Posts Tagged ‘how to invest’

Is Investing Art or Science?

November 8, 2011 Leave a comment

Watching climate change documentary, a scientist drew a bell shaped graph, indicating the 2 degree global temp increase problem.  It’s assumed that 2% would trigger massive changes, setting off carbon emissions from plants, oceans, and mountains which would in turn raise temps by 6 degrees.  That would essentially wipe out most life on earth.  So , in order to avoid this we have to stop the present course we’re on because if left unchecked, we will exceed 2 degrees by 2050.  In order to get it under control by 2050, we have to slow the rate of increase (acceleration) enough so that by 2015 the graph flattens out  (stops accelerating) and begins to turn down, with the 2 degree level reached in 2050.


This got me thinking about investing.  If we use the same bell shaped graph to represent our financial health, what would it look like?  I came up with MASOL or minimum acceptable standard of living.  This is the baseline, below which we would become homeless and start to question our very survival .  if we draw a curve that starts at the point where we enter the work force (or leave home, leave school, or whatever suitable starting point) and ends when we die, we can calculate the masol that will keep us from being homeless.


This assumes that we keep working until we die, and don’t accumulate any savings.  Next step would be to start accumulating savings and then we can create a retirement period at the end of the graph.  Next we can start to draw additional lines that would represent increases in our standard of living.


The informative part of this exercise is being able to visualize, like the climate change graph, what the ‘tipping point’ is – in terms of how far behind the curve we are, and how fast we have to go in order to catch up.  This is a key question for almost everybody, but almost nobody knows how to frame the question, let alone ask the question.  Smart people like Colleen and Peder simply have a vague, uneasy feeling of worry, uncertainty, and dread about what the future holds for their nest egg.  I can answer this by defining it, representing it graphically, and presenting alternative solutions.


In a way this process is like thinking of your financial state of being as driving a car through life, and what you need to know is how fast you’re going now, what gear you’re in, how many gears does the car have, what’s the top speed, and what impact on your standard of living will result from changes in speed and gearing.  The point of this exercise is to find out where you are likely to end up at the end of your life.  Is your current speed and gearing enough to allow you to retire at some future date and enjoy leisure in your sunset years?  Or are you destined to work until you die?


The core of this approach is to ‘back in’ to the calculations by starting with the conclusion.  The question is ‘what will my monthly income need be in the future such that I can live comfortably without working?’  For illustrative purposes, let’s assume this number is $5000 per month in today’s dollars.


The next question is ‘how much capital will I need to accumulate in order to generate enough income to cover $5,000 per month in living expenses?’  That will be the topic of my next post.


Who Are You?

“If you don’t know who you are, the stock market is an expensive place to find out.”

My first mentor in the investment business said this to me in 1972.  At the time, I didn’t really understand what he meant, but over the course of the next 10 years or so I began to figure it out.  Perhaps you have figured it out, too.  But for many investors, it’s a concept that remains elusive.

The significance of the above statement is that investing is a full-contact sport, and one that shouldn’t be played without a helmet, pads, and mouthguard.  Too many investors step onto the playing field unprepared for the shellacking that they’re about to receive at the hands of the professional traders, and other investors who have done their homework and know how to take advantage of the weaker players.

In most of life’s games, this “learning from your mistakes” approach is perfectly fine, since most of us navigate through life by trial and error.  But when it comes to the investing game, every rookie mistake you make costs you real money, and a lot of it.  Not only that, but the time you squander while getting your investment education is time you will never get back.  At ZenInvestor we have a better way get your investing education – one that won’t cost you a fortune in time and money.

The DIY (Do It Yourself) Investor

When corporations began to abandon the idea of providing a pension (defined benefit plan) to their loyal employees, and started transitionitioning to ‘defined contribution’ plans, they ushered in the era of the ‘do-it-yourself’ investor.  But there is a fundamental problem with this.  Most people are ill-equipped to make consistently sound investment decisions over the long term.  And it’s not because they lack the necessary intelligence.  It has more to do with the fact that our brains are set up to use estimation and rules-of-thumb to navigate through the complexities of the world.  Estimation is an extremely valuable skill, and it has served us well as a species in most aspects of life.  Using rules of thumb saves us time, and allows us to make quick decisions and then move on to the next problem.  This works well for most of the activities that we encounter, but when it comes to making investment decisions, it just doesn’t work very well.  Let me give you an example.

Poor Timing

One of the most common rules of thumb that investors use is extrapolation.  How do you decide which mutual fund to buy when it comes time to allocate your 401k contributions?  Most people look at the funds available in their plan, and pick the one or two that have done the best over the past 3 to 5 years.  This particular rule of thumb says that if a mutual fund manager has done well in the past, he or she must possess exceptional skill, and there’s no reason why they should not continue to perform well into the future.  But studies have clearly shown that past performance is not a good predictor of future returns.  In fact, most studies show that the longer a mutual fund manager beats the market, the more likely he or she is to underperform in the next one, two, and three years.  So basically, you are buying high, and when you get tired of the fund underperforming year after year, and you give up on it and sell, you have probably sold at or near the bottom.  Buy high, sell low.  Not an effective way to manage your investments.

Start With An Honest Self-Assessment

How did you do in the market last year?  How about the year before?  Did you sell stocks in 2008?  If you did, are you still on the sidelines, or did you get back in?  What’s your track record since you first started investing?  When you calculate your results, do you include everything on your statements – like contributions and withdrawals, fees and expenses, and accounts that are inactive or have been closed or moved?

Are you the kind of person who makes investment decisions in a rational, thoughtful way?  Or are you a gunslinger who depends on instinct to pull the trigger?  Do you like to pick individual stocks, or do you prefer mutual funds?  Do you know what your asset allocation breakdown is?  Do you monitor and rebalance your accounts regularly?

Do you look to others for your investment ideas, or do your own research?  How much time do you currently spend on your investments?  Do you enjoy the investing process, or would you rather spend less time on it?

What percent of your income are you currently saving?  How many years do you have until you will start tapping into your nest egg?  Do you have a number in mind for your final nest egg?  What percent of this final number do you already have saved?

How big is your investment account?  How much is taxable vs. tax-deferred?  What tax bracket are you in?  When you add up all your commissions, fees, and other investment expenses, what is your total cost as a % of your total assets?

These and many other questions get at the heart of who you are, from an investor perspective.  By knowing who you are, you can see where to focus your attention and energy as an investor. Once you have done a full, honest evaluation of who you are, you’re ready to take the next step – figuring out how much risk you’re taking, and how much return you should expect as  fair compensation for the risk you take.  Most investors can reduce their overall risk level (by a lot) and improve their results (also by a lot) by putting together a simple, clear plan and sticking to it through good times and bad.  If you would like to learn more about what’s involved in making your own plan, ask your financial professional.  If you don’t get a satisfactory answer, visit us at and ask for our free planning guide.

How To Play The Stock Market Game

Investing is not really a game, but your success as an investor depends on how well you understand the basics of “game theory.”  The poker game analogy will be useful as we work our way through the mechanics and strategy of investing.  We chose this because the game of poker has some important similarities to investing.  For example, you are competing against other investors who may be more skilled than you, may have more money than you, or may have better information than you.  The goal of investing, as it is in the game of  poker, is to avoid getting wiped out while you wait for opportunities to win big pots.  Some of the topics we will discuss here include:

  • Rules of the game
  • The players
  • Correct strategy
  • When to cash out

Rules of the Game

  1. Investing is a Zero Sum Game.  This means that for every winner, there must be a loser.  That’s because every time you buy a stock, there is someone else on the opposite side of your trade.  When you buy a stock, you are making a bet that the price will go up.  But the person who is taking the other side of your trade – the seller – is betting that you are wrong.  You can’t both be right.  One of you is going to win, and one of you is going to lose.  Before you buy a stock, you should ask yourself “why is someone willing to sell this stock at this price?”  If the person who is taking the other side of  your trade has done their homework more thoroughly than you, they may know something that you don’t.  As part of our coaching, we’ll teach you how to make a checklist of the questions you should ask yourself before you pull the trigger on any trade.  This is part of the discipline that you will have to have, if you want to compete successfully in the game of investing.
  2. There are no do-overs.  When  you make a mistake and lose money, you can never get it back.  This is because of the existence of the Game Clock.  You only have a finite amount of  time to accumulate your winnings, and once your time is up (you need to start spending your winnings in retirement), your time is up.  For this reason, it’s critical that you learn to minimize your mistakes, and learn from them so you won’t repeat them.
  3. There is no such thing as a stock-picking Guru.  Many investors mistakenly believe that there are highly skilled professionals out there who know how to pick winning stocks consistently.  They figure it’s just a matter of time before they find their personal Guru.  This is not correct.  Stock market Gurus are regular people who are usually smart, hard-working, and extremely lucky.  They achieved the status of Guru because they had a serial run of luck with their picks, and eventually their luck will run out.  This always happens.  Always.  So you need to ask yourself, when is this particular Guru’s lucky streak going to end?  Will I be the last guy to follow his advice just before he crashes and burns?  Beware of the investment Guru, because he doesn’t exist.  It’s better to learn how to pick your own stocks, so you don’t have to rely on someone else for your success.
  4. Don’t put all your eggs in the same basket.  The most common mistake investors make is putting too much of their money into stocks when the market is going up, and then yanking it all out after the market has gone down.  Successful investors have learned that they should always have a balance between stocks, bonds, and cash.  That way they don’t have to panic and sell their stocks when the market takes a tumble.

The Players

Would you walk into the poker room in a Las Vegas casino and play against professional card sharks?  Would you step onto a football field and play against a professional team?  The answer is yes, but only if you have the right skills, ability, and training.  It’s the same when it comes to investing.  You are competing against the best minds and the biggest bankrolls in the world, and unless you know exactly what you’re doing, you will probably get eaten alive.

One way we can divide the players is between the “smart money” and the “dumb money.”  This has very little to do with intelligence or education.  It has a lot to do with preparation and experience.  The smart money is the class of investors who are well informed, usually have lots of capital behind them, and are well connected to the best sources of information.  The dumb money are the folks who are flying by the seat of their pants, hoping that the stock tip they got from their broker, the newsletter they subscribe to, or the guy at the water cooler, will pan out.  The dumb money is what’s called a “low-information” investor.  We’ll teach you how to avoid being the dumb money.

Correct Strategy

There is a right way and a wrong way to invest.  The correct strategy starts with a well-written investment plan, and a discipline to carry it out.  Every time you buy or sell a stock, it should be done within the context of your plan.  For example, you may have decided to put 60% of your money into stocks.  Let’s say that one of the stocks you own announces bad news, and you decide to sell it.  The correct strategy would be to not only sell your stock, but to immediately replace it with another stock that you’ve been keeping an eye on.  That way you will maintain the same 60% allocation to stocks.  There are many other examples of correct strategy, and we’ll teach you all of them.

When To Cash Out

Of all the possible mistakes that investors make, I think the most common, and the most costly, is cashing out too soon.  Most inexperienced investors hang on to their losing stocks for far too long, and then they sell when they just can’t stand the pain any longer.  At that point, the price of the stock is usually near the bottom.  Then, to compound the problem, they wait until the stock has rebounded in price, and by the time they get over the pain of their loss, the price of the stock is near the top of the range.  This is commonly called the ” buy high, sell low” strategy, and it’s undoubtedly the biggest reason that most investors never achieve their true potential.  We’ll teach you how to know when it’s the right time to cash out, and it won’t be based on emotion.  We base our buy and sell decisions on pre-determined rules, so that these decisions are based on reason rather than fear and panic.

If you want to learn how to play the game at the same level of competitiveness as the professionals, become a Premium member of and start your training today.