Here we are, on the last day of Q2 2013.

It is no exaggeration to say that this has been an unusual and exciting year. I suspect most investors would prefer their markets with a lot less excitement. Perhaps we can begin a movement to bring back boring banking.

Regardless, we don’t have to wait until New Years Eve to look back. The end of the 2nd quarter presents an opportunity to review what you have done this year, and consider what changes you may wish to make. And since its Friday, we will be sure to slip in a little philosophy when no one is looking.

I don’t claim to have all the answers, but I do have many of the questions:

 

Questions for investors at the midpoint of 2013

• What surprises should you have anticipated this year? What did you get right, and what did you miss?

• Where’s the inflation?

• Did you ever assume we would become Japan (at least pre-Abenomics Japan, where they tried to become us).

• On a scale of 1-10, how passively or actively managed are your portfolios?

• What genuinely surprised you in a way that could not have been foreseen as a risk factor in 2013?

• Did you consider the probability that rates would start to reverse sometime in 2013? If not, why didn’t you? If you did, what steps did you take to moderate the impact?

• What are you doing to improve your process?

• What did you buy this year because of a terrific story, a narrative that suckered you in?

• What did you not buy because your risk aversion was acting up?

• How much are you paying so far this year in fees, costs & commissions? What can you do to lower that?

• Have you constructed your portfolio so it can withstand the inevitable rate increases?

• How are your alternative investments — hedge funds, venture capital, private equity — doing so far this year? Net of fees?

• Do you have a plan? Are you sticking with it, or making tweaks to it?

• What regulations have interfered with your investments? What Regs have helped them?

• What emotional decisions have you made this year that you regret? What can you do to avoid these in the future?

• How much financial television have you watched in 1H ’13,? How many investment related books have you read over that same period?

• Gold: A terrible investment, or the worst investment of all time?

• What are you doing to make yourself into a better investor?

 

If you can answer these honestly, you will make yourself into a better investor. It is a painful, self-relfective process, one that is necessary if you want to grow as a capitalist . . .

 

Category: Apprenticed Investor, Investing, Markets, Philosophy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Questions for Investors At 2013′s Halfway Mark”

  1. BennyProfane says:

    I thought, that, by this point, I’d be using my cash to buy a nice home somewhere that would be priced about half of ’08 levels, where it should be. Silly me. Besides all of the taxpayer and Fed funded support for the still bubbled market, now I watch thousands and thousands of affordable homes swallowed up in some scheme to somehow take advantage of America becoming a renter nation. It baffles me, how some guy in a cube in Greenwich thinks he can succeed in the mom and pop landlord business. It won’t end well, I would bet, for most parties involved.

  2. MayorQuimby says:

    “Perhaps we can begin a movement to bring back boring banking.”

    Amen to that!

    To Bears:

    Where is damage from QE? Banks are healing and default rates (sans tuition) are declining! Going forward, what would/could be the bear thesis to upset the apple cart?

    To Fed:

    Why the tapering talk without increase in nominal employment? What are we not seeing? Fed afraid of insolvency? Inability to fire any more guns down the road? Signs of hyperinflation we don’t see at all? Fears of 2008 repeat?

    To Bulls:

    Why would you continue hold an S&P divvy under 2% with TONS of risk and at best – weak growth coming going forward? How can you make the case the market is a good buy TODAY – after 140% rally and at very very high valuations?

  3. bizprof says:

    I switched from CNBC to Bloomberg as a New Year’s resolution…I find myself shouting less, and that’s a good thing.

  4. Katya G says:

    1. Failure of investors to understand Fed’s message.
    2. Nowhere
    3. I sort of did, 3 years ago
    4. If 1 being the most passive, 1.
    5. Failure of investors to understand Fed’s message and to realize that Fed is the only game in town these days.
    6. No, I expected low rates to last through at least 2014.
    7. Read BR and some other off the street blogs, read WSJ opeds and assume the opposite.
    8. Nothing, just keeping my longs from previous years
    9. Just took about 20% off after momentary freak out after that David Stockman article
    10. I’m not day trading, so not much.
    11. No, because I did not expect them
    12. –
    13. Sticking to long stocks for now. No tweaks.
    14. –
    15. Taking some position off after reading that David Stockman article
    16. I only watch CNBC for fun in the gym. Just finished Alan Blinder “After the Music Stopped”.
    17. Yeah, just a yellow metal that we dig out from the ground in one place and put underground in another.
    18. Always on alert for my own bias. So far my biases aligned with my investments. I’m on the lookout for when they won’t.

  5. ellen1910 says:

    As an older, very conservative investor — a third in cash/short-term bonds, another third in corp/muni bonds (5-6 year ave. duration), and the balance in equities — my mistake was failure to fight my tendency toward confirmation bias — that is, listening to A. Gary Shilling.

    The bull market in equities is getting long in the tooth. And perhaps, bond rates have had their upward adjustment for the year.

    Is it too late to switch out of bonds and into equities?

    • AssetAllocator says:

      “Is it too late to switch out of bonds and into equities?”

      As an “older, very conservative investor”, I’d be careful making dramatic changes to your asset allocation. Stick with your plan, rebalance semi annually and mute out all the pundits telling you to sell your bonds.

    • bonzo says:

      shilling isn’t yet proved wrong. nor did he ever say 30 year zeroes were for the faint-hearted. If you think long bonds are painfully volatile, you should be extremely cautious about stocks.

  6. HighSeas says:

    The surprise for me in 1H has been growth in the face of the sequester. What happened to all the gloomy forecasts?

  7. EdDunkle says:

    “What did you buy this year because of a terrific story, a narrative that suckered you in?”

    Man, oh man, that is my achilles heel. Every time I read a Michael Lewis book I run out and make a bad trade.

  8. feanwt says:

    Loved this, and took the time to answer these questions from both the individual investor and professional investor perspective (I am a mortgage bond trader at a hedge fund).

    • What surprises should you have anticipated this year? What did you get right, and what did you miss?
    That stocks would continue to go up, well past January, and that there would be a great commodity unwind. I got the mREIT trade right (helps being in the business!). I kept buying commodities all the way down.
    That mortgage spreads would widen and that HPA would increase dramatically. I got selling high coupon high LTV bonds right. I missed mortgage spread weakening.

    • Where’s the inflation?
    Inflation is in food prices and in housing.
    Rates are surprisingly higher in the reds and greens

    • Did you ever assume we would become Japan (at least pre-Abenomics Japan, where they tried to become us).
    I did not assume we would be in a low growth, deflationary-type environment.
    I did not assume we would be in a low growth, deflationary-type environment.

    • On a scale of 1-10, how passively or actively managed are your portfolios?
    3
    5

    • What genuinely surprised you in a way that could not have been foreseen as a risk factor in 2013?
    Magnitude of market moves in a low implied volatility environment.
    Magnitude of market moves in a low implied volatility environment.

    • Did you consider the probability that rates would start to reverse sometime in 2013? If not, why didn’t you? If you did, what steps did you take to moderate the impact?
    Yes, but thought it would be later in the year. I have added very little in fixed income exposure to my portfolio.
    Yes, but thought it would be later in the year. I sold reds and greens versus rate sensitive positions.

    • What are you doing to improve your process?
    Reading opposing opinions, trying to see how other successful investors manage money.
    Reading more research, trying to broaden into other mortgage derivative sectors like fixed rate IO, XS deals, higher loan balance stories.

    • What did you buy this year because of a terrific story, a narrative that suckered you in?
    Gold.
    All mortgage derivatives. They said I had to buy them now, or someone else would!

    • What did you not buy because your risk aversion was acting up?
    U.S. Equities.
    Low loan balance GNMA bonds.

    • How much are you paying so far this year in fees, costs & commissions? What can you do to lower that?
    Very little.
    Very little.

    • Have you constructed your portfolio so it can withstand the inevitable rate increases?
    Yes. I have allocations to inflation hedge instruments (commodities) and am underweight fixed income.
    Yes. I have a reasonable well-hedged portfolio.

    • How are your alternative investments — hedge funds, venture capital, private equity — doing so far this year? Net of fees?
    OK. Bailed out too early on P/E. Hedge fund exposure performing well versus the sector, but lagging S&P 500.
    N/A

    • Do you have a plan? Are you sticking with it, or making tweaks to it?
    Yes. I am sticking with it despite missing the run-up in global equities of H12013. I am constantly re-evaluating my methodology and outlook, but have a hard time adding in an environment where future growth is suspect.
    Yes. Generally I am sticking with it, and adapted to the changing landscape of wider mortgage spreads and a tapering Fed.

    • What regulations have interfered with your investments? What Regs have helped them?
    Re-allocated my personal portfolio so MLP exposure is in tax-advantaged accounts.
    Volker causing prop desks to close, but new hedge funds to emerge. Basel 3 limiting real money mortgage purchases.

    • What emotional decisions have you made this year that you regret? What can you do to avoid these in the future?
    That stock market rally was excessive and in bubble territory. Believed in HPA but didn’t significantly overweight housing exposure. Stop being such a contrarian.
    Being bulled up on mortgage securities. Remember that there are always opportunities to buy, but that windows to sell are occasional.

    • How much financial television have you watched in 1H ’13,? How many investment related books have you read over that same period?
    It is constantly on, but I rarely listen to it for investment ideas. I have read one investment-related book.
    It is constantly on, but I occasionally listen to it when Gross, El-Erian, or Gundlach speak. I have read one investment-related book but constantly read street mortgage research.

    • Gold: A terrible investment, or the worst investment of all time?
    Neither, just a small component of my investment portfolio. I should have been less aggressive filling that bucket though.
    N/A.

    • What are you doing to make yourself into a better investor?
    Consider other investing frameworks (I employ the endowment model) for personal portfolios. Reading opposing opinions. Revising assumptions, targets, and views.
    Being more open-minded on other asset classes. Exploring other mortgage derivative sectors. Looking at assets outside of the OAS framework, such as total return.

  9. Alain says:

    Part of my investing process is writing out why I am buying a certain position. I do it the old fashion way by writing it up in a notebook. I also briefly write up investments I passed on if the decision not to invest came after quite a bit of work was done. I periodically review my holdings to see if my thesis are on target. One of the things I look at in a firm is the composition of their debt so a firm that depends on short term financing or has significant debt with variable interest rates will likely not make the cut as an investment. I do have an overall plan which gets tweaked now and then.
    It looks like I wiffed on Blackberry. I’ll have to review over the weekend once I get pass of my initial shock of the weakness of the last quarter’s earnings. So far no emotional investment decision this year. I try to minimize them by not obsessively checking the prices of the stocks in my portfolio. One thing that help is I don’t tend to consume sensationalistic financial media. I probably watch Bloomberg 10-15 mins a day three or four times a week. Usually its Street Smart for its Top Ten stocks of the day and general recap.
    I try to improve by reading a lot when I have the time. I have read four financial related books this year. I also read quite a bit on the web your blog and others for instance. I am writing and exam in November which I am currently studying so between that and family I doubt I’ll have the time to read any more financial books until December.
    As to Gold I never understood the appeal as an investment. Essentially I have to agree with Buffett views.

  10. Jim says:

    I have been revisiting my assumptions regarding inflation. The first place and most relevant to me personally was our families personal expenditures excluding food & energy. The results were that over several years I saw the most inflation in the cost of health insurance, cable television, and mobile data plans, and school tuition. The mobile data plans is a mixed bag as speeds have gotten faster my cost per GB has gone up so there is a trade off. I saw deflation in housing as I was able to refinance my house from a 5.25% to a 3.7% rate at $0 cost other than time. The cable television cost started to exceed the benefits so we switched to Roku & Apple TV and ditched cable TV and haven’t missed it. The end result is that on a personal level there has been no significant inflation other than my health care insurance. The rest is holding steady.
    The second is internationally the cost of energy is falling as are most natural resources. Lower input costs lead to lower manufacturing costs and should lead to better profit margins and/or declining prices. Prime example is decline in Coffee Prices but increase in Starbucks coffee prices. .http://money.cnn.com/2013/06/25/news/companies/starbucks-prices/index.html

    Capacity Utilization remains low but off its low. http://www.federalreserve.gov/releases/g17/current/

    Barring the extraordinary event I see little in the near term suggesting inflation.

  11. 4whatitsworth says:

    The good:
    1) Taking my profits at a lower tax rate last year
    2) Being all in in my tax deferred accounts (long time horizon)
    3) Staying with 80% index funds
    4) Having the courage to get back in 70% long in my non tax deferred accounts at the beginning of the year.
    5) Selling 50% of my high yield bonds

    The bad:
    1) I love to buy things that are beaten up and was beginning to accumulate emerging markets
    2) I had no idea how quickly even short term bonds could move so I got hurt a little when I should have just taken all my profits when I determined that interest rates were going up
    3) Not recognizing that Obama basically fired Ben so he is outa here

    What to do differently:
    1) Say no to CNBC except maybe Kudlow
    2) Don’t be so cash adverse
    3) Really try and understand the consumer economy is it healthy or not?
    4) Stay out of political discussions it just wastes time and thoughts

  12. peterkrause says:

    If I had listened to my wife we would have gone from net short on January 1st to fully invested, probably in VFINX or similar. So thats a hmm. Risk adjusted, we are still behind the overall market performance, so thats an aww.

    When you are plain vanilla retail as we are, the discussion around the coffee table is a push/pull about sticking to the plan (we are) while maintaining flexibility to tweak or adjust the plan based on market conditions. The first six months of this year, it has been very difficult to find entry points to put more cash to work. This last week was helpful. Refusing to chase performance; as strict value adherents we are dutifully refusing to bite on new ideas unless they smell like Friday’s fish on a following Monday (coal anybody? Anybody? Bueller?)

    Thank goodness we don’t have the quarterly-performance-monkey to obey. Longer horizon investing is incredibly freeing. Thanks BR for your recent post on the matter. To improve as an investor, I’ve completely forsaken the boob tube for TED and other vid-posts — thanks again BR — seeking out only the most intelligent speakers. Another thing I find instructive is to pretend to be a goldbug for as long as I can stand it, try to imagine committing even 10% of the portfolio to the yellow crud. My personal best is two minutes.

  13. VennData says:

    So when you have nine asset classes in close to equal proportions, you sell when one gets too big (REITs and Int’l REITs) and then set limit buys back in way under the market and when you hit he bid, you’re back in. What is the big deal? Who sweats this stuff?

    You will outperform if you stick to disciplined asset allocation.

  14. Theravadin says:

    Ah, yes, this quarter… Once again (on the last, yes the absolute last) day of the quarter, I managed to (incredibly stupidly) be long a stock without a hedge on a known day of volatility. (Sound of a quarter’s profits being wiped out, screams of pain and anguish receding into the distance). BBRY. Nuff said about that… Tomorrow I’m taking my grade two teacher’s advice, and writing lines: “I will hedge known moments of volatility. I will hedge known moments of volatility…”

  15. bear_in_mind says:

    Less = more.

    1) Watched and listened to MUCH less finance audio and TV viewing habits.

    2) Moved to a much more passive allocation, keeping 10-15 pct liquid for cash and short-term (7 to 30-day) TRADING opportunities.

  16. gregory barton says:

    Note these answers are from the perspective of being an investor, not a trader. I would answer quite differently (and more humility) as a trader.

    What surprises should you have anticipated this year?
    None. Surprises on the upside need no anticipation.

    What did you get right, and what did you miss?
    Patiently resisted selling blue chips with good yields that have doubled and tripled since 2009. Uptrend continues.

    Missed nothing much. (Quite different on my trading portfolio.)

    • Where’s the inflation?
    On personal items that aren’t included in the statistics.

    • Did you ever assume we would become Japan (at least pre-Abenomics Japan, where they tried to become us).

    No. Nor do I think you have become Japan.

    • On a scale of 1-10, how passively or actively managed are your portfolios?

    investment portfolio: 8 or 9

    • What genuinely surprised you in a way that could not have been foreseen as a risk factor in 2013?

    Nothing. What surprised me is the extent to which my passive, conservative buy-and-hold portfolio went up by almost 50% from the trough of 2012 to the peak in May 2013 – and how much it came off since May.

    • Did you consider the probability that rates would start to reverse sometime in 2013?
    Sure. The short term trend for the 10 and 30 year bonds has been rising for about a year. At some point there would be a breakout. Why not this year?

    If not, why didn’t you? If you did, what steps did you take to moderate the impact?

    Smoked another cigar, sat back and watched the show.

    • What are you doing to improve your process?

    Investment process? Nothing broken, why fix it?

    • What did you buy this year because of a terrific story, a narrative that suckered you in?

    Nothing. I invest by numbers, not stories.

    • What did you not buy because your risk aversion was acting up?

    Nothing. I only invest in conservative, moderate high yielding dividend stocks with a reasonable record of growth and conservative payout ratios. Everything else is a trade which I limit to a small percentage of my portfolio and speculate wildly.

    • How much are you paying so far this year in fees, costs & commissions? What can you do to lower that?

    $10 per trade. Trade less.

    • Have you constructed your portfolio so it can withstand the inevitable rate increases?

    No. I’m not concerned with macro-economic issues. I constructed my portfolio to provide a certain yield and attain modest growth and not stray too far from the sector breakdown of my benchmark.

    • How are your alternative investments — hedge funds, venture capital, private equity — doing so far this year? Net of fees?

    None.

    • Do you have a plan? Are you sticking with it, or making tweaks to it?

    Yes. Yes. No tweaks. It ain’t broke. I don’t fix it.

    • What regulations have interfered with your investments? What Regs have helped them?

    None that I am aware of.

    • What emotional decisions have you made this year that you regret? What can you do to avoid these in the future?

    None (for investing – many for trading). I don’t regret my laziness when it comes to investing. Laziness seems to be conducive to long term success.

    • How much financial television have you watched in 1H ’13,?

    Only the Daily Show clips on your blog, if that counts.

    How many investment related books have you read over that same period?

    None since 2006.

    • Gold: A terrible investment, or the worst investment of all time?

    Highly speculative, no intrinsic value, produces no income: only for those who are prepared to gamble on story-telling.

    • What are you doing to make yourself into a better investor?

    Paying no attention to the cacophony of macro-economic chatter, focusing on a few basic valuation metrics (that could be explained to a six-year old) and smoking ever-more delicious cigars.

  17. [...] Questions for investors at the year’s halfway mark.  (Big Picture) [...]

  18. bonzo says:

    As a market timer,I thrive on “exciting” markets and look forward to them as opportunities to buy cheap or else sell dear. I’ve sold most of my stocks already, but still have a little left. Prices up some more followed by a crash would be just fine with me. I’ve read nothing because nothing ever changes in the investment world. Graham’s “The Intelligent Investor” told me everything I need to know.

    • Wait — are you saying you are a Graham & Dodd value investor or a market timer?

      • bonzo says:

        Graham allowed for market-timing for those with a “feel for the market”, though he recommended staying within the bounds 25% to 75% stocks. Another of his classic expressions is “buy stocks like you buy groceries” (ie when they are on sale). And then there’s the famous “Mr Market” parable with the implication that the “enterprising investor” can profit by selling to Mr Market when he’s in a manic mood and buying from him when he’s in a depressed mood. Combine this qualified endorsement of market-timing with his roaring approval of index funds at the end of his life (Vanguard just getting going then) and you have my investment system (I’ve opened the 25% to 75% bounds in both directions, including right now, though always keeping in mind that Graham wouldn’t approve).

      • I have always thought of that as purchases made on valuation basis, not market timing.

        They can look similar but the underlying approaches are radically different!

  19. ZenInvestor says:

    Thanks for the great post. In case you missed it, check out Jason Zweig’s column about saving investors from themselves. He’s a truth-teller, just like you. http://blogs.wsj.com/moneybeat/2013/06/28/the-intelligent-investor-saving-investors-from-themselves/