Pitfalls of Do-it-yourself Investing

No sane individual would contemplate to challenge a Chess Grandmaster or Tennis Pro but nearly everyone with money to spare thinks he can take on the investment professionals at their game. Not that they provide stellar returns - adjusted for fees the average money manager underperforms the indices against which they are measured. But studies demonstrate that individual investors that go it alone perform even worse - and by quite a large margin. Unfortunately this still leaves the investor with a major problem - how to find a good money manager. Results produced by the investment experts - be they investment or pension funds or private bankers - show a wide dispersion, even among the funds managed by the same firm. So careful selection of a suitable money manager is nearly as difficult as selecting the next hot stock or asset class.

Never underestimate the impact of fees!

While investment results can never be predicted the impact of fees on the overall return you receive from your investments is a certainty! (Infographic)

Reading List

How to make your Financial Adviser work for you (Marketwatch)

Property a safe Investment - think again!

Zero or near-zero interest rates push desperate investors - individuals as well as institutions - to look at supposedly safe property as a haven. No one can deny that buildings and land are not safe - from a physical point of view. But in the same way that governments and their minions in the 'independent' central banks rob savers of hundreds of billions (a year!) there is no reason why states will not deny themselves the opportunity to rob/expropriate the wealth that citizens have in the shape of property. And there is the big advantage that real estate can not be moved out of the reach of the tax collector.

The only way to hold Euro-denominated Bonds

Whatever you make of the latest measures taken by the ECB to 'boost the economies' of the Euro-zone do keep in mind one key rule for your financial survival: Do not hold any bonds denominated in Euros unless they are backed by the full-faith and credit of Germany. As the interest rate on many of those bonds is now turning negative it probably is advisable to give them a miss as well and stick to cash. At some stage some members of the Euro-zone may default or leave the Euro-zone and the value of their obligations will nose-dive. So buying Italian or French bonds just because they return a measly 1.5 percent is akin to picking up pennies in front of a steamroller. Index-hugging fund managers playing with other people's money in the big investment institutions will continue to play this game of Russian Roulette and you should make sure that you avoid them if they play this dangerous game.

Media complicit in IPO hypes

Time and again one reads headlines such as this one: 'Burger chain gears up for $568 Mio. float'. This one is from CityAM and refers to the planned IPO of another Burger Chain. Apart from the question of how many such chains the world really needs - and the question of the benefit of eating too much meat, especially red meat - one has to wonder why the reporters do not take the trouble to look more closely at the purported 'valuation' that is implied by such a headline.
It is quite understandable that the lucky few among the original promoters behind the business and their (well-paid 'advisers') would put such a 'valuation' into circulation. This is known as 'anchoring' and is a well-known trick used by any wily negotiator. But by repeating this number without any proper analysis of its merits the commentariat is making itself complicit in giving this 'valuation' the appearance of correctness.
Looking behind the scenes in this particular case should give any experienced investor who is not just a momentum player or index hugger pause for thought.
Shake Shack had total revenues of just $ 82 Mio in the nine months to September 2014 (up from 58 Mio in the year ago). Net income was a grand total of $3.5 Mio (4.9 Mio) and Net Equity was a less-than-impressive $14 Mio. All that from 53 shacks (33 a year ago).
Now there have been some hefty valuations in the fast-food business during the recent past and Chipotle Mexican Grill (ticker CMG) continues to trade at vertigo-inducing levels. This may or may not be the correct 'valuation' for a fast food chain. History will sort this out.
But it would be only good journalism if news items about new share issues would be treated as more than just re-hashed publicity items. Much emphasis is being put by policy wonks on the importance of fostering wider share ownership as part-solution for the evolving retirement crisis many baby boomers and succeeding generations will face. Giving them 'access' to new issues trading at stratospheric levels will only benefit the (early?) retirement of the 1% - or even only the 0.01%.

Do you understand the fees that you pay for Private Equity?

If even very large institutional investors have difficulty understanding the various fees that are charged by Private Equity firms it should be obvious that any investor should have intense scrutiny performed before allocating any funds.

Oil won't hit $80 for decades?

Prediction is very difficult, especially if it's about the future. A useful reminder for this Strategist. (CNBC)

Private Equity getting less 'Private'

I always argued that Private Equity was anything but private. The funds were managed on behalf of the Public who was invested in the funds via fiduciaries in the large pension funds, insurance companies and private banks. That the industry is only now paid more attention (Enter the Secret Garden of Private Equity, NY Times) by the regulators is indicative of the fact that no investor should ever rely on bureaucrats to protect his interests. So the blame should really be laid at the door of the supposed 'fiduciaries' who were - and to a large extent - still are asleep on the watch. Should they not have long ago raised all the points about expenses, fees, performance calculations, conflicts of interest etc.?

You are not a 'Client' but 'Strategic Money'

If ever you were called a 'client' by your financial 'adviser' at BankAmerica's Merrill Lynch unit you should think about this for a moment: how can you be a 'client' and 'Strategic Money' at the same time? The word client means that you should be protected by the adviser. But if this Adviser is acting as a commissioned salesman it is difficult to think that he will always put your best interests ahead of a sales commission he or she can earn by proposing a financial product or transaction.