Tuesday, October 21, 2008

How Scott Adams Manages His Money

I came across an interesting blog post the other day... it was written by Scott Adams, the creator of Dilbert, describing how he manages his money.

Statements like this make me very jealous: 

"When I first started making serious Dilbert money, I let experts manage half of it, and I managed the rest, as a hedge against both the experts and myself."

Can you imagine making "Dilbert money"? Me neither. I'd imagine Dilbert money amounts to a pretty tidy sum.

But I digress. The part of the post that most interested me was this part: "The experts invested in Enron, Worldcom, and a number of other companies that promptly exploded. The experts reduced their portion of my money by about a third over five years. (The experts work for one of the most respected financial institutions on Earth, by the way.) My own investments did better, precisely because they were more diversified. So now I handle my own investments, probably incompetently."

I smiled when I read that. One of the biggest lessons the current financial crisis has driven home again and again is that nine times out of 10, the so-called "financial experts" aren't worth the paper their MBA degrees are printed on. Tens of examples appear in the papers every day. From the "geniuses" who created the whole mess by engineering clever securities to the Wall Street research analysts who scrambled to lower their price targets and ratings every time the market dropped 15% this year, the majority of "experts" were outed as frauds. If you had followed their advice, you would find yourself extremely poor right now.

I went to school with these people. I worked with them in investment banks and I worked for the companies they peddled their wares to. Half of the time I couldn't follow what they were saying and the other half I couldn't understand why someone would want to take the kinds of risks they were talking about taking, or why someone would want to hedge against the risks they were trying to get them to hedge against. Warren Buffett warned that derivatives were a "ticking time bomb" back in 2003 a warning that put a bad taste in my mouth for the "financial engineering" I was just beginning to get exposed to at the time. Derivatives and complex financial instruments got really popular though. The big stars at the companies I worked for were those who understood the lingo, who could create increasing layers of complexity to get around accounting rules and "redistribute" risk. Incidentally, these kinds of people were also the big stars at Enron. (And ended up being relocated for their troubles). 

I'm getting into rant territory, so I'll stop here. I realize a variation on this theme has been repeated thousands of times over the past hundred years or so. The most recent one I read was Andrew Lahde of Lahde capital, who wrote a similar rant when he recently quit his job. I highly recommend you read the letter he sent to his shareholders- if nothing else, it's quite an entertaining read. (And I think Lahde money would actually make me more jealous than Dilbert money.)

In an interesting twist, Adams ended his blog post with an endorsement for stocks: 

"In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn't matter how I invested, or it is a once-in-a-lifetime stock buying opportunity. It was an easy decision."

Not quite the same reasoning Warren Buffett gave, but an endorsement nonetheless. When America's preeminent corporate cartoonist starts endorsing stocks, is it a buy signal? You make the call.

One final note: I received an email misinterpreting my prior post as "calling a market bottom." Re-read my posts. I would never call a market bottom. My argument is that stocks are selling at more attractive prices now than they were last year, but nobody is treating them that way.

Saturday, October 18, 2008

Warren Buffett Recommends Buying American Stocks

I started this post on October 11th and never got around to finishing it. Fortunately, Warren Buffett himself finished it for me with his op-ed in the New York Times on October 16th. I can't say it any better than he did, so I'm not even going to try. Let me first show you what I wrote, then I'll add a link to Buffett's letter.
"I feel like I need to preface anything I write about investing in stocks with the following disclaimers:

1) You should only invest money you can afford to lose in the stock market

2) You should not have a high allocation to stocks if you are close to retirement

3) You should be prepared to see the value of your holdings drop 50% without worrying

That said, I want to make the following statement: now is a good time to buy stocks. And bonds.

How can I say this, when the markets are at 10 year lows and when we've had the worst week in history? Who am I to contradict the headlines?

Let me put it this way: were you happy buying stocks a year ago, when the market was at its peak and the dow was above 14,000? Chances are, you were. (I wasn't.)

When I see Tiffany & Co. selling for $22 a share.. it makes me happy."
I'm not calling a market bottom, and neither is Buffett. That said, people are now fearful and I'm happier in equities right now (see the three disclaimers above) than I am in anything else.
To see how he finished my post for me, I highly recommend you read Warren Buffett's Op-Ed in the New York Times.