Posts filed under “Investing”

Dumbest Investing Ideas of 2014

The Worst Investing Ideas I’ve Heard This Year (so far)
Barry Ritholtz
Washington Post, July 5, 2014

 

 

As the second quarter comes to an end, my top 10 list of dumb investment ideas is filling up. All of these would be fairly foolish in any year. (Feel free to explain to me why these are not dumb, or to suggest investing ideas that are even more reckless or just plain silly.)

Note that these aren’t on the list simply because they lost money; the nature of investing is that some significant percentage of trades is going to lose money. That is a given, and it is the reason you should be a diversified investor. Smart asset allocation includes U.S. stocks, as well as those from developed countries and emerging markets. It is also why your bond portfolio should be a mix of corporates, treasuries, munis, etc.

Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. View Archive

As I have said before, good investing is about process, not outcome. These trades all suggest a fundamental misunderstanding about investing.

Here is the first half of my top 10 list of dumb investments ideas for 2014 (check back at year’s end for the rest):

Athlete IPOs. This year, San Francisco 49ers star tight end Vernon Davis IPO’d. Fantex Brokerage Services agreed to buy a 10 percent cut of all Davis’s future earnings for $4 million.

There are so many reasons this is a not a good investment idea, but let’s limit our discussion to three: 1) You have limited ability to pick which companies are going to do well; what makes you think you have any ability to guess what any athlete’s future income stream is going to be? 2) Even a minor injury can end an athlete’s career. In the NFL, the average career is short — either 3.2 years or almost 6 years. 3) Even if the 29-year-old Davis stays healthy, for investors to make money, he needs a giant new $33 million contract (according to the Fantex risk factors), plus he must “attract and retain endorsements, then generate other brand income post career.” Again, the thought of most investors getting this calculation correct is laughable.

This was a terrible investment concept, but it’s brilliant marketing for Fantex, which describes itself as “the world’s first registered trading platform that lets you invest in tracking stock linked to the value and performance of a professional athlete brand.”

That’s a genius concept, assuming there are enough fans stupid enough to part with their money. Based on the cost of beer and hot dogs at the stadiums, I suspect there are plenty of sports fanatics with more dollars than sense.

The goldbug portfolio. Every now and again, I see a portfolio that is so absurdly stupid, I can’t help but slap myself upside the head. The goldbug portfolio is one of them.

It starts out with the SPDR Gold Shares (GLD). Then it is seasoned with a collection of gold mining stocks, such as Yamana Gold (AUY), Goldcorp (GG), ArcelorMittal (MT), Barrick Gold (ABX), Newmont Mining (NEM). Then a few ETFs, such as the Market Vectors Gold Miners ETF (GDX). Add in the smaller miners in either individual companies or ETF flavors (GDXJ). A soupçon of a mutual fund or two. Then a dollop of leveraged holdings, such as the Direxion Daily Gold Miners Bull 3X Shares (NUGT). My favorite position in this nightmare portfolio just might be the S&P 500 Gold Hedged Index — it’s perfectly hedged to never be able to make any money.

What’s wrong with this portfolio? It’s one giant bet on the exact same trade. These positions are all highly correlated with the price of gold, and with each other. Owning all of them ain’t what anyone can call diversification.

Regardless of your views on gold — mine was published earlier this year — this portfolio is simply idiotic. If you want exposure to gold, than buy physical gold and store it in an investment deposit box or home safe. If you feel compelled to put it in a portfolio, than buy SPDR Gold Shares (GLD). But do not buy 50 flavors of a nearly identical investment.

The people who put this portfolio together should be drummed out of the financial services industry.

Mutual funds held at the mutual fund company. This head-scratcher is hard to understand. For some unfathomable reason, people hold mutual funds at the underwriting company instead of at any ordinary brokerage account. Of course, these are the “A Shares,” with commissions typically approaching 5.75 percent (or higher).

This is an insane amount of money to pay for a mutual fund when you can shop around and probably find a very similar fund for 80 percent less. Or find the rough equivalent in an ETF index fund with a 0.15 percent expense ratio, and pay $8 to buy it.

It amazes me that it’s 2014 and we are still discussing A-shares.

Apparently ethics are still an optional aspect of parts of the finance industry.

Ten S&P 500-index sectors instead of one S&P 500 fund. I have to admit that this puzzled me greatly when I first saw it. Why own all 10 sectors of the S&P instead of a single-transaction S&P 500 index? (The sectors are consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunications services and utilities).

There were two explanations, neither of which seems to be any good: The first is to hold them in equal 10 percent allocations. This means that you are wildly overweight the smaller sectors, such as telecom, which is normally 2.4 percent, or utilities, at 3.1 percent. At the same time, you would be underweight in technology (18.7 percent), financials (16.1 percent) and health care (13.2 percent). There are big advantages to owning all 500 stocks in the S&P 500 in an equal weighting — it eliminates all of the distortions that market capitalization weighting causes. Indeed, many studies find that market cap weighting is the worst way to own a broad index. (See Research Affiliates’ “Beyond Cap Weight.”) There are even funds that do this for you, such as the Guggenheim S&P 500 Equal Weight. However, when you own each of the 10 S&P sectors, the holdings still consists of individual components weighted according to capitalization. It’s hard to see the benefit of that.

The second approach is to rotate among the sectors. The odds of outperforming the index by doing this are exceedingly small. That is before you factor in trading costs and taxes.

All told, this a highly suspect strategy that seems more intent on generating turnover — and commissions — than performance.

Tax-deferred products sold in IRAs and 401(k)s. An entire universe of investments has one purpose: to provide a return without generating a taxable event. Think municipal bonds (or municipal bond mutual funds), or insurance products such as annuities or whole life insurance.

All of these products are priced to generate an equivalent after-tax basis return. In other words, you get less in terms of yield, but on balance can come out ahead. Putting these products into tax-deferred accounts defeats their reason for existing, and instead creates an investment that is built to underperform.

I don’t know how this happens, but it does.

As you can see, it’s no trouble to find terrible investment ideas. That’s the first half of my list, and no doubt by year’s end we’ll hit 10 — or more. Next time you feel yourself getting sucked into some nouveau crap investment, remember to stick to your sound and solid long-term strategy.

~~~

Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

 

http://www.washingtonpost.com/business/barry-ritholtz-offers-the-worst-investing-ideas-hes-heard-this-year/2014/07/03/0f93fc40-0067-11e4-b8ff-89afd3fad6bd_story.html

 

 

Category: Investing, IPOs, Mutual Funds, UnGuru

What to Do in a Market Correction

Things to try in a market correction: • Respond emotionally, giving in to your lizard brain. It does a good job of keeping you alive, so you might as well hand over management of your portfolio to it. • Rely on your gut instinct to lead you out of trouble. After all, your instincts helped…Read More

Category: Cognitive Foibles, Investing, Markets, Psychology

Mebane Faber’s Talk at Google on Global Value


Source: Mebane Faber Research

Category: Investing, Valuation, Video

How Not to Beat the Market

Hat tip Josh Brown   Today’s chart comes to us from Patrick O’Shaughnessy, author of the forthcoming book, “Millennial Money: How Young Investors Can Build a Fortune.” O’Shaughnessy makes the observation that investing is “almost free” and investor behavior tends to matter more than their actual investments. As an example, he cites this chart.  Continues…Read More

Category: Cognitive Foibles, Investing

1980s Parallel to Today

On today’s “Chart Attack,” Bloomberg’s Barry Ritholtz looks at a chart that suggests the S&P 500 Index could be headed for a major crash. He speaks with Trish Regan on Bloomberg Television’s “Street Smart.”

What the 1982-87 Parallel to Today Could Mean

~~~

JPMorgan’s James Liu, Global Financial Private Capital’s Mike Sorrentino and Bloomberg’s Barry Ritholtz discuss the outlook for U.S. stocks and Federal Reserve monetary policy on “Street Smart.

Are Stocks at the Beginning of a Serious Bull Run?

~~~

Alcoa reported second-quarter earnings and sales that beat analysts’ expectations after an increase in the price of aluminum including regional delivery premiums. JPMorgan’s James Liu and Bloomberg’s Trish Regan, Julie Hyman, Matt Miller and Barry Ritholtz take a look at the numbers on “Street Smart

Alcoa Earnings Beat After Jump in Aluminum Premiums

Source: Bloomberg, July 8 2014

Category: Investing, Media, Video

Coming July 12: Masters in Business on Bloomberg Radio

Over the past few weeks, I have been dropping hints about a new project I am working on with the folks at Bloomberg. Now that we have an official launch date, I can reveal the details to you. I have over the years, lamented about the state of media (see e.g., this, this and this). …Read More

Category: Financial Press, Investing, Media

I Love the 80′s: 1982 Low vs 2009 Low

click for ginormnous chart Source: The Chart Store   “I Love the ’80s” was a BBC television miniseries that examined the world through the lens of 1980s pop culture. (VH1’s riff on the show can be found here). I bring up the ’80s because of a wonderful chart from Ron Griess who runs The Chart…Read More

Category: Cognitive Foibles, Investing, Markets

Correction? Yes. When? Nobody Knows.

Welcome back from the long holiday weekend. Before we left for our nation’s birthday celebration, markets had a little party of their own: The Dow had broken 17,000, the Standard & Poor’s 500 Index had touched a record high and was spitting distance from crossing 2,000. Even the small-cap indexes such as the Russell 2000…Read More

Category: Investing, Markets, Trading

Inequality and Growth

Category: Economy, Investing, Taxes and Policy, Think Tank, Wages & Income

The Transition From Alpha to Beta

click for larger chart Source: Pension Partners   Hedge-fund assets recently eclipsed $3 trillion. One of the more popular strategies for hedge funds has been the long/short equity fund. Charlie Bilello, director of research at Pension Partners and the source of our chart today, writes:  Continues here

Category: Hedge Funds, Investing