Tuesday, November 30, 2010

A Hard-to-Beat Investment Vehicle

When I was still learning how to invest, I searched for smart heuristics for selecting mutual funds---past returns, low volatility, "value" philosophy, etc. What I eventually learned is that ("active") mutual fund managers have such handicaps (large asset pool, short-sighted clients, non-trivial expenses, high visibility) that there's not much point in trying to find the "best". Even if you manage to find a mutual fund that is better than the rest, it won't be able to produce market-beating returns for long as money will pile in and/or other funds will mimic its behavior. A friend of mine suggested index funds when I was searching for the perfect mutual fund. At the time, I didn't think much of the advice. But, now, I realize how smart such advice was. One of the best index funds is VTSMX which indexes the entire U.S. stock market. VTI is its ETF sister fund. VTSMX is hardly ever one of the best, but it is consistently one of the better ones. Currently, it is better than 69% of funds in its category (10 year return) according to Morningstar. And, this ranking probably doesn't include the scores of funds which were closed over the past 10 years due to poor performance. Sure, you could pick one of those funds which has a better 10 year performance, but how do you know the outperformance wasn't luck? The VTSMX strategy is sufficiently simple that luck doesn't play a role. I think you can do better by investing in individual stocks. But, mutual funds have so many draw-backs that the effort to try to do better than VTSMX just ain't worth it.

Tuesday, November 16, 2010

The Recession Ended Last Year

Most people I talk to don't seem to understand that the recession ended last June. The media doesn't help as various articles go on-and-on about how horrible this recession was, comparing it to The Great Depression, even though the 2007-2009 recession was more like the 1981-1982 recession in terms of length and severity. Whenever I look at economic indicators, I can't see how anyone could think that we're still in a recession. I think the New York Times has the best graphical depiction of economic indicators, which can be found in the right column of their Economix blog. Take a look and tell me what you think. Here is a snapshot of the current numbers

  • Number of jobs: +0.8 million (vs. prev. year)
  • Durable goods orders: +13.4% (vs. prev. year)
  • Manufacturing index: 56.9 (> 50 indicates expansion)
  • Personal income: +3.1% (vs. prev. year)
  • Personal saving rate: 5.3%
  • Gross Domestic product: +2.0% (vs. prev. quarter, annualized, seasonally adjusted)
  • Industrial production: +5.4% (vs. prev. year)
  • Real hourly earnings: +1.2% (vs. prev. year)
  • Consumer price index: +1.1% (vs. prev. year)
  • Retail sales: +7.3% (vs. prev year)
  • Producer prices: +4.0% (vs. prev year)
Of course, I've skipped all the housing numbers because the U.S. created a tremendous bubble then tried to re-inflate the bubble with a tax credit that expired earlier this year. Of course housing numbers are down and it will take years before they look up again. I hope the U.S. will learn that the best way to avoid the after-effects of a bubble is to not create a bubble in the first place. But, I'm not holding my breath. And, of course unemployment is still high. It always takes years after a recession has ended to bring the unemployment rate down. Anyway, the above numbers paint a clear picture to me: the U.S. is in an expansionary period. If you consider the indicators, the economy has clearly been expanding for over a year, as NBER has announced.

Monday, November 15, 2010

Not so Friendly Skies

A lot of news is published about potential dangers of receiving radiation from airport screening machines, but our attention should be focused someplace higher. I've been reading Power to Save the World: The Truth About Nuclear Energy which dispels many myths about radiation including those that we should be worried about radiation from nuclear power plants and airport scanners. The fact is that the sun is one of most dangerous bodies as far as radiation is concerned. Simply living at a higher elevation exposes you to more radiation. Even more dangerous is flying 30,000 feet above the earth for extended periods of time. Yes, a career as a flight attendant is much more dangerous than living next to a nuclear power plant as far as radiation is concerned. A paper to be published next month argues that frequent fliers be classified as radiation works so that they will be warned of the risks and monitored for radiation exposure.

Of course, people tend to be awful at judging risks. A flight attendant might only commute once-or-twice a week versus 4-5 times a week for a "normal" job. Assume that commute is by car and 30 miles each way. Simply doing 3 fewer commutes per week lessens the chance of death by car accident by appx. 0.004% per year. This is based on 1.9 deaths per car passenger mile; compare this to 0.03 deaths per air passenger mile.

Friday, November 12, 2010

Why does it take a Genius to state the Obvious?

George Soros is a smart man. Why do I think so? Because he learns from his mistakes (see answer to "How do you stay levelheaded in the middle of a bubble?"). I think so many people don't learn from mistakes because (1) it's damn hard to admit you're wrong, and (2) religion discourages it ("blame it on the devil"). Society does a poor job of learning from its mistakes. Take drugs, for example. Inordinate amounts of money have been spent and lives have been lost because of the war on drugs. Gangs and drug killings exist mainly because protection and turf is necessary when you're dealing in an illicit substance. Arguments over legal substances are handled in a much more civil manner. An added bonus to legalization is additional tax revenue. Governments have realized this with respect to cigarettes. No state in the U.S. would want to make cigarettes illegal now---the revenue loss would be too difficult to swallow. Why can't we apply this idea to illegal drugs? Soros penned a WSJ article arguing for the legalization of marijuana. There really is no downside. Fewer addicts due to better support, acceptance and education. More tax revenue. Fewer killings and police expenses. Better relationships with other countries like Mexico. This all from someone (me) who hates breathing in the byproduct of the stuff (smoke). I'd gladly trade-in an occasional additional inconvenience of having to breathe-in marijuana smoke for the benefit of a more civil society.

Slow Market? Buy Gold! Please!

It's funny to hear people complain about the market not giving high enough returns, then "investing" their money in gold. The New York Times provides a nice graphic showing how risky this is. If you had invested lots of money in gold around the last time gold was over-valued, January 1980, you'd be sitting on a negative inflation-adjusted return, even considering how far up the price of gold has risen recently. In comparison, had you invested in the S&P 500, you'd have an inflation-adjusted return of 300%, even considering the lackluster recent decade the market has experienced. But, I'm happy to see people buy gold. Why? Because it keeps stock prices low, giving me more opportunities to buy up cheap stocks before the tide turns, gold drops like a rock and the stock market finds a new darling to chase after.