Category — Investing

Well, the first quarter of 2009 is history. We’ve seen a nice bounce at the tail end, but overall it’s been more of the same old downward trend. The S&P 500 finished the quarter down 13.3%, while the Dow Jones Wilshire Global Index, which only consists of foreign stocks, was down 10.8%. There were some positive signs in the international arena as some countries made some impressive gains.

Best and Worst Country Returns Based on the Dow Jones Global Indexes Ranked by U.S. Dollar Performance

Winners (Source: Dow Jones)

Losers (Source: Dow Jones)

Dave Ramsay thinks we should keep investing. He has hope for the near future and does not agree with the talking heads on all the media outlets preaching doom and gloom. He has a free report titled, “The Wisdom of Great Investors” available for download, along with a video commentary. The report illustrates how to make the most of your money in a slow market. It has plenty of charts and graphs showing how media forecasts were wrong 67% of the time. The report says that those who stick with their investments over the long run, often see the highest returns. You get the picture.

While the doom and gloom are all over the media right now, it’s warranted. It really does suck for a whole lot of people. It’s not psychology, it’s real. In my humble opinion, there’s no upside in the equity markets until at least late 2010. There’s no quick fix, no surprise news that will stop the bleeding, let alone trigger a bull market. The economy has no choice but to heal slowly. Invest now, Dave Ramsey? Not me.

All my retirement funds are now parked in CDs and money market accounts. I’m actually getting positive returns in my 401(k) and IRA. Yippee! I changed my future contributions to $0 beginning April 1, so I can maximize cash to get rid of my debt as fast as possible, which is like earning a positive return. The only things I’m trading right now are SPY options, GLD, and USO on the up and down swings. That’s all there is right now…crazy ups and downs, but overall flat or lower for the year.

The report smells like it was written by investment advisers who miss collecting your fees. Sure market timing is extremely difficult, but it is possible. They spin the charts and data in favor of “set it and forget it” investing method. Hey, if you don’t have the emotional control and mental focus to time the market, then by all means, keep it on auto-pilot and worry about other things. They keep pushing the metric of average market return of xx%. Carl at BehaviorGap has a great slide show on this myth of average market returns. ”Recognize that short-term under performance is inevitable”. What?!? Just accept it? Not me. If you are comfortable watching your portfolio value shrink while your advisers still collect their fees, then go ahead and follow Dave’s recommendation. I will keep paying down my debt and waiting for my indicators to tell me it’s OK to enter back into long-term equity mode.

Here’s a quick little interview from Time Out NY with a Dutch fashion model who just started investing in real estate after taking a few seminars at Trump University. I hope she keeps her day job.

Time Out New York

The first Ford Thunderbird that rolled off the assembly line in September 1954 fetched a winning bid of $660,000 at the January 17 Barrett Jackson auction. This amounts to an annual return of 10.93% based on the original suggested retail price of $2,695 in 1955. Not great, but it beats the recent stock market returns.

The February 9 auction of a 1939 Bugatti Type 57S Atalante Coupe brought a winning bid of $4.4 million. Not bad for a garage-kept beater, but a beater that was one of only 17 in existence. I’m no car aficionado, but I’m probably guessing that these are extremely rare cars and not the expected rate or returns for most collectible automobiles.

I wonder what the actual return on investment (ROI) is when you factor in the maintenance and storage costs , and capital gains tax. Heck, my Bimmer cost me thousands of dollars to replace the 20″ tires that had flat spots for sitting in storage without being moved at all. I cut my losses and traded her in…for a Hyundai. Have you ever seen a Broke Wall Streeter cry?

A simple metric to determine if the stock market is undervalued, fairly valued, or overvalued might be the total market value of US stocks as a percentage of Gross National Product (GNP). According to an article in the February 4, 2009 edition of Fortune Magazine, this ratio peaked at 190% in March 2000. The ratio had never exceeded 100% between 1924 and 2000. Compared to the historical norms, this high ratio may indicate that the stock market is overvalued. In the case of March 2000, it could be categorized as significantly overvalued.

In 2001, Warren Buffet referred to this ratio as “probably the best single measure of where valuations stand at any given moment”. He also stated that, “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you”. In January 2009, the metric fell to 75%, right in the sweet spot of Buffet’s range. The S&P 500 index rallied 5.2% in the first week of February. Hmmm…chicken or the egg? Did the rally happen because of the Buffet article published on Feb. 4? The chart sure looks like it. The rally fizzled on Monday, so for the short-term, I think this pop was purely due to the “Buffet factor”. Besides, according to the chart, it looks more like under 50% should be the sweet spot, not Buffet’s recommendation of 70-80%. Hey, who am I to argue with a billionaire? I’m just a Broke Wall Streeter.

As always, use this metric in addition to other models and indicators. Don’t rely on a single metric to determine your long term investment strategy. Click to enlarge the illustrations below.

Fortune Magazine article