Tuesday, September 13, 2005

Thoughts, Blink, and Why people invest?

I consider myself a layperson in the investing world. I just read about it everyday (ever since I could read the USA Today's Money section), I studied economics & finance in college, and I find as many new sources for information as possible. I consider myself out of the norm compared to most Americans, and I find that many friends/coworkers with more money than me to invest, investigate the financial world less. I find that friends who ask me advice seldom listen, seldom follow up on resources I tell them to check out, and seldom read a bit of information before plunging ahead.

As I posted about earlier, I recently read Blink by Malcolm Gladwell. I have thought now that maybe there could be something to the idea of information overload when it comes to investing. Could it be that reading too much about an investment or the economic environment is bad for a casual investor? My answer is yes there are problems of information overload with investing. The key to figuring out if you are looking too deeply at a problem or idea is why are you doing it.

Casual investors do not think clearly about why they are investing. Is it long term (5+ years), short term (3-5 years), or extremely short term (under 3 years).? Is it for a concrete numerical goal, an appreciation of capital, or a quick hit? When you figure out why you are investing, then you can consider what to invest in and where to look for advice/information. Are you looking for some growth for a down payment for a house (people still make down payments) or considering 401k investment options? Can you afford to lose the entire investment or is this 'life savings' (risk tolerance)?

I have friends who ask me about their 401k allotments, and, for example, they discuss the idea of having half of their 401k invested in company stock. Now they probably cursed the Enron employees who did that and lost money "Idiots tying their future to 1 stock", but they will not see it for themselves. They might say "I see the stock going up 20% in the next year"....and then what, a 401k is money that you cannot touch without a penalty for 30-40 years. What's the need for such a big gain in 1 year? I do think 401ks can be set up for information overload to individuals. Too many options can lead people to avoid making a decision or put all their eggs in one or two baskets. If you have a long time horizon, you can afford to take on extra risk. Consider the fact that the 401k money grows tax free, maybe throw in a bond fund into your 401k investments, and for take some risk with emerging market exposure.

I think too many times people have money that will serve a short term purpose but they want serious gains and end up taking on way too much risk (I want +40% in 1 year, dang it!). Too many times people think about the short term or about unrealistic goals? Many people I know talk of doubling their investment or, recently at work, wishing they bought Google at $200. (allow me to use soft numbers a bit) Ok, so the $3000 you have to invest would have bought you 15 shares, which you would have sold now at $300, giving you $4500 which would be taxed at normal rates since you held them for less than 1 year, which would net you around $1000. All of that risk on one stock and with a significant jump in prices, you still only netted around $1000. I think this goes to the get rich/famous quick 'n' easy attitude of Americans today.

I think it is possible for laypeople to read up enough on different investing strategies for different situations over a period of time where they can store this info easily. Look for important information like investment themes, broad situations, then move to specific situations. (I keep thinking of the Doctors of Cook County Hospital diagnosing heart attack risks with tons fo information incorrectly) It can become part of unconscious thinking, and considered in a blink of an eye because of proper previous exposure. In situations one has read/studied about, it can become a choice of "I want to achieve X goal. I should consider investment A, B or C" not "Where do I go to get a great return, let me read XYZ magazine, read Morningstar online, talk to an advisor, consult Miss Cleo". Drilling down to a single investment option might involve looking deeper, but once you know why you are investing you can narrow the field down immensely, It hopefully can help cut through the clutter that is investment information & advice now spewing from every media outlet. I'm invested for the long haul and a student of the Vanguard school of investing. Index, diversify, and keep costs low. I'm not going to beat the market year in and year out. I'm going nowhere for a while so I will keep it simple stupid.

Side note: Doesn't something seem wrong about this chart of the 200 DMA of the S&P 500? Like this latest rally just delayed the inevitable cracking of the 200 DMA. I get the nagging feeling that this Hurricane rally is based on squat and we're going to get a serious downturn as the bad news from rising oil, the bankruptcy law changes, and a soft retail season start coming in at the end of the year. I also remember the last time the Fed raised rates as oil prices rose (and they were nowhere near our oil prices), 1999/2000, which lead to the recession/nonrecession of 2001. The Fed sure cooled things down with the combined pressure of oil prices that time. I think the same will happen this time around.

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