U.S. House approves extending Bush-era tax cuts

WASHINGTON (MarketWatch) -- House lawmakers approved a two-year across-the-board extension of Bush-era tax cuts just before midnight on Thursday, capping off weeks of furious debate and ensuring that rates won't rise on virtually all Americans come Jan. 1.

The bill, already passed by the Senate, now goes to President Barack Obama for signature. It also includes a 2% rollback of Social Security payroll taxes; extends unemployment insurance for 13 months; and brings back the estate tax at 35% for two years on estates of more than $5 million. The House vote was 277-148.

This is a repost from: http://www.marketwatch.com/story/us-house-approves-extending-bush-era-tax-cuts-2010-12-17

NY Senator Charged with Embezzling From His Clinic

ALBANY, N.Y. – Pedro Espada Jr. has been at the center of two of the most tumultuous years the two-century-old New York Senate has ever seen.

Now, the bold and charismatic Bronx Democrat who plied his way from freshman to majority leader in six months stands accused of embezzling state grants he directed to his Bronx health clinic in some New York's poorest neighborhoods to pay for a cool car and a hot night life.

The U.S. Attorney's Office in Brooklyn and state Attorney GeneralAndrew Cuomo on Tuesday indicted the 57-year-old state senator and his son, Pedro Gautier Espada, 37, on six charges stemming from the activities involving the Comprehensive Community Development Corp., a federally funded not-for-profit in the Bronx known as Soundview. They are accused of embezzling more than $500,000 from clinic the senator founded for lavish spending, including a down payment on a $125,000 Bentley and $14,000 in tickets for sports and shows.

The indictment says Espada charged $110,000 in posh restaurants, including $20,482 at his favorite sushi place near his home outside his Senate District in Mamaroneck, and pony rides and a petting zoo at a family birthday party.

"In these difficult economic times, the charged crimes are all the more reprehensible," U.S. Attorney Loretta Lynch said.

Cuomo, New York's governor-elect, decried what he called looting and said the "cruel twist" was "they were using funds that were supposed to go to poor people."

"It's one of the more outrageous abuses of public office that I have ever seen," Cuomo said.

Espada is just the latest Albany politician to be indicted in office, and the second Senate majority leader in three years. But like former Republican Majority Leader Joseph Bruno who is appealing a conviction charge for mixing private business with his state power, Espada vows to take his case to court. Espada called the investigation that lingered throughout his two-year term as a political "witch hunt" by Cuomo.

Few doubt Espada will carry out his threat. He rose from impoverished street fighter in Puerto Rico to Fordham University graduate and boldly manipulated Albany's old-boy political power structure in the Senate. Within days of his election in 2008, his second stint in the Senate, the Democrat formed his "three amigos" coalition with two other Democrats to threaten his own Democratic majority. He demanded leadership positions in part for what Espada said was a needed Latino voice, or the three would join Republicans and end the Democrats' first majority in a half-century.

Espada won.

Then in June of 2009, Espada and freshman Sen. Hiram Monserrate of Queens, then under investigation for a domestic violence incident that would later cost him his seat, carried out the threat. They joined the Republicans, with Espada gaining the title Senate president. More than a month of gridlock ensued, with neither side recognizing the others' authority — even holding simultaneous sessions at one point and locking each other out of the chamber without a clear majority.

But when Democratic Gov. David Paterson appointed a lieutenant governor, in a constitutional gamble upheld in the courts, Espada returned to the Democratic fold. He also gained the powerful and lucrative majority leader's post.

With his bold suits of gold pinstripes in the Senate long dominated by white men in dark blue, the Latino had a charismatic manner in English and Spanish with all lawmakers, and possessed a shrewd political sense.

He became "Pete" to senators of both parties, who voted for him and often castigated him later. Hours before his indictment Espada issued a year-end report of the majority leader expounding on the importance of state grants for nonprofit agencies and taking credit for reforms in the Senate to make lawmakers accountable.

"I am proud to have served as the catalyst for this reform," he stated in a press release the Senate's Democratic majority refused to pay for. After the indictment was released, Espada was immediately stripped of his majority leader title and removed as housing committee chairman.

"Thirty years ago Senator Espada founded the Soundview Health Care Center," said his attorney, Susan R. Necheles. "Soundview has provided high quality health care to thousands of families, children and senior citizens in the Bronx. Today is a sad day for Soundview and a sad day for the Espada family. Senator Espada and his son deny any wrongdoing and we intend to fight the charges in court."

Espada lost his seat in the September primary, with most Democrats clamoring to be seen opposing him. Republicans used Espada's image in what appears to be their successful effort to win back the majority in the November election, pending an ongoing appeal of the vote.

Cuomo said taxpayer funds since 2005 were diverted for the Espadas' personal use.

"There was no doubt he and his son were looting Soundview for a lavish lifestyle," Cuomo, a Democrat, told reporters.

Cuomo said the Espadas could face up to 10 years in prison on each of five embezzlement charges, five years for the single conspiracy count and fines of $250,000 on each charge.

In earlier civil suits, which are still pending, Cuomo accused Espada of siphoning $14 million from his government-funded clinic, breaching his fiduciary duty, and seeking to remove him from the board. Authorities said the difference in amounts represents liabilities on the Soundview books not yet spent, including a severance package of at least $9 million.

"There's a culture in Albany that has been too tolerant of legal violations and ethical absences," Cuomo said.

*This is a repost from: http://news.yahoo.com/s/ap/20101215/ap_on_re_us/us_senator_indicted

Scapegoating: The Response to Underperformance

The institutional money management industry has a split personality.  One half is highly concentrated and stable, consisting of large banks and insurance companies offering generic products.  The other half is unstable, consisting of a large number of money managers offering active money management and specialized services.  In many ways this segment is like the market for restaurants and beauty salons, with customers always in search of new favorites and the latest hot spots.

A combination of private interests and behavioral phenomena provide the basis for the existence of this active segment.  Both frame dependence and heuristic-driven bias play major roles.

Frame dependence occurs as the sponsor divides responsibility for it’s portfolio across several active money managers.  These managers are evaluated relative to benchmarks.  The division of the portfolio gives rise to a mental accounting structure with particular reference points.  This leads investors to react more strongly to outcomes that fall below a reference point than to outcomes that lie above it.  Mental accounting also leads to the view that diversification means having variety across styles rather than maximizing expected returns subject to a fixed return variance.

An important aspect of active money management is scapegoating, or shifting regret to, the manager when returns are poor.  Given the fact that active managers underperform strategic asset allocation, the amount of underperformance may serve to measure the value of scapegoating.

Scapegoating is one explanation for why investors select active money managers.  Another is that investors are overconfident, believing the active managers they hire are likely to outperform strategic asset allocation.  

Forbes 2010 Investment Guide Backtest

It’s that time of the year again!  The time when I take out the back issues of Forbes, Fortune, Smart Money and Kiplinger to compare their hot stock, mutual fund, or ETF for the coming year to what actually happened at the end of the year.  This issue comes from Forbes’ Decemeber 14, 2009 so let’s see their hot picks!

Interestingly enough, this is their “Investment Guide” annual issue but it lacks the typical predictions on ETFs, emerging markets and alternative funds found in previous years.  The one thing they did focus on is a select few Healthcare Stocks.

The Buy

Cross Country Healthcare (CCRN):  At press time, the stock traded at $8.96.  It is trading today at $7.65.  Representing a 14% LOSS per share.

Mednax (MD): At press time, the stock traded at $57.20.  It is trading today at $64.17.  Representing a 12% GAIN per share.

Unitedhealth Group (UNH):  At press time, the stock traded at $28.97.  It is trading today at $36.89.  Representing a 27% GAIN per share.

The Sell

Boston Scientific (BSX):  At press time, the stock traded at $8.27.  It is trading today at $6.55.  Representing a 20% Reward* per share.  A reward would be realized when the investor saved money by dumping this stock if they owned it or they made a profit by shorting the stock.

Health Care Select ETF (XLV):  At press time, the ETF traded at $30.16.  It is trading today at $30.88.  Representing a 2% Missed Opportunity.

Johnson & Johnson (JNJ): At press time, the stock traded at $62.17.  Surprisingly, it is still trading at that price though it yields a pretty nice dividend of 3.47% so, technically that is a Missed Opportunity.

This backtest resulted in a below average rate of return on the buy side with +8.33%.  And, a value of +4.87% return on the sell side.  

The S&P 500’s YTD range is 1101.3 to 1223.9 which represents an 11.1% GAIN.

UPS Requires Photo IDs for Shipping

In the wake of the latest terrorist schemes to mail order a bomb, UPS is now requiring photo identification from customers shipping packages at retail locations around the world, a month after explosives made its way on to one of the company's planes.

UPS said Tuesday the move is part of an ongoing review to enhance security. The directive will apply at The UPS Store, Mail Boxes Etc. locations and other authorized shipping outlets. UPS customer centers have required government-issued photo identification since 2005.

In late October, a printer cartridge on a UPS cargo plane bound for Chicago was stopped in London after explosives were discovered. The package was later traced to a retail location in Yemen.

What can Brown do for you?

This is modified news article found at: Finance.yahoo.com

Hard Work is Here Again!

The free ride in the market is over – for those  investors relying on the sage advice of buy-and-hold.  Don’t expect to make money in the future buying just about anything.  What happened two years ago when stock prices fell through the floor was extremely atypical for stocks.  The market will likely be much more discriminating in determining whom it allows to be a “genius.”

Investors will have to know what they’re buying.  They’ll have to know why they’re buying it and best of all, they’ll have to know when to sell it.  They’ll have to make these tough decisions when the free ride comes to an end, as with what we’re seeing now.

Choppy, manipulated markets put a premium on knowledge and information.  And that means reevaluating what you own, upgrading your portfolio if need be, rebalancing to control risk, and restructuring your portfolio to reduce volatility.

An Investor’s View of Risk

In the real world, investors define risk in a variety of ways.  Mention risk, and many will begin to imagine total, irrevocable, gone-forever loss of their principal.  Fluctuation is not loss of principal.  It is just fluctuation.  Here’s an example that should make the difference clear.  Let’s say you decided that your backyard contains oil. After a million dollars spent drilling, it turns out that there is no oil.  No matter what you do, no matter how long you look at the well, no matter what happens to the price of oil, your money is gone. You have had an irrevocable loss of capital.

Let’s say that you took the same million dollars and bought a diversified investment portfolio (stocks, bonds, hedge funds, proactive asset management).  You then have an unusually bad result the first year, and lose 20 percent of your investment.  Well, you have had an interesting fluctuation, but have not had a capital loss if you can refrain from doing the very worst possible thing and pulling your money out of those investments while the values are down. 

Markets have always recovered in the past. Some took longer than originally anticipated, others faster than anyone can expect.  History indicates that all you must do to recover and go on to acceptable profits is to hang tight.  While an individual stock can go certainly to zero (think Enron, Lehman, and countless others), entire markets don’t.  Except for war or revolution, I am unaware of any market that has gone down without recovering.  As long as we expect the world’s economy to continue to move, the value of the securities markets will reflect that movement. 

Less Is More

Good asset management practices are strategic and evolutionary, not stagnant.  You must keep your long-term goals and objectives firmly in mind while allowing yourself the flexibility to evolve as new research provides better solutions to the risk management problem, or as new market opportunities present themselves.  Discipline is the key to success for the long-term investor.  He or she must not fall into the trap of managing holdings by newspaper headline, sound bites, mindless prediction, gut feelings, or last year’s results.

Developing a successful, modern investment strategy is a lot like gardening.  Both activities require patience, discipline, and faith.  Periodic reviews should be viewed as an opportunity for fine-tuning and corrections, not radical revisions and second-guessing.

How to Protect Yourself From Scam Artists

This list can be endless, but here are common ways many investors get sold on a fly-by-night investment scam.

• Never give any investment advisor a general power of attorney over your account.  Use a limited power of attorney to authorize your advisor to make trades within your account for your benefit.  There is never a reason to name an investment advisor as owner, contingent owner, or joint owner of your account.  It shouldn’t be possible for any other person to ever receive a disbursement from your account.  Your brokerage or trust company should only disburse to you at your home address or to your bank account.  Insist on confirmation of all account activity (this may not need to be sent to you by paper), but easy access to all transactions online should suffice.  Never use your investment advisor’s address as your address to receive statements.
• Select strong custodians for safekeeping of your assets.  Use major brokerage houses or trust companies that are properly insured, audited, and regulated.  Don’t let some Jabba The Hut, little financial institution act as custodian of your assets.
• Remember that if it sounds too good to be true, it probably is.  Con artists almost universally appeal to investor’s greed and unrealistic expectations.  They can’t exist without gullible people willing to believe the unbelievable.  By now you should have a good feel for the range of reasonableness in various investment markets.
• Consider carefully whether you need a guide.  Many investors shouldn’t try to go it alone.  Investing professionally is a full-time job.  It takes specialized knowledge and significant resources.  The field is rapidly evolving.  It takes a great deal of time just to keep up with the research.  Evaluate whether you have the skill, judgment, discipline, and experience to do a proper job.  Your investment plan is your future.  It’s too important to leave to amateurs.  Just because you’ve read some book on how to perform surgery does not make you a surgeon.
• Avoid commission sales.  All financial professionals get paid.  And, of course, all of them have an interest in attracting your business.  You can’t expect any of them to send you to the competition.  How they get paid, however, can have a very significant effect on the nature of their recommendations.  In fact, how you pay for advice may be much more important than how much you pay. 

Home prices falling faster in most metro areas

By The Associated Press

NEW YORK – Home prices are falling faster in the nation's largest cities, and a record number of foreclosures are expected to push prices down further through next year.

The Standard & Poor's/Case-Shiller 20-city home price index released Tuesday fell 0.7 percent in September from August. Eighteen of the cities recorded monthly price declines.

Cleveland recorded the largest decline. Prices there dropped 3 percent from a month earlier. Prices in San Francisco, Los Angeles and San Diego, which had been showing strength this year, also dropped in September from August.

Washington and Las Vegas were the only metro areas to post gains in monthly prices.

The 20-city index has risen 5.9 percent from their April 2009 bottom. But it remains nearly 28.6 percent below its July 2006 peak.

And home prices have fallen in 15 of the 20 cities in the past year.

Prices rose in many cities from April through July, mostly boosted by government tax credits which have since expired. Job worries and record high foreclosures are dampening buyer demand and weighing on prices.

The national quarterly index, which measures home prices in the nine U.S. census regions, dropped 2 percent in the third quarter from the previous quarter.

This is a repost from: http://news.yahoo.com/s/ap/20101130/ap_on_bi_ge/us_home_prices

A New Breed of Financial Advisor

Deregulation, along with advances in Internet Technology, has spawned an entire new breed of professional advisor.  Fee-only advisors can now operate from any place with a plug-in phone line and an Internet connection, bringing low-cost, independent, objective, professional advice of high quality and sophistication right to the investor’s neighborhood.  The clear separation of the sales or brokerage puts the advisor on the same side of the table with the client.  Wall Street’s abuses have been so frequent, and the advantages of fee-only compensation so obvious, that the demand for the new advisors has fueled explosive growth.  While fee-only is a far better way to deliver service and advice, it doesn’t guarantee competence or even honesty.  Investors must still do their due diligence when selecting an advisor.  Investors should get familiar with the SEC’s website or FINRA.  Both sites offer tremendous information for researching legitimate financial advisors.

All that remains is for the individual investor to take advantage of the gifts he has been given.  Everywhere the investor looks, things are better and growing better still.  But the investor must look.  The brokerage industry, the fund companies, and the media all have no deep commitment to providing fundamental education for the investor.  Bad advice is far more profitable than good advice for nearly all players.  Wall Street’s profits are simply not linked in any way to investor profits.  As long as turnover is high, the Street wins either way.  With almost 20,000 mutual funds clamoring for shelf space and public attention, hype is the order of the day in fund advertising.  And, as long as Americans will buy dangerous drivel posing as serious financial commentary, the medial will happily provide it.

America is a land of shocking financial illiteracy.  Few investors have any kind of long-term plan at all; few recognize the dimensions of the problem facing them, yet most are supremely confident of their abilities.  Most indulge in self-destructive financial behavior and lack even basic discipline.  Predictably the results of this muddle are dismal.  Projecting these results forward generates visions of almost unimaginable financial hardship as the boomers march off to retirement without the financial assets to sustain them.

The Fee-Only Alternative to Business as Usual on Wall Street

Traditional Wall Street firms have failed to deliver credible, objective advice.  Their commission-based compensation system irreparably taints the advice process with conflicts of interest and hidden agendas.  But there is a viable alternative to the commission-crazed, churn-and-burn stockbroker.  The independent, fee-only registered investment advisor offers objective advice, superior service, and economical and effective execution

The vast majority of these firms are relatively small, without the marketing clout of the giant institutions.  So, they are not “top of mind” when investors seek out advice.  But they offer a key invaluable advantage: objective advice.  Because a fee-only advisor derives all of his income from fully disclosed fees paid directly by the client, conflicts of interest are virtually eliminated.  There remains no financial incentive that would prevent the advisor from providing the very best advice for each individual.  So, while the advisor may not always be “right” in his counsel, there are no hidden agendas, or conflicts of interest to cloud his vision or taint the relationship.  And, after all, what good is advice if it’s not objective?

The demand for impartial professional advice is enormous and growing.  For instance, since 1989, assets with Schwab’s Financial Advisor Service have grown to nearly a half trillion dollars managed by 5,600 independent registered investment advisors!  Fidelity and Waterhouse are also experiencing exponential growth in similar services, with others entering the fray close on their heels.  Clearly, Americans are looking for unbiased professional advice and an intelligent alternative to Wall Street’s commission-induced conflicts of interest and voodoo-based investment schemes.

The Problem with Hearing it Through the “Grapevine”

My recent post from yesterday talked about how it feels like an eternity when going through a period of negative performance in one’s portfolio.  And how relative pain is remembered more than relative joy during a downturn.  Continuing from that topic: The proverbial “grapevine” makes matters worse.

Marvin Gaye’s hit song, “I Heard It Through The Grapevine” is about gossip, but for our purposes, it is about two investors, one is producing positive returns in his portfolio, the other is producing negative results in his.  This is almost always the case, no matter how bad things may get for our investor, somewhere somebody is making money.  Those people will certainly tell all within earshot, to make matters worst.  Most investors have a very selective memory.  We all seek approval, and we all would like to be considered astute, sophisticated, and successful.

During social gatherings or casual conversations it’s not unusual to stress the positive and repress the negative.  So the investment winners in our portfolios tend to get talked about more than the losers.  Investors with disappointing recent performance will say nothing.  After all, who wants to broadcast failure?  So, the winners brag, and the losers keep silent.  Soon, it may seem to our poor investor like everybody with an IQ over room temperature is making money except him.

So the temptation to second-guess himself grows and grows.  If only his advisor had been more astute, he would be making money too.  Perhaps it’s time to try something else like all those other smart investors are doing.

Once this kind of cycle starts it can deteriorate into a tail-chasing fiasco.  At least dogs that chase their tails remain on level ground.  Investors can dig themselves into a hole as they ratchet themselves ever downward chasing yesterday’s hot stock, hero fund manager, or top performing mutual fund. 

It’s easier said than done, but we have to ignore the grapevine.  And the braggarts of today, will become tomorrow’s silent listener.

The Market Can Beat Up Rambo

America is a can-do country.  Our heroes are action-oriented and full of the right stuff.  Most successful people got that way by using their skills to make something happen.  Rambo claimed authority by showing up with the biggest gun!

Business responds well to can-do, positive, and active management.  If business turns down, there are lots of things a smart business person can do:  Make more phone calls, hire more sales-people, buy advertising, change the product, have a sale, fire the sales manager, buy the competition, increase commissions, or move to a better market.  Success in business depends on active management.

Investing on your own (particularly in stocks, bonds or mutual funds) is a different kind of animal.  It is a very passive activity.  Markets don’t respond to our can-do attitude.  We can’t just whip them into shape. It doesn’t care if you brought a knife to a gun fight.  They have their own flow.  So, we must attach ourselves to the market’s movements and allow it to carry us to our goals.

More often than not, if you have a good strategy in place, the best single thing an investor can do during a disappointing season is nothing.  Of course, this type of thinking can make a successful, can-do, action-oriented, gung-ho investor just a little crazy.  During times of stress, negative performance, or no performance, he wants to do something.  All kinds of self-defeating behaviors come to mind:  Fire the advisor, liquidate the account, move to another brokerage, sell the funds, anything other than sitting still!  The fund that looked so good during last year’s big recovery now looks like a turkey. An advisor who remains focused on the long term, staying put, and maintaining the course of the plan, obviously must be some kind of wimp right?  Any idiot can see things are falling apart and the Rambo in all of us demands action now!

Investor impatience is compounded by a relative pain, relative time problem.  Portfolio downturns hurt a lot more than good times feel good.  it is much more painful to see your portfolio lose one percent than pleasant to see it gain one percent.  And it feels longer.  Two years of back-to-back declines, underperformance, or even just no performance can feel like a lifetime.  And, as we have seen, even a superior portfolio will go through occasional extended periods of disappointment. 

Look Forward NOT Backward!

Smart investors use volatile markets to upgrade their portfolios.  A common mistake investors make during market downturns is that they look backward, not forward.  Investors fixate on lost profits, on what they should have done.  This takes their eyes off what they should be doing to make money going forward. 

You cannot undo the past.  Smart investors don’t miss the future by looking at the past.  They take their lumps, learn their lessons, and do what they can to position their portfolios for the market’s inevitable reversal.  That means smart investors use volatile markets to trim their exposure and adjust accordingly. 

That’s the beauty of the market: at every ups and downs, there’s the probability to profit. 

Bottom line:  Nobody can tell you with certainty the perfect time to invest.  Nobody knows with certainty when a market has bottomed.  What I do believe can be said with a high degree of certainty is that markets move through peaks and troughs.  I can’t guarantee prices will be higher five or ten years from now, but history shows that a consistent investment program produces success over the long term.

First-Hand Experience In Fundamental Economics

Yesterday as my family and I were going into Target (TGT) to browse the toy section for holiday gift ideas, we witnessed a middle-aged man with a cart full of baby products (diapers, wipes, baby lotion, baby shampoo, and a small baby toy) walk out of the store without paying.  There were many people around, some noticed as we did, some didn’t and it was a busy time of day, almost perfect to pull off such a heist.

The man had a determined look on his face, almost a desperate, “I don’t know what else to do” look.  He simply focused straight ahead to the exit and never looked back. 

This is a prime example of how inflation affects America today.  Forget the recent Quantitative Easing solution that is “supposed” to help the economy, in truth all that money that pumped into the system only went to the top-tier citizens of the United States anyway.  The same citizens that caused this demise in the first place!

But, I can relate with the shoplifter, after all I have two young kids of my own, and a baby on the way.  Diapers costs $45 per box of 216 pieces.  Babies go through 8 per day on average.  So, in a little under a month, you’re spending $45 dollars on diapers alone, wipes come to about $20 per box on top of all the other expenses required for a baby.  Crib and crib mattress, sheets for the crib, a changing pad, strollers, car seats, appropriate-sized clothing, formula (if not breastfed), bottles for the milk, bottle warmers, disinfecting bags for pacifiers, bibs, and the list goes on and on!

Desperate times calls for desperate measure, and with the economy the way it is, where jobs are gone, incomes are down or at a plateau, consumer prices are up, the dollar value at an all time low, and lending institutions tightening their standards.  It’s no wonder some can be driven to bunk the system and steal. 

Brace yourselves, my feeling is, more and more people will be driven to do extreme things.

Simplicity Leads to Calmness

A big part of succeeding during volatile markets is staying calm.

When you’re calm, you make much better decisions.  When you’re calm, you don’t overreact to circumstances.  When you’re calm, you think more clearly. 

Being calm prevents you from making mistakes, in trading and in life. 

Of course, knowing you should be calm during crazy markets is one thing; actually being calm is quite another.

One way to ensure that you maintain a measured, calculated approach to volatile markets is by having a clear handle on your financial position and a clear plan of attack.  You do this through simplifying your investment approach.  Instead of choosing four or five stocks out of 7,500 or four or 5 mutual funds out of 19,000 to put in your portfolio, reduce the burden by Indexing.  This way, your costs are low and the probability of success increases in your favor.

The best piece of advice I’ve read about when it comes to trading strategy is the “KISS” concept.  Keep It Simple, Stupid!

I can’t think of any time when simple doesn’t beat complex.  That’s especially the case during volatile markets.

Be A Partaker, Not An Outsmarter

There are two kinds of investors:  Outsmarters and Partakers. 

Outsmarters believe they’re so clever they can beat the system, through inside advice and superior brainpower.  Partakers understand that the best way to make money is to share in the profits of successful businesses, by buying stock in Apple, Cisco, Walmart or McDonalds, for example.

Many investors, especially baby boomers, who are convinced they were born more brilliant than everyone else, begin their investing careers as Outsmarters.  They invariably get outsmarted themselves.

According to Bill Clinton’s autobiography, that’s exactly what happened to them in 1978.  They went into a typical Outsmarter deal-borrowing money to buy land in the Ozarks through Whitewater Development, a company they set up with an insider named James McDougal, along with his wife Susan.  Real Estate is especially tempting to Outsmarters since it’s a game in which the other players often appear to be rubes.  In this case, however, the Clintons and McDougals bought land for $880 an acre from a group that had purchased the property just 19 days earlier for $440 an acre.

The intention of the Whitewater investors was to find people to buy the lots at more than $880 an acre and make a big profit.  But in the end, they found that such buyers did not exist ($440 an acre turned out to be the right number).  The Clintons lost $68,300, according to an accountant’s report they commissioned.

The Clintons are just an example of Outsmarters out there as there are a lot of them.  There are, for example day traders, who think they can profit from tiny ups and downs of stocks over minutes or hours.  I do not doubt that some people can make a profit this way-after all, some people are born with the ability to throw a baseball 100 miles per hour.  But, beyond a tiny fraction of super talented and super-dedicated, day traders eaten up by the transaction costs-the commissions, the spreads between bid and asked prices and the interest incurred in buying stocks on margin.

Other Outsmarters are bottom fishers.  They figure they can identify stocks that have plunged but will soon emerge from the depths.  Occasionally, a smart investor will win by betting on these kinds of stocks, but most of the time…no.  When a stock is exceptionally cheap, there is almost always a reason. 

Remember that a stock that’s fallen can keep falling.  Did Internet Capital Group look like a good buy after it had declined from $196 to $45 in the first four months of 2000?  I sure did, and got burned in the process.  Over the next year it dropped to 34 cents.

Partaking, on the other hand, is the ticket to success in the stock market.  Investing in an index fund with an option to go Inverse (to profit when prices fall) is a way to share in the long-term growth and trend of the U.S. economy. 

My own preference is partaking in the growth of great companies.  Occasionally, it strikes me how incredibly generous the stock market is.  At little cost, I can become a partner in a business like GE, Microsoft or Apple, tagging along on a very profitable ride. 

Avoid Buy And Hold, Sell Your Big Loser!

I’m not a big fan of losing 70% of my money by riding down a stock that I should have dumped.  That’s the problem with buy and hold, it prevents you from selling investments.  You always risk having the big loser.  And that big loser can wreak havoc on a portfolio.

I read a story of a successful investor who, when on straight-to-the-point novice asked what this man’s secret of investment success was, replied simply, “Don’t lose.”

Take a stock that plummets from $100 to $20 per share.  That’s a decline of 80 percent.  But, for that stock to return to $100 per share, that price would have to rise 400 percent!

Now, take a portfolio that declines 50% (and many portfolios have declined 50% or more over the last few years).  The math here is quite simple.  In order to recoup your loss, the portfolio must increase 100 percent.

If you think about that in terms of time, the number of years required to recoup the loss (based on the stock market’s historical annual return of approximately 11 percent) is nearly seven.  In other words, based on historical market returns, a 50% decline in your portfolio shaves roughly seven years off your investment program.

Now, while nobody wants to lose seven years off an investment program, you can afford to play catch-up if you have an investment time horizon of at least 20 to 30 years, especially if you are willing to invest more money when stocks are down.

However, if you are someone in his or her fifties or sixties, the cost of losing big is even steeper.  You just don’t have enough time to make up the lost years as a result of one big hit.

Bottom line:  To everything there is a reason, including selling.  Volatile markets put an even greater premium on selling, as violent market moves can reduce capital gains in a surprisingly short period of time.

Stop Swinging For The Fences!

You don’t have to have your homerun hitters at bat every time to create wealth in the stock market.  A reasonable annual return and time will do the trick.  Swinging for the fences, whether it be concentrating your portfolio in just one or two high-flying technology stocks or buying penny stocks, also increases your chances for that killer loss that will take years to recover.

Indeed, investors who swung for the fences in recent years now wish they had choked up on the bat and slapped some singles.

Remember: The secret of investment success is to continue to set aside money to invest over time, and to generate a reasonable rate of return each and every year while avoiding the big loss. 

That alone is more than enough to make you achieve your financial dreams.