Wednesday, February 23, 2011

Big Picture Investing

I just finished Peter Navarro’s investment book called ‘Big Picture Investing’. There are sections of his work that refer to another book I read recently called ‘Reminiscence of a Stock Operator.’ The book is supposedly a memoir of the legendary speculator Jesse Livermore who accumulated and lost many fortunes during the 1920’s. A well regarded stock investor even today who killed himself because of his financial woes. I am not sure if he is the ideal model to aspire to. But his memoir is brilliant and gives a unique perspective from the early days of stock investing. He is a manipulator of markets similar perhaps to Gordon Gecko - the hero in Oliver Stone’s sequel to his previous movie hit ‘Wall Street: Money Never Sleeps.’ The theme of all these works is the stock trader or investor who actively monitors and invests in the market and makes a huge fortune. In Oliver Stone’s movies, the hero or villain (who can tell?) often end-up in jail, lose their fortune or commit suicide.

On the other hand, Mr. Navarro is a professor of finance in a California university. His book explained a few terms which I had taken for granted. For example, the term inflation which has 2 variations: cost-push and demand – pull. Or economic indicators categorized as leading, lagging or neutral indicators. Or terms like Outperform (i.e. better than the market index). He also clearly explains sector investing and following the business cycle in one’s investment plan. The last chapter I particularly liked which describes his typical investing day. At the start of the day, he reads magazines and web sites like Investor’s Business Daily,   Barron’s magazine, and Dismal Science and Market Watch. The book has given me a lot of investing ideas that I never thought of before. But similar to Jesse Livermore’s memoirs it’s leading one toward active trading. An investment style abhorred by investors like Benjamin Graham or Warren Buffet but a good technique to know.

I read an article in the New York Times of a banker who died recently of brain cancer. He worked as an investment banker for Goldman Sachs and Lehman Brothers before retiring. One guesses that he is familiar with the investment style mentioned above - active trading. But after his retirement he had an epiphany. In his last years he was motivated to write a book called ‘The Investment Answer’ which is the exact reverse of his previous investing style as a Wall Street banker. The advice of his book is simple. It follows the passive investing methods of people like Burton Malkiel who suggest investing on index funds instead of being stock pickers. Basic advice like hiring an independent financial adviser, diversify between foreign and domestic stock and bonds, value and growth stocks, choosing passive investing,  rebalance the winners and buy more of the losers. It’s not rocket science but more like common sense explained in previous books like ‘The Best Investment Advice You will Ever Need.’

Unfortunately, one is in the midst of severe economic problems that one wonders whether one requires drastic moves. For instance, the huge US deficit, quantitative easing, rise of China, political challenges in the US (i.e. rise of tea party and conservative politics), congressional plan to revise the tax code, falling housing prices, rising unemployment etc. One hears about the fall of the dollar and its replacement as the world reserve currency by something like the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) which is based on a basket of currency and commodities like gold or even the Chinese Yuan. Times are changing and the usual financial advice may no longer be sufficient. One is attracted to the works of Nouriel Roubini known as Dr. Doom and his book ‘Crisis Economics.’ His predictions often seem extreme but these are not the best of times. Since coming to the USA, one has tried to exploit the situation – investing in housing to take advantage of low prices, low mortgage rates and tax credit as well as investing in the stock market (i.e. high cap multinationals - leaders in their fields, on the road to recovery, have international businesses, etc.) But is that enough?

The main issue is the fall of the dollar aggravated by the US deficit. Recent political developments don’t seem promising. One looks at the prospect of rising taxes, inflation and lower credits. From the big picture perspective one needs to increase one skills and knowledge especially in finance and possible increase one’s investments outside the US. For example, converting one’s US dollars to another currency and investing in real estate in places like the Philippines and Singapore. Some extreme pundits speak about avoiding stocks and bonds altogether. Hence, the financial investor today cannot just focus on stocks and bonds but other investment instruments like wine, art and real estate. 

Taking advantage of recent trends in the Internet with tools like Google, Amazon and Face book is a good goal in order to develop separate income streams. Afterward, creating a limited liability company (LLC) for tax breaks and employing one’s family in the business maybe the best way to earn money and pay lower taxes. This seems to be the way forward in a volatile economic environment. From a big picture perspective, the US does not seem to be the best country to live in for the long term unless innovative approaches are done by the political establishment based on a McKinsey report. The US is the laggard among the industrialized nations with countries like Singapore faring much better based on a New York Times article. Still there’s always a chance that things will we can?

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