“Never allow someone to be your priority while allowing yourself to be their option.” – Mark Twain
James Altucher’s “Ultimate Guide to Going Broke”
James Altucher is not only a good interviewer (see today’s Journal), he’s a great writer. I’m trying to learn from him. You can tell that he writes his blog posts in less than half an hour. He uses a free form of logic… which helps. And he doesn’t “teach” as much as “tells” – i.e., a journalistic approach.
An amusing introduction to positive psychology…
Thursday, May 16, 2019
Delray Beach, FL.- How comfortable do you feel about your stock portfolio?
A few weeks ago, Bill Bonner posted a warning on his blog – an essay titled “We’re Raising the Crash Flag.”
Bill has always understood economics better than I do. He’s intellectually attracted to big ideas and “connecting the dots,” as he puts it. I like to think of myself as his Charlie Munger, but I’m not sure I am. I am familiar with Buffett’s ideas. I have no idea what Charlie thinks.
In any case, my aim in understanding economics is lower than Bill’s. I don’t really care to understand how it works at a deep level. I just want to understand enough to avoid making stupid mistakes.
On a micro level, avoiding mistakes in the market is not that difficult. Buy mostly large, profitable companies that have a long-term history of paying dividends. And don’t speculate.
But on a macro level, avoiding mistakes is a bit more difficult.
When the economy goes bad (and all economies sooner or later go bad), the stock market goes bad too. And it can stay bad for an awfully long time.
So even if you own only good companies, you can see the value of your stock portfolio tank severely every now and then – and in rarer cases, stay down for years and years.
In my lifetime as an investor, I’ve seen several serious bear markets. Had I been able to predict them, I would surely have cashed out my stocks and moved into cash and gold. Which is what Bill does.
But since I’ve never had a crystal ball, I’ve never tried to time the market. And while that was not as profitable as it would have been to correctly play the future, it was, in retrospect, a lot better than pulling out.
There are lots of studies proving just about every imaginable thesis on investing. I’ve looked at enough of them to know that if it were possible to time the markets, it would take someone much smarter than I.
So my strategy has always been to buy great stocks and hold on to them. And when the crashes come, to buy more of them when their prices are, by value standards, historically cheap.
That said, it worries me when Bill puts out a warning about an imminent market crash. If he’s right – and eventually, he certainly will be right – it means that I’m going to see my stock portfolio descend by millions and millions of dollars.
That won’t be a good feeling. And I can understand that if I converted my stocks to cash today and a market collapse occurred next week, I’d feel very good about that decision.
But I don’t know for certain that the market will crash any time soon. So for the time being, my strategy is going to be as follows:
Avoid speculative stocks.
There are all sorts of reasons to a believer that certain speculative stocks might prevail in the coming years – e.g., Uber. But as of right now, the company is unprofitable. And that means, in my simple way of looking at it, that it is a speculation. If I’m going to speculate, I’d rather invest money in a fledgling business in an industry I know (such as direct response marketing) or in a business I can have some control over (as a founder, for example) than in a company like Uber, about which I know only what I read in the financial press.
Hold tight with my buy-up-to parameters.
My rule for buying stock is based on a simple metric: 10- to 20-year historical price-to-earnings ratio. When the stock market is generally overpriced, these ratios are very high. It becomes difficult if not impossible to buy stock in businesses, regardless of how great I think a particular business’s prospects are.
I just met with Dominick, my advisor at Raymond James, to go over the P/E ratios of my core stocks (the Legacy Portfolio), and only a handful were priced “right” according to the formula we follow. I was not disappointed. On the contrary, I was pleased. It meant that the cash I have been accumulating from dividends and from my active income will be put into cash and income-producing real estate, assets that should maintain their value or appreciate even if the market drops by 50%.
The last time Bill sent out a warning like this (it was prior to the 2008 crash), I started to buy gold. I bought a good deal of it at an average price of less than $500. That was a good contrarian move, and I have Bill to thank for it. But the amount of gold coins I own now is more than sufficient for “survival” purposes. And since gold is not a business and does not produce income, I won’t treat it like an investment. I have enough. I won’t buy more.
Dominick agrees with me that Bill’s thinking, on a macro-economic level, is sound. He gave me reasons why his company believes that we are still in a long-term secular bull market that will endure, with ups and downs, for many years – so long as interest rates stay low. And we both think (as Bill has pointed out) that the Fed is going to do everything it can to keep rates as low as they possibly can.
Of course, Trump’s crazy trade-war strategy is not good for the economy and it is very dangerous for the stock market. If all things were equal, he would settle his dispute with China quickly to bring back a sense of optimism to Wall Street. But I don’t think he cares as much about that as he does getting reelected. And since he’s already been saying that the Fed will be responsible for any future financial collapse, he has something he can talk about if it happens.
Meanwhile, the idiocy of the trade war is beyond the intellectual scope of his core supporters. So he might continue with it through the next elections. And if he does, we might see another collapse of as much as 50%. If that happens, I told Dominick, all of our Legacy Stocks should be trading at prices that are historically super-cheap. And if they get there, I’ll have a stockpile of cash ready for buying.
Warren Buffett on investing: “You never know who’s swimming naked till the tide goes out.”
Alacrity (uh-LAK-rih-tee) is cheerful readiness, promptness, or willingness. As used by Jordan Salcito in The Daily Beast: “Down under, people endearingly call boxes of wine ‘goons,’ and they drink them with alacrity.”
”Chernobyl” (HBO NOW)
I’d read good things about this – a docudrama series about the 1986 Chernobyl nuclear power plant accident – and it didn’t disappoint. The first episode was riveting. It will make you wonder about the potential danger of what many consider to be the cleanest and safest form of energy.
The Chernobyl accident is generally regarded as the most catastrophic nuclear power plant event in history – one of only two classified as a level 7 (the maximum). The other one was the Fukushima disaster in Japan in 2011.
Lots of good moments here…I think my favorite is the screaming strawberries!
Tuesday, May 14, 2019
Delray Beach, FL.- Ah, Gabriela! My middle school crush. Her father, Eric Albreicht, an eminent art critic, had lined every wall of their home with beautiful paintings.
The walls of our house were lined with books. (Books were also piled high on every surface and held up one leg of the dining room table.) My mother, a close friend of Eric’s, was an art lover too. But she could afford only reproductions.
When, some 29 years later, I began to buy art, I bought it for the love of my mother’s intelligence and for the standard of beauty that Gabriela’s father had set for me.
Collecting for love and beauty is a perfectly defensible motive. But as my purchases ran into the hundreds, I began thinking of art as an investment.
I’ve been buying art for more than 40 years. I have owned and run five galleries and have a current collection of more than 1000 pieces. And though I still buy for love and beauty, I temper my enthusiasm by following a set of guidelines I’ve developed along the way.
- Art has no intrinsic value. Its value is determined entirely by the market.
- The most important factor in the current value of a work of art is the reputation of the artist among market insiders.
- The most important factor in the future value of a work of art is the artist’s prominence in art history books. Next is the importance of the museums that display his/her work. Third is the number of corporations and wealthy individuals that own it.
- From a value perspective, when you are buying established dead artists you are buying historical artifacts.
- The fine art market has very little resemblance to the financial markets. It is smaller, more controlled, and less regulated. In terms of participants – brokers, buyers, and critics – it is very small. In terms of dollar values, it is quite large. (The most recent figure I found valued the global art market at almost $64 billion!)
- Contrary to other assets, diversifying does not increase safety with fine art. Specialization does. It’s better to collect 100 pieces by one artist you admire than one piece by each of 100 different artists.
- Evaluating individual pieces of art is easier now that auction records are available online.
- The factors that matter most in valuation are: artist, medium, size, rarity, and style/period.
- Like most tangible assets, rarity and “quality” affect price appreciation. The “better” pieces typically outpace ordinary pieces by a considerable degree.
- As a general rule, oils are more valuable than acrylics… acrylics are more valuable than gouaches… gouaches are more valuable than crayon and ink pieces… crayon and ink pieces are more valuable than ink pieces… and ink pieces are more valuable than pencil sketches.
- “Buy what you like” is bad advice for the new investor. That’s because what they like is not typically what they like after they have been in the game for a dozen years.
- The touted 10% historic return for fine art is contrived. The actual return for most investors and collectors is probably closer to the rate of inflation.
- That said, if you can afford to buy “museum quality” art, it’s quite possible to earn 10% overall. I’ve done as well or better in the last 30 years. (Not so well in the first 10.)
- To maximize profit and minimize risk, buy the most representative examples of the best-known artists you can afford.
- Start slowly, investing in just one to three artists. Stay with them forever if you want. If you wish to expand your collection horizontally, move slowly.
- Constantly upgrade your collection. When you have the chance, sell two or three lower-quality works to purchase a single higher-quality one.
- Art has three distinct financial and estate management advantages: It is portable. It is transportable. And for the most part it is non-reportable.
- If you don’t take daily aesthetic pleasure in your art, you are missing most of its value. In other words, if you aren’t in it for love and beauty in addition to asset growth, you are better off with stocks.