And Ahead to 2009
In Case You Missed it
Happy New Year!
It's been a crazy year, with bank failures, bailouts and a historic election behind us, 2008 will definitely be one to remember. In honor of the New Year, I've been looking back at 2008--all its ups and downs--and came up with a few investing New Year's resolutions based on what's happened.
1.) Don't get caught up in the hype. This is difficult, especially if you're a news junkie like I am, and the news is particularly relevant to your daily life, i.e., a constant barrage of information about the stock market and the economy. At the height of the madness this fall, I was refreshing Yahoo! Finance and other Web sites what seemed like every few seconds--it was probably minutes, but who's counting? It's particularly challenging--now that we live in a 24/7 information world--to ignore any new developments. At one point, I read an article about regular people getting up to check on Asian stock markets in the middle of the night. These were not investors or Wall Street employees, these were average people who were frightened ... and obsessed.
While I love the news (I started my career in the newspaper world), I also believe that there comes a point when you reach information overload. It becomes dangerous when the desire to know what's going on becomes an obsession and you're losing sleep over something you absolutely cannot control (i.e., the Asian stock markets). It's great to stay informed and on top of what's happening in the world, but it's also important to realize when this has taken control of your life. It's probably not going to make you a better investor and it'll likely only make you worry more.
So this year, with no election and hopefully the worst of the market's crash behind us, I'm going to try to take a step back from the computer, the newspaper and the television sometimes. I'll still probably check Yahoo! Finance 100 times a day when the market makes big moves, but I won't worry if I miss one little news story. In a world of 24/7 information, it's overwhelming to try to keep up with everything that's going on. And that's not necessary! What is important is watching, and heeding, the stock market's message.
2.) Follow the rules. At Cabot, we have a paper portfolio competition where everyone gets a certain amount of (fake) money and invests it in the stock market. We meet frequently about the portfolios, to share our views on the market and check up on how we're all doing.
Hopefully after reading this advisory frequently enough, you've gotten down some of the growth stock investing rules that we follow (cut losses short, let winners run, look for accelerating growth, etc.). We often discuss how important it is to follow these rules, as it helps prevent taking a huge hit in a stock or holding on to a winning stock so long that it's no longer profitable anymore.
But it's often the case that rules are not easy to follow and this can be particularly true in investing. I learned that lesson this year when I didn't sell a few stocks from my paper portfolio before the market's crash, despite all of the editors here advising cash. It wasn't that I didn't believe them, I just believed in the stocks I was holding. Right now, I still have my losers, waiting for some sort of bounce to unload them. I'll probably do that this week and start fresh for the New Year.
So in 2009, when I have a stock that exceeds my loss limit, I'm going to sell it. No ifs, ands or buts. It's a tough lesson to learn (I'm glad it happened with fake money), and one I won't soon forget.
3.) Don't let your emotions get in the way of making rational decisions. It's difficult, especially when you're watching the world coming to an end (or so some would have you believe), but it's very important to keep your emotions in check when investing. As I mentioned above, I didn't sell some of my stocks because I believed in them, despite the market's message. Some were Green stocks, which may still be fundamentally sound, but their charts have taken some big hits. I still believe that Green has a great future, but falling in love with a stock because you think it's going to save the world isn't the smartest way to invest.
Getting emotional isn't going to make me a better investor, in fact, it's going to do a lot of harm. So instead of getting too attached to a stock, or freaking out because pundits on TV are yelling about how the sky is falling, I'm going to take a few deep breaths and try to stay rational.
4.) Read more investment books. This one is easy, for me at least because I love reading. I probably read an average of at least one book a week. It's one of my favorite pastimes and, if given the option, I would be content to sit and read a good book all day. The key is reading books that will be helpful and educational along with the ones I read for fun. We have an excellent library of books at Cabot and a selection of book recommendations on our Web site. That's exactly where I'm going to start when I need my first selection.
I hope you enjoyed reading my resolutions and they've inspired you to come up with a few of your own (please share them with us via email or on our blog, The Iconoclast Investor). Remember, learn from your mistakes, but don't dwell on them. They teach important lessons, but the most important thing is to move forward with those teachings in mind. Best of luck to you in 2009!
A few weeks ago, Michael Cintolo wrote about a partial solution to the U.S. Social Security problem. We got many insightful responses, some of which we printed here, and they are still coming in. We received on this week that was incredibly detailed and I'll share it with you below. If you want to read Mike's December 11 Cabot Wealth Advisory, or any of our other past issues, you can do so on our Web site, http://www.cabot.net.
"Here's a response from a native (Gallows Hill) Salem-ite, now relocated to suburban Washington, D.C., and managing to live very well without Social Security, courtesy of the Civil Service Retirement System and 36 years' work for the Federal Government, where I made my living as a theoretical economist.
"1. Social Security is an income replacement scheme. It never will be a pension system, no matter how much folks might want to believe the notion; it just isn't ever going to provide a livable pension to anyone who earned wages and became accustomed to living above the poverty line. The best proof of that can be found in professionally staged retirement seminars in which the mechanics of calculating the Social Security benefit are explained in detail. The more you earn, the lower a proportion of your net income you are assumed to need from Social Security in retirement.
"2. I would be in favor of an opt-out scheme at a certain income level, at a net income trigger of $125,000, or so. That pretty well insulates the opt-out system and keeps the lower level wage earners in a system that could be tailored to their needs. The two big questions here are: "What would such a system look like?" and "Who would run it?"
"3. I would not run retirement systems from within the public sector for two very different reasons; both heavily grounded in pragmatism. The people who brought us the Medicare, Medicaid, Social Security, Fannie Mae and Freddie Mac fiascoes are mired in a hidebound (and cumbersome) world of mediocrity that has rules and oversight that tend to further perceived social goals rather than sound investment decisions. Their natural mind set would be to manage investments so as to avoid punishment for losing portfolio value instead of maximizing returns. You can't avoid this in government, and congressional oversight ensures that the mentality won't change.
"The second reason is that any unified market-based government run retirement program would inevitably result in the federal government taking majority ownership positions in the firms in its portfolio. Go back to the first paragraph to see why this is a bad idea and add Henry Waxman to the mix.
"4. OK, so what to do about Social Security?
"a. Grandfather everyone now receiving a benefit, and everyone over an actuarially realistic age, into the system and have the federal government guarantee Social Security benefits for life to this population. The reason is that this population is, like WWII veterans, self-limiting. You will guarantee their benefits, but the drag on the government won't last forever, and we will surely be out from under most of the cost by the time the incoming 18-22 year old wage-earning cohort hits retirement age.
"b. Craft an actuarially appropriate hybrid system for the wage force not included in 4.a, above. They could be allowed to stay in Social Security with their present account balances and move into a professionally managed family of portfolios such as what the federal government now uses for the Thrift Savings Plan managed for its own employees. One could offer an attractive (say, two or three times the balance) one time buy out of owned Social Security account balances to encourage the younger population to migrate to the new system. They would then abandon Social Security for the replacement market based system. Social Security will continue to under perform any market-based true pension replacement program, so windows for migration could be periodically opened to allow folks to leave Social Security every five years or so. Properly advertised, I should think that this would become a no-brainer decision for virtually everyone who initially chose to remain in the old Social Security system.
"c. Pick a date, after which all new, or returning wage earners would be forced to enter the replacement system. Returning wage earners would be forced to convert their Social Security account balances to the new system and be done with it."
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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.
Cabot Wealth Advisory 12/29/08 - Job-Hopping is History as Tough Times Take Hold
On Monday, Timothy Lutts recapped his Christmas holiday traditions, from delicious meals shared with friends and family to games for the young and old. Tim also wrote about how many of his daughters' college-educated friends are unemployed, because of both the bad economy and their broad degrees. While times are tough for most, for-profit educators are seeing big business as people go back to school to improve their employment prospects. Featured Stock: Apollo Group (APOL).
Cabot Wealth Advisory 1/1/09 - Keep Your Eye on the Ball
On Thursday, Paul Goodwin wrote about how to know when to get back into the market using what he calls the Simplified Cabot Market Timer. Paul also wrote about three basic investing rules that, while simple, will keep you on track if you follow them. To close, Paul ranted about the U.S. energy policy, or lack of one, and his hopes that this will change in the future.
Cabot Wealth Advisory 1/2/09 - The Case for Gallons per 10,000 Miles
On Friday, Timothy Lutts wrote about a letter he received from a reader about the benefits of market timing, especially during the tumultuous year of 2008. Another reader's letter predicted that the end is near, despite the market bouncing back after every major crisis in the past. Tim also discussed a new way to think about how much gasoline cars use and the benefits of using a different scale. Lastly, Tim wrote about an insurance investment idea. Featured Stock: Validus Holdings (VR).
Until next time,
Editor of Cabot Wealth Advisory
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