I've always sensed that women make better investors than men. Call me politically incorrect but when I talk to a woman about investing, she's focused on protecting her savings, not using it to make more money. Women don't think about "beating the market." They think about being safe. They don't want to make a mistake and avoiding mistakes is sometimes what makes all the difference in getting investment returns. And women are less prone to trading and more attuned to buying and holding. As Warren Buffett says, "Activity is the enemy of performance."
Maybe it's our testosterone that drives us to turn investing into a championship sporting event. I don't know. But I've felt that the male competitive spirit often is the very thing that drives us into stupid investments.
Until recently, I couldn't put my finger on how our male "Y" chromosome puts us at a genetic disadvantage to women. However, I recently discovered that Brad Barber and Terrance Odean of UC Davis validated my intuition. They published an article in the February 2001 issue of The Quarterly Journal of Economics titled "Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment."
Barber and Odean obtained trading data from a discount brokerage for over 35,000 households and analyzed investing patterns for six years to test whether overconfidence leads to more trading and lower returns. Since in areas of finance psychologists have proven that men tend to be more prone to overconfidence, the genders were separated so that their trading habits could be studied individually.
The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket.
I'm a long term energy bull -- 10% of my money has been in energy stocks for the last several years and today I maintain that allocation for two reasons. First, I believe in five years, oil and gas prices will be higher than they are today. Second, owning energy is a great hedge against other asset classes like stocks, the US dollar, and inflation.
No one knows which way energy prices will go next week or month so I continually rebalance my portfolio. As my energy stocks rise, I trim them and when they fall, I add to them. If my portfolio goes to 12% energy, I sell them back down to 10% and vice versa.
Now comes the easiest part – which stocks do I pick? Easy you say? Yes – because I don't worry about stock picking due to a miraculous new invention I'll discuss below. I own three energy stocks: the U.S. Oil & Gas Exploration & Production Index (NYSE:IEO), the U.S. Oil Equipment & Services Index(NYSE:IEZ), and S&P Global Energy (NYSE:IXC). Through these three stocks, I own about 200 energy stocks in precise allocation percentages to parts of the energy sector, weighted according to my own preferences – 60% is in IEO, 30% is in IEZ and 10% is in IXC. Why pick stocks when I can own them all? Here's what I mean.
After seeing the interest in yesterday's Serious Money: Five stable stocks for troubled times, I decided to track the stocks on a quarterly basis to see how they hold up over time (otherwise, what would be the purpose of discussing them in the first place?).
I said that all five have shrewd, conservative management teams and have been in the right place, at the right time -- and prepared. The standard for comparison will be the Standard & Poors 500 Index which closed on June 30, 2008 at 1,280.00. Although my original story was published yesterday, I will be using the second quarter end point for my five stocks as well.
If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:
Not reading the prospectus. Too many investors buy stocks on tips from a broker or a TV stock promoter. They do not read the financial statements of a company. If they did, they would know about financial challenges, legal problems, industry uncertainties and other problems which could hammer their investments. But people don't read these financial statements, in many cases because they lack the financial education to make sense of the information.
Not setting stop losses. People fall in love with a stock once they've invested. If the stock goes down, they hold on because they don't want to admit that they were wrong. Investors should set stop losses – if the stock falls 2% to 5% from the original price, they should sell. Most investors do not have the discipline to do this. But if they did, they would limit their portfolio risk tremendously. Would they also miss out on some opportunities? Probably, but more often than not, they'd save themselves losses.
Regular readers know that I enjoy Barron's Weekly (subscription required) one of the best business journals around and that it has provoked some of my better investment ideas. However, even Barron's can fall prey to bad or incomplete reporting, (as if there were a difference), as they benefit from market activity and can stretch an idea too far, becoming all too common.
Barron's incomplete and common story was in the June 9, 2008 issue titled "Timing is Everything". What I find common, and thus objectionable, is the fact that they choose to tout Appel Asset Management's like so many brokerage houses do numerous funds (for the fees), ignoring basic tidbits like said fees, and taxes. The Appels seem to do an admirable job for their investors but they do not beat the indices, so who cares?
Their simple strategy is to invest in the two broadly based hot ETF's, counting on momentum lasting more than one quarter, and switch them out each quarter. This they claim takes only an hour of work every three months, how lovely. In the story they state "From 1979 through 2007, Marvin Appel would have (emphasis mine) returned 16% a year, before fees, better than the 15% a year performance of the Russell 2000 Value Index". They also leave out how long the approach has actually been in place.
I'll never be a fan of stop-loss orders, especially when they're set just a few points below the purchase price. If you buy a stock because you think it's undervalued and it declines 8%, why would you sell, barring some other development? Wouldn't it be a better deal at a lower price? And if you think a stock is undervalued, then you're saying that you believe that the market is not completely efficient and is, in this case, irrational. What makes you think it won't get a little bit more irrational?
The fact that you purchased your shares doesn't mean the market will immediately rouse from its slumber and value the stock appropriately. Sorry, but that's life. I know people who have been down 80% on a stock but held on based on their belief that their reasoning was sound, and have gone on to earn 500% profits. It happens. The fact that a stock has gone down is never a reason to sell if you're investing for the long-term.
The Wall Street Journalsums it up well [subscription]: "Stop-loss orders are clearly double-edged, working well for the quick-hit trader and those who follow market trends, but poorly for those who are looking for long-term value in their investments."
Since reams of research show that "quick-hit traders" tend to get beaten by the market and long-term investing presents the greatest shot at strong performance, I would say investors should avoid stop-loss orders and quick-hit trading.
Recently we have heard hawkish comments from Fed chairman Ben Bernanke. He has stated that interest rates will probably not be lowered any further and that inflation is now a major concern for the Federal Reserve.
The market has absorbed these comments with the dollar strengthening, and the stock market rising. Some are now even forecasting that the Fed will begin raising interest rates as early as the end of this year.
What should investors take from these comments? What has happened to Gentle Ben, that individual who seemed to be the advocate of a loose monetary policy in order to cushion the economic downturn?
In my book Follow the Fed to Investment Success, I have stated, "Watch what the Fed does, not what it says." Despite the hawkish comments from the Fed chairman, he has given no indication that he intends to raise interest rates in the near future. On the contrary, he made it very clear that this is not his intention. As today's employment report and the recent housing data indicates, there is still tremendous negative pressure on the economy which prevents any near-term tightening.
Then, why the hawkish comments? Despite the negative outlook, the recent economic data has not been as bad as expected. It appears that a recession will be avoided this year. The fiscal stimulus from the rebates is starting to be felt. There is very little the Fed can do to prevent inflation, but the comments do help to put a lid on inflationary expectations. This is what the Fed truly fears. These comments are an inexpensive way to combat core inflation with little cost.
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
Question: Dan, Have you looked at the Monetta Young Investor Fund? It combines the use of ETF's with kids-themed investments. It has a financial literacy component for young investors.
Answer: I am all for financial literacy--for adults and for children. Unfortunately, this fund educates its young investors in the wrong way to invest.
The fund invests 50% of its assets in "other funds" that seek to track the performance of the S&P 500 index. The balance is invested in stocks that the manager believes will beat the index. It has an expense ratio of 1.00%.
The best way for all investors to capture the returns of the S&P 500 index (or any other index) is to buy a low cost index fund that tracks that index. For example, the Vanguard S&P500 index fund has an expense ratio of only 0.15%. It will always capture the returns of the index, less these low costs.
The risk of attempting to beat the markets is nicely illustrated by the performance of the Young Investor fund. In the past year it has under performed the index by 0.88%. This is not surprising. Only one in three actively managed funds equals or exceeds its benchmark in any one year, and less than 5% of them do so over a 10-year period.
Parents should educate themselves about investing before they start educating their children. A good place to start, and a very easy read, is John Bogle's excellent book, The Little Book of Common Sense Investing (Wiley 2007).
Perhaps he would consider writing a book for young investors!
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
There is no doubt that the coming retirement tsunami will make $4.00 a gallon gas look cheap.
In a thought provoking article, entitled Common Cents, by benefits consultant, Brooks Hamilton, the author notes these signs of impending crisis:
The majority of American either have no retirement plan or don't participate in the one they have;
Those that do participate, don't contribute early enough and don't make adequate contributions;
The returns earned by participants are dismal.
This perfect storm for retirement disaster is exacerbated by longer life expectancy and sharply increasing health care costs.
These past weeks, the deteriorating stock market that responds to expectations of slower or no economic growth in 2008, continued high oil prices, sagging housing market, high debt consumers and the financial industry quagmire, got me thinking about "my pal Warren" again.
It's times like these, when we are looking for a solid footing in the investment world, the few people with positive track records -- measured in decades, not years -- are worth examining once more.
Last year I started a series of stories on Warren Buffett's very basic investment cornerstones. Buffett's Berkshire Hathaway (NYSE: BRK.A) has such a track record. Today, given how many companies are up to their penthouse executive suites in debt, I thought I would continue.
The subject of debt is a simple one. Companies that carry excessive debt on their books are not as good as companies that have cash sitting around. Debt can be a drag on earnings, reduce the company's flexibility and opportunity in a slowing economy, and has all the negative impacts to a company that it does to an individual household.
There is never a shortage of jobs. Some people have two or three jobs. The classified adds have thousands of jobs all the time -- always. If someone is unemployed there is a reason and it is definitely not a lack of jobs.
Sometimes it is a regional lack of jobs, General Motors (NYSE: GM) and Ford Motor (NYSE: F) in the rust belt states of Michigan and Ohio have downsized, but foreign manufacturers Toyota (NYSE: TM) and Nissan Motors (NASDAQ:NSANY) in the Southeast have up sized. This does not help the states where jobs are leaving, and indeed causes other massive problems like weakening the tax base and pushing housing and other elements of the local economy down. However, from a national unemployment standpoint that does not count.
In our discussions of unemployment and the economic picture we attempt to understand the government figures and attribute some meaning. We know the government is prone to put things in their best light (lie) sometimes and there is discussion about what a true measure would be, but does that really matter? It is more important that whatever criteria is used remain constant so that we can use the data for comparisons, not that it be altered often as people become concerned about the exactness of the figures.
It might be time we need to account for a new set of metrics. What are the costs of retraining? How could these costs be distributed without expanding government -- not something I would support. We know that some people are not employable or are only marginally employable because they simply do not have the capability to do many jobs. I have numerous jobs, although generally speaking, I have created them myself over time. Clearly education and training are a factor, along with over all aptitude.
Most investors buy stocks by simply putting in a market order and hoping for the best. That means they'll pay whatever the offer (or ask) price is for the stock. There are a couple of things wrong with this approach. There's a much better way to buy stocks that saves money and makes more money when a stock heads higher.
Here's the problem with buying at the market: you're paying a price set by someone else, and you may not buy all your stock at the same price. Furthermore, if you're looking to buy 1000 shares and buy it all at once, you're betting a stock is at its low, that it will go up from your entry point. Most likely, that's not the case.
Let's start with the price of the stock. If you've done your homework, you should determine what you're willing to pay for a stock. Whether that's from fundamental or technical analysis or both, you determine what's a fair price. Once you know that, and are comfortable with your price, put that price in as a bid. Most likely, it's not where the stock is trading when you decide to enter your order. So put in your order below the market and wait for the stock to come to you.
Every investor I know is hurting. Doesn't matter how great they were in years past. They're all stunned at the hammering in their portfolios. The smart ones are doing two things now: they're moaning, along with the rest of us, and they're doing research to find bargains they haven't seen in decades.
We all know about stock bargains: they look great when you buy them. Some of them do well and bounce back. Others get to be even better bargains, then hit the clearance bin before they become totally worthless. The bargains I'm suggesting here are the ones that have the best chance of bouncing back. How can you tell?
In the midst of all the bad news it's hard to imagine the stock market ending the year higher than it started. However, that is entirely possible and probably much better than a 50/50 bet. If you want to play it safe consider buying into an index fund or exchange traded funds (ETFs) instead of banking on individual stocks.
For broad coverage you cannot beat the Vanguard Total Stock Market or the Total International Stock funds with the lowest fees and longest history in this area. I think it has also been generally accepted investing strategy over the last few decades that in bearish markets there is a run to quality and "guns and butter" stocks. If you were to follow this old adage you would be considering three sectors, healthcare, defense and consumer staples.
Mutual funds and ETFs (with less history) are less volatile and offer greater diversification than most investors could achieve, and at much lower cost. If you dollar cost average over the next few months you should also be able to smooth out some bumps in the current market.
When the political machine goes to work to juice the economy the market has most often responded positively. That does not mean it's smart for the country, but since when is a politicians first thought about the country.
Large-company stock prices have tumbled 13% in three months. Small-company stocks have done worse. The ratio of share prices to company earnings ("P/E") is the lowest it has been in more than a decade. But is it low enough to make the broad market cheap?
That depends on how you measure. Over the past 135 years, stocks have carried an average P/E of 15.1, based on trailing 12-month earnings. (I'm using data provided on the websites of Yale economist Robert Schiller and Standard & Poor's.) As of the close of trading Thursday, the S&P 500 index, which more or less tracks the stock performance of America's 500 largest companies, had a P/E ratio of 16.6. Viewed like that, stocks look a smidgen pricier than average.
Remove special charges for things like bad loan write-downs from the past year's earnings, and the result is a more alluring P/E of 14.9. Whether that's a fairer number or not is a matter of opinion. But if we were able to apply the same tactic to 135 years of corporate accounting, we'd surely end up with a lower historical P/E, too. That suggests again that stocks are pricier than average, but not worrisomely so.
The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket. 
After seeing the interest in yesterday's 
If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:
This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can. 
These past weeks, the deteriorating stock market that responds to expectations of slower or no economic growth in 2008, continued high oil prices, sagging housing market, high debt consumers and the financial industry quagmire, got me thinking about "my pal Warren" again.
There is never a shortage of jobs. Some people have two or three jobs. The classified adds have thousands of jobs all the time -- always. If someone is unemployed there is a reason and it is definitely not a lack of jobs.
Ted Allrich 
Ted Allrich is the founder of 
Large-company stock prices have tumbled 13% in three months. Small-company stocks have done worse. The ratio of share prices to company earnings ("P/E") is the lowest it has been in more than a decade. But is it low enough to make the broad market cheap?
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