I just finished reading the latest from Jeffrey Goldberg in The Atlantic, “Why I Fired My Broker.” It’s a pretty amusing first person piece – a soul searching mini odyssey that takes Goldberg from opulent loft parties hosted by hedge funders to an “off the grid” cabin where a survivalist stockpiles food and learns to eat mice, because “why waste protein?”
“What do you tell the ordinary mortal … who has $20,000, $50,000, $100,000, or $200,000, maybe, parked somewhere doing nothing? What is your advice right now for that person?” I looked around. The wizards in the room were having difficulty calculating figures of such humble size. I had thought $200,000 sounded like a large and unembarrassing number. But the room reacted as if I had asked, “Bill, I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?”
Anyway, for this piece to be treated as a salient piece of analysis, there are a few too many contradictory ideas thrown around, both for comedic effect, and presumably to recreate the confusion and anxiety Goldberg feels. Buying the Dow 30 turns out to be risky! Individual stock picking is even worse. (Both true, actually!) Buy and hold doesn’t work, trading is the only way to make money. But wait, frequent trading means that fees will eat up your returns. We should be putting together a cache of canned goods and buying guns. No, scratch that, America will be just fine. You get the idea. Still, he interviews some interesting, wise people, who basically tell him what he already knows. For instance, one advisor says:
“If one were to trade the S&P 500 for one day, the probability of losing money is about 46 percent However, as one extends that time horizon from one day to one month to one quarter to one year to 10 years, the probability of losing money decreases as the time horizon lengthens.”
To which I would add this observation from Keynes: “In the long run, we are all dead.”
It was more than a decade ago that our first Merrill Lynch adviser put us in a company called Boston Chicken. A Merrill analyst described it as “the restaurant concept of the ’90s.” It went bankrupt in 1998. Only later did I learn that Merrill had underwritten the initial public offering for Boston Chicken stock, and so had an interest in selling the company to its customers. There were other brilliant pieces of advice–long-term “buy and hold” recommendations that emerged from the Merrill analysis factory: Qualcomm; Sun Microsystems; Nokia; and Citibank, of course, which has recently dipped as low as a dollar a share. The full-service trading fees at Merrill–$80, $100, $130, for modest chunks of stock–were high, but we were told that we were paying a premium for quality research.
In the harsh light of recession, I find it hard to believe I listened to a magazine that, in August 2007, recommended American Express at $63 a share (a “conservative way to make hay from global credit-card growth”), which as I write this is selling for $13 a share; Wynn Resorts, $94 then, $20 now; HSBC, $93 then, $25 now; Washington Mutual, $36 at the time, seized by the government last September–rendering the stock worthless.
“I’ve always said that if you want to take risk–any risk–you have to be prepared to put your money away for five years or more. If it’s that kind of money, I would give someone a couple of alternatives. Do you have enough money in the bank that if you were to lose your job, you’ve got a good window to get reemployed? You’ve got to make sure you have a safety net.
I’m long on America, as my friends on Wall Street might say. I believe that equities will grow in value. I expect the Dow to return to 9,000, or 10,000, if not sooner, then later.
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This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.
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