The next 20 years?

"Looking at current 10-year returns gives me a sinking feeling in the pit of my stomach which I have experienced twice before, during the tech bubble and the financial crisis. Is there any data regarding significantly higher 10-year returns being negatively correlated with lower subsequent 10-year returns (like the tech boom followed by the 'lost decade')?"

My initial answer is that there is a loose inverse relationship between past and future 10-year returns, but so loose that one cannot make money off that information. This column provides the figures to defend--or refute--that assertion. In addition to showing the results of 10-year returns, I also examine five- and 20-year periods.

...

One could not hope for a clearer picture than what occurs with the 20-year chart. When blue is up, red is down, and the converse. There are only brief stretches when the two lines appear on the same side of the median, and in those instances the returns are close to normal, so the signal doesn’t flash brightly. The graph looks so clean that one suspects that its author erred. (The thought did initially cross my mind.)

This portrait is dominated by five events:

1. The depression/war years (weak results)
2. The 1950s/1960s (strong)
3. The 1970s oil crisis (weak)
4. The 1980s/1990s (strong)
5. The 2000s (weak, in fact considerably worse than the 1930s)

Consequently, these results not only lack statistical significance, because the 648 monthly observations so thoroughly overlap, but they also fail common sense. That buoyant economies generate optimistic stock valuations, which eventually decline as the economic news worsens, makes sense. But that such events have occurred on a seemingly regular cycle is surely accidental. The pattern’s apparent inevitability is a mirage, based on a tiny sample size. 

That said, I suspect the 20-year numbers offer a fair guide to the future, if not as accurately as their negative 0.84 correlation suggests. (Now that’s a correlation!) Secular economic changes do tend to occur gradually, and investor emotions can overshoot the mark. Although the letter of this finding need not be observed, its spirit deserves some respect.

Which implies good news for the U.S. stock market, as entering 2020 the real 20-year return on equities was a modest 3.85%, well below the historic norm. These days, it has become commonplace to bemoan high stock prices. Perhaps the skeptics will prove to be correct. But 20-year return measure foresees a happier outcome.

-- John Rekenthaler

Election game plan

As if this year hasn't created enough uncertainty for investors, they must now prepare for a presidential election. While the candidates are familiar, the limited debates have prevented the average investor from getting clarity on polices that would affect the market.

The election will dictate where money flows for the next four to possibly eight years. While we can't predict the outcome of the election, it's worthwhile to go over scenarios and expectations so we can position our portfolios accordingly.

To properly prepare - you need to remove your bias!!!

Let's face it, this is a divisive atmosphere and a heated election. To properly approach this topic, we must remove any bias and focus on the markets.

Below I discuss what we should expect before, during and after the election and how to invest and profit in the weeks and months ahead.

The Weeks Before the Election (October 12th-30th)

The three weeks leading up to the election should be a time of caution. Some will be positioning themselves for what they expect might happen, but there will be a lot of investors who will not want to be exposed to the election results. This group would rather sit back and wait and see what happens, rather than taking potentially significant risk this election year.

The 2016 election saw a sell-off in the last two weeks of October before election week. During this time, the S&P shed about 2.5% and volatility spiked, with the VIX moving higher by over 20%. While the betting markets predicted an easy Clinton win, the options markets prepared for uncertainty anyway.

The Day and Night of the Election (November 3rd)

The calm before the storm will come on Monday November 2nd, when traders back away from the action and await the results. Volumes will decrease into Tuesday when we will see rumors start to move the market up and down.

As official results come in, the stock market will be closed and the futures market will be responding to the headlines. The 2016 election result was a shock when Trump won and the news sent the S&P futures into a tailspin. However, it didn't take long for investors to decide they liked Trump, and a big upwards reversal came the next morning.

If Trump wins: Expect a move higher in the futures and into the next day. The market will like Trump's market friendly approach we have seen over the last four years.

If Biden wins: Look for a move lower overnight and the next day as the possibility of higher taxes will be a perceived negative. However, the market might shrug off a Biden win as a massive infrastructure bill would be appealing for short-term growth.

The Days and Weeks After (November and December)

The smart money will position themselves for the next couple years in the weeks that follow the election. In 2016, the S&P moved higher by over 6% from November into the end of the year.

After the election, investors should focus on the stocks that will benefit from winning candidate. Regardless of what the overall market does, favorable sectors will outperform based on that candidate's policies.

If Trump wins: Market continues to rally, but volatility remains high as conflict with China remains.

If Biden wins: Energy and Wall Street struggle, while eco-friendly and tech thrive. Watch for gold to go higher as spending increases.

Wildcard

This election will be close and if there is no clear winner, the market will react negatively. I would expect the VIX to stay elevated as the winner is sorted out and the market to sell off until there is clarity.

In Summary

Investors have seen a lot of uncertainty and volatility this year, so an unpredictable election seems to fit in perfectly. While certain areas of the market might struggle under Biden or Trump, both candidates should be viewed as market friendly. Investors have a win/win scenario with some short-term risks with Biden that would be cancelled out with the volatility of Trump.

Whatever the result, there will be money to be made. Investors should ready themselves and plan for the possibility of both candidates.

-- Jeremy Mullin, Weekend Wisdom, Zacks

Trump vs. Biden: a sector outlook

The election is fast approaching and investors need to ready themselves for some volatility in their portfolios. Biden and Trump have very different views on how the next four years should look for this country. Because of that, certain sectors of the market will respond to a victory from each candidate differently.

While there are positives and negatives for each candidate for the overall market, individual industries will be affected more directly. Below I discuss exactly what to expect from some selected sectors, and how to profit in either situation. But first let's talk about how the markets perceive each candidate.

Who Does the Market Favor?

The market would prefer Trump to any Democratic candidate because of the threat of higher taxes. While Biden is a net negative for investors, he is perceived as less harmful than Bernie Sanders would have been.

Because of Biden's time as Vice President, the market knows what it is getting, which would be similar polices to the Obama Administration. This creates some clarity and calm with investors as opposed to Trump, who has created volatility in the past with his aggression towards China.

At the moment, the polls and betting markets give the edge to Biden. When he moved ahead of Trump, the stock market didn't react negatively. This is a sign that the investors don't have a major preference between the two outcomes. So, while the market might favor Trump slightly, there isn't major favoritism as there would have been with other Democratic nominees.

Sector Outlook: Trump

Let's look at a few sectors likely to perform well if Trump keeps his seat in the Oval Office.

Infrastructure- Materials and industrials will benefit with a stimulus bill on infrastructure. A big deal has been promised for years, but after COVID-19, we are likely to see finally some movement after the election. Trump has been eyeing an $1 trillion infrastructure package that would target roads, bridges and public transport as well as 5G network infrastructure. The stocks that build and supply the materials for these projects with directly benefit.

Energy- Trump would be friendly to the traditional oil companies, encouraging fossil fuel production with less regulation. Big oil could see a big rally in shares with any threat of a Green New Deal off the table.

Financials- Wall Street will benefit with lower taxes and less regulations. While banks have struggled with low interest rates, the market volatility has been good for trading. Assuming the economy comes back and interest rates can tick higher, a second Trump term could be very bullish for the banks.

Consumer Discretionary- A Trump win would mean taxes stay low – and they could possibly even go lower if Trump gets his desired middle-class tax cut of 10%. A cut of that size would put more income in people's pockets, which would be good for the consumer staples and discretionary sectors. Think retail and discount retail stores as beneficiaries that would thrive with more cash in the pockets of the American consumer.

Sector Outlook: Biden

Now, let's explore sectors likely to benefit from a Biden victory in November.

Infrastructure- Biden has even bigger ambitions on stimulus than Trump, aiming for $2 trillion of investment in his first term. Roads and bridges are of course on the agenda, but Biden will also focus on green spaces, water systems, electricity grids and broadband. A Biden presidency would have a focus on climate change, which brings us to our next sector.

Energy- Big oil is in trouble with a Biden win. Energy would see more regulations and a movement towards greener industries to modernize the economy to combat climate change. Think solar power under Biden.

Tech- The Trump admiration has been talking about rolling back protections for big tech. Additionally, Trump has had issues with tech platforms control of content, which has caused a conflict that could be an issue for big companies like Amazon, Facebook and Twitter.

While a Biden win might throw a wrench in the tech momentum due to tax concerns, the break-up threat wouldn't be there. Additionally, improved relationship with China could help tech companies that have exposure to Chinese markets.

Gold- The amount of spending that is likely to come under Biden will bring the gold bugs out like never before. Not only will we get a big infrastructure bill, but the pandemic has set a precedent for the government to spend.

How to Capitalize

The next president will have a lot on his plate with an economy trying to recover in the midst of a pandemic. Both Biden and Trump have different views on key economic issues, especially tax policy and energy. The one thing they agree on is infrastructure; it's just how much we need to spend that is the difference.

Investors should map out a clear path and strategy to put in place the days and weeks after the election. The next president's plans will shift trillions of dollars around the economy and certain stocks will reward investors that get in early.

-- advertising email from Zacks

***

What about health care?

(successful) value investing

Value investing strategies can become unpopular during bull markets. Rising valuations and optimistic forecasts can cause some investors to switch to growth strategies that place less emphasis on buying stocks at low prices.

However, in my view, value investing is a logical long-term approach to use when allocating your capital. It can help you to avoid excessive risks and generate high returns through buying quality companies when they trade at low prices.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio)'s track record highlights the potential success of a value investing approach. His patient attitude and simple strategy could be key reasons for Berkshire's 20% compounded returns in the past 55 years.

Focusing on fundamentals

It is tempting to follow the lead of other investors in a bull market or in a bear market. For example, some investors may now find themselves becoming more optimistic about the prospects for stock prices after the market's 50% gain since March. Likewise, investors may become pessimistic about the S&P 500's prospects during a bear market because stock prices have experienced a decline.

However, avoiding bullish and bearish sentiment could be crucial for anyone seeking to become a successful value investor. Ignoring your emotions makes it easier to judge investment opportunities based on facts and figures, rather than the prevailing mood among your peers. This could improve the efficiency of your capital allocation and allow you to take a contrarian view when it is advantageous.

Buffett has sought to maintain an even temperament throughout his career. As he once said, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

Using a patient approach

Rising stock prices over recent months may mean there are fewer companies trading at a discount to their intrinsic values. It is tempting to buy stocks that are overvalued in this situation, rather than holding cash due to low interest rates. However, using a patient approach that waits for more attractive risk/reward opportunities to appear could be more effective.

In my opinion, the ability to turn down unattractive investment opportunities could be an important trait of successful value investors. A selective approach may mean that you sometimes miss out on stocks that go on to generate high returns. However, it will also help you to avoid unnecessary risks that may be present in the current bull market.

As Buffett once said, "The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch."

Adopting a simple strategy

Value investing is a simple means of allocating capital. At its core, it is a long-term strategy that focuses on buying quality businesses when they trade at prices below their intrinsic values. They are then held until there are more attractive places that offer superior risk/reward opportunities available elsewhere.

Therefore, successful value investors do not need to use complicated formulas or complex methodologies when managing their portfolios. Complexity may be far less important than consistency and self-discipline when using the market's cycles to your advantage.

Despite being one of the wealthiest investors of all time, Buffett's approach to managing Berkshire's capital has always been very simple. As he once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

-- Robert Stephens, CFA

Chuck Feeney

Charles “Chuck” Feeney, 89, who cofounded airport retailer Duty Free Shoppers with Robert Miller in 1960, amassed billions while living a life of monklike frugality. As a philanthropist, he pioneered the idea of Giving While Living—spending most of your fortune on big, hands-on charity bets instead of funding a foundation upon death. Since you can't take it with you—why not give it all away, have control of where it goes and see the results with your own eyes? 

“We learned a lot. We would do some things differently, but I am very satisfied. I feel very good about completing this on my watch,” Feeney tells Forbes. “My thanks to all who joined us on this journey. And to those wondering about Giving While Living: Try it, you'll like it.”

Over the last four decades, Feeney has donated more than $8 billion to charities, universities and foundations worldwide through his foundation, the Atlantic Philanthropies. When I first met him in 2012, he estimated he had set aside about $2 million for his and his wife's retirement. In other words, he's given away 375,000% more money than his current net worth. And he gave it away anonymously. While many wealthy philanthropists enlist an army of publicists to trumpet their donations, Feeney went to great lengths to keep his gifts secret. Because of his clandestine, globe-trotting philanthropy campaign, Forbes called him the  James Bond of Philanthropy. 

In 2019, I worked with the Atlantic Philanthropies on a report titled Zero Is the Hero, which summarized Feeney’s decades of go-for-broke giving. While it contains hundreds of numbers, stats and data points, Feeney summarized his mission in a few sentences. “I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes. Besides, it’s a lot more fun to give while you live than give while you're dead.”

On September 14, 2020, Feeney completed his four-decade mission and signed the documents to shutter the Atlantic Philanthropies. The ceremony, which happened over Zoom with the Atlantic Philanthropies’ board, included video messages from Bill Gates and former California Gov. Jerry Brown. Speaker of the House Nancy Pelosi sent an official letter from the U.S. Congress thanking Feeney for his work. 

-- Steven Bertoni, Forbes

Six investment mistakes to avoid

Summary

The market has been particularly volatile in 2020, making it treacherous for all types of investors.

The pandemic has created tailwinds and headwinds across all industries, and analysts of all kinds are insisting a crash is upon us every day.

In this context, it can be extremely difficult to know what to do, keep your emotions in check, and avoid common investing pitfalls.

That's why today, I want to cover six investment mistakes to avoid, particularly in a frothy market like the current one.

You may have made some or all of these mistakes in the recent months, without realizing it. 

Great investing is not simply about selecting the right investment ideas. The main factor in the success of your investing journey is about avoiding common behavioral mistakes that we all make at one point or another in our lives.

Morgan Housel just released his book The Psychology Of Money, in which I particularly enjoyed a quote that borrows from Napoleon and his definition of a military genius:

"A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy."

The average investor has underperformed almost all investable asset class returns over time, as illustrated below by the data from Richard Bernstein Advisors.

The main cause behind this is behavior and temperament. Most investors are hardwired to get in the way of their portfolio's success over time.

The S&P 500 (SPY) and the Nasdaq (QQQ) both fell around 30% earlier this year before rebounding to new highs in a record time. The volatile time we are all going through since the beginning of the COVID-19 pandemic has a particularly pernicious effect on investor behavior. Volatility has its ways to compel the most counter-intuitive decisions when it comes to portfolio management.

Today, I want to discuss six common investment mistakes you are most likely to make (or have already made) in a frothy market like this year.

Let's review!

1) Trading too much

Great long-term investing is 1% buying, 99% waiting. But most investors feel that they're lazy if they don't tinker with their portfolio regularly one way or another.

A disciplined investor should look beyond the short-term concerns and focus on the long-term growth potential of the market. Looking at the performance of the MSCI World Index in the past 50 years can help gain some perspective. One dollar invested in 1970 would have grown to $68 by 2018. And the journey to get there was filled with financial crisis, wars, terrorist attacks and bear markets of all kinds. None of these disasters have changed the fact that the best course of action over the years was to remain invested through thick and thin and to stay the course.

Despite history telling us that trading in and out of stocks is a weapon of alpha destruction, some investors can't help themselves.

Investment turnover is another symptom that is similar. Many investors can't help but cash in on their gains as soon as a stock is up 20%, 50% or 100%. They might buy back the shares at the same price or higher several months later when they realize their mistake. But the damage has already been done if they are trading in a taxable account. Or worse, they refuse to invest again in great companies they have previously sold at lower prices and leave a long-term compounder such as Amazon (AMZN), Netflix (NFLX), or Salesforce (CRM) out of their portfolio forever.

2) Relying on your emotions

Many biases are at play when we make an investment decision. I've covered previously the common behavioral biases that can adversely affect your temperament, and I've offered strategies to counter them.

Relying on your emotions is a common investment mistake in a volatile market. And unless you are willing to identify it and address it, chances are your emotions will eventually get in the way. We are influenced by our own fear and greed, often better described as fear of joining in or fear of missing out (another topic I've covered more in depth here).

3) Chasing returns

Performance chasing refers to selling a poorly performing investment to buy one that has recently delivered strong returns.

Chasing returns is the practice of taking excessive risk by selling what you own in order to concentrate heavily your portfolio into what everyone else is buying.

4) Staying all in cash

When the market is volatile, it can feel much safer to watch it from the sidelines. And that's generally a mistake.

Cash itself is a depreciating asset, but it's also an essential tool to buy other assets. Finding the right balance of cash in an investment portfolio can be a challenge, particularly for those who are not generating new income or savings to add to their investment portfolio. Warren Buffett has been known for keeping a huge cash allocation in his portfolio at Berkshire Hathaway (BRK.A) (BRK.B). At the end of Q2, Berkshire had $147 billion in cash. But that cash allocation that so many point out to as excessive represents less than 40% of its equity portfolio. And Warren is in the insurance business, which requires large cash allocations for unforeseen events. If you have more than 50% of your liquid assets in cash, you are likely permanently damaging your long-term returns.

If you are a new investor, waiting too long to start is one of the most crucial mistakes a young investor can make. Albert Einstein famously called compound interest the eighth wonder of the world. Thomas Phelps, author of the book 100 to 1 in the Stock Market has provided valuable lessons to better understand the power of compounding.

5) Concentrating too much in risky bets

Seeking alpha is a noble cause (and a great name for a crowd-sourced content service for financial markets), but that doesn't mean you should be actively trying to beat the market.

Beating the market should be a result of your investing habits, not a goal.

If you invest thinking the market averages are not enough, you are likely to go over-board and heavily concentrate into risky investments.

There is always room for risky companies in a portfolio. But your appetite for market-beating returns should never overshadow the importance of position sizing and proper portfolio allocation based on your risk profile.

6) Not understanding what you're doing

As explained by Adam Smith in The Money Game:

"If you don't know who you are, [the stock market] is an expensive place to find out."

Having a clear strategy is probably the most essential aspect of investing, in both bull and bear markets. If you haven't spent the time to think about your goals, time horizon, risk appetite and understanding what you are trying to achieve, you probably need a little bit of soul-searching.

Understanding why you invest is the very first step, one that comes before learning how you want to invest or in what specific opportunities.

Your next question should not be "should I buy this stock now?" Instead, you should ask yourself if you have built a system that makes room for mistakes, unforeseen failures, or simply bad luck. When the tide turns, you'll be prepared to face the consequences and will be far more likely to stay in the game. Investing should be a rewarding and enjoyable journey, not a source of stress and sleepless nights.

15 books that can change your life

-- From Facebook, Howtomotivation, 1/23/18

more books

The best financial move

What is the single best financial move you have ever made in your life?

To become a minimalist

In 2017, I found out that my business surpassed 7-figures of revenue in a 12 month period.

This translates to multiple six figures in profit personally, however, I still live like someone earning only $50,000 a year.

I own one car (a stick shift sedan), live in the same apartment I’ve lived in for the past 3 years, wear inexpensive clothes, fly coach, and generally keep my purchases and possessions very minimal.

I focus almost all of my time, money, and resources on creating new experiences and improving relationships… Not things.

And this has TRANSFORMED my financial life forever.

I no longer have to worry about money.

I don’t stress about my income or bills because I don’t spend money on material items that don’t bring me real happiness, freedom and peace of mind.

And you know what?

I’m the happiest that I’ve ever been in my life.

When you spend your money on things that bring joy into your life like healthy foods, fun experiences, travel, personal growth and time with people that you love, I can guarantee that you will be happier (and richer) than when you spent money on the latest phones, TVs, clothes and cars.

Stay Grounded,

Andrew

Learn more about my work and mission by visiting my Quora profile here [from my log 1/23/18]