Don’t Strive to Be a Jack of All Trades

Hakeem Olajuwon was one of the greatest basketball players in history.

Two-time NBA Finals champion — and Finals MVP — with the Houston Rockets, two-time defensive player of the year, and the 1994 league MVP; he is rightly included among the all-time greats.

But whatever you do, don’t put a baseball in his hand.

Hakeem the Dream was invited to throw out the ceremonial first pitch in last night’s World Series game in Houston, and it wasn’t pretty. It landed in the dirt.

It was all in good fun, of course. He took it all in stride. The crowd still cheered for him. Hakeem is  a hometown hero.

But let’s just say the Houston Astros won’t be signing him as a relief pitcher any time soon.

There are parallels to investing here.

Just as Olajuwon was legend on the basketball court but a joke on the pitcher’s mound, investors that are good stock pickers might be terrible market timers. Or an options expert might be terrible at putting together a bond portfolio.

Two Real-World Examples

My friend J.C. Parets, editor of Breakout Profits, is one of the best technicians I’ve ever met.

In seconds, he can pick apart a stock chart and tell you what direction that stock is likely to go. But don’t ask him to read a balance sheet. J.C. identifies trends, but it’s not his job to dig into the details of analyzing an individual company. J.C. has no clear advantage there. So, he sticks to his charts.

Now, contrast that to my buddy and fellow Rich Investor contributor John Del Vecchio.

John is a forensic accountant. He can dissect a company’s financial statements with ruthless efficiency. Within minutes, he can tell you whether a company has been overstating its revenues and earnings. He knows where the bodies are buried in the accounting. But don’t ask him to give you precise timing. That’s not his bag. There’s no special advantage for him in this.

The Take Away from This Comparison

To start, don’t try to be a jack of all trades.

Experiment until you find an investment style that suits your skills and temperament, then stick with it so you can refine your techniques.

Keep in mind that there’s no need to pigeonhole yourself into one narrow style. But don’t constantly try to reinvent the wheel or switch from style to style based on what’s hot that moment. That’s a form of performance chasing, and it generally doesn’t end well.

Second, seek out mentors and experts in your chosen discipline.

You’re probably not going to get great results by copying another investor’s style verbatim, but you can certainly pick up a few tricks along the way.

While trying to find your niche, remember that not every discipline works well in every market.

I’m a value investor, and let me tell you, my job was a lot easier 10 years ago. The 2000s were a fantastic decade for value investors and a lousy decade for growth investors. But the 2010s have been the complete opposite… It’s been a cakewalk for growth investors and a hard market for value investors.

That’s ok though. There is a season for everything. And a good strategy will eventually come back into favor.

Speaking of, it looks like we may be in the early stages of a rotation from a growth market to a value market.

Where to Put Your Money in 2020

I’m not sure how I’d feel about inviting Jeremy Grantham to my Thanksgiving dinner.

On the one hand, I could see him being a font of fascinating cocktail chatter. After more than a half-century of navigating the markets, the man no doubt has stories to tell, and in a sophisticated English accent at that!

But on the other hand, at the first mention of U.S. stocks, I could see him being a real wet blanket. His forecast for the next seven years isn’t exactly rosy.

If case you’re not familiar with him, Grantham is the co-founder of Grantham, Mayo, & van Otterloo (GMO), a Boston-based money manager with about $60 billion under management. He’s one of the best in the business, and he successfully called the last two market bubbles in 2000 and 2008, even though he took a lot of flak for it both times.

Grantham’s firm regularly publishes a seven-year forecast for the returns of various asset classes. While it’s not gospel truth, it’s proven to be pretty accurate over the years.

But Why Seven-Year Forecasts?

Grantham’s learned that seven years is roughly how long it takes for profits and stock prices to revert to their long-term averages.

In any single year, guessing the direction of the market is a crapshoot. And over the long term, stocks have historically returned about 7% per year after inflation.

But seven years is that sweet spot where Grantham’s mean reversion models add value.

So, let’s see what Grantham & Co. see going forward:

There’s a lot of red on the chart.

Based on GMO’s mean reversion models, U.S. large-cap stocks are priced to lose 3.9% per year over the next seven years. U.S. small-caps are priced to lose 1%.

Essentially, Grantham is forecasting a major bear market in the coming years and what is likely to be a slow recovery.

Overseas, the story isn’t quite so bad… but it’s not exactly stellar.

Developed international stocks are projected to essentially go sideways over the next seven years.

Even bonds look nasty…

U.S. bonds are projected to lose 2.2% per year over the next seven years, and developed international bonds (i.e. Europe, Canada, Australia, and Japan) are projected to lose 3.9% per year in dollar terms.

If there’s one bright spot, it’s in emerging markets.

Emerging markets have been beaten and left for dead over the past decade. As a case in point, the iShares MSCI Emerging Markets ETF (NYSE: EEM) is still sitting at prices first reached in 2007.

In a 12-year period that has seen the S&P 500 rise nearly 120% even after taking the 2008 meltdown into account, emerging markets have gone nowhere.

Now, I agree with Grantham that emerging markets look like an attractive place to park some of your savings over the next seven years or so. I plan to seek out opportunities in that space.

But you can’t put your entire portfolio in emerging market stocks. That would be madness.

After all, emerging markets started 2018 attractively priced and yet still managed to drop 20% in the nearly two years that have passed.

So, Where Do You Put Your Money?

You can, however, take a more active approach to investing and expand beyond the S&P 500.

Buy-and-hold investing works over the long-term. I believe that. And history has proven it.

But the “long-term” can sometimes be a lot longer than you’re willing to wait…

The S&P 500 went nowhere between 1968 and 1982, leaving investors to tread water for 14 long years.

More recently, the S&P 500 went nowhere between 2000 and 2013, again making buy-and-hold a tough proposition.

None of this means that another 13- to 14-year drought starts today. But if you’re in or approaching retirement, you really shouldn’t take that risk.

You Can Be Overinsured

An tornado ripped through my part of Dallas Sunday night, knocking the power out of my office building. As of this morning, they’re still not sure when the power will be turned back on. Judging from the number of electrical poles I saw ripped out of the ground, I’m guessing it will be a while.

Thankfully, my building wasn’t directly hit. Quite a few of the surrounding buildings weren’t so lucky. I drove by yesterday and the buildings looked like they had been shelled by heavy artillery.

This got me to thinking about insurance — specifically how much insurance it makes sense to carry.

Though I’m talking about home insurance, the same math applies to any form of insurance: auto, life, health, etc.

It’s possible to be under insured. That puts you and your family at risk of being wiped out if a tragedy were to strike. But contrary to popular belief, you can also be over insured and wasting money you could better spend or invest elsewhere.

Before we talk specific numbers, let’s get philosophical.

What Is Insurance, and What’s the Point of Buying It?

Insurance is effectively accepting a known loss in exchange for avoiding a potentially much more significant loss.

For example, your homeowner’s insurance bill might be a couple hundred dollars per month. That’s a known loss. You know ahead of time you’re paying it, and you do so gladly to protect from a potentially devastating loss were your house to take heavy damage.

But here’s the deal… Insurance only makes sense if the losses were potentially so great as to ruin you, or at least make a serious dent in your finances.

MY OFFICE 

My office is uninsured. Were the entire building to burn down, what would the risk be to me? I’d lose maybe a thousand dollars’ worth of furniture and maybe another thousand in assorted computer parts. My library would also be lost, but that’s harder to put a dollar value on since my books have sentimental value, as I’ve collected the books on four continents over two decades. But they have no real monetary value. Were my books to burn up in a fire or blown away in a tornado, I wouldn’t be able to replace them, even if an insurance company wrote me a check for their purported value.

In the case of my office, insurance makes no sense. I could replace it on a shoestring budget within a couple days. Why have yet another monthly payment to protect a bunch of junk that doesn’t really need protecting?

MY CAR

I have liability insurance on my car because it’s required by law and because I have no good way to calculate my risk. If I accidentally sideswiped a Rolls Royce and ran it off the road, I could be liable for hundreds of thousands in damages.

It’s better to pay Geico a modest monthly payment to avoid that possibility. But I declined full coverage. My car is paid for, and it’s pretty much a jalopy after carting around two young boys for seven years. If it were to get totaled tomorrow, I would view it as a blessing and buy something nicer. It wouldn’t be a major financial burden.

MY HOME

My home, however, is a different story.

It’s fully insured. Sometimes, I think it would be a godsend if the thing burned down. It’s been a money pit since I bought it. But if that were to happen, I’d still have a mortgage to pay, and I would potentially lose a couple hundred thousand dollars in home equity. Insurance protects me from that.

But, all the same, I have the highest deductible my insurance company allows because it means a lower monthly payment. I’m happy to accept the risk of minor damages in exchange for that lower payment. The money I save on insurance is used to pay my mortgage down faster, building my wealth.

So, How Much Insurance Do You Really Need?

And at what point does it make sense to “self-insure,” or simply accept the risk of being uninsured?

There really isn’t a firm number here. It’s more of a subjective feeling.

My rule of thumb is the “sleep at night” test. If you can comfortably sleep at night after considering your potential losses should the worst happen, you’re probably fine.

But let’s try to make that a little concrete.

Look at your current savings and ask yourself: “How much of that you’re willing to put at risk?”

If my car were to get totaled by an uninsured motorist, I’d need to have enough cash on hand to make a down payment on a new car. I’m good with that. But if you’re not good with that, then you should continue to have full coverage on your car.

Likewise, I’m comfortable eating several thousand dollars in home damages. My pain threshold is about $7,000 to $10,000. At that point, I start to sweat a little. So, I should have insurance that protects me after a deductible of roughly that amount.

And your number might be higher or lower. There’s no “right” answer here.

The Same Is True of Life Insurance

I want to have enough life insurance so that my wife and kids can continue to live our current lifestyle indefinitely were I to croak tomorrow. But I don’t want to have so much life insurance so as to give them an incentive to off me and make it look like an accident.

I’m joking, of course. All the same, it makes no sense for me to make massive life insurance premium payments for a ridiculously large death benefit when I could take that same money an invest it elsewhere.

Every dollar spent on unnecessary insurance is a dollar you can’t spend elsewhere.

So, this is my recommendation to you.

Do an honest assessment of your assets and look at what you’re paying (or not paying) for protection. Does it make sense? Or are you spending far too much money to protect something that might not be all that valuable?

If you have a healthy pot of savings built up, don’t be afraid to self-insure if you’re comfortable doing so.

Paying too much in insurance isn’t as potentially devastating as paying too little, but it is still detrimental to your wealth. It slows down growth and takes away from other potential investments that could bring in more money for you.

Travel and Spend Your Money the Right Way

My job is to help you make money. It’s what I spend most of my waking hours thinking about.

But today, we’re going to take a break from all of that.

Rather than talk about making money, I’m going to focus on having a little fun with it. After all, you can’t take it with you. The whole point of making money is to eventually spend it.

I recently got back from a trip to Greece and Turkey, so I have travel on my mind. I travel often. Both for business and for pleasure. I’ve wasted more money than I care to admit by doing things inefficiently in the past. But by now, I’ve (more or less) figured things out.

Nowadays, I generally travel better, smarter, and, in most cases, cheaper.

Without further ado, let’s cover a few ways you can make your precious travel dollars stretch a little further…

All About Airmiles

Airmiles are a familiar concept. They can be a fantastic way to significantly lower your travel bill.

Last year I used my accumulated airmiles to fly business class to Paris with my wife, saving thousands of dollars in doing so.

Every airline has some version of a loyalty program in which they reward their frequent flyers. You should sign yourself and your entire family up for an airmiles account with every airline you’re likely to use on a semi-regular basis.

In addition to free travel, accumulating miles with an airline gives you other perks: occasional upgrade to business class, access to the VIP lounge, the right to board ahead of the unwashed masses, and better baggage allowances.

And accumulating airmiles is relatively simple. Actual travel with the airline of your choosing is one way; purchases uses a credit card with rewards — like the Chase Southwest card, for example — is another.

On the first count, there is a tradeoff. If you consistently fly a small number of airlines, you can obviously accumulate miles more quickly. But you might not always get the cheapest price for that particular flight.

So, you have to ask yourself: Is it worth paying a little more in order to better accumulate airmiles?

There’s no “right” answer here.

But my rule of thumb is that I’ll pay $50 more on a domestic flight and $100 to $200 more on an international flight in order to fly with one of my go-to airlines. I’m naturally frugal. I hate paying a penny more than I have to. I do it thought so I can enjoy a decent scotch in Admirals Club while the rest of the poor slobs fight for seats at the departure gate. It makes travel almost bearable.

As for accumulating miles with a credit card… Just be careful. You can easily use that as an excuse to spend more money than you normally would or should. You might think, Well, I don’t really need this new big screen TV, but think of the airmiles… Don’t fall into that trap.

Get those thoughts out of your head. I believe it’s better not to have a credit card at all. But if you’re going to get a credit card, and you’re going to use it on core expenses — utilities, groceries, gas, etc. — then you might as well accumulate miles in the process.

The “right” card depends on what airlines you tend to fly. I tend to fly American Airlines, so the Citi AAdvantage MasterCard is a good option for me. But every airline will have a card that is best tailored to them.

Next time you fly, ask the flight attendant. She’ll likely have a card application on her person.

Again — and I can’t emphasize this enough — only get an airline credit card (or any credit card) for expenses that you were planning to make anyway. The road to financial ruin starts with a credit card, and if you know you have poor spending control, it’s better to leave the airmiles on the table and use a no-frills debit card instead.

To Upgrade or Not to Upgrade

I love flying business class. It takes some of the misery out of travel and makes it almost civilized.

But I’ll be straight with you… Usually it’s not worth it.

I have a rule of thumb for this as well: For flights less than four hours, I won’t even consider paying for an upgrade.

If they give me one for free, I’ll gladly take it. But for short flights, what are you really getting? A little more legroom and a free cocktail or two. If you’re as rich as Jeff Bezos, sure, go for it. But for the rest of us, the money can better be spent elsewhere.

The longer the flight, the more likely I am to consider an upgrade. This is particularly true for overnight flights.

On flights to Europe, Asia, or South America, the seats in business class will often fully recline, allowing you to sleep in relative comfort. Trying to sleep in coach with your seat tilted at a 45-degree angle and your knees being crushed by the seat in front of you is utter misery.

Arriving at your destination well-rested and fed clearly has value. It’s just a question of how much it’s worth to you and what you’re willing to pay.

Buying a business class ticket outright is usually punishingly expensive. But you can sometimes get a fantastic upgrade deal at the last minute. When you check in for your flight, check out the price to upgrade. If it seems reasonable, go for it.

On my outbound flight to Europe last month, I got a fantastic price on an upgrade, so I took it. The deal wasn’t so sweet on the return flight, so I opted to stay in coach.

Now that we’re more than a decade into an economic expansion, it’s a little harder to get a cheap upgrade to business class.

As the economy starts to cool, the cheap upgrades will be back.

Be on watch for them.

Hotels: Take Transport into Account

I try to scrimp on hotels when I can.

There are times when the hotel is the destination. For that, you should plan to spend accordingly. You don’t want to cheap out on your honeymoon or a romantic getaway and ruin the experience.

For most travel though, the hotel is a place to crash and nothing more. I’m rarely willing to pay more than I have to.

Cheaper isn’t always better. You have to factor transportation costs as well. It doesn’t make sense to save $10 per night on a hotel room if you’re going to end up spending an extra $50 per day in taxi fare. Plus, your vacation time is a precious commodity. You don’t want to spend your entire vacation commuting in from a hotel on the fringes of the city.

So, as you look for hotel deals, make sure to check the hotel’s location on Google Maps to see if it’s close enough to the attractions you want to see. I’d gladly take a less luxurious room or pay a slightly higher price to be in a convenient location.

Alas, my pleasure travels are over for the time being.

Hopefully yours are just getting started.

Bon voyage!

Investment Advice From the Greatest Hitter Who Ever Lived

With the World Series set to start next month, I have baseball on my mind. So today, we’re going to glean investment insights from Ted Williams, arguably the best hitter in the history of the game.

Ted Williams Knows How to Hit a Ball

The Boston Red Sox leftfielder finished his 19-year professional career with a lifetime batting average of .344 and an on-base percentage of an incredible .482, and this despite taking time off in the prime of his career to fight in World War II and the Korean War.

He also won the Triple Crown, meaning he led the league in batting average, home runs and runs batted in… and he did it twice.

To put that in perspective, there’s only been 16 Triple Crown winners in the history of baseball, and two of those belong to Williams. To cap it off, Williams was also the last Major League Baseball player to bat .400 in a season.

It’s safe to say that Ted Williams knew a thing or two about hitting a baseball.

And he was generous enough to share some of his secrets in his 1986 book, The Science of Hitting, which I strongly recommend for any baseball fan with an appreciation for history.

Interestingly, we can apply a lot of his same insights to investing.

Williams Had  a Strategy

To start, both baseball and investing are “sports” in which it pays to study. Sure, Williams was probably born with better eyesight and better reflexes than you or me. But that’s not why he was the greatest hitter in history.

Williams was the best because he was willing the approach the game analytically; study his opponents and — perhaps most importantly — practice.

More than a half century before Billy Beane used statistical analysis to revive the struggling Oakland Athletics (as recounted in Michael Lewis’ book Moneyball), Williams might have been the first “quant” in professional sports.

Williams carved the strike zone into a matrix: seven baseball lengths wide and 11 tall. His “happy zone” — where he calculated he could hit .400 or better — was a tiny sliver of just three out of 77 cells. In the low outside corner of the strike zone — Williams’ weakest area — he calculated he’d be a .230 hitter at best.

The “happy zone” will vary from batter to batter, but Williams understood exactly where his was, and he wouldn’t swing if the pitch was outside of his zone.

The Science of Investing

Likewise, investors need to have the self-awareness to know when the market is favoring their specific trading style.

When it is, it makes sense to swing for the fences. And when it’s not, you don’t have to swing at all.

Williams was notoriously patient and disciplined at the plate, which is why his on-base percentage was so high.

He had control over his ego and his emotions and wouldn’t swing because the defense — or even the spectators — was taunting him. He finished his career behind only Babe Ruth in bases on balls (walks).

And in investing, it might be easier. You can watch pitches go by until you see one you like. As Warren Buffett famously said, there are no called strikes in investing.

While professional investors have enormous career pressure to look like they’re “doing something,” individual investors don’t have to worry about a boss firing them. They can afford to be patient and wait for a perfect trading setup.

Williams, an eventual Hall of Famer, was chastised in his day for talking too many walks by none other than the legendary Ty Cobb. Well, frankly, Williams could call “scoreboard” on Cobb.

Cobb finished his career with a slightly higher batting average (.366 versus .344) but his on-base percentage trailed Williams’ by a much wider margin (.482 versus .433).

But perhaps the best lesson from Williams is this:

If there is such a thing as a science in sport, hitting a baseball is it. As with any science, there are fundamentals, certain tenets of hitting every good batter or batting coach could tell you. But it is not an exact science.

While it pays to take a detached, scientific approach to investing, it is absolutely not an exact science. This is why all successful investors diversify and have proper risk management in place.