Less is More. Even Less is Even More.

August 17, 2011

That there’s too much information is obvious. So don’t perpetuate the problem.

If you’re reading this, then presumably you’re financially curious if not financially savvy. As the old saying was supposed to go, curiosity killed the overzealous investor. Here, just this once, resist the temptation to check the market daily. It does you no good to let your moods move in sync with what other people are willing to pay for stocks. If the public is an ass, what does that make the person who lets them dictate his behavior? Instead of exposing yourself to numbers that you’re powerless to do anything about anyway, live your life. Walk your dog. Learn HTML. Take shooting lessons. Floss your teeth, which you probably don’t do enough anyway.

The Wall Street Journal, Yahoo! Finance and every general news outlet’s business section each devote a prominent place to the same particular piece of information, listing the index values and changes from yesterday (or from the previous hour, or sometimes the previous minute.) Every change, no matter how minor, becomes newsworthy by definition: otherwise, CNBC and Fox Business would be reporting on something else.

Even no news is news: “Stocks remained largely unchanged today.”

If you’ve ever obsessed about your weight, and most people have, you’ve stepped on the scale daily. (We’re talking to the normal-sized people in the audience, not the fat ones.) It’s not uncommon to weigh yourself twice or even more times a day; say, immediately before and after a workout. (Note to the fat people who are still reading after specifically being told not to a couple of lines ago: a “workout” is this procedure by which you combine aerobic and anaerobic exercise in order to build muscle and burn lipids. “Exercise” is this…oh, never mind.)

Ever been in a relationship where either you or the other person constantly looked for reinforcement? If it happens often enough, suffocation sets in and the relationship crumbles. If he loved you 6 hours ago, and last week, and last month, and a year ago, chances are pretty good he still loves you now.

The week of August 8-12 was an anomaly among weeks on the New York Stock Exchange, with 400-point swings every day. Given the level of the Dow, that means changes of less than 4% every day. Each of which might be meaningful if every jump hadn’t been followed by a fall of similar magnitude, and vice versa.

400-point swings on an index that sits around 11,000 aren’t as important as you think, especially given how fleeting they are. For a comparison, thank God the ordinary digital bathroom scale only gives readouts to the nearest half-pound. There are people reading this right now who would freak out and discover a new thing to obsess over if there existed a commercial scale that could weigh you at 150.3489 pounds first thing in the morning, 151.9849 after breakfast, 150.6227 before lunch and 150.1452 when you went to bed.

Here’s 12 days’ worth of recent market movement:

And 12 months’ worth, each plot point representing the Dow on the 1st day of the given month (or the 31st day of the previous month if the 1st was a Saturday, etc.)

Note the difference in the heights, but also note the difference in the scale.

Most importantly, note the difference in the progression. The same investors and railbirds who were alternately cheering and cursing the market throughout the time span of the first chart could probably look at the second chart with sober happiness, if they a) wanted prices to rise and b) had the capacity to process information at this more deliberate speed.

Seriously, look at the pretty multihued second chart again. Tell the typical investor in September of 2010 that the market is going to do that over the next year, and she’d have been overjoyed. Unless, of course, she was selling everything short. Granted she’d have preferred to have gotten out of the market back in May, but we humans haven’t been equipped with functional hindsight. All in all, the market has shown a consistent path toward growth over the past year. No, it might not in the future. As usual, that’s not the point.

When you check the market as often as it swings, that makes as much sense as a climatologist duly noting that her geographic region of interest warms up every morning yet gets colder every evening.  It’s not that the data means nothing, it’s that it means nothing unless placed in the appropriate context. If you’re a mayfly, or Zsa Zsa Gabor, then go ahead and check stock prices as often as you can. In fact, even that doesn’t make sense because if you’ve only got a short time ahead of you you should be enjoying life, not looking at columns of data.

Most of you are going to check the market tomorrow regardless of what we suggest. If you’re really hungry for information, browse our archives. Or better yet, buy our book and learn what else you should be doing.

**This article is featured in the Yakezie Carnival, The Hurricane Season Edition**

Filed Under: Bad Examples, Investments, Making Smart Choices, Newsflash Tagged With: , , , , ,

Too big to fail. Too small to succeed.

August 12, 2011

A new adjective to describe the size of our government: gynecomastic.

Stock recommendation coming. But first, a rationale.

You might have noticed that there’s no disclaimer on ControlYourCash.com, the absence of which is yet another feature that sets us apart from almost every other personal finance blog.

There are at least 2 reasons for this. We never included a disclaimer because if you’re stupid enough to lose money on an investment just because we recommended it, that’s your problem, not ours, and we’re willing to argue that in a court of law should it come to that.

We hate the very fact that we had to mention that, which indirectly explains our other reason for the lack of a disclaimer. If we were to act out of defensiveness, submitting to the framework devised by the lawyers who run our nation, that would make us complicit in the problem. It’s the same reason why every time either of us checks into a hotel room, the first thing we do is take a pair of nail clippers and remove that sticker on the blow dryer that tells you not to immerse it in water. Along with the smaller sticker that proclaims that the state of California has determined that the cord is poisonous, therefore you should wash your hands after using it. That we’ve attributed the power of reason to a fictitious political entity, and that most people don’t seem to notice or mind, augurs horribly for the future of a nation in decline and an ostensibly free people.

So here’s the aforementioned stock recommendation. Well, more of an industry class recommendation. Stay the hell away from community banks and invest in the big ones. Because not only are the latter “too big to fail”, but their being too big to fail necessitates that the former must be too small to succeed.

Main Street Bank is, soon to be was, a small commercial and personal lender in the suburbs of Houston. Main Street is a modest little $45 million business (modest as bank sizes go) that’s about to go out of business.

The company’s financials are fine. It’s not being swallowed by a corporate raider and chopped up asset by asset. It didn’t lend more than it could afford to, nor is it the victim of executive malfeasance.

Does Main Street have a lot of bad loans? No. Main Street’s default rate is 31% below average. (That is, better than average, because defaults are bad and you want the numbers to be low.)

Main Street’s business largely consists of lending money to independent businesspeople who use the loans to buy equipment. The equipment ideally enables them to sell more of whatever it is they sell, or do so more efficiently, thus resulting in increased profits, which means the bank gets its loans paid back and everyone’s more successful than they were before the arrangement began.

Unless, of course, the federal government orders Main Street to stop lending so much. Not unlike the absurd CAFE standards for fuel economy, the government has decided what Main Street’s portfolio should consist of. 90% of Main Street’s loans go out to small businesses. The feds have determined that 70% of that outstanding money ought to be loaned out elsewhere.

Title IX is a federal mandate that require colleges to offer as many women’s sports as they do men’s. Ignoring that men like sports more than women do, the inevitable result is that most colleges just end up dropping enough men’s programs to get the numbers to match. In much the same way, Main Street honored the Federal Deposit Insurance Corporation’s orders by lending out less money. One fewer lender in the neighborhood means less choice for the suburban Houston small-business owner, which means the remaining lenders can raise rates and high-five over the handicapping of a competitor. Meanwhile, Citibank not only could “borrow” $45 billion from taxpayers, but practically had that loan forced on it by a complicit executive branch.

If you’re an investor, what are you going to invest in? Main Street was closely held by its founders and not open to independent shareholders, but the principle is the same for dozens of other banks. Given the choice between a bank ordered to shrink by the federal government, and another one ordered to grow by same, an investment in which has bigger potential?

Main Street’s CEO put it best:

“The regulatory environment makes it very difficult to do what we do.”

First, again we’re attributing human failures to institutions. It’s the regulators, actual people in the employ of the government, who are making it difficult for Main Street Bank to accept deposits and lend out money. And ultimately forced it to return its banking charter.
Given how many politicians of both parties have uninspiringly described the ongoing interminable financial crisis as benefiting “Wall Street over Main Street”, well, today’s story about a dying bank is ironic on a level that even a congressman should be able to understand.

Thanks to Robin Sidel of The Wall Street Journal for basically doing all the prep for us.

**This article is featured in the Carnival of Personal Finance #323-Better Late than Never Edition**

Filed Under: Capitalism, Economics, Entrepreneurship, Investments Tagged With: , , , ,

Look at the BIG PICTURE

August 10, 2011

 

Our generation's U.S. Steel

Slow down, already.

Yesterday, Arizona Diamondbacks left fielder Gerardo Parra went 4-for-4 against the Houston Astros, making Parra the best hitter in the world by far. He batted 1.000, or 634 points higher than Ty Cobb’s record career average. Move over, Georgia Peach, there’s a new all-time greatest: baseball’s first perfect hitter. Parra’s historic achievement will doubtless lead every sportscast across the nation and put him on the cover of Sports Illustrated and possibly Time and Newsweek.

Don’t be ridiculous. One day means nothing. Any idiot knows you can’t look at batting averages over a 4-at-bat period and determine anything meaningful.

Are you sure? Because judging from the nationwide panic over Monday’s stock market drop, the extreme short term means everything.

Our nation’s debt got downgraded Friday, for the first time in history (which is to say, 90 years.) Which presumably means the United States will have to pay higher interest rates to borrow money in the future. Those interest rates will trickle down to the institutional and consumer levels, meaning we’re all going to be paying a few basis points more. The price of money goes up, less of us can afford to borrow, and the economy will stagnate all the more.

That much is likely true. But it’s not going to happen overnight, despite what Monday’s enormous market drop would indicate. Because once again, the market followed a gigantic fall with a massive rise. It almost always happens this way.

It’s tough for the rookie investor to believe this, and it’s tough for the seasoned investor to remember it, but…

Stock prices are nothing more than opinions. They’re values attached, via crowdsourcing, to intangible pieces of dynamic, vibrant corporations.

And collective human wisdom can sometimes be extremely short-sighted.

That’s “dynamic” and “vibrant” in the literal sense of those words, rather than their modern connotations. Those corporations aren’t necessarily growing richer and more powerful every day, but rather their worths continuously fluctuate.

Think about it. On Monday the Dow dropped 634 points, one of the 10 highest absolute falls in history (relative to its level, it didn’t make the top 30.) Take a random Dow component, i.e. one of the 30 stocks whose prices comprise the Dow Jones Industrial Average. (Read this if that makes no sense.) Caterpillar closed Friday at $91.09, shortly before the debt downgrade came down. CAT closed Monday at $82.60.

Step back for a minute. Does it make any kind of sense that one of America’s most venerable companies (its venerability ratified by its very place on the Dow), the world’s largest manufacturer of construction and mining equipment, became 10% less desirable to own in a single 8-hour period?

This is a company that grossed $14 billion in profit over the last year. CEO Doug Oberhelmen didn’t suddenly quit and name Russell Brand as his successor. The FDA didn’t find dangerous levels of peanut residue on Caterpillar’s lift trucks. For Caterpillar’s business operations, Monday was just another uneventful day.

But for Wall Street traders and their clients, news that has only an indirect impact on Caterpillar’s business has a direct impact on its stock price. The propensity of traders is to overreact. We just proved that 3 paragraphs ago: there’s no logical reason for a company to suffer a 10% drop in one day unless something cataclysmic happened to its business. Which of course, it didn’t.

On Tuesday, the day after a market sell-off that some ignorant commentators took as the precursor to brokers jumping out of windows (which never happened, not even on Black Monday in 1929), you’ll never guess what happened. The market rose historically, by 429 points. Caterpillar shares gained most of what they’d lost. Again, if you look at it with absolutely no perspective, did Caterpillar do anything to justify a 6% rise in its price, over one day? Of course not. But if you extrapolate that rise over another 10 weeks, CAT will be trading at $1455. This train’s leaving the station! Are you going to be on board?

Every time the market takes a wild daily swing, whether high (stocks just got more difficult for you to buy!) or low (your retirement account lost value!), step back. Don’t ignore the forest for the trees. Even a wild weekly swing is nothing to panic or get excited over. And maybe you should wait a couple of months before declaring a career .279 hitter with below-average power and no particular propensity for getting on base ready for the Hall of Fame.

Parra ran into a couple of pitchers having a bad night. Or perhaps he just swung, hoped for the best, and made contact via dumb luck. Or took advantage of a hungover third baseman playing out of position and begging that the ball not be hit to him. Either way, Parra is not going to be challenging Jose Reyes for a batting title on the strength of one irregular night. Nor is Caterpillar, or any other major corporation, on the brink of bankruptcy. Regardless of what your fellow investors tell you.

**This article is featured in the Totally Money Carnival #33**

Filed Under: Capitalism, Investments, Making Smart Choices, Math, Personal Finance, Shopping Tagged With: , , , , ,
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