Gen Y - Retire Rich!

Post #88 - Robert Kiyosaki – Not such good advice

Post #88

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Robert Kiyosaki – Not such good advice
I have read a couple of Mr. Kiyosaki’s books and I felt that his advice was too bland and non-specific.  You couldn’t read his book and say to yourself, OK, now I have a real action plan as to how to proceed.  Instead all you had was a general idea that there were certain things you could do (like buy income producing real estate) that would make you a millionaire.  You still didn’t know how to go about it.  It would be like me selling you a book telling you to buy the right equities, wait 40 years and you will be rich.  This advice just wouldn’t help you, because it doesn’t tell you all the details. 

Kiyosaki co-wrote a book with Donald trump recently.  Reading that was a real waste of time.  Here’s a link to another guy who feels the same way I do. Trump and Kiyosaki Say They Want You to Be Rich.  But lots of people bought the book, probably due to the Trump name being associated with the advice.   Maybe Trump will help me too.  He could let me put his name on this blog as a contributing editor.

I just wish I had the marketing savvy of Kiyosaki.  Then I’d be really rich.  And I could put almost all my money in super safe bonds, like Suze Orman, so I wouldn’t have to sweat out the economic downturns like the rest of you guys.

By the way, Donald Trump actually talked to me once.  It’s a fairly long story.  The short version is that I had a wait a few minutes to see someone, and the reason for the delay was that Trump was in ahead of me.  When he came out with his bodyguard and wife, he very nicely said “Sorry about the wait.”  I mumbled “No problem”.  My wife was too busy checking out what his wife was wearing to even notice The Donald.

Post #87 - How Is Suze Orman Doing?

Post #87

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

How Is Suze Orman Doing?
I don’t know one guy, including me, who has ever read anything written by Suze Orman.  It would be like reading romance novels.  We just don’t go there.  But millions of ladies read her stuff. 

If you do a little cruising on the internet, you will find a bunch of people who think she gives bad advice.  But lots of people love her.  Time magazine recently did a big article about her.

One of the things that really makes the Suze haters crazy is that she doesn’t practice what she preaches.  Most of her money is invested in extremely conservative municipal bonds.  Kind of like the old Italian ladies talking about the Pope’s message about birth control.  “He no playa da game, he no make da rules.”  I’ll give Suze a pass on the fact that she’s only got a small percentage of her money in equities.  Especially since this current crisis has made her look like a genius.  Not having your money in stocks has been the best thing that you could have done.

Anyway, I decided to find out what she actually tells people to do with their money.  I slinked into my local library, wearing a disguise.  I didn’t want anyone recognizing me perusing chick investment literature.  I found the book Suze wrote for the Young Fabulous and Broke.  That sounds like Gen Y to me.  The only people in that aisle were a couple of male retirees, who were engrossed in investment books written by manly men.  I needed to snatch the Orman book without them noticing, to avoid the snickers they were sure to make.

I slipped the book off the shelf into a plastic Stop and Shop bag I had brought in for camouflage.  For good measure, I snuck a book by Jane Bryant Quinn into the bag also.  .  In for a penny, in for a pound.  The two old guys never noticed.  They might have been sleeping on their feet. 

I did some more slinking to a nearby carrel that was out of the way.  Does anyone out there know what a carrel is?  It’s a good SAT word you can try on your nephews and nieces.  Look it up. 

I read the books.

In general, Suze gives you the same investment advice I do.  There are a few differences.  She is not as gung-ho on international stocks as I am.  She doesn’t see the need for young people to invest in bonds.  I am more dead set against owning individual stocks and actively managed funds.  But in general, we both agree on the major stuff.

Regarding other issues, we also agree that:

• You should buy cars you can afford and pay cash for them. 
• You should buy a house.  (I am a little less fanatic about it than she is.  Some people, in parts of the country where the cost of ownership is high and the cost of renting is low, could do better by renting and investing the difference.)
• You should save as much money as possible.  I gave you a target.  She gives you advice on how to save more.

So I can’t beat her up.  Even though I’m jealous as hell that she’s published a bunch of very successful books.  How come she’s such a successful writer and other, really, really smart investment guys don’t sell as well (or at all)?  There are a couple of reasons.  Sometimes, the really smart ones are terrible writers.  Also, they may not be good looking or flashy enough to get noticed.  Or it could simply be that they are complete dodos when it comes to selling themselves to the public.  Suze appears to be both good looking and a great marketer.  The Time magazine article gives a lot of credit to her girlfriend, who is some sort of brand manager.  The girlfriend did a great job, because Suze is a really well known bradd.

It’s kind of like Madonna versus Cyndi Lauper.  When they first started singing, everyone pegged Lauper as the real talent.  Madonna had the marketing expertise.  She’s the big winner.

By the way, the Jane Bryant Quinn advice was equally good.  She offered a nice Vanguard index fund portfolio of 40% Total US stock market, 20% International, 10% REITs, 20% Bond Market, and 10% Treasury Inflation Protected Bonds (see post # 72 for more about TIPS).  That’s a great portfolio allocation.  But she would have gotten hammered just like everyone else during this current crisis.

As you can see, what I am telling you is not brand new stuff.  Other people offer the same advice.  The difference is that they actually get paid to tell you this stuff and I don’t.

Post #86 - How About That Jim Cramer?

Post #86

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

How About That Jim Cramer?
Jim Cramer has a TV show on CNBC where he yells a lot about investments.  I’ve heard it’s pretty entertaining.  Someday, I may decide I am rich enough to afford more than $8 per month for basic cable.  I’ll spring for the next higher package.  Then I’ll be able to see Jim’s TV show, along with the “Iron Chefs” and “Celebrity Rehab” with Dr. Drew.

Last year, Jim made a big oops, when he told a caller not to sell Bear Stearns stock, right before it collapsed.  I heard Jon Stewart had a field day with that one on “The Daily Show”.  Or was it Jon Daily on “The Stewart Show”?  I don’t get that channel either. 

More recently, Stewart skewered all of CNBC’s reporters and financial guys.  He shows them making statements about AIG, Lehman Brothers, Bank Of America, etc, on air that turn out too be completely wrong just a few days or weeks later.  If you had acted on these pronouncements you wouldn’t just be poorer.  You’d be almost broke.

In a funny way, he tells you the same thing that I’ve been saying.  Do not listen to these people. 

Cramer tried to defend himself by appearing on Stewart’s show, but that backfired.  Stewart made him look really bad.

Here’s an article that tries to put things into some sort or perspective:
Jon Stewart puts spotlight on CNBC and meltdown

I am including the link in an effort to try to be a little fair.  My real opinion is that this article goes way too easy on CNBC.  If I had written it, there would be two sentences.

Sentence 1 – Look at all the stuff the CNBC guys said that turned out to be completely wrong.
Sentence 2 – Don’t ever listen to any financial advice given by the talking heads on any TV show, radio show or magazine.

The one part of the article that I love is the last line, a quote from a Dartmouth Professor.  "If anybody takes seriously anything that (Cramer) says, they're stupid."

Here’s another guy who doesn’t think that Cramer is too smart.  The Worth of Jim Cramer's Advice - Eric Tyson.  This is a pretty good article.  It even calls into question the returns that Cramer says he achieved when he ran a hedge fund.

Before all this fuss started, I had read a book that Cramer wrote.  Some kind of title that talked about being mad for life.  Sounds like a few of my relatives.  Being frugal, I took Jim’s book out of my local library.  Usually, I have to wait 24 weeks before I can get a new book.  All the other retirees put reserves on the new books the minute they come out.  I think they pay the librarians to tip them off when new books come in.  For some reason, there was no waiting list for this book.  But at least Cramer got it published.  What did I ever get published?

But what about the book?

It’s got a pretty red cover.

He says a lot of things that I agree with: 

• It’s important to work hard and save your money.
• Compound interest is good.
• Low cost funds and index funds are good.
• Most of your money should be invested in stocks rather than bonds.  Actually, Jim is pretty aggressive in this area, and recommends higher exposures to stocks than I do.

A good portion of the book is devoted to individual stocks.  He teaches you how to pick them, what to do with them, and his rules for investing in stocks.  Stocks are his game.

Here’s the truth.  Jim can’t teach you how to be a successful stock picker, just like Phil Jackson can’t teach me how to dunk over Shaquille O’Neill.  So don’t bother buying his book.

Post #85 - Good Advice from William Bernstein

Post #85

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Good Advice from William Bernstein
William Bernstein is one of my heroes.  He took a year off posting on his website while he was writing a book.  However, he did a few articles for Money Magazine.  Here is the most recent:

A training program to get in financial shape - Feb. 9, 2009

After his book is published he may not write much more about investing.  He doesn’t like to repeat himself.  As I said earlier in this blog, investing is pretty simple when you get right down to it.  Save a lot, diversify, keep your expenses low, stick with a plan, rebalance every year, and keep doing it for 40 years.  How many different ways can you say that? 

It’s easy to tell you how to invest.  But it’s very hard for people to actually do these things.  Especially when we are going through the biggest financial meltdown since the Great Depression.

Read Bernstein’s article.  He says that past downturns have eventually worked out fine for investors who stuck with their plan.  And he offers some proof.

Bernstein wrote a similar article in 2008:  Take a Deep Breath. Now Stick to Your Plan.  Again, he offers reasons why you need to stick with your game plan, despite the chaos we are going through.  Nothing new here.  But this is the crucial part of investing for the long term.  Stick with your plan.

I know it’s tough to follow this path, especially during this incredible market collapse.  But that’s exactly what we have to do.

I have made one exception to my asset allocation plan.  I don’t see the foreign governments doing as much as the US to try to work through this crisis.  So I have switched some money from international equities (developed countries) to US equities.  

Enough talk.  How about some numbers.  Someone asked me how long it would take for them to recoup the money they lost in the market last year.  It depends on how much you save, what kind of return you get from your investments, and the inflation rate.  Let’s look at an example.

Pretend you had $100,000 in equities when this whole thing started and wind up losing 50%.  Now you have $50,000.

If you save no money and you get a return on investment of 7.2% per year, it will take you exactly 10 years to double your money.  Remember the rule of 72s I talked about in an earlier post?

Now, let’s consider inflation.  In the above example, if inflation were 0% for the next ten years, the $100,000 you wind up with in 2019 has the same buying power as the $100,000 you had last year .   But if inflation averages 5% per year, then your real return will be 2.2% per year.  Your $100,000 in 2019 will have much less buying power than the $100,000 you had last year.

What if you also save $5,000 per year and add that extra money to your portfolio.  At the end of 10 years you will have close to $175,000 total.  The extra $75,000 comes from that $5,000 you saved each year, growing at 7.2%.

Again, you have to account for inflation.  If there were no inflation for the ten years, that $175,000 would be worth a lot more in buying power than if inflation averaged 5% each year.

The point of the exercise is to show you the difference between you Gen Y people and me.  If I lose 50% and stocks increase by 7.2% per year for the next ten years, I will just get back to even.  Because I’m not saving any new money and investing it into equities.  If anything, I will be selling some equities to finance my retirement.

You, on the other hand, can save additional money each year.  I recommend you save 20% of your gross income each year, whatever that is.  Let’s pretend that winds up being $5,000, just to be consistent with my previous numbers.  Then you will make back your 50% loss in ten years and have an additional $75,000 invested.  Way better than me.

So, will stocks grow at 7.2% each year for the next ten?  Nobody knows.  All I can say for certain is that stocks are cheaper right now than they were 12 years ago.  So this is a much better time to invest than any time in the last 12 years.  But I can’t tell you that your investments will go up, down or sideways.

Post #84 - "It’s a Stock Picker’s Market" - Bad Advice

Post #84

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

"It’s a Stock Picker’s Market" - Bad Advice
Now that things have gone bad so fast, stock brokers are trying to pick up the pieces.  They need people to make transactions so they can make money. 

Don’t let a stock broker convince you that it’s a stock picker’s market.  Day traders pick stocks.  Guys with too much testosterone pick stocks.  People who want to brag about their market exploits pick stocks.  Long term investors stick with their plan and use low cost index funds.

Once you tell the broker that you do not plan to buy individual stocks, he will switch tactics.  He will try to sell you a managed fund.  His argument will be something like this:

1. Index funds have all their money invested.
2. Managed fund XYZ has 80% of its money invested.
3. The market went down a lot last month.
4. Managed fund XYZ didn’t lose as much as the indexes, since only 80% of its funds were actually in the market.
5. Therefore, in bad times, its better to own Managed fund XYZ.
6. Plus, because Managed fund XYZ has cash reserves, the manager can jump on opportunities with the extra cash.  Index funds do not jump at opportunities, since they just buy the index, through thick and through thin.
7. This means that Managed fund XYZ will continue to do better for the near future.

Sounds like a reasonable argument, but it’s bunk. 

Here’s a great link with a video segment you can listen to.  It summarizes why index funds are always better than active management: A Stock Pickers Market? Keep Dreaming

Here is a link from Vanguard about sticking with your index funds: Index funds: Built to last through the market's ups and downs

Let’s go back to that argument about the excess cash.  The broker will tell you that having excess cash on hand during a down market means the managed funds will not decrease as much as the fully invested index funds.

If this is correct, then it follows that having excess cash during an up market is bad.  This leads to the conclusion that a managed fund always loses to an index fund in an up market.  It’s the same logic.  But a broker will never agree to this line of reasoning.  The broker will say that having excess cash in an up market is also good, because it allows the fund manager to find even better opportunities for higher profit. 

I’m sorry but you can’t have it both ways.  If excess cash is good during down markets, it has to be bad during up markets.  But you’ll never get a broker to admit that to you.  Ergo, you can’t trust the guy.