Daily Caller: One Nation, Under Fraud (Friendly Warning: The Foreclosure Mess is About to Get a Lot Worse, and That Will Affect You) (New Update in Post #508)

[redskins59]

I actually bought bank of america around 3 something last year in early 2009. Of course I sold it already. This "crisis" is nothing compared to that one, where the whole credit market was frozen. This is nothing more than a paperwork issue. In the long run, the stock market always goes up. Banks will go up in the long haul once:

1. The economy starts adding jobs.

2. People realize that our banks are in much better shape.

3. There is more certainty.

Bruce Berkowitz, who was voted the investor of the decade (2000-2009), is heavily invested in the financial sector. Look at BAC's price/book ratio, which is at less than 0.6. Yes, that's even cheaper than Citigroup. Heck, right now, BAC is trading at less than tangible book value/share.

[techboy]

Quite frankly, yes. At least with the reasoning I've seen so far.

....

Uh oh.

I was feeling pretty good when I had the same assessment as Predicto and PeterMP, but now I'm starting to wonder...

I actually bought bank of america around 3 something last year in early 2009. Of course I sold it already.

Sometimes the worst thing that can happen to an investor is a little success. Don't confuse strategy with outcome.

[redskins59]

Either way, what you will also see if you examine the work of Fama and French and their five factor model is that there are also very long periods of time (sometimes a decade or more) where small and value do not outperform. Recently, small and value have done very well, but Five factor investing is a very long term play.

Yes, that's true. Take the 90's for instance, when many "value" money managers lost their jobs. If you look at Warren Buffet's history, you will notice that he has had a concentrated portfolio many times. For instance, at one point, American Express was around 40% of Warren Buffet's portfolio.

This is why I'm buying 2013 calls, because 2 years and 3 months is a long time. These stocks can recover very fast. Look at BP, for example. It was at 27 a few months ago, and now it's at 40.

[techboy]

Bruce Berkowitz, who was voted the investor of the decade (2000-2009), is heavily invested in the financial sector.

One of the things you'll find if you look back at history is that there's always somebody who is "the investor of the decade" or the current big cheese, and if you look again during the next decade, it's always somebody else. Bill Miller (one of the value managers you reference below) is the classic example: He had something like a 15 year streak going of beating the S&P 500 (not the right benchmark, but whatever). He was the toast of Wall Street.

Until he hit a wall a couple of years ago and his fund plummeted.

Larry Swedroe talks about this effect in his Lessons the Market Taught Us in 2008. I highly recommend the whole thing to everybody in this thread (especially the ones considering leveraged shorts), but here's the relevant excerpt:

Lesson 9: There is a great likelihood that each time there is a crisis, some guru will have forecasted it with amazing accuracy. But that ignores two important facts. The first problem is that even blind squirrels occasionally will find acorns. In other words, there are tens of thousands of gurus making forecasts all the time.

Given the number trying, randomly, we should expect some to make accurate forecasts. The crash of October 1987 was forecast with amazing accuracy by a little known analyst named Elaine Garzarelli. Having made such a prescient forecast she was immediately elevated to guru status and everyone was seeking her opinions. Unfortunately, her subsequent forecasts were well off the mark and the returns she produced as a fund manager were so poor that she was fired in May of 1996.

Each crisis produces its own “Garzarelli.” This crisis produced Nouriel Roubini, professor of economics and international business at NYU’s Stern’s School of Business. A problem with Roubini (and almost all forecasters) is that we don’t know how many other forecasts he has made and what is the track record of those forecasts.

Another problem is that the evidence on the accuracy of such forecasts is best summed up by the findings of William Sherden, author of The Fortune Sellers. Sherden studied the performance of seven forecasting professions: investment experts, meteorology, technology assessment, demography, futurology, organizational planning, and economics. He concluded that while none of the experts were very expert, the folks we most often make jokes about—weathermen—actually had the best predictive powers.

Sherden also provided these insights: He said that the First Law of Economics was that for every economist, there is an equal and opposite economist—for every bullish economist, there is a bearish one. His Second Law of Economics was that they are both likely to be wrong. Sherden’s research found that there are no economic forecasters who consistently lead the pack in forecasting accuracy.(3)

Perhaps the most interesting thing about Roubini is that despite his forecast he revealed that his retirement account had a 100 percent allocation to equities. It seems that Roubini knows enough to ignore his own forecasts as they are not likely to lead to abnormal profits.

"Experts" come and go, and past performance is no predictor of future results.

Yes, that's true. Take the 90's for instance, when many "value" money managers lost their jobs.

Yes, let's "take the 90's". An entire decade, which is why it baffles me (add it to the list, I guess) that you would then write this:

2 years and 3 months is a long time.

Huh?

And of course, we haven't even gotten into the issue that by buying just a single stock, you are exposing yourself to other risk. What if Bank of America has a different problem, like their CEO turns out to have been embezzling billions or something? Then their stock could go or stay down, even if you're right that financials in general will improve.

[redskins59]

I think the 15-year streak was nothing but luck, unless you're scamming people(Madoff). What I'm saying here is that value investing in the long-run beats the market. It will have its up and downs, but in the end, it will perform. Value investing doesn't fare well when there's a bull market going on like in the 90's. How can it really? There are hardly any value stocks you can find when everything's going up. We aren't in that situation yet. There are many value investors who consider buying long-term leaps a "value" strategy. One guy is Joel Greenblatt. He bought 2-year well-fargo LEAPs in the early 90's, when the banking sector was getting hammered. Within two years, he quadrupled his initial investment. And guess whose advice Joel Greenblatt was following? Bruce Berkowitz. Bruce Berkowitz has a long track record. Berkowitz's current strategy of investing only in financials is based on his experience. He saw the 90's banking collapse. These people know what they're doing. They've been doing this for decades.

BTW, Greenblatt generated 50% return for 10 straight years.

[DjTj]

Again, I would only say to you that I'll send you a PM if you think I'm right. It would be bad for me to send you that PM if I'm wrong. What I'm talking about is making money by betting that the stocks of major financial companies will go down. The stock will go down because major financial companies rely upon the ability to foreclose on homeowners that they can't actually foreclose upon. I'll spend time trying to explain to you why that is true. I would hope that you'd be willing to listen.

What this thread really needs is a McD5-like prediction.

Hubbs, do you want to make a prediction for the next couple months on (1) the price of a bank stock, like BAC; (2) some measure of inflation, like CPI?; (3) some measure of money supply, like M2; or (4) whether the government will have to bail out one of the largest banks (BAC, JPM, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley)?

[brandymac27]

Ok, is there like an investing for dummies thread? All I have is a 401K and I get statements and put them in a file b/c I don't know wth I'm supposed to do with it. I want to do some investing online (ex etrade or something) but I have no idea where to start and what to invest my money in (bonds? etc). HELP!

[redskins59]

Ok, is there like an investing for dummies thread? All I have is a 401K and I get statements and put them in a file b/c I don't know wth I'm supposed to do with it. I want to do some investing online (ex etrade or something) but I have no idea where to start and what to invest my money in (bonds? etc). HELP!

You should put your money in a mutual fund if you don't know what you're doing. There are a few mutual funds that consistently beat the market. IMHO, consult an expert.

[brandymac27]

You should put your money in a mutual fund if you don't know what you're doing. There are a few mutual funds that consistently beat the market. IMHO, consult an expert.

But I don't want to have to pay huge commission fees etc.

[redskins59]

But I don't want to have to pay huge commission fees etc.

You can just buy an etf then. Just open an ameritrade (or etrade, or whatever) account, and buy an etf, which trades just like a stock. If you're willing to lose all your money(in the long haul you won't), just buy a bank stock and hold it for a few years. My recommendation would be bank of America. But if you lose money, don't blame me.

[brandymac27]

You can just buy an etf then. Just open an ameritrade (or etrade, or whatever) account, and buy an etf, which trades just like a stock. If you're willing to lose all your money(in the long haul you won't), just buy a bank stock and hold it for a few years. My recommendation would be bank of America. But if you lose money, don't blame me.

How many shares do I buy and at what point do I sell? What is considered a decent profit? For example if I buy a share at $50 and in 1 year it's at $75, would I sell then or hang on to it?

[PeterMP]

Larry,

If bank 1 doesn't own the mortgage they have no business being in court. That's the problem. Some of these affidavits which said "Yes, we own this paper" have started to get thrown out of some state courts because judges are believing them to be fraudulent. There are companies out there advertising the fact that they will help create the paper that was lost. Again, it might not be very widespread, it might be 10% of the cases; but its an issue.

None of this means homeowners are in the clear as I understand it, but it may mean the banks can't foreclose on them.

It is more than that. They are being thrown out because they aren't even looking for them.

And it isn't the banks, but the companies they hire aren't even looking for them.

And isn't because the banks purposely destroyed them, it is simply easier for them. If they can simply stamp a piece of paper saying they looked and get away with and get paid the same amount of money as compared to actually taking the time to go through all of the mortgage documents to actually find the documents, of course they are going to take the easy way out.

It is just the summons talked about in Hubbs' piece. The bank didn't actually deliver the summons. They pay other companies to do it. The company that didn't actually deliver the summons and instead committed fraud didn't do it because the person doesn't exist or is even particuarly hard to fine, they did it because they get paid per a summons, and if they can get away with committing fraud they are going to do it.

In Hubbs' made up universe where banks actually ON PURPOSES destroyed ALL of the records of the mortgage, they might actually have problems. However, since there is no evidence that banks actually purposely destroyed anything OR that all of the records have been destroyed that's an irrelevant point.

But that isn't the case. Country wide, who is even bankrupt is going through the courts to establish how they can get rid of their records, so they don't have to pay for storage or get other institutions to pay for the storage. For now, Countrywide has been ordered to keep their records, but they can charge other people to access them (now, if you had a choice between rubber stamping a form saying that you looked for a document or searching through a bankrupt companies records and either way you get paid, which would you do?).

In addition, the original bank can go to court or be subponed (or in the case of Country Wide they can charge money) to appear in court if they have records indicating that they own the mortgage or another company thinks they have records indicating that company owns the mortgage because the original lender sold it to them.

Mortgages can't be forgiven unless somebody can prove they hold the mortgage. I can't have my brother forgive the mortgage on my property because he can't prove that he holds the mortgage (because he doesn't). If a company can prove that they own the mortgage to forgive, then they can prove they own it to foreclose on the house.

TSF, what you said about mortgages being written to favor the banks is correct, but what you said about the banks suing the borrowers doesn't make any sense. If a bank can't prove they hold the mortgage, they aren't going to be able to sue. If they can prove they hold the mortgage, they will foreclose. Banks rarely sue to get their money back and usually when something has happened to the property to lower its value (e.g. there was a fire and the property didn't have proper insurance, as normally required through the mortgage).

However, one big issue here is because the mortgages are written by the banks to favor themselves is an issue related to interest. The banks doesn't have to identify itself as the holder of the mortgage, and it doesn't matter if the person that "owns" the property even knew about the mortgage. As the borrower or "owner" of the property, it is your job to identify the holder of the mortgage and pay them. So even if there are decades between cases a bank can come forward and say we finally have the paper work that proves we hold the mortgage, and the property is still collatoral for the mortgage, but the loan has been collecting interest so you (or the person that "owns" the property if they want to keep it) has to pay the debt or be foreclosed on.

***EDIT***

I need to clarify the above. Foreclosure requires notifications so the person would have to go through a series of steps to foreclose. They wouldn't be able to show up one day and say, I own the mortgage pay me or get out. That's why banks send notifications to establish the paper trail that you knew you owed them and didn't pay. The loan though still collects interest in the absence of notification that you should be paying by the note holder so on a loan on which you don't hear from the actual loan holder there is still interest the way most of these mortgages are written and no matter what the house remain as collaterol on the mortgage. Even a new title doesn't eliminate that.

***END EDIT**

Issuing a new title doesn't destroy the old one. It is still out there and the title companies and the companies that issue title insurance are going to know that.

What is going to happen is that the companies that do things like issue title insurance are going to get involved and search through the paper work themselves and identify the banks that they at least think most likely owns the mortgage and not insure title insurance until that bank is paid or signs off that they don't own the mortgage (which they are very unlikely to do without being paid).

The end result is that it will be along time until you can do anything that requires you have a clear title with these houses, including selling them to somebody that requires a mortgage because that requires title insurance.

What might/can happen is that people with money will step in and buy them cheap (because most people won't be able to buy them because most people require mortgages to buy houses so the demand will be really low), and then do things with them that don't require clear titles (e.g. rent them).

***EDIT***

If you have a mortgage, even your home owners insurance policy is written to take that into account. You can't remove the parts about the mortgage holder without the permission of the mortgage holder, which you can't do if nobody can prove they are the mortgage holder. Any future changes you want to make to your home owners insurance policy just got that much harder.

[redskins59]

How many shares do I buy and at what point do I sell? What is considered a decent profit? For example if I buy a share at $50 and in 1 year it's at $75, would I sell then or hang on to it?

Well, if you buy an exchange traded fund that tracks an index, you never sell it. You just keep holding it forever. Fees are minimal with etfs.

[techboy]

There are a few mutual funds that consistently beat the market.

Until they don't. I'm going to cite the study later in this post (as I respond to brandymac27), but the short version is that almost no fund manager beats the market consistently, and it is virtually impossible to tell in advance which few actually will.

Past performance certainly won't tell you that, and successful funds actually have a common tendency to revert to the mean, so going by that is a really bad idea. More on that in a bit too.

But I don't want to have to pay huge commission fees etc.

You are very wise. Cost is the overriding factor in most investment returns.

As to investing 101, I'm happy to help as best I can by sharing some of what I have learned in my own research.

This is going to be a rather complicated question to answer, though, so it's going to be rather long (surprise!). I'm going to give you my best advice first, though: I'd highly recommend dropping by the Bogleheads forum, read the stickies, and post a request for help in the Investing- Help section. There are a lot of very knowledgable people, including several authors and academics, that give of their time there for free, and give very good advice.

If you do this after you read through this, they will help you put the general principles I'm going to share into action with a specific plan.

Or, if you like, you can skip everything I'm about to type (don't worry... I'm saving it for the next person that asks ), and just go there now.

First, why the most common approach of simply looking at funds that have good past performance (perhaps using some kind of "fund screener" at Fidelity or the like is a bad idea:

This excerpt is from a speech by John Bogle on the topic of Investing with Simplicity.

My third rule comes to grips with the first element that catches the eye of most investors—whether experienced or novice—the fund's past "track record." (The implied analogy to a horse race is presumably unintentional!) But track records, helpful as they may be in appraising how thoroughbred horses will run, are usually hopelessly misleading in helping you appraise how money managers will perform. There is simply no way under the sun to forecast a fund's future returns based on its past record. Rule 3. Do Not Overrate Past Fund Performance.

Now, I must contradict myself ever so slightly. For exceptional funds with exceptional past returns that are substantially superior to the market will regress toward, and usually below, the market in the future. Regression to the mean—I call it the law of gravity in the financial markets—is measurable and apparently almost inevitable. For example, in two studies of returns over consecutive decades, a remarkable 99% of top-quartile funds moved closer to—and even below—the market mean from the first 10-year period to the subsequent 10-year period. There was only one single, solitary exception to the rule, a fund that ruled the world during the 1970s and 1980s alike. But so far in the 1990s, it has regressed magnificently, falling far below the market's return. Sometimes mean reversion requires patience!

Make no mistake about it: the record is clear that top-performing funds inevitably lose their edge. This industry is well aware of that certainty. Yet fund sponsors persist in promoting their most successful (past) performers. Such a strategy defies all reason except for this one: Promotion of such funds brings in lots of new money, and lots of new fees to the adviser. But such promotions, finally, lead investors in precisely the wrong direction. Ignore them.

Actually, it's a great speech overall, and well worth reading for tips on investing.

For a more academic approach, take a look at The Difficulty of Selecting Superior Mutual Fund Performance. The abstract:

-Much has been written about the management of mutual funds and active versus passive management. This study attempts to quantify the relative performance of actively managed large- and mid-cap domestic stock mutual funds with a passive strategy during a 20-year period, including 11 10-year rolling periods.

-During the study period, most actively managed large- and mid-cap mutual funds underperformed their respective passive strategies. While every period under review had mutual funds that outperformed the passive strategy, few funds did so consistently.

-Furthermore, predicting in advance which mutual funds would outperform was difficult, if not impossible, and the cost of selecting the "wrong" manager was high. These factors combined demonstrate the difficulty for financial planners to select superior performance.

-The study also reviewed the impact of taxes on large-cap investments.

Finally, the author provides recommendations for financial planners in discussing action steps regarding clients' portfolios.

Emphasis mine.

There's virtually no way to predict future success of a particular mutual fund, and certainly not return since inception. All the research is very clear on this.

What does work? I'll share in a bit, but the other thing I will note is that buying just a single fund is a bad idea in any case.

For one thing, there's no way of knowing what's going to be successful in the future. Value stocks are historically a little better than the general market, but there's no way of telling for sure that will continue. It's smart to hedge your bets.

Another reason is that if you spread your allocation out, your portfolio will become less volatile. Most people have trouble stomaching it when their portfolio sinks a huge percentage in one day. That's far more likely to happen if you only own one fund. One benefit of diversification is that if one thing goes down, another will probably go up, meaning the overall portfolio doesn't move around as much, which can be easier on the stomach.

Perhaps one of the biggest reasons to diversify is rebalancing. Consider this NPR article interviewing David Swensen, a brilliant money manager and economist at Yale, One of the reasons I trust Swensen, along with his ridiculously good track record, is that while he could make billions as a hedge fund manager, he chooses instead to live a relatively modest life as an academic at Yale. Here are some excerpts:

To share the wealth with everyone, Swensen wrote a book about retirement investing that details his allocation strategies. He advises having the right long-term mix of stock index funds, bonds and real estate investment trusts (see chart below).

But when stocks tank, that mix gets out of balance: For example, U.S. stocks that once constituted 30 percent of a portfolio may now constitute just 29 percent or 28 percent.

When that happens, Swensen rebalances, shifting more holdings into stock index funds. Then, if the market comes back up and ends the day flat — where it started — Swensen sells those stock index funds.

Swensen's ability to buy low and sell high on the market roller coaster has in some instances earned upwards of $1 million in a single day for Yale's endowment — just by rebalancing amidst volatility.

"So you end up at the same place you started, except a million dollars ahead, that's not bad," he says. "But from rebalancing, not speculating — just sticking with your long-term targets."

That's the upside: The stock market can end up flat, but investors still make money because they rebalanced when it was down. Sometimes the market keeps going down. But over time – five, 10 or 20 years — as the market keeps rising, Swensen says, investors can goose out extra returns by rebalancing along the way.

You can't do that if you only have one fund. There's more on rebalancing in that article if you want to read it, and it actually also has a recommended portfolio which is as good as anything you'll find out there, if you want to take a look at that, though you'll probably want to customize it to your own needs.

What else doesn't work? Market timing and security selection. In other words, you can't get in and out of the market and hope to beat it, and you can't pick stocks or funds and hope to beat the market either. I'm pretty sure you've seen my extensive posts on this subject, so I won't repeat them (though you can find one here, if you are so inclined), but it's a big reason behind the research I just shared: the experts can't beat the market either, at least not consistently, so any particular fund's outperformance is almost certainly luck, and likely to revert to the mean as Bogle talks about.

What does work? Asset allocation and controlling costs.

There's a great speech by Swenson here. I know the page is in Swedish, but if you click on Swenson's name, it brings up a video of a speech he gave in Stockholm, in English. In it, he talks about what doesn't work (security selection and timing markets), and what does (asset allocation and controlling costs), as well as some general tips on investing. It's about an hour, and well worth the time, but I will summarize this and other research below (I'm also at some point going to include a suggested reading list which will include lots of data on what I'm talking about).

First, asset allocation. In a nutshell, our best data indicates that stocks are riskier than bonds, and more volatile, and pay more (because investors demand more compensation for the risk). In theory, the higher a percentage of stocks one has, the higher the expected return (in his speech, Swensen talks about the difference between investing in T-Bills and a market index in 1929, and the vastly different returns), but there's also a higher potential for loss.

Very generally, then, the more return one needs, the higher percentage one should be in stocks. The less, the more bonds. Adjusting this percentage should, at least in theory, adjust one's returns.

Second, and perhaps more importantly, are costs. From Bogle's speech again (I'm not going to take the time to re-add all the bolds and italics):

Rule 1. Select Low-Cost Funds. I've said "costs matter" for so long that the portfolio manager for one of our funds gave me a Plexiglas pillar with the Latin translation: Pretium Refert. But costs do matter. If you don't believe me, hear Warren Buffett again:

Seriously, costs matter .... Equity mutual funds incur operating expenses—largely payments to funds' managers—that average about 100 basis points (1%), a levy likely to cut the returns their investors earn by 10% or more over time.

Sadly, Mr. Buffett was misinformed. The average equity fund now carries total annual expenses not of 100 basis points, but of upwards of 200 basis points (2%), "a levy," if I may revise the master's words, "likely to cut the returns their investors earn by 20% or more over time." Such costs are, well, unacceptable. And bond fund all-in costs—unbelievably—average some 1.2%, a simply unjustified levy on any gross interest yield. In fact, such costs would cut today's yield of 5.1% on the long U.S. Treasury bond to 3.9%, or nearly 25%. Why would anyone buy a high-cost bond fund?

Expense Ratios: A low expense ratio is the single most important reason why a fund does well. If you select actively managed funds, emulate the index advantage by choosing funds with low operating expense ratios. In fact, the surest route to top-quartile returns is bottom-quartile expenses, a fact reaffirmed in all investment equity styles—small- or large-cap, growth or value—and all bond fund maturity ranges as well. Lower expense ratios are the handmaiden of higher returns. Once again, "little things mean a lot."

Transaction Costs: In addition, with today's average fund portfolio turnover at an absurd 85% per year, transaction costs reduce returns by as much as 1/2 to 2.0 percentage points over and above fund expenses. What is more, it carries enormous tax costs. So favor low turnover funds. Taxes: If your fund holdings are in taxable accounts (i.e., other than in a tax-deferred IRA or a thrift plan), high turnover can not only cause you to pay full income taxes on short-term gains, but also deprive you of the extraordinary value of the deferral of capital gains taxes. (By the way, while high fund turnover hurts taxable investors, there is no evidence whatsoever that it helps tax-deferred investors). The odds against active managers outpacing the after-tax returns of index funds become enormous for taxable investors. So, never forget that taxes are costs too.

The emphasis is mine. Reams of research show that the #1 predictor of returns of any fund is costs.

This actually makes sense, if you think about it. As Buffett writes in a bet he put a million dollars of his own money behind:

A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

Since market timing is basically impossible, those costs are a killer.

How should you invest, given what we have seen so far?

In a nutshell, you need to pick a mix of stocks and bonds (and perhaps real estate) which matches your need, ability, and willingness to take risk. What does that mean?

Need- You have to sit down and figuire out how much money you will need for retirement, and how much you'll need to tilt to stocks to get there. This would include any pensions you might have, and what your goals are. You're going to have to consider things like how much you expect stocks (and bonds) to return in the future (there are good conservative estimates out there... I use perhaps 5% real for stocks, less for bonds), and how much money you think you'll need (considering lifespan and a safe withdrawl rate- a lot of people use 4% per year).

A rich person with millions of dollars in the bank has a lot less need to take risk than a twentysomething just starting out.

Ability- Balanced with this is how able you are to take risk. The best plan in the world won't work if you panic when the market's down 30% and you sell all your stocks (exactly the wrong time to do so). You need to take an honest look at yourself and decide what you can handle. The stronger your stomach, the more stocks you can own. We just recently had a huge downturn, so it might be easier to make that assessment. I apparently have a stomach of iron, because I didn't flinch. For others, knowing that down markets are when stocks really make money didn't help, and they panicked. This is sometimes known as the "sleep test", and it's important to be brutally honest with yourself.

Willingness- You might just not want to take risk, even if you can. A person that has enough money to meet his goals can go very conservative with the rest, or he can invest it in stocks with the hopes of leaving it to heirs.

Once you have determined your need, ability, and willingness to take risk, you can set your stock/bond ratio. Personally, my wife and I are young, we both have pensions, and I have an iron stomach, so I went 80/20, which is very aggressive, but our basic needs will certainly be met by our pensions no matter what else happens, and I have dreams of a villa in Italy.

You shouldn't, however, go less than 20% or greater than 80% in stocks, because it hurts the ability to rebalance.

How to break down those stocks and bonds further? Glad you asked.

First, you want the lowest cost possible, and that means index funds. Most 401(k)s have a lot of actively managed, high cost funds. Forget those (as much as possible), and stick with low-cost index funds. You might have to make some compromises based on your investment options in your 401(k), but stick to this as much as possible. Remember: costs matter.

Second, you want to be as diversified as possible. This is for reasons I have already covered, as well as the fact that it is the core of what is called Modern Portfolio Theory, which won the Nobel in economics for Markowitz. These posts are long enough, so if you want more on that, there will be plenty in the suggested reading I include at the end.

Now to the nitty gritty:

Bonds- This is your safety zone. As you get older, this percentage should go up, because bonds are more stable and safe, and you shouldn't have money you'll need in the next 10 to 20 years in stocks (as we saw over the last decade... they'll probably recover, but that's no consolation to people that need the money now). Because you want safety, you want only U.S. Treasuries, the safest there is. There's a bit of discussion about what to do here, but I personally use a 50/50 mix of a TIPS fund (to account for inflation) and an intermediate Treasury fund. Others use slightly different mixes. There's no way of knowing which is best in advance, of course, so the best thing to do is to do some research, pick something that makes sense, and stick with it.

Stocks- Here, you want to diversify. You basically want to hold every stock world-wide, or an approximation thereof. You can do this by holding a fund or funds that invest in the U.S. (many 401ks have at least an S&P 500 fund, which is a good proxy for the U.S. market, though a total market index would be even better, or you can add a small cap fund to the S&P), and a fund or funds that hold the rest of the world.

You'll want to decide on a split between U.S. and international. Most people use something between 20 and 50% international, though that's a raging debate. Personally, I use 40%.

You might also want to include some real estate. If you do, buy an REIT index. Most people recommend 10% of the total portfolio, taken out of the stock side (remember... bonds are for safety).

If you want to get really advanced, many believe that small and value outperform, so you can tilt to those (I do), but you need to do your own research and make your own decisions about that. It's a complicated and controversial topic.

Also, taxes matter (because they are costs). In general, you want to hold bonds and REITs in tax advantaged accounts, and equities in taxable (if you have any taxable investments). You can find more detail in the books, on the wiki, or at the forum in the recommendations below.

In general, the advice is this:

1) Fund the 401(k) up to the match (if any, no sense in giving away free money, no matter how bad the expense ratios are)

2) Fully fund the Roth IRA (because you can choose the provider and get low cost funds)

3) Fund the 401(k) to max (unless the ER is REALLY bad, the tax advantage is usually better than a lower cost fund in taxable)

4) Invest in taxable

If you follow that order, you should be good. Working around ERs in our 401k's is something we all have to deal with, and sometimes compromises have to be made.

Finally, once you have a plan, the important thing to do is stick with it. Buy, hold, and rebalance. It helps many people to write up an IPS (Investment Plan Statement).

You're going to need to do some research now, of course. Again, the best advice I can give you is to go to the Diehards Investing- Portfolio Help forum, read the sticky about asking portfolio questions, and then pose your question to the group. They'll steer you right.

Diehards is a fantastic resource for investing... the people there are exceptionally knowledgable, including several financial authors and advisors who give of their time and expertise for free. Two of my favorites are Larry Swedroe and Rick Ferri, both financial advisors.

Ferri has a free e-book on the web, Serious Money, Straight Talk about Investing for Retirement. Great stuff, and he talks about all this in much more detail.

The Bogleheads' Wiki also has a ton of article about all this stuff.

Other places to start right away are the speeches by Swensen and Bogle I linked earlier, as well as the articles in my various posts.

In terms of books, I'd recommend:

The Only Guide to a Winning Investment Strategy You'll Ever Need by Swedroe

All About Asset Allocation by Ferri

A Random Walk Down Wall Street by Malkiel (a real classic)

and

Unconventional Success by Swenson.

I'd recommend you start with the Ferri or Swedroe books... they're easy to read and very acessible.

Let me know if you have any questions at any time, and I'll help as much as I can.

[brandymac27]

Techboy,

Thank you very much for all of the information. I am going to be reading the articles you linked and posting on the forum you suggested. I am also going to be checking out some of the books you referenced as well as doing some of my own research. I have a feeling this may take a little bit of time, but if you don't mind, I may PM you w/ additional questions or for other resources if I need them (which I'm sure I will).

I will say that I am looking to go about this in a fairly aggresive manner, but I want to also be as smart as possible about this. I can take tough hits w/ out budging (I've pretty much done that already b/c I didn't know what the heck to do LOL). So, I have the patience for sure, I just want to make smart decisions and keep costs as low as possible.

And as far as my retirement needs, Uhhh, let's just say I have the same dreams of a villa in Italy, except right now we don't have a pension to fall back on. Basically, our retirement is gonna be our 401k and whatever other investing we do. Kinda scary.

[Larry]

BTW, since this thread appears to have morphed into an "investment advice" thread, . . .

If Y'all were to argue that "this paperwork SNAFU is going to mean that for the foreseeable future, both the cost and the time required for a bank to foreclose on a home will be higher than expected. And these increased costs and delays were not budgeted for, when the banks issued the loans. And therefore, the banks will be making less money than they expected. Therefore, bank stocks should trend downward, for a while.". . .

Then that's something that certainly appears logical, to me.

(Note, however, I don't think I've ever made a profit on a stock. (I'm very comfortably "positive", right now, with the stocks I own. But even I am smart enough to know that until I actually sell, it's only money on paper.) The fact that something makes sense, to me, might not be worth a whole lot.)

[mojobo]

If you believe in Hubbs (which you should or at least question heavily whats going to happen) there are a few different ways to play this. Shorting bank stocks is the riskiest way to do this, but probably the most profitable as well. The banks that will be affected heavily by this might pay dividends that they can't really afford in order to give the appearance that they are not as bad off as they really are. Those dividends will be taken from your account you trade on and could make this less profitable than it would have been. Another thing the banks have going for them is the FEDs backing. Most of these banks should have failed and no longer existed, but the FED kept them from losing everything. It is possible they would be willing to do this again.

A slightly less risky way to play this would be putting your money into commodities such as food, energy, precious metals, etc. If the banks are hurt by this (which they will be just a question as to the extent) then either way if the FED saves their ass again or lets them fail all of these will go up heavily in price. The best way of investing in these would be ETFs. This is basically you owning a trust with a certain amount of either gold, oil, corn, wheat, or some other asset in it. You might not profit as heavily, but there is much less risk with this and the health financial sector directly affects the price of these goods.

[PeterMP]

If you believe in Hubbs (which you should or at least question heavily whats going to happen) there are a few different ways to play this. Shorting bank stocks is the riskiest way to do this, but probably the most profitable as well. The banks that will be affected heavily by this might pay dividends that they can't really afford in order to give the appearance that they are not as bad off as they really are. Those dividends will be taken from your account you trade on and could make this less profitable than it would have been. Another thing the banks have going for them is the FEDs backing. Most of these banks should have failed and no longer existed, but the FED kept them from losing everything. It is possible they would be willing to do this again.

A slightly less risky way to play this would be putting your money into commodities such as food, energy, precious metals, etc. If the banks are hurt by this (which they will be just a question as to the extent) then either way if the FED saves their ass again or lets them fail all of these will go up heavily in price. The best way of investing in these would be ETFs. This is basically you owning a trust with a certain amount of either gold, oil, corn, wheat, or some other asset in it. You might not profit as heavily, but there is much less risk with this and the health financial sector directly affects the price of these goods.

This might already be priced into the values of commodities though.

This has already been on going for years. The value of gold is already near inflation adjusted highs.

[redskins59]

BTW, since this thread appears to have morphed into an "investment advice" thread, . . .

If Y'all were to argue that "this paperwork SNAFU is going to mean that for the foreseeable future, both the cost and the time required for a bank to foreclose on a home will be higher than expected. And these increased costs and delays were not budgeted for, when the banks issued the loans. And therefore, the banks will be making less money than they expected. Therefore, bank stocks should trend downward, for a while.". . .

Then that's something that certainly appears logical, to me.

.)

Sure, the foreclosure mess will affect bank earnings to a degree, but also take into account the fact that loan quality held by banks have been improving every quarter. Analyst expectations is for bank earnings to reach normal levels in 2012. Per Dick Bove, the foreclosure mess will wind up costing banks 10 billion dollars. This is easily managable.

[Hubbs]

I find your assertion that Bank 1 is going to testify that "Your Honor, we were paid for this mortgage, but we don't know who paid us, or when, because we intentionally got rid of the record of who paid us", completely unbelievable.

And if their answer is "We were paid for this mortgage by Bank 2", then the judge's response is "OK, we have now established that Bank 2 owns this mortgage."

Yeah. It's pretty damn unbelievable. Do you think that, for some reason, I went into this thinking, "I want to intentionally ruin big banks and force the FDIC to take them over or a big bailout to happen"? Me? The crazy libertarian? How would that make any sense at all?

It's crazy. Absolutely crazy. But it's true. And I'm willing to spend the time necessary to prove it. Bank 2 can't prove that it owns the mortgage, even though it can prove that it paid Bank 1. That's because it's quite likely than Bank 2 sold the mortgage. And when you trace the path all the way to Bank 7, you find out that Bank 7 can prove that it paid Bank 6, but it can't prove that it didn't in turn sell the mortgage to Bank 8. That's the crux of the matter. That's why I keep saying that the important fact is that nobody knows who owns the mortgages, not the fact that any given bank got paid, or the fact that the banks can prove that homeowners owe "somebody." Somebody isn't enough. Go ahead and try to go to court trying to prove that simply by virtue of the fact that a homeowner owes somebody, that means they owe you. I'd love to see the argument.

Larry,

If bank 1 doesn't own the mortgage they have no business being in court. That's the problem. Some of these affidavits which said "Yes, we own this paper" have started to get thrown out of some state courts because judges are believing them to be fraudulent. There are companies out there advertising the fact that they will help create the paper that was lost. Again, it might not be very widespread, it might be 10% of the cases; but its an issue.

None of this means homeowners are in the clear as I understand it, but it may mean the banks can't foreclose on them.

If banks can't foreclose, that means they also can't affect homeowners' credit scores (for the same reasons that they can't foreclose). How exactly are homeowners not in the free and clear if that happens? Because they're going to keep making their mortgage payments for ****s and giggles? Out of the goodness of wanting to make sure some bank executive's bonus is as big as he expects?

Shorting bank stocks is a terrible idea because these stocks have already gone down big time this year already. Take last week, for example. Bank of America alone has been down 10% last week. BAC was almost at $20 in april-may, and now it's at 12. The foreclosure mess IMHO is already baked in to the stock price. I'm personally going long bank of America. What I'm about to do is buy 100k worth of 2013 $15 calls, because if you look at the bank earnings, they've actually been going up. If Bank of America doesn't get to 20 by Jan 2013, I'll cut my ears off. I am that sure about this. Without financials recovering, there will be no economic recovery. Seriously, who believes that the economy won't recover by Jan of 2013? Sure, the unemployment rate will be high, but we'll be adding around 200k jobs a month by then. Obama will lose all 50 states if financials don't recover, because as financials go, so does the economy.

No. Bank stocks have dipped for the same reason that shorting bank stocks is still a good idea. Did you see where I said that a major bank was recently advised to raise its litigation reserves to $10 billion? Banks can't survive a $10 billion hit. They simply can't. The entire Bank of America bailout was $25 billion. You don't take away 40% of a bailout and find yourself with a bank that isn't very, very bankrupt. They can't "earn their way out" of this. They can only be bailed out again. Go ahead and tell me why anyone should expect a Tea Party-saturated Congress to do that. People should expect Ben Bernanke to do that. And I'll spend just as much time telling you why Ben Bernanke's methods will have consequences as I will telling you why banks will need his help in the first place.

You're right that as financials go, so goes the economy. Which is stupid, but it is what it is. And those financials are going to tank, then be saved by Bernanke, which has its own consequences.

They will eventually be foreclosed. If homeowners aren't paying their mortgage, do you really think they'll be allowed to stay for free? It may take 6 months, but if homeowners aren't paying, they'll be eventually evicted. Yes, documents are a problem right now, but this will be fixed within a month. Just a bunch of greedy lawyers trying to make a mountain out of a mole hill.

Yes, those damn lawyers, insisting that when banks foreclose they actually present something signed by the homeowner. That gosh-darned rule of law, and those pesky property rights, are getting in the way of everything. We should just assume that banks are always right, even if you paid for your home in cash up front. You should be evicted due to foreclosure on a mortgage that never existed anyway.

It's not quite that simple. Even assuming that you are right about the depth and result of this situation (and I'm not convinced at all), there are still other factors at play.

First, you have to avoid getting in too early, because a bump up could wipe you out, especially if you're using heavy margin. As Keynes said, the market can stay irrational longer than you can stay solvent.

Second, you have to avoid getting in too late, because once the stock drops, shorting won't work (obviously). There are legions of professionals on Wall Street whose only job is to analyze companies and determine what is going on with them. You've got to beat these people to the punch, because once they determine the stock is going down, they aren't going to hold it, and once they act, the stock drops. This means that you either need to know more than all of them (and I promise you, they read court documents and newspapers too), or you have to be smarter or luckier than all of them.

Third, you have to know that the stock will plummet at all. Financials dropped hard in 2008 because we were in a nearly unprecedented crisis and no one knew what was going to happen. People expected major banks to go under.The risk of holding a bank stock at all went through the roof. Now, though, we know that the government won't let a big bank fail. The risk is much lower, and it is very likely that if the banks stocks drop much at all, bargain hunters will jump in, secure in the knowledge that no matter what happens, there will still be a Bank of America (for example). That will put the stock right back up.

You yourself have suggested that the government will bail out the banks, and it's not hard for me to imagine that everybody else on Wall Street expects this too, which could easily be why the stocks haven't already fallen, given the public information you've been analyzing yourself.

It's a huge gamble, and again, I wouldn't suggest using money you can't afford to lose. Especially not on margin.

I wouldn't, either. I'm not buying on margin. I'll be the first to say that Keynes was right when it comes to irrationality. Smartest thing he ever said. But in my opinion, bank stocks will crash quite close to $0 before they're rescued by Bernanke. Remember what happened to Lehman? Worth $68 one day, and $2 three days later? Imagine that happening across the entire financial sector.

For the record, while I agree with this...

...this...

... is pretty nuts too.

What makes you think that your opinions about the economy and earnings aren't just as "baked in"?

The very fact that so many people are arguing with me. Those people, per their arguments, would buy bank stocks at different prices than I would. The disaster isn't baked in. It hasn't even been put in the pan yet.

It's highly risky, but I'm willing to lose all my money. JP Morgan has hinted that they will raise dividend next year. That alone will make the stock price go up. Bank of America will do the same thing. Now, if you look at all the bank stocks, which I have been doing, Bank of America has been hammered the most because of Countrywide financial. Merrill Lynch also has a huge mortgage portfolio. In the long term, Merill Lynch and Countrywide will add value to Bank of America.

That's a strange willingness. I'm certainly not willing to risk losing all of my money. How is JP Morgan going to raise its dividend? Through magic? Do you expect a company that's getting sued out the ass to be able to pay investors a larger dividend? Or do you expect those lawsuits not to happen? Because I'll tell you why they will.

And again, the same people that "baked in" the financial crisis know all of this too, I can assure you.

Still, I wish you (and Hubbs) the best of luck, though I don't see an easy way that can happen at the same time.

The people who are insider-selling at an over 1000:1 clip?

Yes, I too can assure you that they know exactly what's going to happen.

Thanks for the wish, though. (Really. I wish you the same luck, if not more. It would be great news if I'm wrong.)

Quite frankly, yes. At least with the reasoning I've seen so far.

....

So tell me how a major bank can survive a $10 billion hit. You seem to think that it could pull the money from someplace else. I'm telling you that it can't. No bank can. Not even from those bonuses everyone talks about. They're contractual. A bank can't just up and decide to not pay out in a particular quarter.

Well then what's the best way to make a lot of money in this economy w/ limited cash??

And Hubbs, I'm more than willing to listen to you.

That's good, although I would always emphasize that you should only listen, not believe. I think I can make you believe, but I could be wrong. That's why I think people like G. Gordon Liddy are ****ing nuts with their gold commercials. You think gold is a great investment? Then why the hell are you selling it to someone else? The fees involved are minor if you're right about gold being a great investment. G. Gordon Liddy is full of crap.

Listen, but come to your own conclusions. Never, ever stop questioning anything I say.

Fama and French (his collaborator on most of his work) weren't really the fathers of EMH, which has been around in one form or another for over a hundred years, though they did lead the wave that made it the dominant theory in academia for most of the 20th century.

And yes, they found in their research that over long periods, what they call value stocks (and small too) tended to do better than the general market historically. This doesn't necessarily mean the market is inefficient, though (as you can imagine, since Fama is still the most vocal efficient markets theorist), because many people think that small and value outperform because they are riskier, and therefore are properly compensated. Others think it's behavioral. Who knows? I personally tilt a bit to small and value in my portfolio, but I couldn't tell you for sure why the outperformace has occurred or even if it will persist (I hope so, though). Some people think it won't, by the way, that it is an historical artifact.

Either way, what you will also see if you examine the work of Fama and French and their five factor model is that there are also very long periods of time (sometimes a decade or more) where small and value do not outperform. Recently, small and value have done very well, but Five factor investing is a very long term play.

Betting it all on a single stock, over a period of just a couple years, strikes me as insanely risky, and I still don't understand how you can think that some public information is included in the stock price, while other public information is not.

Good luck, though.

Bet it all on black.

Sadly, as usual, there are no certain "get rich quick" schemes.

Never has "always bet on black" been worse advice. And I'm someone who loves that quote.

The people who will ultimately end up in the black generally aren't listed on the NYSE.

I actually bought bank of america around 3 something last year in early 2009. Of course I sold it already. This "crisis" is nothing compared to that one, where the whole credit market was frozen. This is nothing more than a paperwork issue. In the long run, the stock market always goes up. Banks will go up in the long haul once:

1. The economy starts adding jobs.

2. People realize that our banks are in much better shape.

3. There is more certainty.

Bruce Berkowitz, who was voted the investor of the decade (2000-2009), is heavily invested in the financial sector. Look at BAC's price/book ratio, which is at less than 0.6. Yes, that's even cheaper than Citigroup. Heck, right now, BAC is trading at less than tangible book value/share.

You might as well be reading off a Bank of America press release. Of course they're going to say that this is nothing more than a slip-up in clerical paperwork. What do you expect? Somebody to come out and say, "Yeah, actually, we've been committing criminal fraud this whole time, and probably foreclosed on a lot of people we couldn't actually foreclose on"?

I get that what I'm saying sounds like a conspiracy theory. I'm trying to explain why there's no conspiracy involved, unless you consider major banks thinking that destroying mortgage papers a good idea to be a conspiracy. No one's plotting with the Legion of Doom. They're making completely rational decisions. It just so happens that their rational decisions are very, very illegal, but they're only starting to wake up to that fact.

Uh oh.

I was feeling pretty good when I had the same assessment as Predicto and PeterMP, but now I'm starting to wonder...

Sometimes the worst thing that can happen to an investor is a little success. Don't confuse strategy with outcome.

Start to wonder. Fo rizzle, yo.

What this thread really needs is a McD5-like prediction.

Hubbs, do you want to make a prediction for the next couple months on (1) the price of a bank stock, like BAC; (2) some measure of inflation, like CPI?; (3) some measure of money supply, like M2; or (4) whether the government will have to bail out one of the largest banks (BAC, JPM, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley)?

I'll never make a timing prediction. Like you said, that's McD's territory.

I'll predict that major banks will crash, and that will lead to a Tea Party Congress not bailing them out, but also lead to Ben Bernanke deciding that he will bail them out. I won't predict the timing of these events. That's not my territory. Hell, it could happen in slow motion. But it will happen, because the only alternative is to pass a law saying that because it can be proven that homeowners owe "somebody," that means they owe Bank of America. Lobbyists almost convinced the federal government to pass this law with HR3808, which would have forced states to recognize robo-signed electronic records. Enough people became really pissed off about the bill to force Obama to veto it. Banks have already shot their wad. There won't be another HR3808.

Bernanke's bailout will come in the form of additional "quantitative easing," by the way. He'll print more money to buy bonds. On the surface, it will have nothing to do with banks. But who has been the primary buyer of bonds since the financial crisis hit? US banks.

It'll be a bailout to compensate for the losses banks take due to the foreclosure mess. But Bernanke won't call it a bailout. And anyone who doesn't understand the mechanisms of the banking industry won't realize that it's a bailout. You know how China has a reputation for buying US government debt? The Fed is already following through on a program that will make the largest holder of American debt not China, but the Federal Reserve. It's buying the debt from banks. And that's how they'll be bailed out, unless enough public pressure arises to make Bernanke extend direct lines of credit to banks, like he did in 2008. Personally, I don't think that will happen, because the people who got mad about HR3808 aren't also the people who understand how the Fed works. There's a disconnect there, and that disconnect will allow the bailout to happen through quantitative easing. Get ready for what financial websites are already calling QE2. A fresh trillion or three in cash. If Bernanke doesn't do it, that means he's betting on the financial industry being able to survive this. My prediction, which I hope satisfies your request, if that he will be wrong, and an initial decision to not go through with QE2 will ultimately lead to a reversal of that decision. The only way I can see that not happening is if the legal process moves so slowly that investors also move just as slowly. But investors don't move slowly. As someone already pointed out, after the precedent has been set, everyone will know the precedent. PeterMP will realize that he really, really doesn't want to hold bank stock. And everyone like Peter will be trying to sell all at once.

The precedent isn't the cases which have been concluded without questioning bank documents. The precedent is Patrick Jeffs. He's living in his home, and he isn't making any mortgage payments. What happens to the banking system when everyone is Patrick Jeffs?

Ok, is there like an investing for dummies thread? All I have is a 401K and I get statements and put them in a file b/c I don't know wth I'm supposed to do with it. I want to do some investing online (ex etrade or something) but I have no idea where to start and what to invest my money in (bonds? etc). HELP!

Oh Jesus Christ, my advice to you would be to put your money in anything but bonds. Again, never accept my advice on blind faith, but you might want to at least listen in case I'm right.

[Hubbs]

Sure, the foreclosure mess will affect bank earnings to a degree, but also take into account the fact that loan quality held by banks have been improving every quarter. Analyst expectations is for bank earnings to reach normal levels in 2012. Per Dick Bove, the foreclosure mess will wind up costing banks 10 billion dollars. This is easily managable.

It won't cost them $10 billion. And even $10 billion isn't "easily manageable."

[techboy]

Thanks for the wish, though. (Really. I wish you the same luck, if not more. It would be great news if I'm wrong.)

Oh, don't worry about me. I'm invested with a very long term goal, and in point of fact, my portfolio would almost certainly benefit from another market crash, since I'm heavily into stocks, still acquiring, and won't need the money for at least 20 years.

[redskins59]

It won't cost them $10 billion. And even $10 billion isn't "easily manageable."

10 billion total for all banks isn't easily managable?

[Hubbs]

Oh, don't worry about me. I'm invested with a very long term goal, and in point of fact, my portfolio would almost certainly benefit from another market crash, since I'm heavily into stocks, still acquiring, and won't need the money for at least 20 years.

You and Warren Buffet agree on that one. (I do, too.)

[Hubbs]

10 billion total for all banks isn't easily managable?

No, no. It's not $10 billion for all banks. It's $10 billion for every major bank. And it will actually be a lot more. They can't survive that without a bailout.