Seems to make much more sense than the index-chasing, asset-driven investment approach that everyone’s buried their heads in for the past couple of decades.  The concept is not new, and was first introduced to satisfy asset-liability match in large pension plan metrics. Vanguard talks about it (pdf) here in a 2008 paper.  When it comes to your personal pension savings, why not invest according to anticipated liability that is specific to your age, risk tolerance, and expected liability profile?

Yesterday I talked about how the market is far, far from efficient.  Today, I want to point you in the direction of a Wharton interview with Robert Stambaugh and Jeremy Siegel, who discuss the idea of stock volatility in the long run.

In the long run, instead of falling volatility, we are in fact faced with more trend uncertainty that compounds the short-term volatility problem. Uncertainty about the trend itself becomes more important than the actual volatility itself.  More specifically:

That uncertainty about the trend itself becomes more important the further into the future you project investment outcomes. […] to an investor with a long horizon, stocks actually are riskier per period. That is, the rate at which risk grows over the horizon such that it makes the investment riskier over the long run.

The other feature of the stock market that contributes to uncertainty is the fact that at some points in time we think the expected rate of return is higher than at other points in time. In other words, over time the rate of return that you can expect to earn over the short- and intermediate-terms fluctuates. The fact that the expected return fluctuates also adds to uncertainty because we do not know — for example — if expected returns are currently high, which many of us would guess they are. We don’t really know how long they’re going to stay high.

Using global warming as an example of uncertainty a long term horizon is subjected to:

It provides an interesting analogy to this concept because we might be very uncertain about how quickly the Earth is warming, but that uncertainty doesn’t much impact our uncertainty about crop output and economic output next year.  But if we look 50 years down the road, uncertainty about the rate [at which the Earth is warming] has a much bigger impact on our overall uncertainty.

So in the short term, rate of returns fluctuates above or below the mean. But not knowing what a meaningful average might be for a given period, we are unsure of whether to enter or pull out of the market. In the long run, the risks lie with our inability to project and assess long-term risks beyond our control, and those beyond our capacity to foresee and project.

This time around, nobody seemed to have been able to project the combustive mix of cheap credit, excessive leveraging, a loose and hardly independent regulatory environment, an over-reliance on faulty maths models, skewed short-term corporate incentive structures, and government legislation that started with nothing but goodwill.

Many people did foresee an eventual combustion.  But the depth and longevity (thus far) of the slump has surprised even some of the most bearish of economists and analysts.

This is but a glimpse of what long run risks could mean.  When a series of short term macro variables snowball into something bigger and more dynamic than we are able to assess from a distance.

picture source: ladyface

Don Coxe is one of the godfathers of commodities investment.  His recent investment letter highlights some market developments over the past half year, and is delivered with some commentaries.

• Interbank lending heading back to normalcy: TED spread had fallen from 110 to 72.
• The Chicago Volatility Index (VIX): high of 86 on October, 48 in mid-March, now at 32.
• Commodities as measured by CRB Index: low of 200 in February, down from 460 last June, now at 232.
• On the surprising performance of copper: not likely to see strong correlation between copper and industrial activity as some would suggest.
• China is stockpiling on industrial metals as a result of low LME prices. Even with copper’s sales surge, copper inventories on the LME has not shrunk. Investors are advised from drawing broad conclusions, instead, watch for decisive recovery of Baltic Dry Index.
• Base metals and steel stocks are the most economically sensitive group, followed by energy and agriculture; precious metals are responsive to fears of dollar or banking collapse, and inflation.
• Agriculture stocks are driven by demand on the ground. The economic slowdown has reduced demand for wheat and feed grains, but it will not to the same level as the fall in metals and oil.
• Skepticism on Obama’s initiatives on Clean Energy: jobs (estimated 4 million) will be created in universities and laboratories, but other than political goodwill, it’s far from certain his investment will provide good returns.
• Long gold, short bond, short the dollar.
• Once economic outlook improves, may boost base metal exposure and return to more exposure to oil refiners.

Some other things that caught my attention today:

• The Dutch becoming “euro-skeptics” (opens to video): I live in the Netherlands, but this is news to me.  The Dutch do not seem  overly political, and are painfully aware of the symbiotic, and highly dependent relationship it has with greater Europe.  The pragmatists are truly concerned over money (and really, that is the one unwavering theme that will always bring the country together), and the populists are throwing the usual immigration, insecurity and border issues around. Not sure why the FT focus is on the Netherlands this time, perhaps there are French and German segments coming up also?

• There are girl soldiers in the world.  Horrifying? But when your mind gets around the bend, it’s hardly surprising. There’s an equal number of girls as well as boys for the picking, so it’s only natural that military factions will take advantage of their youthful ignorance and compliance equally.  It reminds me of this story on Marie Clare years ago on the proliferation of female suicide bomers in Sri Lanka.  More often or not, they are victims of social ostracism and poverty, playthings of larger and more sinister political agendas.

• To lose a companion of many decades and have to walk the earth alone, to lose a son and not see closure in your lifetime, these are stories that will make life at this very moment seem so easy and carefree.  How does one make peace with death?  How will family and friends of the Air France crash victims cope?  Heartfelt condolensces to them all.

picture source: joy55

Water is perhaps the most scarce resource on earth.  Yes, there is water everywhere.  But most of the water is not drinkable, not accessible, nor is the resource evenly distributed.  It’s not unlike the oil situation, where a small percentage of the earth holds the majority of crude.  But unlike oil, water is not replaceable.

So how bad is it?

A study by the University of New Hampshire shows that some 41% of the world population live in river basins under “water stress” – meaning the region is subjected to frequent shortages.

The most readily consumer able source of water, the freshwater variety, occupy less than 1% of the earth surface, yet it plays vital roles in agriculture, industrial productions, and our domestic lives.  Over 70% of water is used for agriculture, making population increase a squeeze on all aspects of our natural environment, particularly water.

The need and the necessity of water

On top of basic agricultural needs, the rise of a genuinely more affluent class in the developing worlds are consuming more meat.  As we know, animals require much more water to raise than its caloric equivalent in grains.  Additionally, industrialization and mass urbanization have placed unprecedented strains on infrastructure. Thus, the accessibility of clean water has been compromised by rapid growth in many parts of the world.

High pollution and habitat degradation makes clean water increasingly inaccessible to the poorer regions. Many demographers, geologists and political scientists have attributed the root of war and violence in conflict regions to the lack of resources, particularly water availability.

Businesses stepping in

If there’s demand, then the market will find a way to meet the need.  And it is hardly difficult to point to the existing challenging global eco-system, draughts and the ensuing human devastation to see some potentially lucrative opportunities. The explosion of bottled-water businesses is only the start.  Up and down the water security chain, from bottling rights, purification and treatment, to distribution of the product, the water business is big.

So far, GE has bought up numerous water filtration companies, and have seen success in distributing water purification systems that produce clean water from sewage. Dow Chemical’s water solution unit has also seen substantial success by licensing its variety of technologies. A small company named Water Health International, that seeks to deliver clean water to the poors, has attracted the likes of Dow’s venture fund, Johnson&Johnson, and the Acumen Fund.

Ethical issues

Of course, ethical issues will arise out of the question: Is water a basic human rights?  Officially, the UN forum designates access to safe drinking water a “basic human need”, but not a “human right”.  A number of advocacy groups are working to overturn the verdict, and prevent “price gouging of the poor by for-profit entities”.

Local conflicts over the private manipulation of resources is still a worry.  Bottle water companies, private municipal providers, shipping companies, and pipeline companies may eventually join force to move water in bulk.

Investment opportunities

Given the vital importance of water, and the potential for unscrupulous business dealings around it, it’s perhaps no surprise that water utility related companies are highly regulated in the US and elsewhere. But plans of industry-wide consolidation, particularly in the water purification sector, are still vibrant.  Holding on to those dreams, investment ideas are not exactly scarce.  A number of support companies, ranging from copper pipe and valve maker, to flow-control products maker, to developers of ocean-water desalinization plants and water distribution systems, can be looked at.  If stocks are not your thing – and it should not be most people’s thing, try limited exposure to water-based funds for more diversification.

picture source: abela

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When it comes to investing, the general public has been steadily moving away from the old adages that called for set allocation between the (perceived) safe bonds/cash and the (supposedly) more risky stocks. Nowadays, we have all become heavy investors in the stock market, whether it’s outright ownership or group purchasing through our work-sponsored pension plans.

Last week, I talked about the importance of market timing, particularly when it comes to market entrance or exit points. When we choose to enter or exit have the largest impact on overall portfolio return, much more than the year-on-year growth, diversification, asset allocation and all the detailed balancing and fine-tuning. Today, I want to continue the thought on market timing, and address the issue of long-term riskiness of stock market investment.

We have been conditioned to believe that in the long run, the market goes up consistently. Certainly, there are occasional dips, but many of us have probably heard of the success stories achieved by market-illiterate pensioners that retired comfortably by holding steadfastly to their basket of stocks for decades. Does this much-embraced truism still ring true in face of such market carnage? In addition to my guest post at GenX, here are more thoughts on what we can learn from the market bust.

Imperfections of diversification

One of the major cornerstones of modern portfolio theories is the benefit of diversification. Most of the time it worked. This time it didn’t, at least when applied to the stock market. There are many reasons why it didn’t. But unless you’re an octogenarian and a historian with a succinct understanding of the intertwined global financial and consumer market, and foresaw the implication of mass de-leveraging and forced liquidation, and allocated a substantial portion of your portfolio in non-stock investments, you probably didn’t benefit from diversification this time around.

In fact, long-term, buy-and-hold, value investor guru Warren Buffet, had gradually shaved his 73.5% stock holding in his portfolio in 1995, to just 25% in June, 2008. Because even he didn’t believe that diversification offered him any protection when the overall market was massively over-valued.

That’s not to say that diversification doesn’t work. It does, but only to a certain degree. Slicing and dicing stocks into ever so minute classes, series and geographic reach has not offered most investors the protection they sought.

Long-term riskiness of stock returns

A new study came out just over a month ago that attempted to poke holes in current statistical methods applied in measuring volatility. Traditionally, statistics have shown that market returns over long periods have been consistent. Thus, good returns have been followed by subpar ones, and the reversion to the mean usually paints a picture that points upward in the long run.

Applying the new and unorthodox methodology, the statisticians have found that forces other than mean reversion affect long-term returns. In one instance, the researchers claim that uncertainty about market fluctuations increases with the holding period, because uncertainty is more difficult to quantify in the long-run.

As summarized by Mark Hubert, one of the best examples of uncertainty in the long run is the case of global warming. Its impact over the next year is most likely next to nothing, but should the horizon be expanded to the next few decades, possible effects may range from “negligible to catastrophic.” Applying the Bayesian statistical model, where new information is continually incorporated into the formula to update probabilities, the researchers estimated that stock market returns over a 30-year horizon is almost one and a half times more volatile than returns over a 1-year horizon.

Buy and hold

It’s time to look at whether the buy-and-hold idea applies for most people. I recently stumbled on an article by Henry Bloget that both opened my eyes, and confirmed my suspicions in the following: Market timing and the longevity of one’s investment horizon matter much more than they are given credits for. Since I can hardly put it any more eloquently than Mr Bloget, I am quoting his 2004 article. If you have some time, the entire series of articles are well worth a read.

In the financial markets, the “long term” is long. Over the past 200 years, U.S. stocks have, on average, returned approximately 10 percent a year (about 7 percent, after adjusting for inflation). For many of those 200 years, however, stocks have returned nothing—or worse. The fallow periods, moreover, have not just lasted months or years. They have lasted decades. In a 2001 Fortune article, Buffett observed that the 20th century encompassed three major bull markets in which the Dow jumped more than 11,000 points and three major stagnant markets in which the Dow lost 292 points. The three bull markets, in aggregate, lasted 44 years; the three bear markets 56 years. For more than half of the century, in other words, stock performance stank.

The most recent market cycle spanned 34 years, from 1966-2000. The bull phase, the one we all remember, lasted 18 years (1982-2000), and it took the Dow from just over 800 to just under 12,000. The bear phase—the one almost no one remembers—lasted 16 years (1966-1982—16 years!), and it took the Dow down nearly 20 percent. Lest this tempt you to rush out and buy bonds, average bond returns from 1966-1981 were worse than those on stocks (bonds can be dangerous when inflation is rising, a fact worth remembering now).

Essentially, the message here is that markets cycle swings are much longer, and sometimes, steeper, than we are led to believe. Therefore, if you pluck your money down in the stock market, be prepared for long and sometimes breathtakingly volatile returns. Ultimately, most of us do not have this kind of time horizon when it comes to our money. Many needs arise that range from getting married to having children, from buying property to dealing with unexpected health issues. And given the uncertainty of the market to move consistently upward in the medium-term, its actual liquidity is in fact much lower than commonly perceived. Therefore, the stock market might not be the appropriate default deposit for our hard-earned money.

picture source: ~Srboraa

This might seem like a pretty out of the character subject for me to discuss, since I write about sensible, non-hype, and long-term investing principles. Those would be exceedingly prudent and timely given the market onslaught. If you are at all familiar with general investing terms, then you would most likely associate technical analysis with the image of someone hunched over multiple LCD screens, fixated by indecipherable charts and graphs in a range of neon colours, and occasionally yell “Buy!” or “Sell!” with a touch of craziness into the phone. Needless to say, your average value investor would not approve of this behaviour. In fact, Warren Buffet famously dismissed technical analysis and quipped, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.” So far not great, then why am I talking about it?

But first, what is technical analysis and why the bad rep?

It all depends on what you believe in.

Belief numero uno: Efficient market

At the crust of the matter, technical analysis is deemed the opposite of fundamental analysis. Where fundamental analysis make buy or sell decisions based on intrinsic value of a stock compared to market valuation; technical analysis disregards intrinsic value (since it assumes the market is efficient enough) of the stock, and focuses purely on supply and demand in the market.

In modern finance, this rests in something called the efficient market hypothesis (EMH). Most economists believe in a weak version of EMH, which is to say that the market does a pretty ok job when it comes to incorporating public information into the stock prices. But it’s not perfect, since insider information may still exist. On the other hand, technical analysts assume the market is perfect in incorporating valuation related information as well as market psychology into the stock price, or at least accurate enough for its purpose. The rest of the market movements are determined by more immediate demand and supply, as well as market psychology.

Belief numero dos: History tends to repeat itself

Fundamental analysts do not believe historical trading patterns serve any purpose in stock evaluation. The technical analyst on the other hand, believes that investors behave in rather predictable ways. Market psychology is believed to contribute to the repetitive nature of price movements, and technical analysts expect market participants to react in a consistent manner over similar market stimuli.

Belief numero tres: Trends

Chartists love trends, and a collection of rather imaginative terms have been created to describe them. Technicians frequently talk about moving averages, lines of support and resistance, channels, and many other obscure formations. They believe that as a result of behavioural consistency, prices also move up or down following trends. And once a trend has been established, future price movements tend to move in the same direction.

Then what’s with the bad rep?

All these will most definitely make Benjamin Graham turn in his graves. What would grate him more, you think, that these analysts 1) disregard intrinsic values and trust the mob? Or 2), their over-reliance on past trends and data? Granted, technical analysis is mainly used by traders who do not claim to be investors. And as to looking at past data, Peter Lynch said, “Charts are great for predicting the past.” Warren Buffet was equally unforgiving, he said, “If past history was all there was to the game, the richest people would be librarians.”

That’s just as well, since empirical evidence is largely inconclusive when it comes to either confirming or refuting the validity of such practice. Much of the gains made by technical analysis are eaten away by high transaction costs. But it’s important to bear in mind that there is sound technical analysis and badly practiced technical analysis, just as there are sound investing principles and bad investing ideas masqueraded as good ones.

The issue of timing – technical analysis’ redeeming feature

Most investors are given more or less the same advice: diversify, have a long-time horizon, be fearful when others are greedy and be greedy when others are fearful, etc. We are thus fixated on the idea of asset allocation based on one’s perceived risk tolerance. And this tolerance is based on your age, financial obligations, investment horizons and overall comfort level with market movements. Nowhere do most advisors talk about the importance of timing.

I’m not talking about market timing in the context of one’s attempt to bottom-fish or sell at the peak. Consistently doing so is next to impossible, with or without the help of either fundamental or technical analysis. What I’m talking about is this: most people who are told to buy and hold are not advised on the issue of entry or more importantly, exit timing.

Charts and statistics are always portrayed in a way to tell the story of a market that in the long run, has nowhere to go but up. That is all and well, but should your investment exit point comes in the middle of a market correction, or worse, a structural recession such as what we have now, what are you going to do? Are you going to push back your retirement by ten years until the market picks up its upward trajectory again, or tell your kids that they need to hold off college for a few years until the glitch in your investment portfolio corrects itself? In the long run, the market will move up. But in the long run, we are also all dead.

The important thing to consider here is that when we choose to enter or exit the market, because those two acts can have significant impact on our overall portfolio return. In that department, fundamental analysis does not provide enough information. Even if a business possesses an impeccable set of financial statements and favourable long-term prospects, it cannot fight the overall depressed (or euphoric) market sentiment. When you decide against entering the market because you’re pessimistic on broader market sentiments: on some level, that was a call made compliments of technical analysis.

Various accounting scandals of the past decade, as well as the widely publicized abuses of special purpose vehicles (SPVs) also provide another legitimate use of technical analysis. Fundamental analysis is performed based on financial statements and qualified opinions provided by firms and their accountants. If this information is inaccurate, or worse, fraudulent, then what good is fundamental analysis? In the Satyam case, technical analysis signaled selling pressures before evidence of accounting fraud eventually surfaced. In the least, would it not make sense to use technical analysis as a way to aid and affirm your conclusion drawn from fundamental analysis?

For the average investor, none of this really matters, because the average investor should not be so heavily invested into the stock market as to become severely affected by adverse market conditions. But I know that’s not the case. Decades of bull markets have made stock market investment as ubiquitous as Starbucks, so everyone’s a shareholder now. So if you plan to dive into the shark pool at some point in the future (if you’re already invested then be prepared to park it for a while), of course, perform all due diligence. Invest in what you know and understand, or invest with someone that can do that for you. As the last cautionary step, check with technicians on when to enter before you find yourself neck deep in a sinking market. Knowing your exit timeline, it would also pay to watch the market carefully. If you ask a technical analyst, a persistent downward trend may very well take away all your years of hard-wrought gains.

Hindsight is always 20/20. Here’s to another tool that may help investors with some sorely lacking foresight.

If you like this article, please spread the word and tell your friends about it, I would love to hear what you think! For more discussion and ideas on the market, please subscribe to my RSS feed.

picture source: ~sarcasticmalfunction

Given the present market bloodbath, there are many ongoing discussions on what the sensible investment strategy should be going forward, and whether one should still be investing in face of economic uncertainties at all.

Most solutions favour an old-school approach. Many personal finance writers have gone back to basic principles of investing such as dollar-cost averaging, diversification, looking at the long term, be calm when the market is fearful, etc. Many are viewing investment through a mostly unchanged framework as what we have become accustomed to. But my question is, in a time when the corporate world, government bodies, and media complex have abdicated or neglected to perform their roles, why aren’t investors moving towards a different paradigm?

Here are some ways that I see the rules of investing change in the coming decades.

Long-term sustainability. Once a successful business becomes a publicly traded company, the management team willingly subjects themselves to continual scrutiny by the market. Dozens of analysts pore over the company’s quarterly and yearly forecast and issue their own estimates. After each earning call, those whiz kids compare and contrast their estimate to the actual numbers and company forecast, and issue their “buy” or “sell” recommendations. The market then reacts, sometimes violently, if the quarterly numbers greatly exceed or disappoint the analysts.

As a system, we have a stock market that rewards short-term gains and profits. By doing so, we inadvertently create unsavory incentives for the management team to maximize short-term profits at the expense of pretty much everything else.

Remember Chainsaw Al? A self-proclaimed turn-around artist, Al Dunlop infamously presided over Sunbeam over a decade ago. Within three months of his installation as CEO, Sunbeam had cut over half its employees and eliminated 87% of its products. Employees saw working for him akin to trench warfare, many exhausted from having unrealistic goals imposed on them. Upon his firing, it became clear that massive accounting fraud had taken place. Revenues had been padded through various dubious or outright illegal revenue recognition techniques. The company was cash strapped. Share prices shot up from $12 to $53, before falling back to $11.

Dunlop was an extreme example from another time. More current incarnations of companies and individuals buckling under the market pressures of high performance are numerous. Enron and Worldcom all carried on the tradition of growing through accounting trickeries.

Looking forward to the investment environment, I imagine the investors would be very wary of overly aggressive CEOs whose claims to fame are quick turnarounds accompanied by massive restructurings. Maybe investors would be more interested in slower and steadier progress that are on par with the general economy, and have long-term, sustainable trends supporting their growth.

Shafeen Charania coined the term “Integrity, transparency, accountability (ITA)” as qualities that investors will place most value on in the new investment environment. He likened the corporate imperative to act with ITA to the initial challenges faced by the green movement.

In the beginning of green, companies that chose to act did so knowing that while it was the right thing, costs would initially be higher than returns. They felt in their hearts and stomachs that green was a societal imperative, and that others would come around. They engaged the world on this basis, sacrificing the perception of being less-profitable for the reality of being more right. So too must the out-behave community act.

He goes on to say:

Integrity, transparency and accountability (ITA) are not where a company will out-innovate or out-perform their competitors, but rather where a company out-behaves. This could also be where a company creates market advantage, where they can capitalize on the perception of mistrust and outshine the rest to be recognized as having a management ethos and discipline that can be trusted, that won’t be rapacious, that will be open and honest and accountable. This could also be a really effective marketing strategy, one that results in (like Whole Foods) market and price advantage.

My gut says companies that out-behave are more sustainable than those that don’t. They are potentially better long-term investments because they are less likely to get caught out, but will be able to capitalize on the those that do, capturing market share, talent, etc., when the ill-behaved are outed (AIG, GM, Madoff, etc.). Imagine if there was an ITA-compliant directory of companies from which you could choose your insurance, banking, investment provider, or where you could buy your car, etc. Would you go there if you just found out that you’d been “Madoff’ed”?

In face of an investment landscape that has been all but ravaged by incompetence, greed, short-sightedness and outright corruption, sustainability and steady growth might not be a bad deal after all. The investment industry has long been plagued by its lack of transparency and secretiveness when it comes to strategy, and investors have been more or less silent on this information asymmetry as long as money rolled in.

Less than a decade ago, Enron and Worldcom rocked Main Street with its unscrupulous practices. The solution was to impose tougher accounting regulation. But instead of addressing corporate integrity and accountability at its source – to be upheld by corporations themselves, the investors relegated those issues to the regulatory bodies. Now the alarm has struck again, the SEC and various other watchdog bodies are under attack for their lack of oversight. This is justified. But this extricates responsibilities from investors themselves. And this cannot go on.

The corporations and the investment industries will only change when the consumers demand it so. Government mandated monitoring will exert some pressure, but this pressure will tighten or relax along with the wind of politics and ties to the industry itself. The only unwavering voice that can have a long-term influence on the behaviour of corporations is from the consumers. Without a collective call for corporate responsibility, and without subsequent consumer behaviour modification that either rewards or punishes certain corporate actions, most businesses will continue to place the achievement of short-term goals before sustainability and corporate responsibilities (the stockholders – us, demand it so!), and investment managers will continue to invest in those volatile and supposedly high-performing stocks (its customers – us, demand it so!).

Diversification will take on slightly different connotations. Traditionally, an average investor focuses on investment classes such as bonds, preferred stocks, common stocks, mutual funds. And for the higher-worth investors, hedge funds. To diversify, we look at the bond/stock split, and within stocks, we look at large/small cap, tech versus pharmaceuticals, commodities, and different regional indexes. This strategy didn’t work too well this time. The increasingly inter-connected web of global commerce has rendered much of the benefits of diversification meaningless.

Many people have discussed the issue of self-education when it comes to investing and personal finance. But unless you are an accounting and finance whizz, can you make sense of a public traded company’s EDGAR filings? Even if you can, how can you be sure of their various off-shore financing vehicles and securitized debt obligations are recorded correctly? If you invest in a mutual fund, those quarterly reports paint a vague picture of your holdings. How much information can you squeeze out of that coloured pie-chart, when up to 1/3 of your money is sometimes placed in the dubiously named “others” category?

I hate to bring up Madoff’s name again. But when I read about how some of his victims were not aware of their involvement in his scheme until the bottom fell out, because their investment advisor had put all their money in one of his feeder funds, that makes me cringe. Going forward, I want to know where my money is going to. That might constitute micro-management. But unless the investment industry can demonstrate its trust-worthiness, I don’t mind that.

The rise of peer-to-peer lending is as interesting as the idea of Kiva and various other micro-financing initiatives. Kiva works on a micro level to help individuals in developing regions who may not be able to secure a loan through any other means. The domestic peer-to-peer lending program takes bank out of the equation, and allows lending on a more individual, grassroot level. They are different in application, but the core idea to me is the same. Both are highly transparent, both are highly personal, and from what I hear, loan repayment statistics are pretty good.

Now my question is, what if we apply the idea of peer-to-peer lending on a more macro scale, and allow for corporations to solicit loans from the general public, without relying on the bank as middleman and spin master. This is already done with much of corporate debt using public auctions, so the customers here are mostly institutional. But for small to mid-sized companies, can direct lending from an investor to a business become a viable way to grow that may be cheaper, more sustainable and creates more goodwill for the business; and allow an average investor to invest directly in a transparent, responsible, and sustainable business? Warren Buffet has done this on a mass scale for decades with success, but his success can hardly be replicated without his money. Short of buying shares of Berkshire Hathaway, can we find a similar investment model for the average investor along the same line?

picture source: ‘gilad

Thank you to The Penny Daily for including this article as its “Editor’s Pick” in Carnival of Everything Money #5.

We set out to see what the experts are saying about 2009.  What we didn’t realize was how the art of providing financial outlook has become a game of “one down-manship.“  How else would you explain the boom in competition for the title of Dr Doom?

So it would seem that the Rapture is upon us, are you ready?  Yeah, we feel the same way.

Here’s our survey of what some of the bigwigs in the investment industry have said about 2009 in recent months.  In our mock* roster, we have Warren Buffet the sage; Nouriel Roubini aka Dr Boom/perma-bear, or our favourite, the playboy Professor; Nassim Taleb aka Black Swan; Peter Schiff who’s-laughing-now; Jim Rogers my-kids-speak-Chinese-and-that-is-my-investment-hedge; Marc Faber the original-Dr-Doom; Don Coxe via Basic Points; and John Embry the Canadian goldbug.

Outlook for 2009

Investoralist: So how bad is 2009 looking?  Don’t hold back now, give it to us straight-up!

Warren Buffet: We have lived in one way in one type of economy. And we’re now deleveraging that economy. We’re gonna have to live without the same impetus from credit expansion that really helped propel the economic engine for a long period of time. That wind will not be at our back.

The economy will be in shambles throughout 2009, and, for that matter, probably well beyond, but that conclusion does not tell us whether the stock market will rise or fall.

Nouriel Roubini: The worst is yet to come.  I don’t want to name names, but many [banks], given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven’t started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.

Nassim Taleb: The problems are still here. People that were in charge, they are still around. The bankers that got us here are still around. And we’re giving them more money. It’s not a regular crisis, the whole system need to be changed. We need to reduce debt. We need to reduce asymmetric pay-offs of the banks. This is just the beginning, we need to de-leverage so massively.

Peter Schiff: I wouldn’t get to enthusiastic about it. I think the lows are not in for the Dow, if you measure Dow in terms of ounces of gold, then US stocks are headed for a lot lower in 2009. Ultimately, everything that Obama is proposing is destructive to our economy.

The government is interfering with the free market cure, and they are worsening the disease. We are broke because we borrowed and spent too much, we need a serious recession by going back to saving and producing. The government is trying to re-inflate the bubble, to dig us into a deeper ditch. And therefore it’s going to be much more difficult to get back to the viable economy again.

Had they allowed a more severe recession to take place in 2001-2002, we never would’ve had the housing bubble in the first place. We need to let the market function.

We’ve had a bull market in bonds since the 1980s.  We’re now in the maniac stage, when the bubble bursts, we’re gonna take out the lows in the bond market in the 1970s.  The dollars in which they’re denominated in are gonna plunge too.  People are going to get wiped out in its purchasing power.

Jim Rogers: We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. The fact that it’s historic doesn’t make it any more fun, of course.

But it is a pretty interesting time when there is forced selling of everything with no regard for facts or fundamentals at all. Historically, the way you make money in times like these is that you find things where the fundamentals are unimpaired. The fundamentals of GM are impaired. The fundamentals of Citigroup are impaired.

Marc Faber: Well, economically it will be very bad. We have a contracting economy, globally, everywhere. And, I mean, not mildly contracting, but falling off a cliff. However, after this fall off of a cliff, the news in the next 3 months could look somewhat better than expected. In other words, there could be some rebound from the lows in economic activity.

John Embry: [On the subject of currencies] Nouriel Roubini recently checked in with his latest prognostication and it qualifies as a true shocker.  He suggested that credit losses in U.S. institutions could now peak at a level of $3.6 trillion, half of them absorbed by banks and broker-dealers, and to him, this means the US banking system is insolvent.

However, those wishing to flee the U.S. dollar aren’t going to be all that thrilled with their alternatives in other currencies, all of which appear to be terminally flawed.

The euro is being dragged down by the countries formerly known as Club Med but now derisively being referred to by the acronym PIGS (Portugal, Italy, Greece and Spain).  These countries are suffering from economic and financial infirmities that are approaching or, in some cases, exceed those of the U.S.  The question is not what the relative value of the euro might be but whether it can even survive if things continue to worsen.

The English pound does not even deserve mention in view of the horrific state of the British economy, while the Japanese yen, despite its current strength, will ultimately be dragged down by the endemic deflationary problem plaguing the country which has one of the highest government debt-to-GDP ratios in the world.  The Russian ruble is headed down the toilet hand in hand with the discredited oligarchs whose proclivity for debt has brought many of them to the edge of ruin.

[And] I honestly think most observers may be missing what is really going on in China.  The country for years has had one of the most unbalanced economies on the planet with exports and capital spending constituting an inordinate large amount of economic activity in the country.  To keep the Yuan from rising, China is going to have to print a lot of money domestically.

This will all be part and parcel of the world’s major nations staging a race to the bottom in a declining currency derby.

Exit Timeline?

Investoralist: What do we have to do to get out of this, can we get out of this, what’s the timeline here?

Warren Buffet: Well, I don’t think it’ll be five years. But I don’t have the answer to that. I don’t know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars, you had the Great Depression, you had the flu epidemic, you had a dozen recessions and panics, you had all kinds of things.

At the end of that century, the average American was living seven times as well as the start of the century. The Dow Jones average went from 66 to 11,497. With all those problems. This is a country that has the ingredients that well, it unleashes the potential of humans. And they’re still here. So five years, you can put me down on that one. You can’t put me down on one year.

Nouriel Roubini: Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG, and after $700 billion bailout plan. Each time they have called the bottom, and the bottom has not been reached.

Nassim Taleb: The ones that saw the crisis coming, should be put in charge. Nationalize banks, guarantee bad assets. Do what they did in Sweden versus what they did in Japan. We need to look at the credit losses.

Peter Schiff: This is a bear market that began in 2000, we’re 8 years into it, I think there’s 5-10 years minimum left of the bear market.

Jim Rogers: The (biggest issue) right now is that the American government is printing gigantic amounts of money right now and that in the end is going to be the worst problem. They’re propping everyone up everybody in sight; throughout history, when you’ve printed that much money it’s led to inflation, and in some cases runaway inflation.  I think in the end, the credit problem is not going to be the serious problem.

Marc Faber: I think a recovery will not come for the next couple of years— maybe in five, ten years time. But I really don’t see a catalyst that would propel economic growth to a higher rate. I think we’ll fall sharply like we fell in economic activity in October, November, early December. And we’ll be at the bottom of the valley for quite some time, and maybe we’ll go even lower. I think 2009 is going to be a catastrophe, economically speaking.

Don Coxe: Both Keynesian and Friedman policies are put into place.  There’s some serious heroin economics going on, but the alternative is dying in horrible pain.

In the meantime?

Investoralist: Capital preservation?  What can we invest in while the rest of the world falls to pieces?

Warren Buffet: If you own a farm nobody tells you when it’s gone down 50 percent ’cause you don’t get a quote every day. But you really look to the farm and what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they’re making a mistake.

They have to look to the business, the asset itself. If you own an apartment house you wouldn’t get a quote on it every day. You’d just look at– what the rent rolls were, and what your taxes were and expenses were. And if they all came in with– in line with what you expected when you bought it you’d feel you’d made a satisfactory investment, and you’d never get a quote on it. So I don’t look at quotes. I can’t tell you what Berkshire Hathaway is selling for today.

Nouriel Roubini: Cash.

Nassim Taleb: Cash.

Peter Schiff: Opportunities are to preserve your purchasing power. By getting out of US dollar assets. The biggest casualty is going to be the value of our money. Seek out a tax haven from the inflationary tax, and invest aboard. There’s been a firesale on foreign assets.

Load up on quality companies outside the US, continue to buy precious metals (gold), and we’ve had a major dip in commodities, industrial, energy, agricultural commodities. This is one of the best commodity buying opportunities that I’ve seen.

Jim Rogers: Virtually the only asset class I know where the fundamentals are not impaired – in fact, where they are actually improving – is commodities. But if and when we come out of this, commodities are going to lead the way, just as they did in the 1970s when everything was a disaster and commodities went through the roof.

What I’ve been buying recently is agricultural commodities. I’ve also been buying more Chinese stocks. And I’m buying stocks in Taiwan for the first time in my life. It looks as if there’s finally going to be peace in Taiwan after 60 years, and Taiwanese companies are going to benefit from the long-term growth of China.

I have covered most of my short positions in U.S. stocks, and I’m now selling long-term U.S. government bonds short. That’s the last bubble I can find in the U.S. I cannot imagine why anybody would give money to the U.S. government for 30 years for less than a 4% yield. I certainly wouldn’t. There are going to be gigantic amounts of bonds coming to the market, and inflation will be coming back.

In my view, U.S. stocks are still not attractive.

Marc Faber: Buy gold, buy commodities, and buy natural resource stocks while getting ready to short U.S. debt massively.

Well, I personally, I think that the Chinese economy will suffer very badly. They’ll have a bad recession. And I also think that politically in the world, geopolitically, we have tensions coming up. And so I would be trading Chinese stocks— maybe you buy them here and you resell them like other emerging economy stock markets that have underperformed the U.S. over the last 14 months. Since the market peaked in November 2007, the emerging markets and those of commodities have been hammered. And so the rebound may occur there more than, say, in the United States. But, as I said, look at it as a trading opportunity.

I continue to like gold. And, at the present time, that is very depressed compared to physical gold are gold miners— the exploration companies. I would also say that oil at around this level is becoming attractive, and that oil companies are reasonably attractive. So these are the investments I would carry out at the present time. And the big mining companies— CVRD, Rio Tinto, BHP, and larger gold producing companies like Newmont. But after their very strong rebound I think we have to wait for a correction.

I think the dollar is a disastrous currency. But the others are not much better. The Swiss franc is not the Swiss franc we had in the 1950s. Its quality has gone down very substantially. And the Fed, by pursuing this zero interest rate policy, which leads essentially to dollar weakness, it’s to some extent a trade war. You cheapen your currency, so you export problems to somebody else. But since the whole world is engaged in trying to lower the value of their currencies, it may very well happen that all currencies lose value against, say, hard currencies like precious metals, silver, platinum and gold.

Don Coxe: Commodities stocks, not commodities.  You want to be able to identify management talent.  For coming out the other side, an appropriate portfolio should be 50% commodities.  There will not be a dawning of the new world unless the banking sector reforms.  Commodities in 2011 will go higher than I thought they would ever go, because of what’s been done in response to the [banking] crisis.  The next commodity bull market will make the first one look tame.

In 2008, commodities caught up with the rest of the market and other risk assets.  they were the last to go down, which is characteristic of where they should fit in the cycle.  They have traded as if they were stocks.  The slaughter was more dramatic because they had a last-minute run up when the stock market was going down.  As for oil, for the majority of the cycle, demand was always slightly ahead of supply, driving the price up.  Once the recession hits and supply drops, you fill up the extra tankers, and that extra little supply is enough knocks the price out.

John Embry: Gold. [But] as long as people are abandoning the sector and taking money out of these funds, then there’s a lot of irrational selling. The fund manager has no choice but to sell. This is creating a phenomenon where prices don’t make much sense. The larger cap stocks are the ones being bid up; they trade because generalists buy them. There’s a far bigger pool of capital prepared to buy them. That’s why you’ve got this remarkable discrepancy in valuation between the little guys and the big guys.

You can’t get into production because it’s hard to attract capital and the capital costs have risen so much, but an existing mine with a good orebody is fine. This credit problem will significantly impact gold production over the next three or four years. There’s a bunch of mines coming off the table as they get depleted and the high-grade ores run out. Without new mines, production is going to fall regardless of the gold price. The supply-demand gap, which is already yawning, is growing wider and wider. Central banks will do what they can to fill the gap but if they can’t, the price is going to explode.

The downturn in both gold and silver was literally preposterous in magnitude relative to the rise in the dollar. This was a violent intervention by the paper players. Three U.S. banks on COMEX shorted something like 8,000 contracts in a very short time. That’s more ounces than all the world’s miners produce in a month.

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*Not real questions, but the responses are taken from interviews given in various TV and newspaper, thus very real.

Thanks to the Skilled Investor for including us in its Carnival of Financial Planning for Mar 7.

Really?  Yes.  And I’m not talking about the less stress, better health, more me and my family-time kind of perks.

Let’s rewind.

For months, we have been pounded in the head over and over again on the evils brought on by the recession.  Let’s recount the havoc wreaked.

• Retirees have seen their savings significantly reduced or wiped out, some even going back to work to alleviate the cash problem.

• Baby boomers see their expected retirement date stretched indefinitely into the horizon, investments portfolio reduced, housing worth shattered.

• Gen X are getting squeezed in the workplace in more ways than one, and feels more insecure in the job market.

• Gen Y, having just gotten their feet wet in the workplace, feels betrayed by the many promises dangled in front of them.  Demographers have predicted speedy career advancements as a result of baby boomer exits. So much for that.

There has been considerable faults placed on the baby boomers, in their relative easy paths to success in America since the 1950s.  There were no major war nor catastrophic financial turmoil, jobs were easy to come by, properties were cheap, and the infrastructures were there to service their every need.  Many Gen Y and Gen X blame the “selfish” generation for their over-the-top consumption, excessive debts, degradation of the environment, mis-management of the social security and health care systems that will be defunct as soon as they have benefited from it, and falling asleep at the helm when it comes to financial regulation that plunged the nation, and perhaps the world, into the perilous position that we are in now.

Simplistic and over-dramatic? Indeed it is.  But there is no denying that for the younger generations, the foreseeable future is an uphill battle.  The workplace will only become more competitive, property prices are still steep in many parts of the country, health care and social security is broken, and country is bankrupt. Ouch.

But is this recession really the be-all and end-all that a lot of people make it out to be? Of course not.  Is there a silver lining under all these stories of misery? Of course there is, as there always is, during times of unjustifiable pessimism.

Times are bad, and things are difficult.  But as Warren Buffet said, and I’m paraphrasing him here, that in the last a hundred years, the US has seen a flu epidemic, two world wars, a great depression, a dozen recessions and panics, and by the end of the century, an average American was living seven times as well as they did beginning of the century.

Granted, many people lament that this will be the first generation that will not live as well as their parents.  And surely, we have no reason to expect the past to repeat itself indefinitely into the future.  But perhaps this recession will even out the playing ground just a little bit for the disgruntled X and Ys.

1. Housing will be invariably cheaper than it would otherwise be.  If anything, the recession has “reset” the astronomical rise in property prices in many parts of the US and UK.  With substantially lower prices and tighter lending policies, tighter credit making the rounds means slower rise in housing prices.  That is, housing prices will not rise in a way that is unsupported by an increase in demand or value.  Bubbles of this magnitude will not happen again in the foreseeable future.  Good news for everyone that’s looking to buy or upgrade their housing in the coming decades.

2. This is the golden nugget.  The credit bubble burst has led to massive de-leveraging across the board.  The resulting catastrophe means that many markets are giving back all the advances made this century.  These kind of price resets probably happen once in a generation, if that.  That’s to say, this is a great opportunity to pick out some businesses to hold for the long run – businesses that are sound and well managed, yet due to overall market sentiment, trading very cheaply compared to their intrinsic value.  Even if your previous savings are seriously damaged, for the Gen X and Y, your best earning years are still in front of you.  In the meantime, educate yourself and take advantage of market corrections such as this.

3. If nothing else, let this be a serious educational experience for all of us, especially those who still have our best investing years ahead of us.  Jobs will come back in one form or another, we will consume, the standard of living will again rise, the bear market will give away to the bull, and irrational exuberance will invariably creep its way back into the market.  When that happens, turn off the TV, remember all that you have seen and learned in the last year, and act accordingly.

I will leave you with those words from Benjamin Graham, to be taken with a grain of salt, both in times of relentless pessimism and times of unjustifiable optimism not far off in the future.

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.

picture source: ~MaraleA

Thank you to Penny Daily for including us in its Carnival of Investing Strategies #5.

What makes a successful long-term investor? Is it an exceptional understanding of the market? Is it a Blackberry full of Wall Street contacts that tip you on every insiders’ move? Is it a PhD in quantum-physics or mathematics?

No. Because if that was the case, then most investment funds with their well-paid, well-educated, and well-connected managers would not be walking around with their portfolios 50% lighter.

So what is it about the market that suckers in so many people? How is it that some investors are ruthlessly spit out, and others remain relatively unscathed in the long-run?

Knowledge.

But not just business knowledge. What has been taught in business school and other rudimentary business classes do little to improve one’s chances when it comes to investing. Why? Because the knowledge presented in those accounting and finance classes only give you a myopic look at the whole picture.

For example, say you are an accounting maven but know nothing of what’s going on in the mortgage market in 2006. You look at the balance sheet of banks, match up the debit and credit sides, check off the triple-A rated loans, and marvel at how the bank has managed to grow so quickly in the last few years. But any economists looking at the picture would be alarmed at the rate of growth, probe deeper into the loan ratings, gasp at the poor judgment exercised on part of the bankers, and issue a warning. Someone who is schooled in politics would take a hard look at the political contributions made to head of committees that signed off on the predatory lending policies and yell foul! And any Tom, Dick, and Harry, who’s been canvassed by sketchy pseudo-lending institutions would tell you that if it walks like a scam, and quacks like a scam, it is a scam.

So there, it only takes someone who is in touch with reality to smell the foul. If confined to an academic or industry-conformed bubble, it will take someone who is willing to see the whole picture and dare to ask questions to reach the same, sane conclusion.

Here’s another more direct investing example, taken real-time off the happenings of the current market bloodbath.

When the market started going off the deep end beginning of the year, many respectable economists and analysts called for a sharp decline in the US dollar.

Not that the dollar didn’t deserve it. The stock market was abysmal, debts were piling up, inflation was fuelled by the astronomical rise in crude prices, and the gold bugs went nuts.

But the dollar didn’t fall, at least, not in 2008. Contrary to what many expected, the greenback went from strength to strength against the pound, the euro, the Aussie and Canadian dollars. How could they have been wrong? Their analysis made so much sense.

Myopia was to blame, again. Two things worth noting, both should drive you to pick up the paper and read the World section and brush on financial history.

First of all, many experts failed to survey the whole picture while predicting the greenback doom. Instead of examining the economic health of other currencies relative to the US, they either ignored or failed to consider the effect of a US belly flop. It turned out that part of the Eurozone had just as much of a real-estate fuelled credit bubble as the US. Many had even more dire loans made out to emerging markets that were unlikely to be recovered in the near future. Ouch!

Remember the fuzz raised when upscale retailers in the New York area accepted euros in fear that the dollar would become worthless, and everyone rushed out to open their euro accounts? Nowadays, the very survival of this currency is debated. The market is fast, furious, and seems to retain no medium to long-term memories. Who else but you can add all these episodes to your experience notebook and defend your money against market schizophrenia?

Secondly, nobody seemed to remember the experience of LTCM. I watched a PBS documentary on the failure of LTCM in first year statistics class, and later went on to read “When Genius Failed”. On a curious note, this book was on the curriculum for the CFA Level III exams back in the days.  Not sure what the case is now, but considering most buy-side investment advisory would require their analysts to hold such designation, did nobody remember the lessons from mass de-leveraging?

It turned out that in September and October, when panicking investors started withdrawing their capital en-masse form the market, many investment funds were forced to liquidate their holdings regardless of performance. This exodus of cash resulted in two things. One, an enormous demand for the US dollars rose as people liquidated out of their holding currency to settle accounts. Two, mass withdraw resulted in a capital exodus (i.e. forced liquidation) from the well-performing commodities group. This, combined with a reduction in demand for certain raw materials, contributed to the weaknesses in the currencies of commodity producing countries, namely, Russia, Canada, and Australia. The weakening of many previously perky economies, whether its due to a fundamentally weak economy and credit system, or the reduction in commodity revenues, further drove jittery investors to the relative “safety” of the dollar.

I didn’t see this coming, of course. But unfortunately, nor did many of the economists or analysts whose job it was to pay attention to these events and extrapolate these scenarios. A truly brilliant analyst, like a good historian, should be a good storyteller. They should be able to navigate through the muddy terrain that is the ecosystem of the market, and find a stable tree to build their theory from. From this tree, they should be able to split off the branches, testing assumptions and viability of their stories. They should anticipate thunderstorms, tornadoes, snow in July and the odd Indian summers. They should consider the vast ecosystem of where the tree is planted, consider the various interactions the tree would have with the other inhabitants in the woods.

Because staring at that one branch and self-congratulating on the infallibility of one possible scenario will in no way help you see the bigger picture. It’s only by recognizing the existence of the bigger picture, and acknowledging and anticipating the inter-connectedness of the wider business ecosystem, that any of the business education can be put into use.

picture source: boojamon

It is little exaggeration to say that many people are losing their shirts (if not worse) through the ongoing financial turmoils. A few got caught up in some truly heinous swindles, but for the most of us, the losses came through our previous-thought conservative investments.

What happened? What happened to the smart experts that put out money into hyper drive for a fee, but came back with losses? Are all these letters behind their names truly worth their weight in paper?

In all fairness, in a year where even Warren Buffet’s having a tough time, we can ask for little more than a mere preservation of capital. But for millions of ready-for-retirement boomers, this is no consolation. The S&P Index is back to 1997 lows, the bloodbath continues on Wall Street and Main Street.

Troubled started brewing by the end of 2006, as many forecasted low growth for 2007. Yet the market defied expectations, and the naked emperor marched on.

Now in retrospect, the picture is so clear. The US and a number of European countries were experiencing massive real-estate led credit bubbles. Many banks were leveraged to the hilt on their sub-prime lending. Debts were piling up (residential, commercial and credit cards). But the general consensus, or should we call it wishful thinking, was that there would be a soft landing at worst.

Instead of heeding to a minority of economists and analysts’ pleas to exit the market, more individual and institutional investors poured money in, hoping to ride the ever-rising wave to riches.

The media outlets were of no help. The 24-hour squawk box provided little insights and meaningful discussion to the issue. Eager to fill out its screen time, so-called experts and analysts were brought in, each with their own agendas. The stage was set up for them to further confuse the public and fan the flame of speculation.

At a time when the only thing left to say should have been: we’re in trouble, how do we get out, and by the way, get the hell out of the market right now; the discussion on short-term profiteering and trading opportunities raged on.

As much as on-line discussion over the true state of the economy becomes increasingly evolved, timely, and trustworthy, it pales in comparison to the media machines dominating the airwaves. Is it any surprise that on a day of epic market decline, McCain, a respected political veteran and what we would expect, an informed citizen representative, could utter that he believed that the economy was “fundamentally strong”? I’ll bet I know what show they had on TV while he was waiting backstage for his campaign rally.

On that note, let me address the titular issue of why being smart and educated does nothing for your investment portfolio. This may come across rather old-fashioned, but the basic human virtues of integrity, patience, self-awareness and self-understanding are the qualities that will make you a winner in the game of investing. And the sooner we recognize it, the sooner we start making smart and wise decisions in our investment lives.

Let me explain. Have you ever turned on MSNBC and saw Jim Cramer flapping around like a chicken on steroids? Have you followed Ben Stein’s insights on the US economy? You think these guys are dumb and uneducated? Of course not. Both have very impressive resumes that can only attest to their level of intelligence and education. But both embody everything that is WRONG with media business reporting.

I’m not sure how one can sleep at night, or expect to be taken seriously, with the knowledge that their flip-flopping market insights are recorded for eternal derision. Because what they preach are no longer rational economics or investing strategies, it’s EGO-nomics. End of the day, this is nothing short of selling integrity for media exposure. In the celebrity circle, this is called famewhoring.  Crass? True.

Unlike those media vultures, most of us, as well as our investment advisors, are well-meaning, sensible, and smart individuals. In fact, many of us who are active in managing our portfolios are educated or self-taught in the field of personal finance and financial planning. Perhaps because we are stubbornly smart, self-deception sometimes creep in, and our egos take over.

Every five-year-old can grasp the principle of buy-low and sell-high. While in reality, few investors abide by the rule, while always hoping to out-smart the system and everyone in it. Sure, the across-the-board market decline in 2008 was unprecedented in both its scope (truly global) and sectoral reach (except for gold, the dollar and a few consumer product groups). But a year ago, a large number of investors were still trying to get on the gravy train and make a few bucks before the system derailed. Calls for complete stock market withdrawal were in the minority, but they were certainly there. Yet most of us didn’t listen. Because we thought we knew better, and were smarter than the rest of “them”.

If nothing else, perhaps this bear market will be a humbling experience for everyone. Especially the smart and educated.

photo credit: rednuht