Monday, April 13, 2009
(Cont'd from above)...

Jim (cont'd):   

They say that it is impossible to beat the market… some regular people suggest to invest in low cost index funds to try to mimic the market… you may not beat the market… but unlike all those numbskulls out there, picking stocks like that bafoon Cramer… at least it won’t beat you… no… that is hogwash… and just like a hog… if you listen to this piece of conventional wisdom… you will, get slaughtered… somehow in the 21st century when increasing personal autonomy is all the rage… when we have an endless nonstop world wide garage sale on the web… when everyday, everywhere in all aspects of our lives we are encouraged to think for ourselves… the so called responsible people think that in just one area, managing your own money… things should be left to others… to the experts… to the index funds… doesn’t that sound nuts to you when you think about it like that… especially after the experts have so fantastically and publicly dropped the ball.

I have said this before, I will say it again… you care more about your money than anybody else… this is not aherotical, it just seems like it because of all the nonsense you hear… your fund manager, your broker, they care about getting a piece of your money… and that is why this common sense consensus that individual stock picking is for losers, is so good for Wall Street… bad for you… make no mistake, fund companies practically print money with these index funds… even if the fees are low… because they don’t think they will work… they love it when you hand your money over to them and take their cut… they are good at taking their cut… that is their job… me, I believe that you can do it yourself… I don’t want your money, I don’t want your fees, I don’t want your commissions.

The arguments against what we do here do not make a lick of sense… it has never been a better time to be your own manager… commissions has never been cheaper, information has never been faster, easier to access, your computer… you are on… if you want, you can just do it all on the web… we are living in a world where anyone sitting at… well, anywhere… can instantly pull up more valuable information about the market then say, how about JP Morgan, the man… more than he could learn in his entire lifetime is at your fingertips… but somehow two big ideas have gained wide spread acceptance during one of the greatest bull markets in history… you know, the one that came crashing down in 2008.

First, there was the idea that everyone should always own stocks all the time… but at the same time so called experts would tell you that no one should invest on their own… isn’t it pretty clear that both of these ideas have been discredited… here is the thing… everybody talks about how the first idea, that you should always own stocks, seems to have failed spectacularly… nobody is pointing out the failure of the second idea… that no one should invest on their own… that the safest most responsible course is to keep your money in an index fund, or a group of funds… sorry friends, that argument is bogus… it is as bogus as the one that says that you should always own stocks all the time… now do not get me wrong, index funds are terrific in their place… they are a valuable and welcome innovation for investors who don’t have that much time on their hands… or much interest in picking stocks… everyone should be aware of them… and there are plenty of times when owning an index fund is the right choice for an investor who wants some exposure to stocks… but that doesn’t mean that index funds are the only appropriate way for regular people to own… or that you are an idiot if you try otherwise… and that is the near consensus among the pundits though.

That watching this show is wrong… that watching is wrong… because it gives you control.. they think that if you are not a professional you can’t handle it… and that anybody like me who tries to help you is aiding and abetting dangerous behaviors… is that what it is… dangerous behavior, do you think that… why has this transparently bogus consensus emerged… first, most people who puntificate about stocks and investing don’t really know much about these things… there is no reason why they should… usually they have never done it themselves… let’s be honest… if you are someone who knows how to make money in the market… you don’t usually become a commentator… I am an oddity… I am a freak… just the freak that I play… a guy who left the hedge fund business, who was running a half a billion dollars, after a terrific run because I knew that someday it would give me a heart attack… most of these people are casual observers… and in most cases they don’t even claim to have any expertise… just good old American common sense… how difficult can it be anyway… everyone knows about stocks… that is exactly the argument that alienated the portfolios of all of the peoples who believed that timing the market was impossible… individual investors picking stocks on their own, on the other hands, could have saved themselves fortunes by getting out when I said sell when the Dow was at 11,300 back in September of 2008... and again at Dow 10,000 on my “Today Show” appearance on October 6, 2008... when I took my whole career and put it in the hands of the market, because I had that much confidence... and I was right.

There is a total legitimate case for index funds too and that is what makes this defeatist argument so compelling… there is a grain of truth… in essence the case for index funds is that it is very difficult perhaps impossible to beat the market… so why even try… imperically see I know that that is not the case… but in the right context it is not a bad argument… here is the thing… the case for index funds did not start out as a case against managing your own money… it started out as a case against professional mutual fund managers… which we agree with it… most actively managed mutual funds do not consistently beat the market… therefore if you are turning your money over for someone else to manage for you, why not put it into an index fund… pay a significantly lower fee.. that was the secret sauce of the index fund… I am down with that… actively managed funds is a class, with very few exceptions, the worst type of investing… that is because there is an inherently misleading aspect to the way nearly everyone of these funds operate… I know this, I was a professional, no one is going to blow… who has an interest to tell this other than me.

Most people assume that a mutual fund will get out of the market if its professional managers think that there is a serious risk of the market falling… that is just untrue… a pro can not afford to under perform against its competition… the key words in that sentence being not under perform, but against his competition… that is the other guy running other funds… in practice, that means that almost all mutual funds stay almost fully invested almost all the time… see no one can ever be sure if the market will be rising or falling… that is what they think… and a fund manager cannot miss any of the rises… that is how he gets fired… because all of his competitors will make money when he did not… if the market falls, they all lose money together… so what… they still get their percent anyway… he gets to keep his job… so there is no real incentive for these guys to get out at any point… they never feel like they have to sell.. they think it is heretical… they are wrong… too many people have a false sense of safety with actively managed funds… you saw it in your account.. you can’t count on them to protect your money the way that they would their own… do you think they even have their money in it… maybe.

And these guys all rationalize it by saying that if people did not want to be investing into it all the time, they would not put their money… wouldn’t have put their money into the fund… in reality… you are looking for them to help… in reality you are actually better off in an index fund… there at least you don’t have any excuse for thinking that someone is watching out for you… but the case for index funds, for holding up your hands and saying oh the market is unbeatable… just doesn’t make sense… the same way when you are comparing the ordinary home gamers for running their own money… why should you yourself… well, first of all we try to make it fun.. that is not a sin… although many people think that it is… well, they are wrong too… and you know that because you watch… we want you to be in control of your own money, most people didn’t side step the markets huge sell off in 2008 at the very beginning of 2008... but some people did… if you watched you did, and you had the best chance of being one of them if you managed your own money… and not to brag or anything, if you are listening to me, you sold… you sold and started to get back in when it got much lower.

You were not outclassed… the hedge funds they have advantages, but so do you…. the big guys can’t run rings around you… you will here people say that home gamers can’t compete with the big boys and you read it without getting trampled.. but there is no arena… sure the big institutional investors, they have some advantages… but so do you… you are nimble… trading billions is a whole lot harder than trading thousands or hundreds of thousands… you do not have to worry about the politics of professional investing either… and you can take the taxes when you want to… not when they tell you to.

The bottom line...

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The Bottom Line!:     That is why I believe that by picking the right stocks and knowing when to sell… you the so called little guy, like I was when I started, can come out ahead… Stick with me, and I will give you the best possible coaching I can give you to help you get there... I think you can invest on your own, if you’re willing to do the homework & I’m here to help.

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:    I have a stock that has doubled in price. Now what do I do?    Do I let it ride?    Do I take out half?   I am not sure what to do.

Jim:    Well, I will tell you, I like to fall back on some time honored principles which I first articulated in REAL MONEY, which is now in paperback… and I always say that bulls make money, bears make money, and hogs get slaughtered… it is imperative upon you to be able to take some profits… you will never, ever regret taking profits… no one has ever regretted taking a profit.

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Q:    I am pretty young and I have a limited capital. And my question is do you recommend a practice account, using a portfolio tracker?    Or do you believe the true practice can only come from buying actual shares?

Jim:    The problem is, is that I like people to get started with paper portfolios or buying one or two shares… that is how I started, so maybe I am biased… this is a very intimidating process, you watch the show, you learn how to do the homework, and while you do it you don’t lose a lot of money… I used to tell my people when we started my hedge fund, when we had a new area, that we would do it like, literally like a rotisserie link… so I can’t tell you to do different… my suggestion is rotisserie link… and in being in control of your own money… I think you can invest on your own… got to do the homework… got to keep watching the show… but you will keep making money.

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[verbatim recap]

[end of segment]

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