund's fall from glory:
A year ago, his Value Trust fund had $16.5 billion under management. Now, after losses and redemptions, it has assets of $4.3 billion, according to Morningstar Inc. Value Trust's investors have lost 58% of their money over the past year, 20 percentage points worse than the decline on the Standard & Poor's 500 stock index.

These losses have wiped away Value Trust's years of market-beating performance. The fund is now among the worst-performing in its class for the last one-, three-, five- and 10-year periods, according to Morningstar.
Here are a few lessons learned from this example:
  1. Just because a fund has consistently been a top performer in the past doesn't mean it will always be a top performer in the future.
  2. Every great money manager will have a period of underperformance.
  3. Investor's who "chased" performance by buying the fund anytime in the past 10 years now have a loss.
There is much more to mutual fund selection than last year's performance.  In addition to performance, there are 3 other P's you must understand about a mutual fund:
  • Philosophy - How does the manager approach investing?  Try to understand exactly what the manager is looking for in an investment.   Spend as much time as you can seeking to understand the manager's investment criteria. 
  • Process - How does the manager execute his or her philosophy.  What are the steps the manager takes to narrow down the vast universe of investment opportunities?  How does the manager identify the most attractive investments to be included in the fund portfolio?
  • People - What is the manager's experience and prior track record?  What is the quality of the research team that supports the manager?

Thursday, November 27, 2008

10 Things I'm Thankful For

I love Thanksgiving.  I love the food, and I love the time with family and friends.  But, I also love the spirit behind the attitude of gratitude.  

You see, with all the negative news about the economy and stock market it's easy to forget the good things in life.  It's not intentional.  It's just that the negatives in life seem to build this cloud over all the positives not allowing us to see life with a clear perspective. 

However, when you take the time to step back and think about isn't so bad.  In fact, if you are living in the United States of America you have a lot to be thankful for even when the economy is in a recession and the stock market is struggling.

I have A LOT to be thankful for.  Here are just 10 things that come to mind:

  1. Family & Friends.  I have a great family and many wonderful friends!  No explanation needed.  Everyone knows what a blessing it is to have family and friends.
  2. Living in the USA.  Yes, today our economy is in a recession.  Since 1926, we have been through 14 recessions.  In all cases, the economy eventually recovered and the stock market went on to reach new highs.  Our country is resilient.  Freedom, opportunity, and determination have enabled Americans to make our world a better place.  I'm glad I get to be part of that.
  3. An opportunity to buy stocks at cheap prices.  The recent crash in the stock market has created an opportunity to buy stocks at levels rarely seen in an investor's lifetime.  If you're investing for a goal 10 years or more from now, then you don't want to miss this opportunity.  I see some high quality businesses with strong finances where the stock is now trading at value prices. 
  4. Our firm's new investment strategy, the Global Trends Strategy.  This strategy is designed to participate in rising trends and be on the sidelines when there are none.  The strategy is working!  
  5. Dividends.  When investing in individual stocks we prefer to invest in companies that pay dividends.  Dividends are especially nice when stock prices are declining.  We have retired clients who are living off their dividends.  Although the drop in price for the stocks they own is no fun to watch, it's the dividends that keep them invested.  Without dividend income what would they live on?
  6. Technology & the Internet.  I recently moved to South Carolina.  Technology has enabled me to continue to work seamlessly with the team in Ohio and stay in touch with our clients.
  7. Clients.  I wouldn't have the opportunity to do what I love without our clients.  Our firm has many loyal clients who have placed their trust and confidence in us.  I am honored to work for every one of them.
  8. The team of people I get to work with.  They are fun to be around and great at what they do.
  9. The invitation from some new friends to join them at the Clemson vs. South Carolina football game this Saturday.  Go Tigers!
  10. Did I mention family and friends?
I could certainly go on all day about the things I'm grateful for.  How about you?  Do you have an appreciation for the good in life, or are you stuck on all the things that aren't perfect?  There is no better time than now to re-focus your perspective on life.  Refuse to participate in all the "Oh, no! We are in a recession, and we are headed for The Great Depression 2.0!" talk.

Happy Thanksgiving!

Wednesday, November 26, 2008

The Strategy Works

On July 1, 2008 our firm launched a new investment strategy, the Global Trends Strategy.  The investment approach is simple:
  1. Identify sustainable trends.
  2. Invest in those trends via ETFs.
  3. Adapt quickly when those trends change.
  4. When unable to identify a sustainable trend, wait in cash.
The strategy is designed to participate in rising trends and be on the sidelines when there are none.  The strategy is working!  On September 18th the portfolio was 90% in cash.  The Dow closed at 11020 that day.  By October 16th the portfolio was 100% cash and has been ever since.  As I write this the Dow is now trading around 8500.  In other words, the market is now 23% BELOW the level at which we began selling our positions.  Our risk management rules told us it was time to be in cash.  The decision to be in cash has protected us from the painful crash in the market as well as "the worst week ever".

On October 3rd (with the Dow at 10325) I wrote "Cash Is King...For Now".  My main point with that post:
If you've been executing a trend following strategy, then by now you should be in cash and you should stay in cash until new trends are established. 
Cash is still king for trend followers that are looking for sustainable rising trends.

[DISCLOSURE: Clients of Freedom Financial Solutions, LLC that are invested in the Global Trends Strategy currently have a cash position of 100%.]

Thursday, October 23, 2008

Understanding the Financial Crisis in Less Than 3 Minutes

Here is a nice video via Enspire Learning that provides an explanation for the financial crisis:

Obviously, it is more complicated than a 2 minute and 17 second video can explain. However, the video is well-done and tackles the root of the problem.

I like short and simple explanations like this. How about you? Have you found videos or visuals that explain the current financial crisis in short, simple, and easy to understand terms? If so, feel free to post your links in the comments to this post.