It seems as if everyone is worried about the economy going into a double-dip recession these days. Worry in and of itself can be very destructive, both to your mental state and to the economy overall. Besides pulling out your hair, causing acid reflux and other health problems, worry can actually become self-fulfilling prophecy and cause the very thing you are most afraid of.

A number of years ago when I read Dale Carnegie's book How to Stop Worrying and Start Living, one method he suggested was just to accept the worst case scenario and then move on with life from there.

So accept it: THE ECONOMY IS DOOMED! it's going to be 10 years of economic nightmare!

Now what?

Continue reading The Economy Is Doomed! Now What?

The Economy Is Doomed! Now What? originally appeared on BloggingStocks on Sun, 01 Aug 2010 14:40:00 EST. Please see our terms for use of feeds.

Continue reading Schwab's bad advice about sector investing

Schwab's bad advice about sector investing originally appeared on BloggingStocks on Wed, 03 Jun 2009 15:20:00 EST. Please see our terms for use of feeds.

There is a theory of investing that says you must diversify. What does that mean? Quite simply it means that, in the overall, some stocks will rise and some will fall, but hopefully there will be more winners than losers and you will make money.

Some mutual funds have taken this to the extreme. For example, there is a Total Stock Market Index Fund that includes more than 3,000 stocks. This is stretching the limits of diversification.

So does it work? First we must keep in mind that most mutual funds are not short sellers. Selling short is the practice of selling a stock first and then replacing it at a lower price. In other words, you are betting that the stock price will go down. There are some so-called Ultra-short Index Funds, but generally they are not widely used. Hedge funds do trade the short side of the market and are able to profit when we have a bear market like the one in 2008.

Now let's look back at 2008. Stocks across the board fell an average of 40%, with some falling as much as 90%. The fundamental flaw in these diversification theories of investing is that they work well in bull markets like we've seen up to 2007. When a bear market hits the fan, all bets are off and investors are blindsided and suffer enormous losses. Even the highly diversified Vanguard Total Stock Market idx (VTSMX) fell 37% during the past year.

So what to do? Over the years, I've followed a simple rule: "When in doubt, don't." When you don't "feel" right about the market or a particular stock, stand aside.

Is diversification the way to make money in the stock market? originally appeared on BloggingStocks on Sun, 04 Jan 2009 09:40:00 EST. Please see our terms for use of feeds.

Continue reading Chasing Value: Inflation protection with gold & platinum (AAUK)

Chasing Value: Inflation protection with gold & platinum (AAUK) originally appeared on BloggingStocks on Wed, 10 Dec 2008 13:15:00 EST. Please see our terms for use of feeds.

Market gurus like Jim Cramer preach the benefits of broad diversification, something I think is good for investors too: if your goal is to produce returns approximately equal to the market averages. In other words, if you believe in diversification, buy an index fund. If you don't want to simply buy and hold index funds, broad diversification is unlikely to make sense for you.

I recently found a good summary of why combining diversification with stock-picking is a bad idea from an unlikely source: Michael Konik's The Smart Money, a book about an elite sports bettor who gambles hundreds of thousands a day on football -- and wins. Here, he explains why the elite gamblers don't bet on more than a few games each week:

I'm sober enough about the difficulty of betting sports to realize that gambling on seven pro games in one weekend is the sign of a sucker. The linemakers just don't make that many mistakes on NFL football, where all the information is widely known to everyone in the universe.

It would be impossible to sum up the problem with diversification in the stock market any better. Generating greater returns without taking greater risk requires the investor to spot instances of market inefficiency -- the stock market equivalent of the linemakers making a mistake. And even the best investors in the world can't find enough market inefficiency to earn exceptional returns while owning a lot of stocks.

The perils of diversification: A lesson from the sports betting experts originally appeared on BloggingStocks on Sun, 24 Feb 2008 12:10:00 EST. Please see our terms for use of feeds.

Several weeks have passed and I still can't help thinking about how tough it is to invest in individual stocks and how many ways there are to be blind-sided. When the Board of Citigroup (NYSE: C) finally asked for the resignation of CEO Chuck Prince at an emergency Sunday meeting, after the company announced that an earlier released figure of a $6.5 billion write-down was actually going to be $11 billion, were they surprised of just disgusted?

Was that the last straw or were they in the dark as to the magnitude of the losses. As investors we have to consider a vast array of issues to determine if a company is worthy of investment. I know most people do not, but lets give them the benefit of the doubt and say they do. So you look at the sales and services offered, the quality of management, the various performance metrics like P/E, P/S, P/B, ROE cash flow, debt and more. You may look at the macro economic environment, interest rates, even the weather but in the end what do you know?

After you analyze everything you can get your hands on you are still just giving it your best shot (in the dark) and hope for the best. If the Board of Citigroup can't keep track of it's own company, its management structure, its risk analysis and it's exposure to major market conditions that will greatly affect the company, how are we supposed to?

Just one more good reason to stay diversified. If you are not, you should give that as much consideration as you do any individual investment. Was the Citigroup Board really in the dark? I don't know, but you should not allow yourself to fall prey to their folly.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

Sunday Funnies: Was the Citigroup Board really in the dark? originally appeared on BloggingStocks on Sun, 16 Dec 2007 21:10:00 EST. Please see our terms for use of feeds.

A lot people look to religion or spirituality when things appear to be in chaos. But when the financial markets are looking out of control, investors should look up Vanguard Group founder John Bogle for reassurance.

BusinessWeek did just that, and Bogle was his same-old self: Investors should stay the course, ignore the volatility, but make sure that they have an adequate percentage of their portfolio in bonds. Of course, that right ratio depends on your time horizon and the size of your portfolio.

Bogle explains more intelligently than I can here why investors shouldn't do anything. As I said in my Volatile Market: Just ignore it, don't try to time it, individual investors (and the experts too) have a terrible record of timing the market. It's why the average investor's return is so much lower than the market's average return: We have a tendency to jump in and out at precisely the wrong times. What's the solution? Buy and hold!

I love Bogle's use of Shakespeare to describe the current market turmoil: "A tale told by an idiot -- full of sound and fury, signifying nothing."

Sound and fury: Bogle on the current state of the market originally appeared on BloggingStocks on Sun, 19 Aug 2007 15:10:00 EST. Please see our terms for use of feeds.

The Dow Jones Industrial Average fell a long way today dropping 387 points and we can all look forward to reading and hearing why in the coming hours. For me, I preach calm. Either you have developed an investment style and portfolio that allows you to rest easy and stay calm over major market hurdles or you are worried silly. If you are worried silly then I still preach calm...of a different sort. You should calmly transform your portfolio to one that does allow you to find peace in down markets. For the calm seekers:

• More cash - less leverage
• Industry (sector) diversification - not specialization
• Large companies paying dividends - not small caps paying nothing
• Index funds - not developing market funds
• Dow Utilities over Dow Industrials
• Time in the market - not timing the market

What would you add to the list to get through difficult markets? What gives you peace, when all around you seems to be behaving badly? Have you made changes or adjustments in your portfolio over the past few months? What were they? Time to share, because this market is going through some real growing pains and your experience and wisdom might help someone. Perhaps some milk and cookies might help.

Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well - INCLUDING ANY BAD CALLS.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.

Dow down 387 - still preaching calm and change originally appeared on BloggingStocks on Thu, 09 Aug 2007 17:30:00 EST. Please see our terms for use of feeds.

The stock market has been experiencing a tremendous amount of turbulence over the past three weeks. We have seen wide swings in the Dow Jones Industrial Average ($INDU) of hundreds of points up, and then down, and back up and back down. Today,the Dow had its second-worst loss of the year. If you are losing sleep or getting a queasy stomach over any of this then your portfolio is not right for you. You have made big mistakes in allocating your capital and you need to make a change.

Anybody that has been investing for any period of time has been told to be diversified, or even more simply -- do not put all your eggs in one basket. After each market swing Wall Street prognosticators, be they analysts, brokers, media talking heads or us at BloggingStocks attempts to rationally explain what is happening in the market. Some times the explanations make sense, and sometimes they do not. But, it is important to remember that even when the explanation is rational, plausible, and backed up with a few facts IT CAN BE WRONG!

There are many aspects of the stock market that replicate gambling. The most important one of them all is this: Do not play with money you cannot afford to lose! You should consider diversity of risk and limiting risk to levels that allow you to be at peace with your decisions. Diversification does not mean you need to own a large quantity of stocks or funds. You can be diversified with as few as four or five stocks as long as they are not in the same industry. You can be diversifed in just one mutual fund, if that fund includes diversification as one of its goals.

Continue reading Serious Money: Losing sleep over market turbulence - take action

Serious Money: Losing sleep over market turbulence - take action originally appeared on BloggingStocks on Thu, 09 Aug 2007 17:10:00 EST. Please see our terms for use of feeds.

General Electric Co. (NYSE: GE) trades at a 4% conglomerate discount. A conglomerate owns many different businesses -- which do not share resources. The rationale for conglomerates was that they allow investors to buy a diversified earnings stream -- when one business is up the other is down and vice versa. In theory this makes earnings smoother.

Finance theory suggests that conglomerates should trade at a discount to the stand alone value of those businesses. The reason for the conglomerate discount is that investors are able to construct a portfolio of stocks that will achieve the diversification themselves. Thus all the overhead needed to manage these diverse businesses under one umbrella adds cost without creating offsetting investment value.

One way to test this theory is to compare the weighted average price/earnings (P/E) ratios of the industries in which GE competes with GE's overall P/E. When I did this, I found that if each of GE's business units was a stand alone public company, its industry P/E weighted by its proportion of operating earnings to the total, averaged out to 19.9. This is substantially above GE's P/E of 19.1, suggesting that GE trades at a 4% conglomerate discount.

Continue reading Does GE trade at a discount?: A BloggingStocks series conclusion

Does GE trade at a discount?: A BloggingStocks series conclusion originally appeared on BloggingStocks on Mon, 30 Jul 2007 13:09:00 EST. Please see our terms for use of feeds.

SmartMoney recently published its list of Seven Money Mistakes to Avoid. The first six are great:

1. Saving with right hand and spending with the left
2. Playing it too safe
3. Looking into a cloudy crystal ball
4. Living in the moment
5. Throwing good money after bad
6. Following the crowd

The seventh, however, I'm not so sure about. Of course, "letting your ego get in the way" is a very bad thing. As the article says, "[...] in the stock market, overconfidence leads people to believe that they can beat the market when, more often than not, they can't. The consequences are high-risk investments, overtrading and under-diversification, all of which chip away at long-term returns."

Here's the problem: The handful (and that's really all it is) of super-investors who do beat the market don't do it through diversification. Here are two great quotes from the world's greatest investor, Warren Buffett, on the hazards of diversification:

Continue reading SmartMoney's mistakes to avoid ... and one that maybe you shouldn't

SmartMoney's mistakes to avoid ... and one that maybe you shouldn't originally appeared on BloggingStocks on Thu, 28 Jun 2007 16:50:00 EST. Please see our terms for use of feeds.

The controversial company VeriSign Inc. (NASDAQ: VRSN) has gone up nearly $4 since the sudden resignation of embattled CEO Stratton Sclavos this past Tuesday. I wrote earlier this week that Stratton Sclavos was indeed a polarizing figure, but had survived the Silicon Valley merry-go-round by having lasted 12 years at the helm. Some major institutional investors did not want to be involved with VeriSign's stock as long as Stratton Sclavos was the CEO.This past week has changed that thinking as the stock has lifted from $26 to $30.

As I wrote in my book Stop Losing Money Today, the most important factor in making a decision in owning a stock is the senior management. If an investor cannot get comfortable with a company's CEO, chances are they will avoid the stock. The CEO sets the tone and the vision of the company, plain and simple. The CEO selects the people to run and operate the divisions within a company. The CFO -- chief financial officer -- is entrusted with delivering the vision by the numbers and too communicate effectively with Wall Street as to the composition and direction of those numbers.

Stratton Sclavos was indeed a visionary with VeriSign. When he took over the reigns in 1995, the yet to be public company was doing about $10 million in revenues and was viewed basically as a security company. Under Stratton's watch, VeriSign has grown to a $1.6 billion revenue base company with healthy margins and a strong bottom line. So what happened?

Stratton Sclavos was an acquiring CEO. He believed that whenever something could not be developed internally in a timely fashion -- go out and buy it. Buy it he did. Stratton kept investment bankers busy and always searching for the next property to put into VeriSign's portfolio. Several missteps happened along the way, as well as some good, solid acquisitions. Stratton annoyed some investors as they were concerned about VeriSign deviating away from its core competencies.

Continue reading VeriSign up nearly $4 after CEO resigns

VeriSign up nearly $4 after CEO resigns originally appeared on BloggingStocks on Sat, 02 Jun 2007 11:10:00 EST. Please see our terms for use of feeds.

A recent publication by Wharton analyzes the diversification strategies of Internet companies.

As a Wharton graduate I am biased toward agreeing with my former teachers. But it seems to me that they missed a fundamental truth about Internet companies -- they almost always get only one shot at greatness. After that one shot, they survive based largely on inertia and no amount of "adjacent" diversification will restore them to their initial state.

The key to achieving that initial greatness is coming up with a new idea that rapidly becomes very popular. During this phase of an Internet company's development, revenue -- and in some cases profit -- grows very quickly. The rapid growth creates a seemingly insatiable demand for the stock whose stunningly rapid upward rise acts as a magnet to attract Silicon Valley's top talent.

The inflow of talent demands to be expressed in the form of employee-driven innovations. But most, if not all of these innovations fail to generate sufficient new revenue to enable the company to keep growing at the same rate. (It's far harder for a $500 million company to triple its revenues every year than for a $10 million company to do so.)

Continue reading Internet companies only get one shot at greatness

Internet companies only get one shot at greatness originally appeared on BloggingStocks on Fri, 29 Dec 2006 09:45:00 EST. Please see our terms for use of feeds.

I rattled some cages by pulling back the curtain on General Electric (NYSE: GE). I did that for good reason. The way I see it, there are going to be some significant readjustments in the markets starting early next year. The heady upward spiral we've been watching just can't go on forever. I'm sorry I have to make that call but that's the way I see it. Values have to equalize sometime. Overvaluations need to recede and correct. I'm thinking it's time now to pull some profit, take a stance, and brace yourself for a bit of a downward ride.

That's why I'm so high on GE. In my view there's no better place to shore up some funds. In fact, I have heard of GE as being referred to as a marvelous hedge of protection when times get volatile. It sure looks that way to me. In his recent statement to investors, GE chairman and CEO Jeff Immelt made his declaration of his company's strategic position clear and strong. Consistent growth, responsible investment, conservative diversification, and quality people, these are the things which Mr. Immelt banks on. This one handy quote from CEO Immelt puts GE's performance for 2006 into a nice sturdy package:

"The year is going to be a good year. Revenue will be $163 billion, up 10%. Earnings will be $20.5 billion, up 12%. Earnings per share up 15 or 16%. Cash flow at $25 billion, up 15%. Two point expansion and return on total capital and a pretty attractive segment profile. If you look across the company, really the only business that is turnaround mode is NBC Universal."

Continue reading Revisiting General Electric with good reason

Revisiting General Electric with good reason originally appeared on BloggingStocks on Fri, 22 Dec 2006 11:44:00 EST. Please see our terms for use of feeds.