Christmas 2016

The big news for 2016 is David's college graduation. We've paid our last education bill and the kids all have degrees and jobs. David and Ben now share an apartment in San Francisco, both working for Thumbtack.

David graduated with a double major in mathematics and computer science. While in college, he took four years of classical piano. In his junior year, he started Russian and now reads, writes and speaks it quite well. He spent his last quarter of college with fellow students at Moscow State University. Ann, Ben and I met up with him in Russia when he finished in June and spent a week touring Moscow and St. Petersburg, and then another week in Finland. The trip was wonderful. David was our personal guide and translator, bringing us to great restaurants and endless sites. Russia is this northern land, in many ways similar to northern Minnesota, a land that time forgot. The Orthodox churches are simply amazing. The history is at once horrifying and inspiring, and sent me off on a Russian reading campaign. No, Putin and I aren't Facebook friends, but I've gained a new appreciation for their situation. But regardless of politics, the story of one of the most consequential countries of the past two hundred years is riveting.

With kids in Texas and California, holidays have become a bit more complicated. For Thanksgiving, Ann and I spent over a week in SF at an historic hotel a block from Ben and David. Ann and David made Thanksgiving dinner in their apartment, including homemade apple pie. Our hotel suite was roomier than some apartments, so hanging out there was fine. We took a short road trip down the coast. Ann and I become comfortable walking and taking the bus around most of SF. We found a Starbucks nearby that opened by 5am (haha) – and sold the New York Times. I might retire in that hotel.

For Christmas, everyone is coming home for up to ten days. We’ll spend a couple of days at our place in Lutsen, MN. The kids are then all flying out together to SF for another week together.

Ann and I have done well at home. I’ve joined Ann working our gardens. I had forgotten how much I like yard work. I remember as a kid so enjoying our yard and our land in Michigamme. We landscaped our gardens (including deer proof fences) and now have raspberry and asparagus patches. We also grow beets, tomatoes, peas, lettuce, beans, hot peppers, squash and herbs. The peas sometimes grow taller than me. We also planted plum, cherry and apple trees in the yard.

Ann is now the state rep for northern Minnesota for Celebrate Recovery. She stays in touch with the couple of dozen other CR's in her region, plus travels to short and long summits around the region and country. I usually travel with her. I continue to run the music with the help of over twenty musicians. I returned to playing my now twice reconditioned guitar I bought in college. It has new electronics and a series of pedals. I'm also the primary vocalist, which is new territory for me. Ann and I lead groups at our weekly meetings. We also have after hours closed groups that spend a year walking people through an intense 12-Step recovery program. It includes a series of workbooks that can move almost anyone closer to a personal objective that improves their lives.

After talking about it for over ten years and after sending out over seven thousand Tweets (@JonJosephA), I set up my blog, Confessions of an Investor (InvestorConfessions.com). I'm actually getting a little activity on it. I've made connections with people overseas and was even interviewed by some guy from Bloomberg News. It’s a start.

Merry Christmas and Blessings to You,

Ann and Jon

An Irrationally Exuberant Call to Action

I was excited to read Robert Schiller's 3rd edition of Irrational Exuberance. He's famous for calling both the internet and real estate bubbles. Somewhat predictably - and justifiably - he's quite concerned that after tripling from its lows in 2009, the US market is again in a bubble. The book is a wonderful read on how stock markets, bond markets and real estate markets all can get into bubbles and busts. He exhaustively makes the valid case that there is no such thing as a rational market.

OK, I buy it. I've lived through three market crashes and watched the horrors of the most recent six year real estate crash. I realize that nothing is supporting the value of my house, retirement and even my dollar bills except what others perceive it to be. I also realize that there is no supposedly secure place to rest my life's savings. Like so much in life, there really aren't any guarantees. Waking up tomorrow is only a bet.

But I looked forward to Mr. Shiller's last chapter, A Call to Action. I don't like being acted upon, far preferring to take action. Here's where I hoped to learn some tips for dealing with the vagaries of markets.

Well, that wasn't to be. The Call to Action is at best some ideas for government and leaders that may soften some of the harder edges of bubbles and busts. He encourages leaders to help people through these rough times, even while he acknowledges that views that a market is over or under priced are never universally held. He says that monetary policy should "gently lean" against bubbles, but he also says the Fed probably shouldn't try to burst a bubble through aggressive tightening. This is pretty timid action.

He suggest that opinion leaders should offer stabilizing opinions. That institutions should encourage constructive trading with tools such as circuit breakers. That the public should be helped to hedge risk. The public? Helped? Hedge risk? Who can do this, and how and when?

For us, the individual investors, he rightfully suggests we not pull investments out of the market in favor of bonds, and that we shouldn't be "lulled into complacency," that things can go bad.

So the call to action is mostly little or no action, which is about how I handle busts. Minimize your risk, primarily by keeping close to a fixed allocation, by saving regularly and by responding little to bubbles and busts except to reallocate to your original plan.

I still highly recommend this book. If you believe him, you will understand why you can't take a lot for granted; you can't assume any stock, bond or house is necessarily going to rise predictably according to some formula. Instead, they can all float in time and space at various valuations, and you can only live assuming they will eventually probably go somewhere good.

And for assurance, keep up your health, relationships and interests. Even with the best of planning, you may one day find that's about all that you have.

Lessons Coal Taught Me

First, let me clarify: I keep most of my life savings in low-cost indexed funds. It's mostly the no-brainer way to invest. At the same time, I struggle with the unavoidable structure of indexes where more is invested in an overpriced security and less in an underpriced security. My brain says to do the opposite. I've never fully accepted this situation as "good enough." Further, I fundamentally believe that with reasonable research, intelligence and emotional control, an individual can outperform the indexes. Blasphemy - I know. I'm still trying to prove myself right.

Therefore, I allow myself to allocate a portion of my securities to individual stocks. For example, for over 15 years ago, I have periodically traded Ford, once selling it at 6 times its purchased price. Ford remains the best purchase I've ever made.

For years, I have also followed the world's largest private-sector coal company, Peabody. A few years ago I bought Peabody while it was on one of its periodic downward swings. When it dropped still further, I again researched the company. I noted that even the International Energy Agency predicted that coal would continue to be a huge and expanding source of energy worldwide - which it still is. I was confident that all was well, and I doubled down on my losses. Then for two long years I watched while it continued a steady decline into bankruptcy. Peabody is my worst purchase ever, wiping out all my Ford gains.

Contrary to popular thought, renewable energy didn't sink Peabody. It was undone by the low cost of shale natural gas and by a leveraged coal mine acquisition. Coal prices dropped with demand and the company couldn't service the debt.

Where did I go wrong? First, I didn't let the stock settle at a bottom before buying. Twice I bought into a steadily sinking stock. Second, I didn't look carefully at Peabody's heavy debt. Financial analysis is not just about profits and cash flow. It's also about the ability to handle rainy days. Last, it could be argued to sell after a certain point. But it can also be argued to buy at the same point.

For you, I offer some lessons. To repeat, indexing is a very good way to invest. With some basic understandings of investing and an occasional review of your holdings, you should do very well with little work. In contrast, it is risky to buy individual stocks. If Peabody can go under, so can anything else - including Amazon, Microsoft and, yes, Tesla. Second, you should understand anything that you buy, but regardless, you (and the expects) can still be widely off the mark and you can lose a lot of money. Finally, this is an extreme example. Most established stocks continue on year after year for decades, paying and increasing dividends, and gaining in value.

I still have my mostly worthless Peabody shares. Peabody continues to produce huge amounts of coal over six continents. And a couple of months ago I again bought Ford.

Hangout With My Son

Yesterday, I used Google Hangout to help my son set up his 401k. He's living the dream in Silicon Valley and wants to make good financial decisions. He already knows to never carry a credit card balance, to spend less than he earns and to invest in low cost indexed equities.

First, how much to save. Although he probably can save even more, we agreed that if you save 10% a year, keep it invested aggressively and don't ever withdraw a dime until you retire, you will do well.

Next, Vanguard defaulted him to a "Target Retirement" plan. Not a bad choice but at age 22, why waste away any of your 401k in bonds. In long term investing, cash is the scariest place to be, followed close behind by bonds. After inflation, cash loses money - sometimes a lot of money. In the 70s, cash lost half its value in less than ten years. I know, because his grandparents' retirement was decimated in that decade. Historically, bonds gain about 1% after inflation. That is, they double in value about once a generation.

Meanwhile, equities will return multiples more. I did some quick math for him and figured that in forty years, his bonds might go up about 50% but his equities will not just double or triple (after inflation), but will probably do this more than once. That's the earning power of investing in businesses that work hard every day to get the maximum return on your investment.

So instead of a target fund, he bought into three indexed ETFs: US equities, developed international equities and emerging markets. He put 60% into the overbought US market and 20% into each of the foreign markets. I suggested that he rebalance every year or two. Then when he's 40, he can look at buying some bonds as insurance for an equities catastrophe. That's it!

He sent me a screen shot of his completed form and then hit the enroll button. He's on his way to a safe and strong retirement, just a month into his first job.

Markets High, Markets Low - What to Do?

We're seven years into a thinning recovery, bonds are returning negatives, stocks are overpriced by most valuations and the global economy is shaky. And did I mention George Soros is back trading?

So what to do? I'm at my normal 60/40 equities and fixed income, with 40% of my equities outside the U.S. (and half of those in emerging markets). About a third of my equities are individual stocks, including the 1% remaining of Peabody Coal, my biggest single loss ever.

I agonize over a move to 50/50, an allocation I've never done. I spent my first twenty years investing in at least 80% equities.

So I roam through my holdings, ignoring the market noise. I trust the U.S. to continue to make money and return it to its stockholders. That includes my Wells Fargo, IBM, Charles Schwab, Ford, Cummins and even Seagate holdings. I trust the rest of the world won't implode - sans maybe China - mostly trusting my stocks in Mexico, Japan, France, Israel, Spain, Indonesia and around the world.

I'm fine with my REITs and my handful of Krugerrands. Bonds make me nervous, but they're spread around the world, in both governments and corporations. And I'm getting used to the 3-4% returns, unfortunately.

So I'm staying the course. I might clean out a few stocks that are getting a little pricey. And I'll probably let any sales sit in cash while I ride another bumpy stretch.

And if the market jumps another 20-30%, I'll be doing some selling. And if it drops 20-30%, some buying.

Which is about what I've done forever.