Here's a bit from the post below:
"I wanted to respond to Tom Hawk's comments. Someone I respect a lot, but who I disagree vehemently on this topic," wrote Mark:
Wall Street has done an AMAZING job of creating conventional wisdom. "Buy and Hold " is the 2nd most misleading marketing slogan ever, after the brilliant "rinse and repeat" message on every shampoo bottle. We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you.
That is total bullshit. Its for suckers.
I rarely venture off into the area of personal investing. That's what I do for a living, and my blog has always been a place for me to get away from this part of my life.
Hindsight of course is always 20/20, but I wanted to take a brief moment to revisit the last year in the equity markets and talk about my own personal views on how one ought to think about personal investing.
The reason for my original comments were that I worried that Mark Cuban was giving people bad advice when suggesting that they keep their money in cash investments vs. the equity markets.
Cuban rattled off a lot of good objections as to why he didn't like the market (many of which had to do with how it's marketed and less with the core underlying investment value of its, components which are easily bought today through low cost mutual funds and ETFs). His first objection, though, is one that I see time and time again and that is that the old argument for the emergency reserve.
In response to my objection that hoarding cash for a rainy day is a tremendously inefficient strategy, Cuban wrote:
Tom, I stand by what I said. You can have as long a term horizon as you want, but like most other long term plans we have, most peoples lives don't match up to their "horizons". Its amazing how life intervenes. Kids, whatever. its a fortunate few that can just shell it away and never touch it. Your "horizon" hits a dead end when you have to put money into a checking account. I have never seen any investing research that deals with random withdrawls that represents real world. And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.
So here we are a year later (much too short a time horizon to matter by the way) -- where would you be if you took $100,000 and followed Mark Cuban's advice vs. mine?
For comparison purposes, I'm going to assume that two investors both had $100,000 to invest on January 3, 2006. Had you followed Cuban's advice (and I'm using the Vanguard Prime Money Market Fund) you would have today approximately $104,882.60.
Had you taken that same $100,000 and put it into the Vanguard Total Stock Market Index (a low cost basket of stocks that tries to roughly equate to the U.S. Market) today you would have approximately $113,890.00.
Now ask yourself this question. Did you have a real life emergency situation last year that required you to cash out?
That's what I thought.
Oh, wait, you did? Whew! The market was up and you still likely came out ahead.
But what if the market had been down? Well, do you own a home (home equity), are your securities marginable (the Vanguard Total Stock Market index is) for a short term loan until you got back on your feet?
Bottom line is that in general the market has been up more years than down. But in the event of a down year, there are other places to get cash for most investors. Now let's say the market was down and you had no other place to go and had to sell your stocks in a down market. Well, at least the first $3,000 that you lost is deductible against ordinary income taxes.
So last year, following Cuban's advice could have cost you about $9,000 on your $100,000 retirement nest egg. But is that all it would have cost you? Do you know what $9,000 would be worth in 25 years compounded at 8.42% (the return of the S&P 500 over the past 10 years which includes the most brutal 3 year in a row market correction of most of our lifetime)? $9,000 compounded at 8.42% over 25 years turns it into $67,916.86.
But the point is that it's only been a year since Cuban said stocks were for suckers. He still may be right, so we will check in with this post once a year to see how things go along in the longer term.
So, where are we at today? Today the Price to Earnings ratio on the Standard and Poor's 500 trades at 17.76 times last years earnings and 16.14 times next years projected earnings (Google, by the way, sits at 56 times last year's earnings).
Historically, if we go back the last 20 years, the high on the P/E ratio of the S&P 500 was around March of 2002 when it traded at about 62 times earnings. The low was in December of 1988 (a good time to invest) when it was trading around 11.59 times earnings. The average for the past 20 years is about 22.67 times earnings. The real time to have backed up the truck of course was in December of 1974 though, when the P/E ratio of the S&P 500 hit a low of 6. (And that's exactly how Warren Buffett made his fortune, by the way, backing up the truck on low P/E stocks in the mid 70s).
So, at least in relative terms to where we have been in the immediate past (and if you believe in a reverting to the mean type philosophy), the market still feels attractively priced.
I don't know if Mark Cuban still feels that stocks are for suckers or not. Hopefully we'll hear from him on this. Despite my disagreement with Mark over investment strategy it's worth noting that he's a billionaire and I'm not. He also is a strong proponent of HDTV, something I also think holds a lot of promise for the future.
Oh and one more thing. That $104,882 that you would have grown your money to in that money market fund? Well, had the investment been in a taxable account, $4,882 of that would have been subject to ordinary income tax. Assuming a 28% Federal rate you would have been left with $103,515.04. Yep, you had to pay $1,366.96 in taxes.
Your $113,890 that you held in the Vanguard Total Stock Market index also would have been taxed, but only the dividends. Most of your growth would have been the result of an unrealized long term capital gain. Dividends of course are taxed more favorably than money market interest (15% at present), so you would have paid about $270 in taxes, leaving you with $113,620.
So here's a little free very general advice (not investment advice, remember):
1. Your first home is the best investment you can make. Do everything you can to buy instead of rent your primary residence.
2. Put the maximum amount of money that you can into your company's 401(k) each year (use the Roth 401k if your company offers it and you can afford it). Don't invest in your company's stock in your 401(k).
3. Try not to buy expensive things that depreciate (eg. cars, clothes, horses, vacations).
4. Never put more than 4% of your money into any non diversified investment unless it's your primary residence.
5. Fees matter perhaps more than about anything else. Keep them to a minimum.
6. Individual stock selection is largely irrelevant. Asset allocation and holding a diversified basked of securities that approximates various market weightings will be far more responsible for your returns.
7. In a taxable account each year, sell any security that declines in value by 10% or more irrespective of your investment outlook for the company. Take the proceeds and put it into another company in the same sector.
8. Don't sell a stock with a capital gain in your taxable account unless it becomes more than 4% of your total liquid net worth. Then just keep trimming it to keep it at 4%.
9. Once you own your own home and have maxed out your company's retirement plan, use your remaining money, if you have at least 10 years until retirement, to purchase either low cost index funds and ETFs or to build a portfolio of stocks which approximate market sector weightings.
10. Don't day trade your account.
11. Don't sell your stocks when things seem like they are at their worst. (The best time to invest in the past 5 years was right when we invaded Iraq and everyone was dumping stocks and pundits were saying the sky was falling).
12. Ignore the noise (CNBC, stock pundits, Cramer, Yahoo Finance, stock message boards, your neighbor Eddie down at the dog park, etc.)
13. Sometimes the best thing to do is to do nothing.
14. Sometimes the worst thing to do is to do nothing.
15. The "experts" don't know much more than you do.
16. Avoid things that are "sold" to you.
17. If you want to save for your kid's college education, use the lowest cost equity 529 plan you can find. If your state offers tax benefits for using their 529 plan, consider using their plan.
18. Don't take out personal loans against your 401(k) (the interest is taxed twice) unless your are using it to buy your first home.
Ok, now that's all from me on investing for the next year.
Happy New Year.