Sunday, October 25, 2009

Simplified Investing (guest essay)

In response to my suggestion of a rather demanding investment approach, correspondent BOC suggests a simplifed strategy that takes a few hours a year to manage.

Correspondent BOC recently submitted this informed view on simplifying our investment strategy to save time, money and anxiety and earn a consistent return.

After wending my way through Deflation or Inflation: Who Cares?(October 9, 2009) (nice piece of writing as usual), I finished with a distinct sense of ennui. I believe this derived not so much from your distinctly honest style as much as from the destination at which you arrived:

"We all want a simple investment strategy that works in all time frames and all eras-- but no such strategy exists once you understand purchasing power and relative performance/ratios/ pairings."

I am afraid that, for most of your readers (bright as they are), your conclusion might well be summarized as "The situation is not just serious but hopeless as well." Your point on "pairings" is insightful, and well taken by a very few.

However, most people just do not have the time, conceptual framework, and/or analytical skills necessary to assess disparities between the members of such pairs. Indeed, the assessment of the relative merits of just four entities in relative pairings will cause an extension of analysis to 6 ratios, not counting the reciprocals. Beyond that - - well, "the more the messier".

There is indeed a way to simplify a lot of this to where most folks can handle their investments with less stress and limited time. For a base model, I would direct you to the work of the late Harry Browne. There is a title (Fail Safe Investing) at his website (run by his widow, I believe) which presents a greatly simplified, and very helpful view on the matter. It’s $9.75 for an ebook that takes maybe 2 hours max to read. (Disclosure – I get nothing - - zip, zilch, nada, de rien - - for this endorsement.)

I am delighted to do it because his work has saved me untold wasted hours, major anxiety, and untold thousands of hard earned income. I’m the patient in the old Yiddish joke... Doctor: "Are you comfortable?" Patient: "I make a living.") This book must date back to ’89 or so since that is when I discovered it under another title. The link is here:

Fail-Safe Investing

So... I discovered it in ’89 -- a fair question is whether I have used it. "Yes!" From the moment I picked it up... on my portfolio, as well as on my parents’ and in-laws’ for over ten years. Next question - - "Did it perform as advertised?" Affirmative, again. Last question - - "Do you still use it?"

As a basic platform to guide my thinking, yes. As "the" model for detail – no. Browne’s model has afforded me the time and his insights have allowed me the ability to ask the right questions to develop my own model which -- for the last 10 years -- has provided greater comfort and quite reasonable returns though at the cost of weekly involvement. Most people would not want to get involved in my method -- too much math. [I could probably simplify to a 50–page ebook and an Excel sheet ‘robot’ if there was interest though.]

The next set of questions will the expected ones from a sophisticated and skeptical reader base such as yours.

a) "Is this just about budgeting, etc. ?" – No. I (well, we) have not budgeted in years. I set an expectation of how much our growth in net worth is going to be for one year out. Almost magically, spending comes in line to a "sustainable future" orientation. (I think this is because we’re working toward a visible goal rather than just taking what we can get.)

b) "Does this take a lot of time?" – I don’t know… is an hour a year (around January 1) a lot of time to you? (Yep – an hour a year. Maybe three, if a person is not well organized -- or hung over from New Year’s Eve.)

c) "Must be a lot of esoteric stuff I need to study up on, right?" – Ummm, no, that’s a concept that Wall Street has been using an excuse to pick everybody’s pockets all this time. There are only four (4) asset classes that matter for a “passive” investment portfolio – stocks, bonds, cash and gold. If you want to get fancier than that,’s just a lot of wasted effort -- and a whole lot more risk.

d) "What about my real estate as an investment class?" – Real estate is an active business, not the "passive" investment that folks envision for a retirement savings vehicle. For that you will have to get involved in budgeting, cash flows, balance sheets, etc. Specifically, your house is your home – while an asset, you have to live somewhere; it is not part of a retirement portfolio. Same thing is true of your business, if you have one.

And then, of course, the same sophisticated and skeptical readers will inquire as to the downside of such an approach. Well -- here they are as bullet points:

  • The approach is boring. It just doesn’t have that 'Las Vegas' feel of "action".
  • It makes you an outcast since it does not allow for following the "next BIG thing." (Well, it does actually, but that is part of a Variable Portfolio – sized to max 10% of the Permanent Portfolio.)
  • "It’s so easy everybody will be doing it!" – Well, they haven’t for twenty year... and considering the first two bullet points, they’re not likely to start anytime soon. Please remember that the populace (investing public included) "loses their mind quickly as a herd and regains it on an individual basis very slowly." (Wasn’t it Blaise Pascal who noted that mankind’s miseries derived from the inability to sit quietly alone in a room?)
  • "The approach won’t make me rich." Correct...and neither will any other passive investing approach. But it can keep you more than even and that is significant. There are very few investment approaches out there that allow one to take more out than they put in... including any dividend and/or interest returns.
  • In the immortal words of the Mogambo Guru, "If you want a hamburger in the future, you need to save the cost of a hamburger today." Earnings come from our occupation and our earnings are being rationalized to the equivalent of a global workforce -- in short, on a purchasing power basis they are headed down. This approach allows one to take advantage of major trends in motion without a lot of taxable events, minimal downside risk and a laughably low time investment.
  • "I need to see XX% annual return." Understood, and there’s the problem. Most folks do not have an appropriate idea of "expectation" when it comes to their investments. What has Buffet (Warren, not Jimmy) done in terms of performance? I seem to remember about 22% or so on an annualized basis over time -- and let’s remember that he is spending most of his time on company selection, he’s deeply assimilated Graham/Dodd’s work, he has a staff and that he owns a commanding share of most of his holdings over the last 20 years or so. Heck -- if us mere mortals can eke out an even 8% (that your pension manager can’t) - - then we’re stars. And, based upon experience, I believe one will find returns of better than 10% per year over time.
  • The ultimate in sophistication is the ultimate in simplicity. Be a human being (have a life), not a human "doing" (spend lots of time to make lots of money for what purpose?).

    Expect that the ongoing crisis will force a "de-financialization" of the economy – in short, towards a simpler set of investment vehicles for savings that you can accrue.

    The defining question for the next 10 years will be "What IS money?" Get ahead of the curve: simplify your thinking, save what you can, and spread your bets. There are no real "gurus" out there who know "what’s best".

    I’m in the business of financial forecasting and experienced in the maxim that those " who make a living with a crystal ball often wind up eating ground glass".

    Thank you, BOC, for sharing your experience with a simplified "spread your bets" investment strategy.

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