Rules For Investing

This is great!

Little Oil

As economics would teach us, oil consumption in the US is on the decline. I guess incentives really do matter. But, as Megan put it, don’t start pricing minivans just yet. Barry Ritholtz explains. Stock traders are circling the companies involved with oil, waiting for the right time to buy. Oil companies of all types are looking more and more like tasty morsels.

Naked Short Selling

…not as exciting as it sounds! If you need a good in depth analysis of short selling, naked short selling, and the dubious nature of the new government restrictions, this article is about as good as it gets.

End of the World

The “end of the world” scenario is unlikely, but less unlikely than it was a short while ago. I’ve already headed in the direction Mr. Kling is thinking about: a highly diversified portfolio with a lot of exposure to foreign stocks. In addition, I have moderat exposure to foreign bonds and I’m now considering shorting the dollar. Ugh.

Creative Capitalism

Larry Summers has a great “really big picture” view of the Fannie Mae + Freddie Mac mess. There are general lessons to be learned here. I doubt the most important lessons will be learned by politicians or society as a whole, but the individual lesson which you and I can learn is clear: watch your wallet!

Adam Smith Weeps

This perfectly captures my general thinking about markets and recent financial events. Hat’s off to Barry! But some folks think that the answer to our problems is better regulation. I view recent events as the result of too much regulation. Regulation must always fail in a changing world and regulations themselves create new problems. I’m not the least surprised when regulations do more harm than good. I’d rather trust the vagaries of the market than the vagaries of the “ne’er do wells, clueless dolts, political hacks” and other inhabitants of any political system, however well intentioned they might be. I’d rather be harmed by enemies than friends.

Market Signals

My, that Arnold Kling is smart! Here’s a great little essay about what’s going on with the economy. The heart of it is this:

The market is sending signals that some industries need to expand and other industries need to contract. However, it takes a long time for these signals to work their way through the economy and get processed to the extent that people get new jobs and so forth. Meanwhile, we get employment and production that are below capacity levels.

I believe that these signals, telling different industries to expand and contract, happen on an ongoing basis. But sometimes the signals come abruptly because something somewhere hits the wall. Recently, this has been the housing/mortgage bubble, which ended abruptly. The market is telling us that we need fewer new homes that require long commutes. But what do we need more of? What’s gotta grow? That’s always the question for investors.

Blind Men & Elephants

When you read things like this, it’s easy to be glum about the economy. But, as with a lot of things, you can know the facts but not know what the facts mean. At least two things need to be remembered.

First, forecasting the US economy is like forecasting the national weather. We don’t discuss the national weather much because the concept isn’t very helpful. For practical purposes, there is no national weather. To a lesser degree, there is no national economy.  Yes, technically, such a thing can be described - but it’s utility is greatly overrated.

Second, discussions of wage stagnation tend to overlook or discount non-wage compensation. For example, employer provided health care is becoming more expensive - and if an employer absorbs some of the cost increase, that is an indirect financial benefit to employees. Employer actions which benefit employeees in non-financial ways (flex time, for example) are also changing. So, while wage data is correct, it gives an incomplete picture of total compensation.

I’m not disputing the data or claiming that everything is rosy. But when your best data is incomplete, it’s wise not to put too much faith in what it seems to be telling you.

Investment Advice

I occasionally get a request to post some investing advice. I usually ignore the requests. Why? Because everyone is different, everyone’s situation is different, and there are many different styles of investing and trading. What’s right for me might be absolutely wrong for you - and I certainly don’t want to lead anyone astray.

Nevertheless, a lot of advice is published. Some of it is good, some of it is bad, but most of it does not apply to most people. There’s no such thing as “most people”. I’ve read excellent advice for someome who wants to set up an investment plan and then ignore it for 30 years (until retirement). This neither appeals nor applies to me, but it might apply to you - but probably doesn’t. Age, resources, temperment, and time commitment all matter.

Nevertheless, there is one piece of advice that is widely applicable: keep your costs low! Even here, this doesn’t apply to everyone in every situation. Some folks have done very well with very expensive hedge funds. But these folks are in a (very rich) minority.

Keeping costs low drives a lot of what I do. Vanguard is my favorite mutual fund company. My favorite (and most unusual) brokerage is FOLIOfn. No one can predict what markets are going to do, but fees can be known in advance.

Bank Risk

Barry Ritholtz has made a strong case for increased financial regulation. Megan McArdle has made a strong case against it. Who are you going to believe?

The principle arguments against regulations in general are that the regulators don’t have superior knowledge, regulations add costs that we all pay, and that regulations can stifle innovation. True enough. But there are some regulations that work well. For example, we all drive on the right side of the road (at least in this country). There’s no particular advantage to this, but we all agree that it is beneficial for everyone to drive on the same side of the road. Sometimes stifling innovation is a good thing.

As Megan herself noted, Galbraith has argued that finance does not lend itself to innovation. Alll financial “innovation” is simply a variation of the old leverage problem. Sooner or later, leverage always fails. Once you get into the leverage business (which is what banks do), the only question is how much leverage do you take on? The more leverage you assume, the riskier it gets.

I find it hard to believe that there is a “correct” amount of leverage that regulators, or anyone else, could specify. But I would favor regulation that required better disclosure of leverage and risk. We allow people to participate in risk - we don’t restrict bonds to AAA ratings. And as we all know, the bond rating guys have a serious black eye now. They can be wrong, and they can be wrong in either direction.

You can’t regulate risk away. Even disclosure is problematic. I believe the oldest financial advice is the best. The oldest advice? Caveat emptor!