Rally Evaporates

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As expected, the Fed cut the fed funds rate and the discount rate by 0.25% each. The accompanying statement regarding inflation concerns was largely unchanged from last month. The Fed further elaborated that readings on core inflation have improved somewhat and that trend should moderate in the coming quarters.

Apparently, that was not good enough for the Wall Street crowd, and the markets reversed course with the Dow, at one point being up 178 points, closing down 12 points.

Our Trend Tracking Indexes (TTIs) fared as follows:

Domestic TTI: +1.23%
International TTI: -2.85%

That means, domestically, we’re back to watching further trend developments to see if the upper band of the neutral range (+1.50%) will be broken, which would then generate a new Buy signal.

Right now, we need to continue to be patient; I will focus on those areas that already have started their own individual trends regardless of the positions of the domestic and international TTIs.

All Eyes On The Fed

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Market activity has been sloppy over the past couple of days with anxiety rising as to whether the Fed will cut rates again tomorrow. The decision will be announced around 2:15 PM EST.

Our Trend Tracking Indexes (TTIs) pulled back and are situated as follows:

Domestic TTI: +1.11%
International TTI: -2.72%

We are holding on to some our small positions in emerging countries, Latin America and the Transportation Index along with our Swiss Francs. Our sell stop points are set and will be executed if the markets head south.

My guess is that the Fed will cut 0.25%, but the accompanying statement will be just as crucial. Any unanticipated wording, which might be interpreted as a negative, will most likely result in a sell off, which will send our TTIs back to the lower range of the neutral zone.

I will post an update after the market close on Wednesday.

The Annuity Game

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While I don’t always agree with Paul Farrell’s viewpoints, he did write a nice piece about annuities called “Clip Job.” If you own an annuity, or are consider investing in one, you owe it to yourself to read the entire article. Here are some highlights:

Although I rarely write about annuities anymore, over the years I’ve built a huge file of “colorful” articles on annuities. “Colorful” is my metaphor for some juicy and brutal titles that sound more like they’re ripped from tabloids. The message is painfully clear: The press loves trashing annuities, year after year after year.

But what’s really striking is how the critics are still hammering away at the same old problems, suggesting that all the bad press, criticisms, lawsuits and piñata whackings have had little effect on changing the annuity industry’s bad behavior.

Indeed, sales have roughly doubled in a decade. And as InvestmentNews put it in a special report on insurance products last fall: “Acceptance of annuities seen to be on the rise.”

Don’t get me wrong, there really are honest annuity companies and brokers out there. And annuities do work for many investors: “We’re not condemning the product,” one senior executive at the Financial Industry Regulatory Authority, the securities industry’s “self-policing” agency, was quoted as saying in BusinessWeek. But “we have concerns about the way they are sold.”

Along with FINRA, however, there’s a vast patchwork of state agencies and insurance industry regulators that make effective policing tough.

In fact annuities have countless, hidden flaws that all too often remain undisclosed until it’s too late: excessive commissions, lower returns, payout delays, surrender fees and long lock-ins. Still annuity sales climb.

As BusinessWeek puts it: “Potential buyers can ignore the sales fluff and dig into the fine print to figure out if an annuity is right for them. But that can be a real slog.” Some prospectuses can run “over 500 pages, so you know why most buyers wind up relying on a sales spiel.”

The big reason annuities sell so well is simple: Sales commissions are lucrative for annuity sales agents, some as high as 14%. As a result, the industry attracts aggressive hustlers with questionable ethics preying on vulnerable customers, especially the elderly, a pattern that gives the rest of the industry a bad name.

Bashing annuities has been major league sport among independent experts who’ve analyzed them. Here’s a montage from my files over the years, about how bad things have been for a long time:

Smart Money: ‘Can’t get a bigger commission’

In “Ten Things Your Variable-Annuity Seller Won’t Tell You” you’ll hear that “legions of brokers, insurance salesmen and independent financial advisers are clamoring to sell them. Why’s that? ‘You can’t get a bigger commission for anything else these days’ … about twice what your broker usually gets for peddling a mutual fund.”

Bloomberg: ‘Good for one lady in Iowa’

“When I was in the insurance industry,” said finance professor and annuity expert Moshe Milevesky, “we used to joke that there probably was one lady in Iowa for whom the product was good.”

Wall Street Journal: ‘Treat them like blind 12-year olds’

In a critique of the “Annuity University,” one of their trainers tells salesmen the best way to sell to potential senior-citizen customers: “Treat them like they’re blind 12-year-olds.”

InvestmentNews: ‘Sellers are burning consumers’

“Too many sellers are burning consumers … buyers of variable annuities have no idea what they’re actually buying, and many have been lured into an inappropriate investment vehicle. … Many, if not most, elderly will see little or no benefit from a tax-savings strategy that can take 10 to 15 years to pay off.”

The story goes on featuring other ‘sales techniques.’ Over the years, I have been asked by many readers and clients about my view of annuities. Here are two facts I have found based on personal experience:

1. I have never met a client/reader who told me that he was happy with the annuity he or she owned. Au contraire; most asked for my assistance in getting out from under it.

2. All annuity owners I have come in contact with did not go out to buy an annuity. It was sold to them.

And that has been the rub. They were sold an annuity; they did not do the research and selected one based on their criteria and needs. My view is that, especially today, with instant access to the internet and just about all the information you could ever want, it has never been easier to spend a little time and do some annuity research to educate yourself. Whether you then choose to work with an agent, or contact an insurance company directly, is up to you.

Since I believe that there is never a reason to buy a “load” mutual fund, there is also no reason to ever pay a ridiculous “up front commission” to buy an annuity product.

Buy And Hope To Hold

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Random Roger had an interesting take on the China market and whether it might make sense to ease back in with a conservative allocation. He concluded that “this all might flow into an idea I have expressed before that maybe “buy and hold” should be replaced with “buy and hope to hold.”

Buy and hope to hold? I must admit that I have never heard that term before, but it makes a lot of sense. Hat tip to Roger, if he created that one!

Even when applying trend tracking, I take a position in a fund/ETF that I believe has started an uptrend and my thought is that I like to buy and hope to hold, only subject to my sell stop rules. So the hope to hold is not wishful thinking but simply an extension of my exit strategy.

This is what happened when we entered (late in the trend) a few positions for aggressive clients in the China market via FXI last year.

Take a look at the 1-year chart of FXI:


Our entry point was late August and the idea was that FXI’s trend might continue; in other words we bought and were “hoping to hold.” Early November, the trend reversed and we were stopped out with a 30% gain. FXI slowly, but surely, deteriorated and hit a low of some $125 in late March of 2008 before rebounding.

Those investors who were simply “buying and holding” pretty much surrendered most gains of the last year or so. This is a very good example of not only of the proper use but also the importance of a trailing sell stop along with the mindset “buy and hope to hold.”

Sunday Musings: Get Smarter Using Simple Heuristics

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I’ve been reading “Simple Heuristics that make us Smart” by G. Gigerenzer and P. Todd, since I found it referenced in an investment book.

The authors define the term “heuristic” as “serving to find out or to discover.” In the early 1900s, Einstein used the term as “an approach to a problem that is necessarily incomplete given the knowledge available, and hence unavoidably false, but which is useful nonetheless for guiding thinking in appropriate directions.”

With the advent of information processing theory in cognitive psychology, a heuristic came to mean a useful shortcut, an approximation, or a rule of thumb for guiding search, such as a strategy that a chess master uses to reduce the enormous space of possible moves at each point in a game.

Read that last paragraph again. Isn’t that what most investors are faced with when trying to make investment decisions? Reducing variables in the decision making process is what I like to call it. Here’s how the authors describe the simplification of a decision making process:

There is a sound reason why a person might base a decision on only one reason rather than on a combination of reasons: Combining information from different clues requires converting them into a common currency, a conversion that may be expensive if not actually impossible.

That is exactly what you are faced with when making investment decisions based on fundamental analysis which, given the wide variety of information available, may require you to have the anticipating mind of a chess master.


Even if you have the time and ability to correctly analyze hundreds of data points leading to your ultimate investment decision, and the purchase of a certain mutual fund or ETF, you will still need one more thing once you are actually invested. That one thing is a trend in place to propel your investment higher assuming you took a long position.

My take on using heuristics is that my trend tracking approach filters out all of the noise and reduces dozens or hundreds of variables to only one that I can measure: The trend; is it up, down or sideways?

It’s a far simpler and more effective process, one that I have used even before I knew what heuristics were all about. The book is only interesting to a certain point for me. It’s not an easy read, and I will most likely not finish it since it’s more suited to a psychologist or therapist in that field.

This not meant to be demeaning to the quality of the book; it’s just my shortcoming that my interest in that subject is limited.

Never Too Big To Admit Mistakes

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I have repeatedly talked about the importance of not only tracking a sell stop but actually executing it when the price point is triggered. Many readers have told me that this is one of the most difficult things to do. Why? Very simply, because it is an admission of having been wrong especially if that sell stop triggers a loss as opposed to locking in a gain.

Get over it! When you invest, you will have losses and admitting that you were wrong from time to time will not kill your portfolio. What will kill it is letting small losses turn into large ones.

If you need a reason to get over that false sense of pride, take a look at how Warren Buffett, one of the greatest investors of our times, handles this issue. If you think he never makes mistakes, think again. Here’s an excerpt of his letter to shareholders (page 8) for the world to see:

And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors.

To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and that $1.35 billion would have gone to somebody else.

About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting, called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it. I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners.

Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager and outstanding human being. He knew the television business forward and backward and would not have called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But I didn’t listen.

In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once described: “If his I.Q. was any lower, you would have to water him twice a day.”)

Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions:

“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

I like his down to earth style of describing how things are and not how he would like them to be. There are great lessons to be learned from his attitude, so take that to heart and next time you find yourself on the losing end of a transaction, swallow your pride and think how Warren Buffett handles failures.

If you openly admit to a loss, rather than trying to hide it, you might even get some (deserved) sympathy from your better half.