Some things are easy.
Some things are hard.
Some people make hard things look easy — like darts players or crane operators.
While others make easy things look hard.
Many investors fall into the latter category. And we’re not just talking about novice investors either. Even the pros can take a simple concept and turn it into something completely unintelligible.
We’ll show you what we mean…
This week the Financial Times claimed that macro hedge fund managers (those who make big bets on big macro-economic events) had come back to the fore after a torrid few years.
The report quoted hedge fund manager Arvin Soh:
‘In Q1 it was all about Japan. Macro managers played that through the Nikkei and the yen. In Q2 it was about getting out of that and shorting precious metals. And in June and July it has been about shorting emerging markets – there have been opportunities in a whole bunch of asset classes.’
Wow! Buying the Nikkei…shorting precious metals…short selling emerging markets. Impressive. Or is it?
Not when you look at the alternative…
Don’t Muddy the Investing Waters
This is a classic example of taking something relatively easy and making a meal of it.
Because when you look at the results of the macro hedge funds that have supposedly made a comeback, well, given the market conditions they actually haven’t done that well.
As the FT reports, funds run by Caxton Associates are up 17% this year, those run by Tudor Investment Corporation have gained 12%, and Moore Capital’s hedge fund clients have made 10.5% so far.
Not bad. But as we say, consider the alternatives.
US investors who just bought plain old stocks in the S&P 500 are up 19% for the year so far…without paying huge hedge fund fees.
And to be honest with you, seeing as gold has slumped more than 20% this year and the Japanese market gained over 40% from January to May…a 10.5% gain isn’t that great.
Look, we’re not saying investing is simple, because it isn’t. But what we are saying is that you as an investor have a choice. You can choose to keep your investments as simple as possible or you can add in unnecessary complications.
To our mind, elements of macro investing do just that.
While it’s a good idea to look at the big picture, sometimes it can confuse you or muddy the waters.
It’s why we prefer a simple approach to investing. We recommend allocating your money to a few key asset classes: cash, gold, dividend stocks, and growth stocks.
Short and Long Term ‘Meddling Protection’
To us, macro investments are the things on which we focus the least amount of time. That’s cash and gold. If you like, they are the short and long-term protection against meddling.
We recommend buying and owning gold for the long term because ultimately governments will always devalue paper money. We don’t care about the shorter term booms and busts.
And we recommend holding cash in a savings account because, well, it’s important to have some security during the short-term booms and busts.
You see what we mean? That’s as complicated as you have to make it.
As an investor you should focus most of your attention on the micro-economic events — e.g. individual stocks.
This is where things get more complicated — but only relatively speaking. You can still choose to make stock investing easy, or you can complicate things.
Where possible, we prefer the former, and we recommend you do the same.
So, how can you keep things simple?
Easy Investing 101
For a start, you can limit the amount of income stocks in your portfolio. Rather than picking 20 OK stocks, spend a bit more time and pick 5, 6 or 7 great or outstanding stocks.
Then, if you don’t need the dividend cash, subscribe for the company dividend reinvestment programs (providing the companies offer it).
On the growth side, you can have as many stocks as you like. But again, we suggest keeping things manageable. Divide your speculative growth portfolio into short-term and long-term positions. You may have half a dozen punts you expect to hold for five or ten years.
Plus you may have another half a dozen punts you’re holding for the short term.
Whichever you choose, the decision is yours. Naturally, the more time you can devote to monitoring your stocks the more you can afford to own. If you barely have time to follow stocks then you should put a limit on the number you own.
Put simply, to be a successful investor in this market or any other market you don’t have to trade Japan, short sell gold, and gamble on emerging markets.
If you want some exposure to those markets go for it. Just don’t presume that’s the only way to make money in this market, because it isn’t.
As we’ve explained all the way through this current bull market rally, the best way to build wealth is with stocks. So keep it simple.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: The End of The Economy Deformed by Easy Money
Money Morning: Read This Before You Buy Another Stock or Bond…
Pursuit of Happiness: The Dark Side of Technology
