Burton Malkiel: How to Invest

I do not own Malkiel's new book, but his advice is well worth heading, and makes a lot of sense to me. For investors who were diversified, this was not a lost decade, but a decade of moderate positive compounding. In addition to the average bond market compounded returns over the decade of 5 - 7% per year, the diversified investor could have reaped the following total returns:

Domestic	Return	International	Return
Large Cap	-9.1%	Large Cap	12.4%
Large Cap Value	27.6%	Large Cap Value	41.4%
Small-Cap	41.2%	Small-Cap	52.3%
Small Cap Value	121.3%	Small Cap Value	198.6%
Real Estate	175.6%	Emerging Markets Large Cap	154.3%
		Emerging Markets Small Cap	176.7%
		Emerging Markets Value	212.7%

Hardly what I'd call a "lost decade." But this does not mean, go run out and put all your money in emerging markets as you chase last years performance. It means follow an asset allocation strategy that spreads your investment across all these classes so that if one class doesn't perform well the performance of other classes can keep your portfolio on an upward trajectory.

Robert Hagstrom: How to Beat the Market

I don't have much faith in market prognosticators. Years ago I did buy Hagstrom's book The Warren Buffett Way, and was quite taken with Hagstrom's analysis of each of Bufett's major investing decision.  The argument was compelling that a rational investor in control of their emotions could substantially beat the market by selecting a small number of companies with superior long-term business that possessed wide motes or barriers to entry.  However, this was much easier said than done.  I invested a nominal amount in the Legg Mason Focus Fund run by Hagstrom.  Don't try to track down this fund, because it doesn't exist anymore.  Beating the market is much more difficult in practice than theory.  Unless you are a budding Warren Buffett, you're probably better off practicing an asset allocation strategy across multiple asset classes than trying to pick a handful of winning stocks.

Worldwide Ubiquity of Fast Food/Convenience Culture

Is America's revenge on the rest of the world to make them fat? All kidding aside, American fast food is growing like wildfire all around the world.  An interesting article in Business Magazine highlights the invasion of the fast food companies in the Middle East.

Learning from Sweden's Free Market Renaissance

Sweden was a rich nation between 1870 and 1970 when government was very small, but then began to stagnate as welfare state policies were implemented in the 1970s and 1980s. The Center for Freedom and Prosperity Foundation explains how Sweden is rolling back the welfare state in an attempt to undo the economic damage of these policies. The highlight of the video is the "peeing in your pants" analogy.

Lessons I Learned from Financial Armageddon

Today marks the one year anniversary of the market lows experienced during the global financial meltdown.  That day the S&P 500 closed at 676.  Today it stands at 1140.  I would less than honest if I didn't admit I felt like the world was ending, and that everything I'd worked so hard for was going to vanish into thin air.  At the bottom, I literally felt like throwing up every time I looked at my portfolio.  But I resisted the urge to sell in panic like so many of my friends.  I'd been investing since before the market crash of 1987 and knew instinctively the long term trend for equities as a whole is up.  Investing is an act of faith that tomorrow will be better than today, but that faith is always tested by bear markets.  I didn't sell anything, but stuck to my asset allocation model, keep my discipline.  And this made all the difference.

I think all long-term investors should keep a historical perspective on the markets.  They should especially go back and review those periods in history where turmoil takes hold and the markets veer irrationally out of control.  Looking back over the past year, reinforced some lessons that bear repeating:

1. People aren't as risk tolerant as they think.  Design your portfolio so you can emotionally withstand the inevitable down periods without panicing.
2. Performance chasing, just like envy, is an emotion that is alive and well in the investment community.  It is the hype that Wall Street is built on.
3. Common sense goes down the drain when it comes to investing. Who wouldn't jump at paying $1 dollar for a hamburger that previously cost $2?  But how many run away from buying the S&P 500 at 670 when they were buying with both fists at 1200.  Or has Warren Buffett recently said, and I paraphrase, "When it's raining money, bring a bucket instead of a thimble."
4. Seers and forecasters have no special insight and are wrong most of the time.  Yet people will pay a lot of money for expert advice (magazines, newsletters, investment accounts).  Like a stopped clock, they will be right every now and then, and they will be anointed gurus.  Hope lives eternal.
5. What we learned previously is easily forgotten when the greed cycle kicks back in.

My own reaction to this most recent financial Armageddon was to tough it out and place my faith in the long-term upward trend of economic growth and human improvement.  My shortcoming during the crisis was not keeping a level head and buying more at the low points.  May I have a more wisdom during the next crisis to seize that golden opportunity.

Is it Time to Move to Open Source Software?

After years of frustration with Microsoft Windows dealing with issues from declining performance to virus and adware, to purchasing expensive software such as Microsoft Office I made the decision to save myself money and headaches by switching to Linux.

I was under no illusions.  Linux is not for the faint of heart.  It requires some computer savvy, and the willingness to seek out answers and experiment without the fear of failure.  It also helps that I earn my living in the computer field and have a better than average knowledge of both Windows and Unix.  My idea of a fun Saturday is tearing down and rebuilding old computers.

I deleted Windows from all my computers and chose to install the Ubuntu distribution.  I much prefer the Debian based distributions to others such as Red Hat, Suse or Mandriva.  That is a personal prejudice of mine, just as I prefer Gnome as my window manager over KDE.  It is all a matter of taste.

What did I get for all of my troubles?  Other than a few technical challenges that I was able to overcome with all the help posted on the web, I now had a rock solid operating system that didn't cost me a penny with the following features:

1. Open Office, the open source equivalent of MS-Office.
2. A world class image editor, the GIMP, which I use to create web images and design book covers.
3. A vector drawing tool, Inkscape, which I use to design scalable graphics and book covers.
4. Format print quality books using LATEX.
5. Rip CDs and DVDs.
6. Load music onto my iPod.  The latest and greatest iPod models are not always support right away.
7. Record live radio into my own library of podcasts.
8. IM with any of the major IM systems.
9. Watch and record TV shows using MythTV.
10. Browse the web using Firefox, Google Chrome or Opera.
11. Make calls using Skype.
12. Sync files across all my PCs using Dropbox (love that program).
13. Manage money using GNUCash.
14. Manage eBooks using calibre.
15. Too many multimedia options to list.
16. Programming and web design tools such as Eclipse.
17. CD/DVD burning.
18. Virtual Box to run other OS's in a virtual machine.

 There is no major feature I can think of that I've had to go without.  My main annoyance is the lack of support for some propitiatory Microsoft formats streaming over the Internet.

For the average person, I  recommend the Linux Mint distribution which comes configured with full multimedia support out of the box.  I'm not crazy about the default look and feel of Linux Mint, but that can be changed easily enough through the Gnome Look website.

If you have an old PC laying around ready for the junkyard, give Linux a try.  You'll be pleasantly surprised and save yourself a few bucks.

Why I Don't Buy Personal Finance Books Anymore

The writers of personal finance books may not like the title of this article.  But don't get me wrong, in the past I've bought plenty of books on personal finance and investing, even a couple of get rich quick schemes.  However, I've reached my limit and won't be buying anymore.

Why?  Because they all seem to be variations on the same theme, and I don't need to have 100 different authors put their unique spin on the same ideas.  My bookshelves aren't that big.

At the 10,000 foot level you can sum up the collective wisdom as follows:

1. Spend less than you earn.  Be frugal.
2. Build up an emergency fund equal to 3 - 6 months of your salary. 
3. Education never ceases, and is the key to increasing earning power (i.e., invest in yourself).
4. Limit the number and use of credit cards.  Ideally, become self-financing.
5. Pay off high interest rate loans first.
6. Don't over-complicate your investment strategy.  Keep it simple and diversified.
7. Compounding is the eight wonder of the world.
8. Cost matter in everything, especially where they compound year after year-- like mutual fund fees-- so seek out the low cost providers.
9. Integrity matters in everything, so seek out those companies with an unblemished record of honesty.
10. Stick with index funds.  Don't put your faith in star managers.
11. Determine the proper asset allocation for your risk tolerance.  Then stick to it.
12. Invest and rebalance regularly.
13. Don't fall for get rich quick schemes.  If it was such a great idea, they'd be doing it themselves instead of wasting time selling you their system.  They are marketing companies, not investment companies.
14. Pay off your debts so you can live like nobody else.  

That's my synopsis.  I'm sure many can come up with other ideas of what to add to this list. The point is that money management and investing is simple at the conceptual level, but much harder to put into practice because it requires discipline, the deferral of immediate gratification and a lot of good old fashion values.

What I've learned about investing is contained in a handful of books, the others are just rehashings of similar ideas.  I would recommend Common Sense on Mutual Funds by John Bogle and The Four Pillars of Investing by William Bernstein.  Everything I need to know about investing is contained in these two books, which is why I don't need to buy the latest and greatest, and can invest the money I saved.  In addition, I find numerous articles on the internet that are worthwhile, but like everything on the internet you have to sift through the garbage to find the gems.  

Quote of the Day: Ralph Wanger

“For professional investors like myself, a sense of humor is essential. We are very aware that we are competing not only against the market averages but also against one another. It’s an intense rivalry. We are each claiming, ‘The stocks in my fund today will perform better than what you own in your fund.’ That implies we think we can predict the future, which is the occupation of charlatans. If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you.”

~ Ralph Wanger, former manager of the Liberty Acorn Fund