Will the real Paul Farrell please stand up?

In his most recent installment of doom and gloom financial pornography, Paul Farrell writes:

Warning:  Crash dead ahead.  Sell.  Get Liquid.  Now.

Fascinating.

Particularly when you consider these excerpts from his book, The Lazy Person's Guide to Investing:

"The only solution is to be in the market all the time and stop jumping in and out." 

"Never try to time the market; it's too much of a gamble." 

"The market is totally random, irrational, and unpredictable." 

"Greed triggers a buying frenzy at the top of a cycle. Fear creates a selling panic at the bottom. Investors lose both ways."

and the kicker.... wait for it....

"The more I know, the more I know I just don't know, and neither does anyone else."

Another book by Paul Farrell:

The New Money A$trology Success Formulas

 

 

How Folio Investing helps you trade ETFs safely

The unprecedented "flash crash" in the market two weeks ago highlighted the delicate nature of trading securities in today's financial markets dominated by program and "high frequency" trading.
 
I've written before about why I love Folio Investing's unique online trading platform.  Here are several features of their technology that can help protect you from trading mishaps:
 
1)  No margin.  Folio will not execute a trade if you don't have money in your account to cover it.  This is a vast departure from many firms that let you "buy now and pay later."  This serves as a safety mechanism against your inadvertently placing a trade in error.
 
2)  Trades are based on models and percentages, not dollars and shares.  Converting from percentages to dollars and dollars to shares and then manually entering each trade is highly prone to human error.  Folio's system is much more efficient resulting in less potential for human error.
 
3)  Window trades are converted from dollars to shares at the time the trades are executed, not when the trades are placed.  This means you can place the trades after market hours without having to worry about after-hour market price movement (this does not, however, protect you from possible market movement or volatility if your trade is sent as an unqualified market order as many of Folio's window trades are-- see #6 below for an additional protective measure).
 
4)  Window trades are "crossed," when possible, among multiple Folio clients.  In these cases, you get a better trade execution without the order being sent to an exchange.
 
5)  Window trades are "batched," when possible, across multiple Folio clients.  Large trades are then sent to market makers on a "not held" basis in an attempt to gain execution at the average price for that window period.  This works to protect you against trades that might "move the market."
 
6)  Folio's platform allows you to set a "cancel limit threshhold."  When set, this feature will automatically cancel any window trade if the aggregate order "moves against you" by a certain percentage between the time you place the order and the time the next window closes.  This essentially serves as a personal "circuit breaker" to keep you away from highly volatile trading conditions.
 
Whether you use Folio or another brokerage firm, there are risks inherent in trading ETFs.  If you do not understand or are not comfortable with the risks that ETFs pose, you should consider investing in traditional mutual funds instead.
 

 

A big case of recency bias?

Recently, a number of financial pundits have been predicting that stock market returns will be "substantially below average" in the coming decades.

Sometimes the statement is made that way, other times it is cloaked in financial speak making reference to a decrease in "the equity risk premium."

They could be right.  Stock returns and everything associated with them (corporate earnings, P/E ratios, etc) are incredibly unpredictable.

But what is prompting this feeling among the fortune-tellers?  It could be a heaping helping of recency bias (believing the future will be similar to the very recent past).

According to Jeremy Siegel's research, dating back to 1871, there have been 14 ten-year periods of negative real (after-inflation) returns for stocks (including the one just ended).

In the decade following every previous "lost decade," inflation-adjusted stock returns exceeded 10%.

 

Beating the market is the ultimate red queen's race

"Beating the market" is called a loser's game for good reason. 

It's worse than casino gambling because: 

1) Upward bias. Casinos mercifully kill off losers because they run out of money. The upward bias of the markets allows most losers to continue playing the game, blissfully unaware of their underperformance. 

2) High costs. The trading, management, and tax costs of active management make the casino's juice downright cheap in comparison. 

3) The rules change. Financial markets exhibit dynamic, not deterministic behavior. Casino games, while the odds are against the player, at least the rules don't change.  Players can confidently make their moves in the context of pre-determined probability and odds. Financial markets are "self-correcting;" what worked yesterday won't work tomorrow. 

Red_queen_logo1

It's the ultimate red queen's race. No professional chess player would play an opponent, either professional or novice, if the audience (the market consensus) could change the rules at will. 

The truly "professional" investor chooses not to play the game at all.