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Zone of Competence

~ Dollars, Sense, and Probabilities.

Zone of Competence

Monthly Archives: December 2013

For the Beginning Investor

11 Wednesday Dec 2013

Posted by JC in Uncategorized

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Beginning Investor, Investing Basics

Here are some links for the beginning investor. Morningstar is a great resource. In particular, the Family Finances tab on their website is helpful, with links to budget worksheets and a Money Management Classroom.

Morningstar – Family Finances

Jack Bogle’s book, The Little Book of Common Sense Investing, is another good place to start to get the gist of the Vanguard founder’s low-cost indexing philosophy.

As far as blogs go, there are a lot of great ones. I would begin with Abnormal Returns and Clear Eyes Investing.

Abnormal Returns is the gold-standard in “forecast-free blogs.” It is a clearing-house for links to articles about all things related to finance and investing. Clear Eyes Investing is a newer blog I have come across that discusses some of the basics including the importance of having a strategy that fits your temperament in that you can live with it when the market goes against you.

When you are ready to move on from there, I would also recommend taking a look at the list of blogs I follow. These should provide a pretty good foundation for further inquiry and research.

And now, some of my favorite quotes and sayings about finance and investing:

The fundamental law of investing is the uncertainty of the future. — Peter Bernstein

The financial markets generally are unpredictable. So that one has to have different scenarios. The idea that you can actually predict what’s going to happen contradicts my way of looking at the market. — George Soros

Price is what you pay. Value is what you get. — Benjamin Graham

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful. — Warren Buffett

So there are risks. Nothing is automatic and easy. But if you can find some fairly-priced great company and buy it and sit, that tends to work out very, very well indeed especially for an individual. — Charlie Munger

Confidence when losing, humility when winning: a formula for long-term success in the markets. — Dr. Brett Steenbarger

The key to making money in stocks is not to get scared out of them. — Peter Lynch

With television, the sentiment virus will infect you. What television does best is pass along the emotions of the market.
— Barry Ritholtz

Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed. — Benjamin Graham

If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring. — George Soros

Investor, Know Thyself: A Good Time to Revisit Your Risk Tolerance

03 Tuesday Dec 2013

Posted by JC in Uncategorized

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risk tolerance

After a great 2013 with the S&P 500’s total return percentage in the high 20’s, it’s a good time to revisit your risk tolerance. The sleep-at-night factor is key to long-term investing success. Even if you have a good process and strategy, you need to be able to resist the urge to sell during a downturn. The following chart from Josh Brown is helpful in simulating the emotions felt during a selloff. Ask yourself, can you take the pain? If not, you better lighten up while the sun is shining.

JBselloffchart

(h/t Josh Brown)

Howard Marks: Risk Rising, But Not Time to Head for the Exits

02 Monday Dec 2013

Posted by JC in Uncategorized

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Howard Marks, Risk, risk tolerance, Valuations

Howard Marks is a legendary investor at Oaktree Capital. In his latest memo, he sees heightened risk:

Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so.

He says caution is appropriate, but we aren’t in the danger zone yet:

Is This a Sell Signal? If Not, Then What?

No, I don’t think it’s time to bail out of the markets. Prices and valuation parameters are higher than they were a few years ago, and riskier behavior is observed. But what matters is the degree, and I don’t think it has reached the danger zone yet.

First, as mentioned above, the absolute quantum of risk doesn’t seem as high as in 2006-07. The modern miracles of finance aren’t seen as often (or touted as highly), and the use of leverage isn’t as high.

Second, prices and valuations aren’t highly extended (the p/e ratio on the S&P 500 is around 16, the post-war average, while in 2000 it was in the low 30s: now that’s extended).

A rise in risk tolerance is something that should get your attention and focus your concentration. But for it to be highly worrisome, it has to be accompanied by extended valuations. I don’t think we’re there yet. I think most asset classes are priced fully – in many cases on the high side of fair – but not at bubble-type highs. Of course the exception is bonds in general, which the central banks are supporting at yields near all- time lows, meaning prices near all-time highs.

The whole memo is worth a read:

Howard Marks: The Race Is On

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