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Aaron Hoos’ weekly reading list: ‘Fundamental analysis, monetary policy, and medical ethics’ edition

Aaron Hoos: Weekly reading list

Here’s what I’m reading this week.

  • The limit of fundamental analysis: You. I love investing and I particularly love fundamental analysis. There’s something really fun (perversely so, I realize) about doing your own due diligence on a stock. So the title of this article caught my attention. In the article, Jordan Terry talks about the challenges of performing fundamental analysis and how the analyst’s biases can skew the numbers, and he rightly points out that good fundamental analysis should also force us to consider whether our own point of view is influencing what we see.

  • Monetary policy hindered by demographics. Way back in the day when I was a stockbroker, it was hammered into us at the time that we should be looking forward to the great asset transfer in which baby boomers would pass along their assets (some of it while they were still alive and some of it after they had died) to their children. We were trained to sell around those concepts. So I was fascinated by this article, which reports on how the aging demographic is changing the face of economics in unexpected ways, and I’m particularly interested in the conclusions drawn about how monetary policies need to change to keep up with the massive shifts in demographics.
  • Five days at Memorial: A hospital becomes hell. Normally I write about business and the markets because that’s the kind of stuff I like to think about but I try to read more widely than that because it keeps the old brain juiced up. I stumbled across this article in Salon about the events that occurred at Memorial Hospital in New Orleans during Hurricane Katrina. This article was a tough read — partly because it’s true and partly because it exposes darker truths about ethics (in the medical system and in myself). I want to think that I would do the right thing in that situation but it’s such a complicated situation… and what is the right thing? It’s easy for us to sit comfortably in judgement at things that seem very wrong but gosh, what a crazy scenario. Read this article but be warned that you may ask yourself the same questions I asked… and not like the answers.
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Aaron Hoos’ weekly reading list: ‘Business models, prospecting, and social media’ edition

Aaron Hoos: Weekly reading list

Here are a few of the things that caught my attention this week:

  • How to turn your business idea into a business model: I’m totally a sucker for any article that contains the word “business model” in the title. It’s Pavlov’s bell to me. This article by Entrepreneur does a great job of highlighting the difference between a business idea and a business model and then connects the dots to help you turn your great idea into an actual enterprise. This article is a must-read for any entrepreneur who thinks they’ve created a better mousetrap.
  • Live to prospect or prospect to live?: This is a blog post by my friend Mark McLean. Like so many of his blog posts, it contains really practical advice for real estate professionals who want to grow their practice. In this blog posts (which contains video and text — be sure to watch the video!), Mark talks about running (he’s an avid runner) and draws some parallels to prospecting — possibly the most important activity any real estate pro can do.
  • Downtowns: This article by The Economist explores the consequences (both good and bad) of cities. Cities have some advantages, like diminished transportation costs and improved competitiveness (if you’re a Michael Porter fan, you’ll think this stuff is gold!). Cities also have disadvantages, primarily short-term economic thinking that can lead to downturns and even amplify their impact. I live this type of macroeconomic thinking (although I recognize that it’s not going to compel anyone to abolish cities anytime soon). What’s interesting about this article, to me, is that you could exchange the word “city” for “nation” and the article preserves a lot of truth. Many of the opportunities and challenges created by a city are also created, on a larger scale by a nation. This article won’t interest everyone but it’s well worth a read if you love economics as much as I do.
  • 20 astonishing social media statistics for financial advisors: I often hear from financial professionals that social media is not a place where they can do business. It’s hard to target geographically, people don’t want to talk about finances on social media, and there are (of course) regulatory considerations as well. But this article from the Financial Social Media blog, does a great job of presenting a number of social media statistics that should jolt these professionals into taking a second look at social media. I’m not saying it will be easy but it’s definitely worth considering how your financial practice can use social media. If you’re not sure how, start by developing your social presence map.
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Yes, you CAN time the market (just not in the way you want)

You can't time the marketTiming the market is the most ridiculous idea out there. (Well, maybe not the MOST ridiculous idea out there but it’s pretty out there and it’s pretty pervasive so maybe it’s high up on the list).

The thinking behind timing the stock market goes something like this: “Oooh! I want to buy that stock. But the price is too high right now. Maybe I’ll wait until the price goes down.”

And then when the price does go down, the thinking changes to: “Ouch! I want to buy that stock. But the price is low and what happens if I buy it and it goes lower?”

This is true for real estate, too. A potential homebuyer might say: “Whoa! Houses are too expensive right now. I’m going to wait until home prices come down a bit before I buy.”

But when the sellers market becomes a buyers market, the potential homebuyer now says: “Yikes! House prices seem to be declining. What if I buy and the house declines even further in value?”

I hear this line of thinking OVER AND OVER AND OVER AND OVER. I heard it when I was a stockbroker and I hear it today in my work with financial and real estate professionals. I’ve tried to talk people out of this thinking but it can’t be done. (And the truth is, sometimes I fall into the trap, too!)

Like some optical illusion, the price of a stock or a property is never perfect right now and investors believe that by waiting, they can buy it at a “better” time.

Unfortunately, there never is a better time. EVERY price point has its advantages and disadvantages. Unfortunately, investors only see the disadvantages to buying now (regardless of price point) and the advantages of buying later (regardless of price point)… and they don’t seem to remember what they said only a few months ago when the price was different.

And waiting for a market bottom or market top is impossible because it takes months of data from indicators (including lagging indicators which come after the event) to prove a market peak or valley.

Timing the market is a fools game because investors and homebuyers are always looking for the perfect price point (even though they often can’t identify what that price point is and, even when they do, they fail to act when the price reaches that point).

Timing the market is ridiculous idea and a fools game… but it’s not impossible. You just have to rethink what you mean when you want to time the market.

Joe Average and Jane Average (Mr. and Ms. Average to you) try to time the market but they fail. There are people who CAN effectively time the market. I’m talking about short term traders. Short term traders (day traders and swing traders in the stock market, and real estate investors such as flippers in the real estate market) can time the market and many of them do pretty well at it.

Here’s why some people can time the market but most people fail at it:

  • Information volume and prioritization: Successful market timers do it effectively because they receive a barrage of information and they filter out what they don’t need. Compare this to Mr. and Ms. Average who glean tidbits from headlines or from the half-wits around the watercooler at break time and act on each piece of limited info that they get, as if the latest piece of information is the most correct.
  • Entries AND exits: Successful market timers consider both entry and exit positions before they buy. To a successful market timer, an “expensive” stock is still cheap if the price goes up and a “cheap” stock is still expensive if the price ends up going down. The same goes for those in real estate. It doesn’t really matter what the entry point is… it’s how much you can sell it for afterward when you are ready to sell. Compare this to Mr. and Ms. Average who likely intend to hold their stocks for decades and who will have to live in their house. They are making entry-only decisions and forgetting that there are other (hard-to-measure) aspects to owning these assets.
  • Mindset: Successful market timers view the (financial or real estate) markets as their “business”. They make money from it. Therefore, they make decisions from a business perspective. The Average family, on the other hand, is looking at buying stocks for their retirement portfolio or their next home and they are trying to weigh their decisions on a much more personal level, which makes the stakes seem higher.
  • Buying a range instead of a single price point: Successful market timers don’t look to one specific price point as THE bottom or THE top. Rather, they expect to buy a range, buying through the bottom and selling through the top and fully realizing that they might miss a few points here or there but overall they are hitting it at the right time. Mr. and Ms. Average, though, see every single low price point as a question (“is this the bottom or will it get worse?”) and every single high price point as the top (“is this the top or will it continue to climb?”). In a way, they are making a technical trading decision without any technical information.

Don’t bother trying. You cannot time the market… at least, not in the way that you want to time the market.

 

Image credit: 2020VG

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How much will you spend so you can save money?

People love to save money but there is almost always a cost to it.

This reality is illustrated in a silly example from my life:

My wife and I are avid users of the library. A couple of years ago, whenever we had a book that might be overdue if we didn’t return it right away, we’d just drive it down to the library (which isn’t that far from our house). But today, even though library fines have risen, the price of gas has risen much more and we weigh the cost of driving our car to the library versus paying a little more in fines to return the book another day.

Yes, that’s a silly little example and it really boils down to a difference of a buck or two. No big deal. But it illustrates the way people SHOULD think when they consider the cost of saving money. However, I’m surprised at how often people don’t think along these lines.

Instead, they’ll drive long distances to use a coupon. Or they’ll take a vacation we never intended to take because it’s ridiculously cheap.

The problem is, we don’t calculate all of the costs when we buy something.

Here’s another example, taken from a slightly different perspective: I have family who live a couple of provinces away and they don’t always understand why I would rather fly out to visit them instead of driving to visit them. They say it’s cheaper to drive because they are comparing the big initial price of airfare against a seemingly small price of driving. But driving is expensive: Fuel in my SUV isn’t cheap. Neither are the two nights of motels (1 each way), food, and the very-hard-to-calculate cost of wear and tear on the car. But the biggest non-calculated price is time. Regardless of how many times I’ve tried to explain, they don’t get that I can work for an additional 3 days if I fly compared to if I drive, thus (approximately) working off the cost of the flight. (Oh, and let’s not ignore the fact that I feel SO MUCH BETTER by only spending a couple of hours in the air instead of how I feel after a solid 20 hour drive in one direction!)

This reality was highlighted for me once again when I read this story: Toronto motorists line up for 50 cent gas. To give my American friends a quick conversion: Gas tanks are about 60 liters, gas prices are $1.35/liter ($5.12/gallon) and in this story, gas prices had dropped to $0.50/liter ($1.90/gallon).

So here’s the part that drives me crazy: According to this story, people lined up for 2 hours to get gas. Now, some people might say “it’s worth it for that price!” but I say it isn’t:

They were saving $0.85/liter ($1.35 – $0.50). If their tanks were bone dry, that means they’ll pay $30.00 instead of $81 for an average-sized tank of gas. Sounds like a great savings of $51.00 until you factor in the cost of being unproductive for 2 hours. In other words, the people who lined up for gas spent 2 hours to save $50. That works out to a value on their time of $25/hour.

Now the argument could be made that they weren’t going to be productive in those two hours anyway (maybe they just left home early to get to work) but I believe that we all have a value on our time, every single hour of the day, every single day of the year. That value might be expressed in dollars, although there are other ways to measure value. For example, if these people weren’t being productive at work for those two hours, fine. But could they have spent those two hours studying investments to do a better job saving for retirement? Or maybe they could have spent those two hours starting a business? Or maybe they could have spent those two hours with their kids? Certainly the two hours should have seemed more valuable doing any of those things than waiting in line for gas!

And here’s another example I discovered when I was a stockbroker: People who put their money in the bank think they are saving their money. But the interest they get on those deposits (if they get any interest at all) doesn’t come near the cost of inflation, which usually rises at about 3% per year (and is rising much faster right now). So these savers were getting maybe 1% of interest on their money and they were paying 2% in lost value to do it.

We’re all guilty of this in some way. To give you some examples from my own life: I do my own taxes when, if I really think about it, I have to admit that it’s cheaper for me to give them to my accountant to do. (The problem is, I perversely enjoy my taxes and like to keep a tab on the various line items in my taxes). I also do my own administrative work when it would be much cheaper to hire someone to do it for me. However, I spent a lot of money on an assistant a while ago and don’t feel that I got the value I wanted to get from her so I’ve since pulled my administrative stuff back to me for a while. As I write this, I am reminded of the cost of doing the work myself and I think I should probably find an assistant again.

How much are you spending to save money in your business… and in your life? How do you value your time? How do you value the other assets you have? What areas in your business (and life) could you revisit and realign your expenditures to your values? Most of us are guilty of this to some degree but only those who understand the value of their time and assets can make the best decisions about how much they are willing to spend.

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My 7 favorite economic indicators

Economic indicators are tools used by investors and economists and governments and business owners to forecast how the economy is likely to change so they can plan accordingly.

I’ve always followed a couple of economic indicators but I recently picked up a book called The Wall Street Journal Guide To The 50 Economic Indicators That Really Matter by Simon Constable and Robert E. Wright because I wanted to find more to follow. It’s a great book and if you are ever interested in following economic indicators, you’ll find some in there!

Obviously, I can’t follow all 50 but reading the list helped me add to and change the list of economic indicators I’m following.

So here are my 7 favorite economic indicators:

CONSUMER CONFIDENCE INDICATOR

Uses surveys of households to measure how consumers feel about the economy. Although I find surveys to be generally unreliable, the consumer confidence indicator still offers a glimpse into the mind of the consumer, which is a pretty good starting point in any economic study.

HOME SALES

Okay, I’m cheating a little by using two economic indicators here instead of one – existing home sales and new home sales (see the press release on this page) – but I like to pay attention to both numbers.

FEDERAL FUNDS RATE

Banks lend each other money and the interest rate they charge each other is set by the Feds (sort-of; I’m simplifying a bit here). This interest rate is a frequently reported number (you’ll hear it on the news a lot) and it determines how much interest banks eventually charge its customers. Feds have traditionally used this number to help speed up or slow down the economy so the Federal Funds rate is a good measure of how the Feds see the economy and what they’re doing about it.

WEEKLY LEADING INDEX

I love this aggregate indicator that measures money supply, industrial price indexes, housing activity, jobs and labor indicators, and prices in the capital markets. Although you’ll need a membership to access some of the information, you can get a good synopsis of the Weekly Leading Index in their news center.

METAL INVENTORIES AND PRICING

Good economies require infrastructure and infrastructure requires metals (mostly copper but other stuff too). Based on the laws of supply and demand, remember that smaller inventories will drive prices higher and bigger inventories will usually drive prices lower. So tracking the inventories and prices of various metals is a great way to see whether economies are building infrastructure or not.

ARUOBA-DIEBOLD-SCOTTI BUSINESS CONDITIONS INDEX

The Philadelphia branch of the Federal Reserve publishes some great data on the economy, including the ADS Business Conditions Index. This aggregate indicator pulls together a lot of really useful economic information on unemployment, industrial production, personal income, sales, and GDP growth.

MISERY INDEX

The Misery Index is one of my favorite aggregate indicators. And it’s so simple, too; just add the inflation rate to the unemployment rate. And voila! You have two depressing numbers combined together in one.

… AND THE RUNNERS-UP

There is also a ton of great economic indicators here: