Potential investing in the Future: Robotics and Automation

Investors,

 As you all have heard over and over again, investing is a patient man's game, as it is incredibly difficult to stock pick with consistent winners as a day trading individual investor/trader. However, a big part of investing is about getting in the game before others do, or before herd mentality kicks in. Look at the late 90s and early 2000s when internet and dotcom stocks were booming. Not many people really knew what to do with all this "dotcom" talk, but everyone knew they wanted a piece of it, as its sector in the stock market seemed to consistently never lose. Of course, what goes up, must come down and the dotcom euphoria shot down hard, as people lost fortunes in the process. But what about the people who got in before everyone in the public started talking about these so called "dotcom" companies? What if you thought this whole dotcom thing was a pretty genius idea and you invested your money into it before crowds of investors got in and sold before the bubble burst. While it's hard to sell when a company you own is skyrocketing through the markets, sometimes you need to be wary when everyone on the news or all your friends are telling you to get in...that might even be the time to get out! Nonetheless, as simple as it sounds, it's about buying low and selling high. Some people rode the dotcom wave and made killings, while some didn't have the discipline to sell, or bought in too late, put all their chips on red and lost fortunes. Which leads me to my point for this post... an industry that I believe is just getting started: Robotics and automation.

 

 President Trump claims he wants to bring back jobs to America as so many US workers especially in the manufacturing industry have lost their jobs to offshoring. Companies offshore to other countries, especially third world countries because wages are a lot lower than in the US...it is a lot cheaper to manufacture overseas than it is domestically. Companies want to allocate their capital as efficiently as possible, so they prefer manufacturing goods outside of the US, which is why we rarely see "made in USA" on tangible goods. We offshore a ton of work to Mexico because wages are lower in Mexico, they have relatively decent production standards and the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico allows for the gradual removal of tariffs on goods traded between the countries. 

 

 But wait a minute...Trump wants to build a wall on the US-Mexico border and also wants to bring jobs back to the US by employing more American workers. The con to that is that companies (and a lot of companies offshore to Mexico) will be forced to rethink how to allocate their capital efficiently, as mentioned before. Before they offshored work to Mexico and other countries because it was cheaper that way. Now they will be forced to base their production in the US, which is not so cheap for companies as wage rates are higher. Therefore, companies have two options: 1) They can lose money that they didn't have to worry about before by employing a myriad of US workers or 2) They can rethink their strategies and look to automation and robotics as a cheaper and more efficient way to avoid the increased costs of employing US Workers. That doesn't mean no US workers will be employed in the manufacturing, retail, truck driving fields (a few of the job fields that could potentially be hit the hardest), for surely US workers can complement the automation. I don't think Trump and the myriad of jobless Americans looked far enough into the future to see that automation is coming and its coming fast. Trump promised jobs, but companies need to make money and if it means turning to automation for more efficient and cheaper labor costs to produce their goods, undoubtedly they will. 

 

Furthermore, overseas automation is moving even quicker than the US, especially is China and Japan. I don't recall the exact statistic, but from 2015 to the beginning of 2017 China employed more than 3 times as many robotics in their workplaces than did the US and the number is growing. Japanese and Chinese Robotics firms are already being called upon for their parts to be used in the US for myriads of jobs in order to increase productivity and gain comparative advantages in the US.

 

While scary to think about, robotics and automation are nonetheless coming fast, if you do decide to invest in this sector, don't become a fool like the dotcom junkies. Do your research.

 

https://www.credit-suisse.com/us/en/articles/articles/news-and-expertise/2016/09/en/welcome-to-the-future-investing-in-robots.html

http://www.wyattresearch.com/article/investing-in-robotics/

https://www.usatoday.com/story/tech/news/2017/02/20/cuban-trump-cant-stop-rise-robots-and-their-effect-us-jobs/98155374/

 

Recap: KP Investment Club Meeting

During our last meeting, we talked about stocks vs. other investments, investment vehicles, and market timing. Next on the agenda is portfolio diversification.

Here is a link to the PowerPoint slides (KP Investment Club Meeting Slides). I added additional details in order to convey a similar message to the one presented at the meeting.

 Thanks. Matt.

History, Volatility, and the Key to Successful Investing

Recently, I ran across a good article on Investopedia titled "Portfolio Returns: What is Reasonable to Expect?"  It addresses historical returns of the S&P 500, volatility, and staying to course as an investor.

Here is my quick take on the article:

As an investor, you must learn to stay the course during periods of market volatility. By researching history and embracing volatility, investors are able to stay to course and know that such market events occur regularly over time but don't last all that long.

Knowing enough not to panic when markets drop ~10% or so every few years is one fundamental aspect of personal investing success. And understanding that the power of compounding (the rule of 72) can help you accumulate lots of assets down the road is also a fundamental aspect of long-term oriented successful individual investing.

Regarding market timing, here is a great excerpt from the article:

"Over the 20 years from 1996-2015, an investor that stayed fully invested in an S&P 500 index with zero changes to their portfolio would have enjoyed a 6.44% annualized return. To put that in investment terms, a $100,000 investment would have grown to $348,347 over this 20-year span. By missing just the 10 best performing days of the S&P 500 during this same time period would have diminished your annualized return to 2.81% annually and left you with $173,979 in that same initial $100,000 investment. This is the powerful effect that poor market timing can have on your nest egg."

Here is a link to the article: Portfolio Returns: What's Reasonable to Expect?

Mutual Fund's Ridiculous Disclosure to Investors

Investors,
  
  Attached below is an intriguing and quite amusing article that quotes a mutual fund's (IPS Millennium Fund) final disclosure letter to investors, near the peak of the internet bubble in the early 2000's. For those of you who don't know what happened in the early 2000s to the stock market, basically investors poured their money into internet start up companies in the 1990s, hoping that these new advanced technological companies would one day become profitable. High-tech companies with actual earnings were driving the technology sector (Intel, Cisco, Oracle, etc), but it was the upstart dotcom companies that created a massive stock market rally beginning in 1995 based on pure speculation. Nobody really knew what was going on with the internet or what it even was at the time, but everyone wanted a piece of it, which caused incredible overvaluations of dotcom companies who couldn't keep up according to their actual earnings. And over time, this overvaluation was simply unsustainable. The bubble bursted.

  Keep that in mind while you read the article below. Basically, the Mutual Fund Manager is hilariously blunt to all of his investors, stating that they shouldn't come crying back to him if the fund loses money day in and day out. In that part, I agree with the Fund Manager. You shouldn't be worried about the daily hiccups in the market if you're a long term investor. Too often, people check their daily ups and downs to see how their invested money is doing, yet what does that do besides stress you out if you aren't seeing green? If you're plan is to invest longer than a year's time, that shouldn't matter to you anyways. As I've stressed in the past, actively traded mutual funds, like IPS Millennium Fund, try to outperform the market through their "expertise" and rack up anywhere from 2-4% in fees per year. Therefore, if the fund actually earns a return of 8% in a given year, yet they make 3% in fees, you actually only make 5%. Avoid fees, they can destroy your future potential wealth down the line. On the otherhand, index funds, such as Vanguard 500 Index Fund (VFINX) simply tracks the S&P500 and purchases all of the stocks within the index. Therefore, they don't rack up trading fees, and expenses and fees come down to something extremely low like .15%. Something to keep in mind, from 1993-2013, the S&P 500 index returned an average annual return of 9.28%. The average mutual fund investor made just over 2.54%, AN 80% DIFFERENCE!

  I hope you enjoy the article, as one can imagine, the actively traded mutual fund IPS Millenium Fund, went out of business shortly after when the internet bubble burst and their stock picking "expertise" couldn't keep pace with the market. Incredibly accurate point of view from the mutual fund investor, getting queries from their clients about why their money is down one day and up the next!

In other news, Federal Reserve raised interest rates to 1 percentage point today, more on what that means another time. Peace!

Max Maudsley

http://jasonzweig.com/best-mutual-fund-disclosure-ever-dont-come-crying-to-us-if-we-lose-all-your-money/

Investing in Real Estate and Warren Buffett

The other day, I saw an article shared on Facebook titled “Warren Buffett’s Best Investment.” The article was referring to a vacation property that Buffet purchased in 1971 for $150,000. Today, the home is listed for $11,000,000. People are astonished. People commented about how this exemplifies the profitability of investing in real estate. Due to my general disbelief that real estate is a good investment over the long haul, I decided to do a simple opportunity cost analysis. Granted, Buffett purchased this home for vacations not necessarily as an investment to grow his portfolio. Nonetheless, what if Buffet invested the same $150,000 in his company or the S&P 500?

Here is what I found:

Buffett’s Berkshire Hathaway, from 1965 to 2015, earned an average annual rate of return (with dividends reinvested) of 19.6%. If he invested the $150,000 at that rate over the same time period he owned the home (46years), the present value would be over $550,000,000. This exponential growth from $150k to $550 million exemplifies the power of compounding. Investing early, even small amounts pays huge dividends down the road.

Nevertheless, a 19.6% return is a remarkable feat. Here is a more realistic comparison:

It would take an average rate of return on the 150k of 9.8% for 46 years to equal 11-million-dollars. The average rate of return of the S&P 500 over the same period, with dividends reinvested, was 10.34%. At this rate, the 150K would be worth almost 14-million-dollars. That is three-million-dollars more. It is worthy to note that the 0.54% return over the course of 46 years made a three-million-dollar difference. This demonstrates how large an impact fees can have on an individual’s retirement portfolio. Be conscious of fees.

Was this Warren Buffett’s greatest investment? No, but a 9.8% return is great. Warren Buffett acquired this home for living. The point of this post is to encourage people to think twice before investing in real estate. It isn’t a sure bet, and you should consider the opportunity cost of choosing another investment vehicle. Once you throw in the various costs of ownership such as property taxes, maintenance, etc., other investment vehicles look even better. Further, owning physical property presents a problem of liquidity.

Personally, I believe homes are for living. From 1900-2012 the U.S. real estate index has returned 3.4%. This barely beat the average annual rate of inflation. I think the attractiveness for most people centers on tangibility, less volatility, feeling more in control, and the common “my parents purchased this home 40 years ago for 100K now it is worth 300K.” Of course, there are always exceptions, and people have made great livings investing in real estate.

That is my take.

Thanks. Matt.

The Election and Your Portfolio

The Election is over, and Donald Trump is the President-Elect. Further, the Republicans took control of both Houses. But, how does this affect my portfolio moving forward? Looking at history, it doesn't.

Elections tend to only have short-term effects on the volatility of the stock market. In the video below, it states, “The markets don’t like uncertainty, and presidential elections, by definition, add another layer of uncertainty.” The video then goes onto to point out that historically the volatility ends shortly after Election Day.

The reality is whether a Democrat of Republican is in office has little impact on the overall performance of the stock market. Tomorrow, we will have the same issues that we had yesterday, last month, and last year...issues of slow growth, low interest rates which may rise soon, and excessive indebtedness. As the video points out, the most important factors in the market valuations are not what party is in office, but other factors such as globalization, technology, demographics, the Fed and the economy, and unforeseen events such as wars and natural disasters.

As pointed out in this article called Long-Term, Really Long-Term, and What You Should Focus On, the 18% annual growth of the 1980s may not be seen again in the next 30 years. In the 1980s, valuations were low, and interest rates were high leaving room for growth. Today, we are in the exact opposite situation. Michael Batnick, who runs one of my favorite blogs, The Irrelevant Investor, states the following:

Valuations are high (although not nearly as expensive now as they were cheap then) and interest rates don’t have much space between where they currently are and zero. And given that stocks are up 260% from the bottom in 2009, it’s easy to understand why low expected returners feel this way (even though stocks are up just 66% from the 2007 highs).

 In the most recent long-term period (the last thirty years) the S&P 500 has had a good, but not great run. I guess two 50% crashes lead to below average returns. And if we were to see even lower returns for the next 10 years, say 2.5% nominal, the long-term returns from 1996-2026 wouldn’t look so hot. In fact, it would produce by far the worst thirty-year return in the one-hundred years from 1926-2026, even worse than had you started investing at the top in 1929.

 If this scenario were to play out, the S&P 500 will have grown at just over 6% a year (nominal) for thirty years. But even the worst thirty year period wouldn’t be such a tragedy; 6% for thirty years would produce a nearly 500% return.

To put this in perspective, an investor who invests $10,000 a year for 30 years at 6% would have approximately $850,000. Add ten more years, and that amount increases to 1.65 million dollars. That is the power of compounding at work.

I still believe stocks are the best game in town…even at 6% annual rates of return. However, I believe the that by swinging at good pitches, as Chad Cook describes in How I Invest, Part 1: Find the Sweet Spots, individual investors with the right approach can outperform the market benchmark.  




In Conclusion:
In the short run, stock prices fluctuate and sometimes widely. However, as seen in the graph below, over the long haul, stocks outperform bonds and other investments by multiples. The short-term swings in the market become insignificant when compared to the overall upward movement of prices throughout history.

Market timing isn't for me. My plan remains unchanged. It is to continue saving early and often, buy solid blue chip companies that pay dividends, ride the ups and downs, and allow time and compound interest to work wonders.    

Thanks. Matt.

Why don't you invest in passive index funds?

***I first drafted this as a supplement to this post at this blog. Then today an interesting article was posted on Bloomberg.com about a research note published by Sanford C. Bernstein & Co. that is also related to differences in active and passive management (it comes from a unique perspective to be sure).***

There are many who advise individual investors exclusively buy "passive" funds like SPY, which describes itself this way:

There seems to be countless studies that prove that professional fund managers, after fees are deducted, are unable to predictably outperform this type of passive investment strategy. I agree that someone who wants nothing to do with evaluating investment options should seriously consider investing in such passive funds.

But I obviously believe that individual investors, with the right approach, can do better than both the pros and the benchmark. Why? Because we individual investors have only our own emotions to manage, which is sometimes quite difficult but always very doable. The pros have to account for the short term expectations of their fund investors. To do better than the benchmark, one has to invest differently from the benchmark. If the pros invest differently and do not guess (all short term investing decisions are essentially guesses) correctly, they will lose the funds invested. So no matter how sophisticated the pros are, they are doomed to mostly mirror the benchmark. Subtract fees and you predictably get a lower-than-benchmark return.

Individual investors can invest differently than the "market weighted" index because we can train ourselves to expect short term differences in performance versus the benchmark, and to not abandon the plan when these inevitable differences materialize.

But to "beat the benchmark" actually is not why I research, buy, and monitor individual stocks. I want to beat the benchmark. But more than that, I want to do all I can to ensure that the shares I own are of businesses with long term profit producing power that can fund distributions to shareholders like me for a long time. If I've done that, when prices plunge, I think I'll be better prepared to avoid panic selling than if my investing philosophy was solely based on passiveness and blind trust.

Continuing to invest and staying invested are the keys to achieving long term financial goals and are more important than how to invest, I think. Which reminds of a great passage from a recent post on a good blog: