Friday, October 28, 2005

Give me Stephen Roach any day over Austin Pryor

I'd lambasted Joe Carter, because especially lately, his blog has seemed increasing irrelevant, because, maybe it's a mixed-metaphor, but "morally tone-deaf" seems to be the words going through my mind.

While it's one thing to claim a moral high ground shilling pseudo-science, and mistaking a brain dead woman for a live, concious woman and zygotes for born people, it's quite another to turn a blind eye towards what is now manifestly the most corrupt Republican regime in memory, with all kinds of sins like theft and murder, and lying, rolled into one, creating a bad national karma for the US...

So it is with some interest I read today's entry on Carter's blog from one Austin Pryor on investing. Good, I can work with that, although I don't want to come across as a Borscht Belt comic or dour fanatic as I do it.

So without further ado, I'll resond to Pryor, who, if memory serves me right, is some kind of a "Chrstian investment" guy...ah yes, at "Sound Mind Investing."

Some things can be predicted; most things can't. Since nobody really knows what is going to happen, your plan must allow for the fact that the investment markets will experience some unexpected downturns every now and then. That's where diversification comes in...

Actually there is one thing we can say with absolute certainty: the past will not be repeated. And in fact we can say that about the United States.

Anybody who's read Stephen Roach and related folks (see, e.g., here) or worked at a job in the US that was involved in anything that involved making anything knows that the US economy is a radically different beast than it was in the 1960s or 1970s, or 1980s, or even 1990s. Jobs and many services can be easily outsourced today.

This trend may or may not continue, but it seems that the future does hold that there will be a continuing deterioration in the US economy unless some form of protectionism kicks in, but of course that could start a trade war and a real war. (We already see signs of that in the lumber dispute with Canada, which could get ugly. They export oil to us you know.)

Alternatively, really high energy prices will force a restructuring of the US economy, perhaps not as bad as the clusterfuck nation guy says, and in fact somewhat better.

Anyway, short rebut to this point: there are indeed long term trends macro-economically, and these can be profitablly followed if thought about them far enough in advance. But- and here's the point- there will be uncertainty and volatility. No pain no gain.

Both of SMI's core strategies offer you portfolios that combine stocks and bonds in various combinations in order to reduce volatility and risk while still achieving attractive long-term returns.

While I'm a big fan of diversification, I also think this position - "stocks and bonds provide diversification" is simplistic enough to be potentially disastrous to even the capital preservation of a portfolio.

Think Argentina. Think Turkey (the Turkish lira was once something like $4; today it's thousands to the dollar).

Economies, to use the technical term, shit the bed every now and then. It's good to be diversified in other ways; such as real estate, commodities, and especially foreign assets, especially in a situation where the mid-term trend is a deterioration in dollar denominated assets.

But in the short to mid term, it is likely that some sectors of the US economy may flourish and others not. It's important to know which.

Principle #2: Your investing plan must have easy-to-understand, clear-cut rules. There must be no room for differing interpretations. You must be able to make your investing decisions quickly and with confidence.

I have a better principle, although who can disagree with the statement above translated to "Know what you're doing and why!"

My better principle is: Sell it even when you think it's going to go higher. Buy it if you think it's going higher in the mid-term, even if you think it can go lower in the mid term. Cut your losses. Lock in gains. Practice detachment about it.

Your plan should prevent you from taking risks you can't financially afford. Every day, people who mistakenly thought "it will never happen to me" find just how wrong they were....

Know what you're doing and why.

We receive letters asking us to recommend safe investments that will guarantee returns of 12%, 14%, and more. If by "safe" they mean there's no chance of the value of the investment falling, then we don't know of any investments like that. Investments that are "safe" in that sense usually pay much less than 12%...Consider the story of Jack and Jill: Jack saved $600 in an IRA each year between ages 8-18, then never added to it again; a total of $6,600. Jill waited to start saving until she was out of college at age 26. She put $2,000 per year into an IRA for 40 years; a total of $80,000. Both earned the same 10% rate of return.

Res ipsa loquitur.

There's a great deal of information on the 'net about this. And much of this information is completely free of charge. You can do better than Austin Pryor, but you've got to know more than he tells you.

And you don't have to pay him a red cent to do better than he does.

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