Frisco Financial Planning LLC

Investment portfolio design with a Christian worldview 
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March 9, 2010

The market bottom: one year later

Here we are, one year and 72% higher (S&P 500 with reinvested dividends) after the market bottom. Here are some choice bits of financial doom and gloom, all from within one week of March 9, 2009:

 

 

 

The above humdinger is courtesy of John Mauldin, a newsletter writer with
over 1 million subscribers.

 

 

"The man who thinks he knows something does not yet know as he ought to know."
-- 1 Corinthians 8:2
"Then the Lord said to me 'the prophets are prophesying lies in my name.  I have not sent them or appointed them or spoken to them.
They are prophesying to you false visions, divinations, idolatries and the delusions of their own minds.'"
-- Jeremiah 14:14

Related post:  Respect uncertainty

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Filed under  //   investing  
March 1, 2010

Investing lessons courtesy of the Austin marathon

The Austin Marathon makes a pretty bold claim on its website, one that ironically holds some valuable lessons for investors.

Here's the claim:

Deceptively Fast Course

 

The 2010 Austin Marathon is also a Boston Marathon qualifier and consistently produces one of the largest percentages of qualifiers, compared to other Texas Marathons. In fact, a comparison of finish times from the 2008-2009 Marathons of Texas season showed that for the average runner athletes in Austin ran more quickly across almost every age group. 



* The chart above was produced using official results from the indicated races from the 2008 - 2009 Marathons of Texas season. To compensate in differences in course closure times no runners finishing after 6 hours were factored into this chart.

Wow.  Those are some pretty impressive statistics.  If somebody is looking to run their first marathon, this would be a nice course to run it on.  And more experienced runners, those wanting to qualify for the Boston Marathon for example, would really like this course since the times are so much faster.

Or are they?

Lesson #1:  Consider the source

Always be skeptical of data interpretation that is produced by a party that has a vested interest in the outcome.

Lesson #2:  If it sounds too good to be true, it is

There's no logical reason why the Austin course should produce faster individual times than the Dallas course.  The Austin course has three times the vertical ascent and descent and neither is a point-to-point course so the net elevation gain/loss is close to zero on both.  

Lesson #3:  Don't confuse cause and effect

Their claim is that the course is significantly faster and they base this on data that shows that the average times across representative age groups are faster.  The data are true but the conclusion is not.

Lesson #4:  Data can say whatever someone wants them to say

If the course is significantly faster, then runners who finish both races should (at least on average) have faster times.  My cursory examination of the Male 30-34 and Female 35-39 age groups of runners who ran both the 2009 Austin marathon and the 2009 Dallas White Rock Marathon showed a significantly higher proportion of better individual times in the Dallas race, not the Austin race.

Lesson #5:  Logic and common sense are better than statistics

How about this for a better explanation.  The course isn't faster, the field (ie, the group of participating runners) is.  Austin has an extremely fit population while Dallas does not.  Dallas was ranked #14 (Houston was #6) in the 2009 Men's Fitness magazine "fattest cities in America."  Austin was ranked #17 on the same survey's "fittest cities in America."

If you ask a runner who regularly competes in both cities, they will tell you that relative to other runners, they are slower in Austin than they are in Dallas.


Lesson #6:  Most of what you read is incorrect, misleading, or biased.  

"Always start your day with the truth (God's Word)... since you're likely to hear lies the rest of the day."
-- Steve Farrar  

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Filed under  //   investing  
February 13, 2010

Fear and greed in the bible

"Do not fear" appears in every book of the bible.

Greed is mentioned more than a few times as well.

There's definitely an investing lesson here...

"So do not fear for I am with you.  Do not be afraid for I am your God.  I will strengthen you and help you.  I will uphold you with my righteous right hand."  -- Isaiah 41:10

"Do not worry about tomorrow for tomorrow will worry about itself.  Each day has enough trouble of its own." -- Matthew 6:34

"A greedy man brings trouble to his family, but he who hates bribes will live."  --Proverbs 15:27

"With their mouths they express devotion, but their hearts are greedy for unjust gain."  --Ezekiel 33:31

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Filed under  //   biblical finance   christian finance   investing  
January 18, 2010

Respect uncertainty

"It ain't what you don't know that gets you into trouble.  It's what you know for sure that just ain't so."
-- Mark Twain

As humans, we tend to have a very high opinion of ourselves, particularly when it comes to overestimating our skills and abilities.

This is abundantly apparent in our attempts to predict the future.  It's a particularly dangerous exercise when it comes to investing because not only are we woefully bad at predicting outcomes, but even when we get it right, it only "counts" if we were right and the market consensus was wrong (if we know something that everybody else knows, it's not terribly useful).

How much do you think you know about the future?
Cut it in half.  Ten times.  Now you may be close.

"Since no man knows the future, who can tell him what is to come?"
-- Ecclesiastes 8:7

"The race is not to the swift or the battle to the strong, nor does food come to the wise, or wealth to the brilliant, or favor to the learned, but time and chance happen to them all."
-- Ecclesiastes 9:11

"Cast but a glance at riches and they are gone, for they will surely sprout wings and fly off to the sky like an eagle."
-- Proverbs 23:5

Build an investment plan based on an unknowable future. 
Have a healthy respect for uncertainty.

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Filed under  //   biblical finance   investing  
January 14, 2010

Annual inflation-adjusted U.S. residential housing price increase from 1890-1990 equals 0.4%

According to Yale economist, Robert Shiller (co-creater of the Case-Shiller home price indices), residential housing prices in the U.S. increased by 0.4% beyond the CPI from 1890-1990.

Factoring in the housing bubble and bust of the last twenty years doesn't change the average much but it does illustrate the great volatility involved.

Most of the people who have gotten wildly rich in residential real estate have done it in one or both of two ways:  They've gotten lucky by being in the "right place at the right time," or they've taken on great risk by using leverage (borrowing other people's money).

Does that mean you can't make money in residential real estate?  No.  But it's the cash flows that usually determine the profitability of such an investment, not the price appreciation.

And what about owning your own home?  Owning a home does have a tremendous benefit, but it's not the future price appreciation (0.4% beyond inflation hardly makes up for the costs involved in being a homeowner).  Nor is it the tax advantage (only one of the ways our screwed-up tax code rewards excessive risk-taking).  The big advantage to owning your own home is the "implicit rent" that accrues.  If you were living somewhere else, you'd be paying rent each month at an ever-increasing rate, whereas by living in your own home, your payments (at least the principal & interest components of a fixed mortgage) never increase and ultimately end.  This, by the way, is true whether you have a big mortgage, small mortgage, or no mortgage.

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Filed under  //   budgeting & debt   investing   real estate  
January 4, 2010

Think you're a genius? Take this online test to find out but don't invest based on high IQ

Think you're a genius?  Find out with a short, psychometrically valid IQ test.  But don't invest based on a high IQ (yours or anyone else's).

 

MENSA, the organization whose membership is limited to those who test in the top 2% of IQ's, had (and may still have) an investment club with shockingly bad results.

 

From Eleanor Laise’s article “If We’re So Smart, Why Aren’t We Rich?, Dow Jones Newswire, May 15, 2001:

 

"The club's recent record has been nothing short of a fiasco, thanks to an overweighting in trendy tech stocks and pitifully bad timing… all told, the club saw the value of its assets fall by more than 40 percent over the past 12 months. One member said 'we can screw up faster than anyone else'; another, a member since the mid-1960s, describes its investing strategy as 'buy low, sell lower...'  From 1986-2001, the club’s investments returned an average of 2.5 percent a year (versus, for example, the S&P 500’s 15.3 percent)."

 

Ouch.

 

And let's not forget the Nobel Laureate rocket scientists who brought the entire U.S. financial system to the brink of collapse via the hedge fund, Long Term Capital Management.

 

"For the foolishness of God is wiser than man's wisdom, and the weakness of God is stronger than man's strength."

1 Corinthians 1:25

 

"May I never boast except in the cross of our Lord Jesus Christ, through which the world has been crucified to me, and I to the world"

Galatians 6:14

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Filed under  //   biblical finance   investing