Learning to be still

One of the hardest lessons to learn about investing is to be still.  Learning how not to get caught up in news and most importantly the noise of the moment.  Learning how to wait for the shot.  Learning how to control your breathing.  Learning how to slow things down.  Remembering that it is the long game you are playing.

I have several friends who at the present time who have “Buck Fever” they have seen the stock market on a tear for the last year, and they want to jump in with both feet.  I can tell this from the nature of our conversations and e-mails.

They want to know how much I have added to my various investment positions.  They are surprised when I state that I have not added significantly to any position, but instead I have readjusted some of my position (Take Profits), and given the current conditions I plan to readjust some more in the very near future, after 1 Jan 2014.  Additionally I will not be in too much of hurry.

Their response to this is “Are you crazy?”  My reply is hardly!  They want to know what I am seeing that they are not.  I tell them that we are all seeing the same thing, but that it how we processes it, especially in terms of the various lessons that we have learned to date in our lives and the particulars of our portfolio.

My decisions are based on the particulars of my portfolio, the condition in the market, and my age, and finally my sense of intuition, and when do I want to pay the tax due on any gains.  After 1 January the taxes are due on 15 April 2015, rather then 15 April 2014.

The first two (Market and Age) are easy to explain, the third (intuition) shapes my appetite for risk, and is an enigma, the fourth well it the Wimpy rule (I will gladly pay you next Tuesday).

I tell them that what may be good for me may be bad for them.  To a person they all want a list of reasons why at this time I am doing what I am doing with my portfolio.  So in an attempt to comply with their request here goes.

First reason is that the object of the exercise as always is the buy low and sell high.  At the present time the market is high (especially when compared to my basis), will it go higher (I hope so, that is why I have money in the market)?  Yes.  When?  (I do not know.)  The flip side is can the market go lower? Yes.  When?  (I do not know.)

Second the amount of the unrealized gain in my portfolio is quite high, which is good, but one does needs to capture your long-term gains when and if you can and if it makes sense, in context of carried capital losses.   At the present time it for many of my taxable investments it does not make sense for me, although for some of my tax deferred investments this is not the case since in the end they some will be taxed as ordinary income when the funds are withdrawn, some will not be taxed at all (You have to love the Roth).

Third is that everyone seems to be buying stocks, so maybe it be time to be selling stocks.  On the other hand everyone seems to be selling bonds, and so maybe it might be time to start looking at increasing my position in bonds, again if and when the conditions are favorable to me.  (Yes I know that QE is coming to an end and Bond prices should drop as interest rates rise, but sometime a good deal is a good deal).

The fourth reason is “Reversion to the mean”.  This 2013 is a gross outlier, it is not normal, and it is at least a 2 Sigma event.  Will next year be the same?  Highly unlikely, the law of large numbers is not in my favor.

All systems are self-correcting; you may not want to be around for the correction, especially if you just dumped a large amount of your net worth into the market just before it tanked.  So a slow and steady approach is required (Aim Small Miss Small).

Fifth reason is that I am starting to see articles in the press that “This time is different”.  Unless there was some fundamental shift in the fundamental laws of the universe during one of the nights while I was sleeping, it is not going to be different this time, in the end the results are going to be the same, it is that the timing of the events that will be different.

Sixth, the rate of contact by various brokers has been increasing, either by phone or e-mail.  Most just want to help me in this time of uncertainty.  How thoughtful, caring, and nice on their part (Their mother would be proud of the concern for the plight of others).  The calls go unanswered and the e-mail are deleted, and in some cases the filters for my e-mail are adjusted.  My though on brokers has been discussed in other post.

Seventh reason is more technical in nature and it has to do with CAPE for the market as of 1 November 2013 stands at 25.16, 6 January 2014 it was reported to be 26.07, and quite frankly this is getting in the nosebleed range, and if it gets much higher (27-30) it will be a rectal bleed.

One would need to hold one share of the SP-500 for 25 years for the current earnings to equal a price of that one share.  I know how old I am and 25 years is very close to end of my estimated actuarial lifetime.  This is one of the particulars of my situation alluded to earlier in the article.

At the end of the day I will still have money on the table and in the game for in realty that is the only way to make money.  I will have a little of my unrealized gain and put it in my pocket waiting for the next opportunity to buy.

I tell them that I continue to reinvest dividends, I have minimal amount of programed purchases, and that I continue to watch for other purchase opportunities, and if and when they present themselves, I will act.  But at the present time they are not forth coming, so I have consigned my self to be still and will wait to take my shot, since the basic rule for this endeavor as stated earlier is to buy low and sell high.

What a Wonderful Open and Free Country, and soon it will be even better to Invest in.

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According to a Bloomberg article

http://www.bloomberg.com/news/2013-01-08/hong-kong-proposes-law-making-it-harder-to-identify-directors.html

It seems that someone, somehow, and somewhere proposed legislation in Hong Kong to amend the current laws and regulations to obscure the residential addresses and full identification numbers of company’s director.  This legislation would also block this information an any and all historical filings.  This was proposed back in November 2012, but it is just now seeing the light of day.

The various agencies and governmental departments are silent, as I expect them to be, and it would not be too much of a stretch for them to remain so, after all they know who butters their toast.

In the past this information has been used by member of the media and hedge funds to either show how the many and various off springs (Children, Grand Children and even Great Grand Children) of the “Immortals” have prospered and grown to become the uber rich of the Peoples Republic of China, or to show how various individual with less than sterling character are connected to various business with questionable reporting practices.

In both cases it has cause a great deal of embarrassment for these individuals as they have been asked to explain how they have achieved so much success.  Additionally it has caused much embarrassment to various government officials, as they have had to explain how such a thing could have happen on their watch.

The parties involved, the Communist Party and the uber rich want the spotlight turned off, and they want it turned off quickly.

Corruption has been an ongoing and increasing issue in China, especially as the stakes have become greater.  It has reached the point where it was even reported as a main topic of discussion at the recent 10-year party meetings.   Part of the party faithful are so concern that this issue may be the one item that will end their control of the country, and they are bring pressure on the party leadership to address the issue before the issue address them.

For at some point, at some time, Horton will hear a Who, and then there will be some significant portion of the 1.6 Billion Chinese’s that will be pissed off enough to change the system.  The Communist Party via the government should be able to keep a lid on this problem for a few years, but in the end I suspect that this will be one of the main issues that will tear the country apart, eventually the toothpaste will find the weak spot in the container.

Mean while all of this should give significant pause to any and all investors in China.  Yes it is true that there is a potential for great profits to be made in this country.  The question is does any body really believe that Mrs. McGillicutty of Sandusky Ohio, or for that matter Mrs. Feng Shui of Lijiang will make it.  It will be made by individuals on the inside, and not by some Laowai. (For those more familiar with Japanese the term is Gaijin, or those familiar with German it is Ausländer)

There have been several instances where the accounting practices in some of their companies has at best been or is questionable, at worst criminal, and the shareholders, at least those unlucky enough not to get out early have been financially wiped out, strange the Directors of the companies never seem to be in this group.  I guess the directors are a lucky lot.

With this proposed rule, now it will be even more difficult to track the various questionable players through their various companies.

It has been obvious that the Communist Party, and the Government of the Peoples Republic of China, would like to hide the problem, rather than deal with it in the light of day.  Why else would they even entertain such a change to the registration of Company Directors?

So as they say Caveat emptor.  Invest/Risk some money in China, but please do not bet the farm.  Invest only what you can afford to lose.  Take profits early and often.

What is a millionaire

But what is a millionaire?  What do the various groups that are using the term (Democrats, Republicans, Liberal, Conservatives, Libertarians, Independents or any other group that you can think of) mean when they use the word?  What is the term “millionaire” a code word for?  To tell the truth I have no earthly idea at this point in time?

It used to be that when a person was a millionaire he or she current net worth (Assets – Liabilities) was equal to or exceed $1,000,000.00 Dollars.  It was not used as a term to describe someone who income (gross or net) exceeded $1,000,000.00 Dollars per calendar year.  I have no idea what one would call this individual other than possibly blessed and or extremely lucky.

So is a person who has a net worth in excess of $1,000,000.00 Dollars rich?

So is a person who has a net income in excess of $1,000,000.00 Dollars rich?

Lets take the first question.  The answer depends.

I have a cousin who is mentally handicapped he has the ability to function as someone in the third grade.  Both of his parents are now deceased.  After all was said in done the proceeds from their estate was worth slightly more than a million dollars at the time of his fathers death.  Based on various sources his most likely projected lifetime would be on the order of 26 years (the average of various life expectation tables).   We then performed calculation assuming a 4.0 percent inflation rate (computed average 3.23) and 4.0 percent net rate of return (25 year annualized return for SP-500 was 9.28), this calculation indicated that he could expend at most 35K$ per year for his assisted living arrangement and not out live his trust.  Would you classify this individual as a millionaire?  (Net Worth now is in excess of 1M$, but annual income below US Average)

Lets take the second question.  Again the answer depends.

I have another cousin (other side of the family) who is also mentally challenged he has the ability to function as a college graduate he actually graduated from college.  He has a position that has provided him and his family a 7-figure income for many years (Medical Sales will do that).  So on the surface his salary and bonus is slightly over  $1,000,000.00 Dollars (he is a very good salesman, he has almost sold me once or twice).  He lives in a very nice Mac Mansion (Not paid for), he drives a very nice high end Japanese luxury sedan (Not paid for).  He has his hobbies (not paid for).  His American Express bill some months is equal to significant percentage of Americans annual salary.  He has loved often but typically not wisely which has resulted in a cash flow hole that will end some 6 years in the future.  But at the end of the day he has a negative net worth, even with his company life insurance his creditor will still lose.  Would you classify this individual as a millionaire? (Net Worth is less than 0$, but is annual income is way above US Average)

So today what do we really mean when we say millionaire?

I think that in reality our government and individuals in our government actually uses both definitions, it just depends who is talking and what they are talking about. (They never really tell you which definition that they are using after all “In confusion there is Profit” (“Operation Petty Coat” Universal International, 1959)

The first definition (Traditional/Historical) is used when the Government is in the business of collecting estate taxes.  1M$ is a great deal of wealth transfer not to tax, whether you are a Republican or a Democrats.

The second definition (Non Traditional) is used when the Government is in the business of collecting income taxes.  Applying the current low rate to such large amount of income appears to be pure folly especially given the current fiscal situation.  Granted that the number of individuals making these high incomes is a relative few it is being made and it is being made because of the features, benefits and or accommodations of our current system of government.  It is highly unlikely that these individual would be as fortunate operating somewhere else in the world.  It should also be remembered that individuals or relatively large groups of individuals making incomes in excess of 1M$ is historically a relatively recent phenomena.

I am starting to think that more and more individuals are also using the nontraditional definition that a millionaire is an individual whose income whether earned or unearned is in excess of 1M$, but I suspect that will change if and when a relative dies and that relative has an estate in excess of 1M$ that they might share in.

To set the record straight by the traditional definition my wife and I could be classified as millionaires, we have a net worth in excess of $1,000,000.00 Dollars but at no time in our life have we ever received income in excess of $1,000,000.00 Dollars in income.

We have never met the requirements of the second definition, and I suspect that we will never will we are too old, and too slow, and quite frankly do not really need or want the hassle.  They do not pay you that kind of money because you look and smell nice, ok for a few select individual they do, but for most of us they don’t.

We both have college degrees, and we have worked for all of adult lives.  We own a modest house that is paid for (It has been our only house).  We made a concerted effort to pay off the mortgage as soon as possible (did not really care about the mortgage deduction since at best we put a dollar out the door in interest and received a deduction of at best 39 cents.  At the end of the day we were out at least 61 cents.  Pay off the house, and invest that dollar, give 25 cents to the Government and keep 75 cents, a much better deal.  One I am out 61 cents and the other I am up 75 cents.  It is a game of inches).

We own two cars, one (mine) is over 11 years old hers is 5 years old both are paid for.  It is cheaper to fix then purchase a new one.  A vehicles only real purpose is to get you from point A to point B in a safe, comfortable and most cost effective manner, nothing more nothing less.

We strive to live below our means, and yet we live comfortably.

We set about from the beginning on living on one of our salaries and saving the others salary.  We chose to live on the lesser salary and save the greater salary.  We did not get here over night.

We invested in the herds (Indexes Stock, REITs, Bonds, Foreign Markets). Our investments were diversified.  We did not nor do we actively trade.  We invested in funds with low expenses and fees.  Our expectations for our investments are modest.  We did not seek to out perform nor did we want under perform the market.  We know that we cannot beat the market.

We do not invest in things we do not understand or do not make sense.  The majority of our investments are in companies that make things that people need versus making things that people want.  Our investments are not exciting or for that matter entertaining (you want exciting and or entertaining try the movies or the circus).

We tend to our investments like a garden.  Periodically we do pull the weeds (losers) and compost them (reinvest the proceeds).  We will sell when it makes sense (High) and buy when it makes sense (Low).  Investments are for the most part spreadsheet driven it removes the emotions of the moment.  We practice the three-day rule on large purchases or sales of any investment, in other words no quick snap decisions.

We have found that the hardest thing to do concerning investing is that sometimes you must do nothing.  Do not have a clear idea of where to invest your money then let it sit in cash.

We periodically review our contribution allocations and make adjustments if the situation requires, it is not set it and forget it.  We keep enough of our investments in cash to pay our modest expenses for 12 to 18 months.