Financial Markets with Professor Robert Shiller (spring 2008) is a fantastic resource from Open Yale courses: 26 webcast (also available as mp3) lectures on topics including: The Universal Principle of Risk Management, Stocks, Real Estate Finance and Its Vulnerability to Crisis, Stock Index, Oil and Other Futures Markets and Learning from and Responding to Financial Crisis (Guest Lecture by Lawrence Summers).

Robert Shiller created the repeat-sales home price index with Karl Case that is known as the Case-Shiller home price index.

Related: Berkeley and MIT courses online – Open Access Education Materials – Curious Cat Science and Engineering Blog open access posts – Paul Krugman Speaks at Google

Would the Dow Dump General Motors?

I discussed dropping GM from the Dow Jones Industrial Average in December of 2005: “I agree removing GM makes sense, though I see no reason to wait.”

Related: Dow Jones Industrial Average Changes – Another Great Quarter for Amazon (July 2007) – Stop Picking Stocks – Curious Cat Investing Web Search

In his blog Scott Adams, author of Dilbert, provides often quite intelligent and interesting thoughts. In a recent post he wrote on investing and Diversification:

Related: Stock Market Decline – Warren Buffett on Diversification – Investment Allocations Make A Big Difference

On Tuesday the United States Treasury department purchased $125 billion of bank stocks becoming one of the largest stockholders in the world instantly.

$25 billion was invested in Citigroup, JPMorgan Chase and Wells Fargo.

$15 billion was invested in Bank of America and $10 billion in Merrill Lynch (which is being acquired by Bank of America).

$10 billion was invested in Goldman Sachs and Morgan Stanley. And the treasury department invested $3 billion in Bank of New York Mellon $2 billion in State Street.

Related: Goldman Sachs Rakes In Profit in Credit Crisis (Nov 2007) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies (Feb 2008) – Credit Crisis

Buy American. I Am. by Warren Buffett:

Yet more great advice from Warren Buffett. I must admit I think buying stocks from the USA and elsewhere is wise, but there isn’t any reason to listen to me instead of him.

Related: Financial Markets Continue Panicky Behavior – Great Advice from Warren Buffett – Stock Market Decline – Warren Buffett’s 2004 Annual Report – Does a Declining Stock Market Worry You?

401(k)s are a great way to save. Yes, today those that have been saving money have the disappointment of bad recent results. But that is a minor factor compared to the major problem: Americans not saving what they need to for retirement in 401(k)s, IRAs, even just emergency funds… Do not use the scary financial market performance recently as an excuse to avoid retirement savings (if you have actually been doing well).

The importance of saving enough for retirement is actually increased by the recent results. You might have to re-evaluate your expectations and see whether you have been saving enough. I am actually considering increasing my contributions, mainly to take advantage of lower prices. But another benefit of doing so would be to add more to retirement savings, given me more safety in case long term results are not what I was hoping for.

Now there can be some 401(k) plans that are less ideal. Limited investing options can make them less valuable. Those limited options could include the lack of good diverse choices, index funds, international, money market, real estate, short term bond funds… My real estate fund is down about 2% in the last year (unlike what some might think based on the media coverage of declining housing prices). And poor investing options could include diverse but not good options (options with high expenses… [ the article, see blow, mentions some with a 2% expense rate - that is horrible]).

But those poor implementations of 401(K)s are not equivalent to making 401(k)s un-viable for saving. It might reduce the value of 401(k)s to some people (those will less good 401(k) plans). Or it might even make it so for people with bad 401(k) options that they should not save using it (or that they limit the amount in their 401k). I don’t know of such poor options, but it is theoretically possible.

The tax deferral is a huge benefit. That benefit will only increase as tax rates rise (given the huge debt we have built up it is logical to believe taxes will go up to pay off spending today with the tax increases passed to the future to pay for our current spending).

And if you get matching of 410(k) contributions that can often more than make up for other less than ideal aspects of a particular 401(k) option.

Also once you leave a job you can roll the 401(k) assets into an IRA and invest in a huge variety of assets. So even if the 401k options are not great, it is normally wise to add to them and then just roll them into an IRA when you leave. If the plan is bad, also you can use an IRA for your first $5,000 in annual retirement savings and then add additional amounts in the 401k (if they are matching funds normally adding enough to get the matching is best).

401(k)s, 403(b), IRAs… are still great tools for saving. The performance of financial markets recently have been poor. Accepting periods of poor performance is hard psychologically. But retirement accounts are still a excellent tool for saving for retirement. Using them correctly is important: allocating resources correctly, moving into safer asset allocations as one approaches and reaches retirement…
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The panic driven declines in worldwide stock markets have been remarkable. Deciding whether to join the panic and sell, or hold firm, or buy in now is very difficult. In general trying to time the stock market is difficult and not something many have succeeded trying to do. When I look at the long term values of individual stocks I see plenty that seem like bargains to me. Of course I have no idea if they will be greater bargains in a week, a month or a year. And I could easily be wrong that they are bargains at all.

Still I have bought some Google (GOOG), Templeton Dragon Fund (TDF), Toyota (TM) and ATP Oil (ATPG). The first three I am happy to buy and hold for 10 years (and actually there is a greater than 90% chance I will hold the shares I have now own 10 years from now). The fourth one is fairly speculative, we will see how it goes. I did sell one stock, not because I think it is overvalued but because I liked what I could buy if I sold it (the price had held up well so relatively I could trade it for more shares of what I wanted today than I could have a month or 6 months… ago) – Comtech Telecommunications (CMTL). Often those stocks that hold up well in declines are very strong and do very well once the market corrects, so this could well turn out to be a mistake.

Trying to time when things have hit bottom is very difficult. So I am not trying to do that. I did not invest all my cash now, and will be adding to my positions over the next year (most likely). I have been fortunately that I have been saving up cash and not buying into the market much (I wasn’t smart enough to sell though, and my retirement accounts were still going into stock funds primarily). I am guessing the declining prospects (due to the worsening economy) on the stocks I am buying have been more than offset by the declining stock prices. Only time will tell whether that was a profitable move or not.

Related: Does a Declining Stock Market Worry You? – 12 Stocks for 10 Years June 2008 Update – Beating the Market – Another Great Quarter for Amazon

SEC to temporarily ban short-selling: report

Wow, that would be very surprising to me (especially if you asked more than a month ago the chances of this happening). But given these crazy times I can believe it. I wish they just properly regulated short selling the last 10 years (the failure to do so has been very disappointing). And I would be against banning short selling unless there were a very extreme situation. I don’t see that are necessary now, but I have far from all the details so maybe it is warranted now (though I am skeptical).

Update: SEC Halts Short Selling of Financial Stocks

Related: Naked Short Selling – Shorting Using Inverse Funds – Investor Protection Needed

Watching your new worth decline isn’t fun. But when investing over the long term you will have some good periods and some bad periods. Diversification can help smooth out the extremes but the markets are often driven by emotion. And those emotions (greed, fear…) cause extreme price swings. I am getting ready to invest more in the market. I don’t know how much further we will go down, or if we are at the bottom now (unlikely). But there are investments I am happy to own at these prices. The main reason I don’t buy more is the limitation of my capital. And I would rather buy in slowly so if prices decline I can get more for my money.

Not surprisingly the stocks I am looking at are those in the 12 stocks for 10 years portfolio. I am looking at buying more Templeton Dragon Fund, Toyota and Google for myself now. I am happy to be able to buy more of these stocks for the long term. It is not fun to see my net asset value decrease but that does provide some opportunities for buying stocks at lower prices. They may turn out to be bargains, or maybe they will drop much further. That only time will tell, but I am happy to add to those positions at these prices.

On the overall market I am waiting and watching. But I am leaning now toward moving more of my long term investing into stocks – I am already over-weighted there compared to the conventional wisdom but that is my style. I am willing to take more risk with a long long term investment portfolio. As the time frame shrinks (and the assets grow) I believe in reducing the risk profile for the overall portfolio (though I still believe conventional wisdom over-emphasizes price volatility risk (compared to inflation risk, for example). This market does have real potential for creating serious long term problems, which is why I need to think more (and get more information) about the long term implications.

Related: Investment Risks – books on investing – Does a Declining Stock Market Worry You? – Uncertain Economic Times

I respect the management of Google. They are not tied to conventional ways of thinking. When they bought huge amounts of dark fiber (fiber optic cable that had been laid down in the internet bubble period, but was sitting unused). I figured they had made good investments while the cable was very cheap (pennies on the dollar). I watch with interest as they continue to build their own (with partners) fiber network. I am guessing this may be partially because they are smart enough to know the business oligopolies providing internet infrastructure will try to exploit their positions and government cannot be counted out to play their proper regulatory role, which is required in a capitalist system. And partially due to their huge bandwidth needs and projections for future growth.

And since those oligopolies are not very effective companies (that rely largely on paying politicians, in order to undermine the proper role of government in a capitalist system, to gain government granted monopolist profits). That increases the benefit of Google buying into their own distribution network since excess capacity can likely be sold at a large profit: the competing companies are so used to charging monopoly prices leaving lots of room for profit. The second point can be debated but I don’t think if the economy functioned properly, with intelligently regulated natural monopolies providing internet bandwidth, I doubt Google would invest in this, but, of course, I could be wrong.

About the Unity bandwidth consortium

Google stretching underwater comms cable?

I own Google stock.

Related: Monopolies and Oligopolies do not a Free Market Make – Challenges in Laying Internet Fiber Under Oceans – Plugging America’s Broadband Gap – Not Understanding Capitalism

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