Category Archives: Financial Commentary

Another Annuities “True Horror” Story

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The following comment was sent by a reader looking for help.

My mother and her husband (deceased in 2003) were scammed for over $800,000 in annuities with a major life insurance company. Luckily, the principal has not been lost, and I have been helping her to cash them in as they become due although we can do nothing about the $300,000 sold in immediate annuities. After my mother was widowed, she was conned and then neglected by her financial advisor. He is under investigation now by the a major life insurance company, and they will only admit that he took $100 in a gratuity check from her shortly after her spouse died. She wanted to reward him for driving to her home to help her “sort” out papers. I believe he took the paper work from the annuity he talked her into selling (from the major life insurance company ) and then talked her into buying another one immediately. The company will not give me info on this annuity as I was not POA at the time. The agent did admit to taking the money. What can I do legally to prevent him from selling to others? That should have been illegal, and I am trying to get proof of the cashed check to report this. Who do I report this to? I have written NASD. I do not trust anyone anymore.

2007 Economic and Markets Forecast

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The following was released to clients and select prospective clients in January.  I hope you find it interesting!

 

Camarda Financial’s Special Reports:

2007 Annual Investors’ Markets Forecast

Clients and limited select distribution only
Do not post to public assess area of Camarda.com
 
 
The beginning of the year is a wonderful time, for many things.  To reflect on blessings past, present, and for the future, and to try to chart a better course to bring the future blessings for which we hope to be thankful for in years to come.

Since money is such a powerful tool to help make the time for the things we love, and to enhance the quality of the life we wish to have, it is a good time to reflect on the decisions we have made, the places we might want to be, and the strategic changes we might want to make to maximize the opportunities likely to come to pass in the days and months to come. 

It is a popular time for planning, and for predictions.  Here are mine on the capital factors and markets, with the usual caveats that things are NOT likely to unfold as I have foreseen.  Some probably won’t happen, some may, and some may (or not) for reasons different than I may think. While useful and interesting, these should not be relied on as absolute “bet the ranch” divinations of what will transpire.  Rather, you may choose to deeply consider them, along with other sources, before perhaps allowing them to slightly color the well-considered risk control systems you currently use (or should be using) to manage your investment lives.  Hopefully, my research and opinions can help you (and us) squeeze a bit more juice out of your (and our) prudent judgment and investment management decisions.

For those of you that have seem my forecasts before, please do not be swayed by what you may consider to be my uncanny accuracy in the past.  Every day, it’s a brand new world, and the only constant is that unpredictable change can and will befall us. 

That said, here’s what I think.

 

2006 Summary

Let’s begin with a quick review of 2006’s major events.  The US housing market – one of the very central elements driving the American economy – undeniably collapsed into the vacuum of a bubble created by one of the hottest and most protracted real estate markets of a generation.  The Fed, under a new chairman, finally relented from years of steadily increasing interest rates, though, apparently, too late to pump up the housing bubble, at least for 2006.  The war in Iraq, and the other in Afghanistan, became increasingly unproductive, unpopular, and un-winnable, at least in the sense for which they were originally prosecuted. Meanwhile, east across the axis of evil, Iran supported Hezbollah into the first seemingly successful war against Israel ever, while even farther out Kim Jong Il, bane of both President Bush and the North Korean people, had the audacity to both launch (unsuccessfully, thank the maker) a missile with the design-range to reach US territory, and detonate what appears to be a weapons-grade nuclear device. Oil surged, for a time, and the dollar dove. The stock markets plunged through midsummer, and the experts raved that the inverted yield curve presaged recession. The Democrats took control of both houses, and the administration’s stand and staff on war matters quickly softened.

It was a murky, challenging, wrenching year.

But US companies coined money, and the markets soared like they haven’t in three years. On the wind of fear and misfortune, the bull thrust higher through 2006.

What about next year?

The US housing market will continue to suffer.  Foreclosures will increase, roiling the derivatives bond markets, and lenders, predictably, will tighten credit standards (even for those for whom they should not) only now that the horse has fled the barn. Prices will drop, as those wishing to sell make peace with the fact that 2005 is gone and things have changed.  Accelerating price drops, sellers’ anxiety, and lenders’ woes:  buyers will be scarce, frightened, and renting while they “wait and see.”  While northeast Florida, Camarda’s home market, spared much of the bubble’s froth and still a relative bargain, will be far more stable than elsewhere, the pain has already begun and will become more acute before things begin to turn in 2008/09. Buys in single-family housing will emerge for rentals investors later in the year; prices and seller expectations, while beginning to slip, are still too high now. Rents will continue to rise.
 
The US commercial real estate market will plateau and begin to decline. While not nearly so severe as residential, commercial’s been on quite a tear lately, and this trend continues despite flagging rates of return (“cap rates”); investors seem willing to take on more risk in exchange for lower returns, never a good sign.  Unlike for single-family and other “small” residential, long-term leases with high credit-quality tenants in commercial buildings, and apartment rents rising with the demand for housing for those who can no longer afford to buy, can mitigate this to some degree, but risk looms, especially for those investing in investment pools like REIT’s where share prices may increasingly  be disconnected from the economic reality on the ground (sorry, couldn’t resist), at least for a time. Shares in REIT’s are at risk of a severe price tumble. Commercial “cap rates” – essentially expected return – are way down, meaning buyers are willing to take more risk for less return, never a good sign.

 
US interest rates will normalize. Short-term rates (the ones the Fed controls and you hear about all the time) will stay level, then decline as inflation abates and the economy slows in mid-cycle. Long term rates will increase and eventually overtake declining short rates, erasing the current “inverted” yield curve (where short rates are higher than long) that has caused so much nail biting and predictions of recession, and bringing forth a “flat” curve (where shorter and longer rates are about the same) or a more “normal” curve where rates get higher the longer the term.  Please note that I am in the definite minority on this prediction – many predict a flat or still-inverted curve by year-end – and that interest rate predictions are about as complex and unreliable as currency forecasts. But if I am right prices for longer-term bonds will fall. The quality spread – price differences between better and poorer rated bonds – will widen to more normal levels, and prices for bonds of lower quality will fall.
 
The US economy will chug along.  The Fed – after 17 successive interest rate hikes – will have engineered a “soft landing,” and economic growth will continue at a more moderate pace. Inflation will hover near the Fed’s 2% target.  Workers’ real incomes will continue their recent increase, reversing an unhappy near-decade trend, and this will fuel consumption and growth.  Unemployment will remain “safely” above labor-shortage levels, and lost jobs from a higher minimum wage will “help” this. US companies’ torrid profit margins will slow, then rise again as massive cash hoards are deployed in search of corporate growth. “Goldilocks” (an economy of not-too-fast, not-too-slow growth) will smile. Despite protracted trade deficits (which probably no longer accurately measure “balance of ‘trade’” issues, anyway) I believe the US economy to be in remarkably healthy, mature shape. On big benefit of globalization, yet to be widely appreciated is that outsourcing labor and manufacture to emerging markets like China spawns benefits far beyond lower prices for consumer goods; Far beyond cost savings, American companies have learned to transfer the dangerous, cyclical risk of manufacture (demand up, build factories, prices rise, demand down, shutter factories, layoff workers, recession) to foreign companies and workers, whilst still capturing most of the profit!  This has already led, I think, to safer, gentler economic cycles and better, more stable jobs for workers, and the trend will accelerate in my view. This has resulted in far more favorable rates of relative wealth increase– the US is getting richer faster than the countries it is outsourcing its manufacture to – and this may be a better way to measure trade in the modern age. For this and other reasons, US stocks will continue to soar through 2007 and beyond as American and others see great value in our companies and great stability in the dollar.

 
The world will become more dangerous as the fundamentalist-terrorist ethos becomes endemic across the globe.  Iraq will transform into the premier incubator of exported misery, and Afghanistan will regain much of its former stature in this regard.  This problem will spread into formally stable regions like Thailand. New threats will arise in Africa and South America.  Absent a significant nuclear event, this will not materially affect average global economic activity or investment opportunity. China’s rise as a new superpower will become evident; it’s influence and responsibility will wax, even as internal problems increase.

 
Democrats in control of both Congressional houses will increasingly call the tune as a war-beleaguered President approaches the lame duck zone. The minimum wage will leap from $5.15 to $7.25, a whopper of a 41% jump that is sure to cost workers hours and jobs, and add to inflation where the jobs can’t be scaled back, automated, or otherwise eliminated. All hope for estate tax repeal will die, and tax rates on the “rich” will begin to creep up again here as the Democrats pursue expensive social policy, and the massive Social Security deficit crisis looms ever near. Death tax rates will eventually revisit their old pre-reform peaks, as will income taxes, as higher brackets and the AMT squeeze even more from high earners and even those of modest means. IRS audits of high-income filers will rise dramatically as Treasury scrambles to capture more revenue by dredging high-cash-flow targets with fine-tooth combs. This trend was clear in 2006 and will gain unpleasant traction as 2007 unfolds. Odds of audit have gone up substantially, and those selected will face longer and more invasive examinations. Top income tax rates will again approach the Clinton-era’s 40% – before the additional Social Security/FICA taxes are considered.  And the caps on income subject to the Social Security tax – an additional 12.4% split between taxpayers and their employers – will be raised sky-high or removed entirely, extracting from Americans to another $100 billion in taxes for each year alone; sadly, this money will be promptly “borrowed” and spent by the government, rather than used to put a dent in the Social Security welfare system that, due to longevity gains unforeseeable when the New Deal was dealt, has grown massively more expensive and generous than anything ever intended even by FDR. 
 
The dollar will stabilize, then go up. So many factors – the trade accounts with various countries, the efforts of the US and foreign central banks (like China’s, but they all do it) to manage their economic aims via currency trading, the influence of US exporters (who want a weak dollar), US interest rates, US voters (who want good jobs from a weak dollar but cheap imported goods from a strong dollar) and unexpected market forces (like the fact that the dollar has become the de facto world currency, driving demand for greenbacks unrelated to goods/services) make currency predictions and bets fraught with risk.  Still, I’ll stick my neck out a bit and call for a rising dollar against European currencies, and a falling dollar against Asian currencies, especially those other than the yen.  Overall, the dollar will stabilize, and move gradually up. If this happens, non-dollar investments in foreign assets like stocks and bonds will be negatively affected in dollar terms. China and India – clearly new economic superpowers of the new century – will see growth abate as economies mature; the Chinese will allow their currency to rise against the dollar, raising prices for many US consumer goods from the Far East.

 
Commodities prices – especially oil – will decline moderately, as global demand slows from greater efficiencies, sharply curtailed US construction, and especially as overall emerging markets’ (overwhelmingly led by China) appetites contract due to slowing rates of economic growth; many emerging markets will, however, consume more basic goods.  This trend will be exacerbated by diminished speculative fervor, and discovery of both new sources of alternative and in-the-ground resources, and new technologies to exploit these resources. Many countervailing forces will conspire to produce slightly lower prices for commodities.

US Large Cap stocks will continue to rise, based on strong fundamentals and the “rotation” of investor interest.  The Dow will continue to make new highs, and finish 2007 near 14,000.  The S&P 500 will finally break it’s 2000 record and rise to new highs – in the 1600 range – and even the mega-cap-moribund NASDAQ will regain much lost ground and approach it’s 2000 high, but still finish well shy of it.

 
US Small Caps will pause from their record run ups, and see slower share-price growth or even end flat to slightly down, finally yielding to investor rotation and showing lower PE’s.  This will prove temporary, as these growth engines on the cutting edge benefit from a benign US economic environment and easing interest rates. Nonetheless, small caps are due for a breather, and large caps will clearly lead the US markets in my view.

 
Foreign “first world” stocks will show moderating growth, as rotation continues toward US large caps, and the dollar rebounds, cutting returns on international investments from the American perspective. This is despite the fact that valuations of many EAFE (Europe, Africa, Far East – a good foreign index) in many ways can be viewed as less dear – and hence better buys – than US stocks, and so more worthy of investor attention.  The “rotation” factor will reduce US investor demand, as will the higher (probably unjustified) perceived risk of these stocks, and a rising dollar will sodden things more.  Overall, I look for positive but only single-digit growth here.

Select Emerging Markets will continue to soar, offering heady returns with dizzying risk.  Emerging markets – what we used to call “third world” generally refer to rapidly developing economies, from “adolescent” to “young mature,” like post Soviet-bloc East Europe, Southeast Asia, Korea, and China, all of South and Central America, and so on.  This is in contrast to “foreign” which tends to mean developed non-US economies like Britain, Canada, Germany, and Japan. Without question, the future of world growth belongs to these emerging economies as they hurtle, with information-age/globalized-trade speed, to the levels of development enjoyed by countries such as ours. Fortunes to rival America’s gilded age will be made in places like these, and by those investors prescient enough to spot the winners among companies and countries. The emerging world is yet filled with lessening but still staggering risk, and these waters are not to be transversed lightly. If you sail, do your homework, spread your risk, and keep the cannons loaded for pirates.

 
Forecast Summery:  Avoid real estate & REIT’s, long bonds, junk bonds, US small caps, commodities, and foreign stocks. Bet, (if you must), on US large caps, emerging markets, the dollar.  Look to buy cheapening US real estate (buildings, NOT securities like REIT’s, which tend to lag) as the market continues to deteriorate. And remember to smile, as money’s not everything, after all.

 
Forecast Warning: In the end, financial forecasts are somewhat less reliable than long-range weather forecasts, and pundits tend (though not me, dear reader,) to trumpet their successful (lucky?) calls, and downplay (or conveniently forget) their bad ones. Take all you read here, and elsewhere, with a shaker of salt, and make sure to do your research and spread your risk.  Most importantly, if your assets are not unlimited, and you truly care about your long term financial security (and who doesn’t when I put it that way?) use some sort of risk control program (like Camarda Financial’s ISIS® – more at camarda.com if you do not know of it) to balance exposure and hopefully increase the probability of good returns, while at the same time substantially lessening the risk of devastating losses – such as those encountered in the Great Crash of 2000-2003 – from which some investors will simply never recover. Good hunting, and good luck!

 

 

 

Prudent Investing: The Essence of ISIS®

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            The New Year is a great time to reflect on the essence of what Camarda strives to achieve for its clients, principally through our trademarked, proprietary portfolio system, ISIS®.

            ISIS® stands for Integrated Strategic Investment System. The “integrated” part covers a lot of meanings, not the least of which is its relationship to the word “integrity.”

It is integrated in terms of its aim to address all aspects of a client’s investment needs, with regard to funds in Camarda’s care. Also integrated is the portfolio management piece with ongoing client communications, including portfolio accounting and statements, client relations though your advisor and operations staff, and Camarda’s total Client Community™. We try very hard for you to wrap it up into one easy, pleasant to use program. The “strategic” part means that Camarda is committed to a long-term strategy of how we think we can best serve your investment return desires with the least amount of risk, contrasted to “tactical” approaches which might try to bet on which sectors or securities are thought to be “hot;” we consider tactical schemes to be high risk, dangerous, and inappropriate for the prudent, long-term management of wealth, which we believe our clients want.

            In a nutshell, ISIS® is based on a Nobel Prize-winning theory which has shown that different markets, over time, tend to move in different directions.  If these markets are combined in effective ways, it is unlikely that “crashes” in some will cause material damage to the entire portfolio, and so endanger the financial security of the investor.  Even if some parts go down, it is likely that some parts will go up, and overall portfolio returns will be reasonable.  In fact, when the pieces are cleverly put together, risk can actually be reduced without sacrificing attractive target returns.

             Camarda has, we believe, been very fortunate in blending these different markets for its clients, and clearly the returns – which we are quite pleased to be able to report to you – speak for themselves.  But too often, perhaps, we may be guilty of our excitement in sharing the return’s performance with you to the point where we overlook reminding you of the other side of the Camarda coin, namely risk control, and our aim in not only growing your wealth in good times, but in protecting it in bad times.  There, also, our performance speaks for itself – you have only to look at how Camarda clients fared during the market meltdowns of 2000-2003 to appreciate the value of this other critical mission of ours.

            There, also, is the “integrated” part of ISIS® – the integrity of striving to put it all together so it truly serves you – is mission-critical to our commitment to you.  It’s been awhile since I talked about it, and I though I should tell you again. It’s not only important to shoot for more, it is vital to strive to keep what you have.

            That said, with your January statements you’ll receive a new Special Report called Camarda’s 2007 Annual Investors’ Markets Forecast [blog readers can get this by filling out an information request form at Camarda.com], which I trust you will find interesting reading.  I had fun researching and writing it for you, but I want you to know – no matter how you may feel about the accuracy of my past predictions – that we won’t be using these premonitions to alter our strategy or “bet” with your money. The integrity of the ISIS® strategic mission will remain intact.  Because, believe it or not, I could – just could – be wrong, and that’s no way to run a prudent portfolio.
            Happy and prosperous New Year to you and yours!

3rd Secret of Habitually Successful Investors

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            Make no mistake; many of those who have lost a lot of money during “bad” markets like the great crash of 2000-2003 owned a lot of different things – there were a lot of “names” on their portfolio statements – and thought they were adequately diversified.  In hindsight, it is clear they were not.  Why?  Putting too much of their wealth into too few companies or issues. But a lot of people who owned nothing but mutual funds – even many different mutual funds – also got whacked. And why is this?  Again, concentration is the culprit.

            You have probably heard the terms “asset class” and “asset allocation” before.  Asset class means a type of investment whose overall market tends to move in different cycles from other classes.  Take U.S. real estate and foreign stocks. While sometimes (due to mostly random forces) they move in the same cycle, it is reasonable to expect them not to go up and down together, since they are affected by significantly different forces.  The technical term is correlation, and the prudent investor wants little pieces of lots of markets that are poorly correlated – that move in different cycles – to reduce the odds of everything in the portfolio going down at the same time.  Those whose portfolios are predominantly invested in one or a few asset classes take a great risk of great losses if (or when) the only markets to which they are exposed crash before they get out.

            This is why many investors with lots of different investments still lost big in 2000-03:  high correlation among their portfolio components. If you owned ten funds that primarily invested in U.S. growth stocks (probably picked because their trailing performance numbers were the highest), then all ten funds got hammered when the market in which the funds swam tanked.  The diversification was an illusion, since all ten funds invested in similar enough things that they were highly correlated. Many investors never realized that the very year NASDAQ crashed; U.S. utilities were up something like 40%.  Those whose portfolios were asset-class diversified had nowhere near as painful a year. 

            Striving for portfolio efficiency – where we still want to maximize returns and minimize risk – takes us away from simple measures like the Sharpe Ratio, and into the nuts and bolts of Modern Portfolio Theory (MPT to save my fingertips).  MPT’s basic premise is that if we have enough different pieces of poorly correlated asset classes in just the right percentage combinations, then we can get a lot of the risk to cancel out without sacrificing attractive target returns. MPT requires that we focus on the performance of the overall portfolio instead of the component pieces (though we still want to pick good pieces, and our friend Dr. Sharpe and his famous ratio can really help us here).

            A MPT portfolio accepts the fact that some pieces will do poorly (relatively) in some periods, in exchange for probably having some pieces that will shine.  Investors (and their advisors) who try to guess what the next “hot sector(s)” will be so they can put all their eggs there risk getting it wrong (and most usually do), and seeing the whole portfolio go down with the chosen sectors. Spreading it around makes it a lot likelier that you will already have of piece of those sectors when their time comes to be “hot,” and gives you a much higher statistical probability of overall portfolio success.  By spreading your “bets” thinly, you’re a lot likelier to have at least a part of your “action” “hit” and at the same time less likely to lose “big” on those pieces that might otherwise be thickly “laid” on what might become poorly performing markets.

            Let’s talk about “asset classes” in a bit more detail.  Generally, the term is taken to mean different types of investments which trade in somewhat different markets in somewhat different cycles with respect to time.  In the above example, utilities were soaring at the same time NASDAQ (and other major U.S. indexes) was crashing. Different asset classes emerge for stocks of different “size” companies (large cap, mid cap, small cap, micro cap), value vs. growth styles, bonds of different maturities and qualities, investments outside of the United States in established and emerging economies, real estate, commodities, securitized real estate, private equity (investments in companies not publicly traded), hedge funds, and so on.

            MPT’s defining concept is the efficient frontier.  In a given universe of asset classes, for each level of risk there will be one and only one combination of asset classes in a unique weighting of each that produces the highest return; sort of like the Sharp Ratio in that it measures investment efficiency.  The line that connects all these “dots” from lowest risk to highest risk is called the efficient frontier.  You can find examples of the efficient frontier to look at in any basic investments textbook or at countless sites on the Internet. There are two important points I would like to make about the efficient frontier.  First, the curve tends to flatten out:  beyond a certain point, more risk does not produce any higher return.  Second, most portfolios lie under the frontier, meaning they are inefficient and do not produce the maximum return for the risk taken.  And when I say most, I mean the overwhelming majority of different asset class combinations possible.  This, I firmly believe, is why so many investors never do as well as they could.  They take far more risk than was smart – probably because no one ever thought to measure the risk relationships – and predictably suffer for it. In fact, many portfolios have returns that can be expected to produce losses if held long enough!

            So, how do you determine what kind of mix you should have for your ideal efficient portfolio?  Actually cooking up your own may involve biting off more study and math than you want to, but those interested can get mean variance optimizer software, and play around with different scenarios. I caution you that this part is as much art as science, however, and big helpings of markets knowledge (and the resultant intuition) are usually needed to pick prudent asset class universes and data time periods – and even the big-name “pros” often come up with mediocre ones at best.

            The specific methods and mixes that we at Camarda use for our ISIS® portfolios are considered trade secrets, so I can’t and won’t reveal them to you here. If you choose to talk to us, we will prescribe a specific mix (along with a customized Investment Policy Statement for your own situation) at no cost or obligation in an attempt to earn your business.  Other places to look are the profusion of asset allocation models offered from everyone from mutual fund companies, insurance companies (to sell their insurance products like annuities and variable life) and brokerage firms, to those cooked up by individual financial planners and salespeople. As mentioned, quality varies widely, and you would be wise to look at the risk/return data of the different mixes over different time periods when making your decision.  Be sure to get returns after all costs, fees, and expenses in order to make fair comparisons. Remember, quality varies quite widely from superb to abysmal.  You can get basic information on Camarda’s ISIS®, if you wish, and view the historical performance of all models – net of all costs, and based on actual client money – at camarda.com, and judge for yourself. As we often say, Camarda’s performance “truly speaks for itself.”

            Once you’ve decided on an asset class mix, there is the problem of deciding which particular investment is best suited to represent the asset class in the mix.  The Sharpe Ratio is a good barometer here, and other factors such as returns, costs, asset class fidelity, and so on should be considered.  Camarda’s ISIS® process, for example, examines fifteen factors each quarter to determine its “best” choice of fund to represent foreign equities.

            Remember, the investments world is in constant flux, and you need to revisit investment selections regularly; what was once good can quickly change, go bad, or simply be eclipsed by a better contender.  Keep constant tabs.

            Finally, be sure to check the “balance” regularly, and reset the percentages to the model when appropriate.  The current crop of “winners” will soon exceed the model percentages desired for them (since they will go up more than the others during a given period), and if you don’t reset you will wind up having more of your money than is prudent in them.  This increases risk and reduces probable return: efficiency goes down.  Resetting or “rebalancing” reminds you to sell high and buy low (since you can get more of the ones that did not do so well “cheap” when you bring them back up to their target allocations).

           

2nd Secret of Habitually Successful Investors

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Again, when I say investment success, this is what I mean: maximizing returns while minimizing risk of loss.  In a perfect world, we could make gobs of money and risk nothing.  Sadly, the world is far from perfect, and to make more than a tiny pittance after inflation and taxes are considered (as is the case for guaranteed investments like bank accounts) we need to take some risk.

            Success, in my view, means putting together a portfolio with a very high probability of producing good returns with a low probability of actually losing money. It does not mean taking outlandish risks – where devastating losses are possible or even likely – in hopes of hitting a home run and buying an island with the profits. This sort of activity is speculation – gambling – not investing, and can be likened to playing the lottery, which no one really expects to win. Most investors understand that the lottery is a losing proposition, but don’t have the information to be aware of speculative activity in their portfolios, so they can control it.  While it is true that expected return will go up with risk, it is true only to a very limited point, after which additional risk does nothing for return but predictably increases the odds of loss, to the point where loss becomes certain.

            The great bear market of 2000-2003 is a great example. Many folks lost vast sums because of uncontrolled risk they (and their advisors) never knew were there, losses from which it took them years to recover; and some may never fully recover.  People in risk-controlled portfolios like Camarda’s ISIS® came through this great cataclysm OK, in terms of not suffering devastating losses, and some even made good money along the way.  Not because they or we got “lucky,” but because they owned efficient portfolios.

            The secret is in taking no more risk than is required to produce acceptable returns. Most investors risk far too much for far too little in the way of profits, and for this reason are often disappointed. Investment efficiency is defined as getting the biggest return for the least amount of risk, and is well described by an elegant little measure called the Sharpe Ratio, named for one of the winners of the 1990 Nobel Prize in economics, awarded for Modern Portfolio Theory. It is deceptively simple, and looks like this:

                                                Sharpe Ratio = return/risk

The higher the ratio, the more return and the lower the risk, and vice versa. You want your investments – and the portfolio they build – to have a high Sharpe Ratio, meaning you want the maximum investment “bang” for the cheapest risk “buck.”  Many different units can be used to produce Sharpe Ratios, with historical return/standard deviation of return perhaps most common.  You can get these numbers from many financial data services, such as Morningstar.

            I find the Sharpe Ratio most useful as a yardstick to compare similar sorts of investments – to look for a superior large cap value fund, for instance.  Also, like most metrics used for analysis, it is very much period-dependent:  the five year numbers can look vastly different from the one-year ones.  Look for consistency across periods.  I discourage you from using the Sharp Ratio to compare dissimilar vehicles, like foreign stock funds vs. U.S. government bond funds, because the tendency of dissimilar investment types to move in different cycles – which our second secret looks to profit from – makes accurate comparisons harder.

            One can also use this ratio to evaluate individual issues like stocks and bonds, but the added uncertainties and risks associated with such issues make this far less valuable in my view.  This is because the risks associated with asset concentration – putting a lot of your money into the stocks or bonds of a limited number of companies – take you so close to the speculative realm that the Sharp Ratio is not very useful without tons of other work.  So much can change in a given company’s prospects – the economy in which it operates, government regulations, new competitors, lawsuits, management going brain-dead, and on and on – that the amount of analysis required to find and keep up with a good company in a good industry will strain the interest and ability of most DIY investors.  When one considers that you’d need at least thirty such stocks in at least ten different asset classes (as we shall see in the next secret), it should be clear that keeping on top of some 300 different issues is beyond the ability of even a small team of professional analysts. Remember, diversification is spreading your money around so well that a few things can go bad or go bust without it really hurting you; to do that, you need to own small pieces of a lot of different things. In my opinion, the only safe way to get the diversification you need is by using “pooled” vehicles like mutual funds and ETF’s (Exchange Traded Funds).  At Camarda, we continue to believe – for now, but we reevaluate it regularly – that selecting no-load mutual funds from a universe of thousands (none of whom pay us commissions or charge surrender/redemption fees) offers our ISIS® clients the best way to target the performance and diversification that we believe they both want and need.  

            Not that a great deal of money hasn’t been and can’t in the future be made by picking a few individual stocks hoped to be home runs – in fact, Camarda plans to introduce a hedge fund that looks to do just that.  But such a strategy is not efficient; it’s more of a “swing for the fences,” “go for broke,” risk is in the red zone, than prudent portfolio management, which by far is what most folks need. 

So the second secret is investment efficiency – learn to measure risk, and take no more risk than is required to target acceptable returns.  This is only one piece of the puzzle, however, so before running off to buy the Brazilian stock fund with the highest Sharpe Ratio, you need to know a little more.            

1st Secret of Habitually Successful Investors

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The First Secret: Clear Purpose

            You need to have a good idea what the money is for, and deploy it with the goal in mind.

            If your savings – or a part of them – is for a specific near-term expense, like a wedding, house or kids’ college in a year or two, you need to treat it differently than that for retirement a decade or more off.

            This does not mean you can’t dip in if life’s changes and emergencies demand it – so long as your investment selections are “liquid” (instead of locked up in something like a limited partnership or un-traded security), you should be able to cash out, even if the timing is horrible and you take a loss.

            But it does mean having a plan beyond “making a lot of money,” and allocating your various investment pots to match the uses and times for which you intend them.  And it does mean reasonably sticking to such a plan, unless emergencies or your own changed goals, make changing the plan make sense.

            It is for this reason that Camarda clients receive a detailed Investment Policy Statement for each “pot” of money under our care, and have the opportunity to update it at least annually. You should do the same, whether you do it yourself or get outside help. Later you’ll hear about our “no-cost/no-obligation/no-pressure” offer, and if you take us up on it, we’ll prepare such Investment Policy Statements – and a lot more – for you as a way of showing you what we do for our clients and trying to earn your business.

Introduction to the 7 Secrets of Habitually Successful Investors

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            Welcome!  I sincerely hope that the information in this report helps you to build and protect your investment wealth, and to enhance lifestyle and financial security for you and those you care about.  It contains the basics upon which Camarda Financial’s ISIS® portfolio management system was built…and ISIS® documented performance in both good markets and bad truly speaks for itself. ISIS® is Camarda’s own exclusive Integrated Strategic Investment System, developed by us and available only to Camarda clients. It is uniquely ours, and obtainable nowhere else.
            My objective in writing this report is to help you join the ranks of “habitually successful investors.” These folks, in my view, are those who consistently make steady progress toward their financial goals, in good times and bad, and get lots of sleep along the way. They set up and stick to investment programs that control risk – and worry – and through which they can reasonably expect to accomplish their goals of financial security.  In other words, they have the know-how to set up the game so the odds (while never guaranteed) are very much in their favor, and avoid the crazy risks of devastating losses that “ordinary”’ investors unwittingly expose themselves to all the time, over and over again.
            Some folks take the time and effort to do this for themselves, and the basics are here for you to build on if that’s what you want to do.  Others prefer to hire firms like Camarda Financial to do this for them, choosing to spend their time on other things, and perhaps expecting even better results from those with ongoing professional expertise. Later in the report you’ll learn how to take Camarda up on its free Portfolio Plan™ offer, and see exactly what our professionally-customized advice would look like for you – at no cost or obligation. You’ll also see how to get a free Portfolio Stress Test™, and how to use it to uncover danger areas in your current holdings. 
The techniques I’ll share in this report have been well-known to professionals for many decades, but for whatever reason are still needlessly mysterious to the average private investor.  So our purpose in sharing this “uncommonly-used” information with you is two-fold.  First, if you are a serious investor guarding your family’s wealth, you really need to know about it, and may not find it anywhere else. The information is so critically important that it can literally mean the difference between investment success and the unraveling of a family’s financial security; sadly, it is so frequently ignored (even amongst retail advisors) that getting the word out in a report like this has the potential to do a lot of people a lot of good. I hope you are among them.  Second, of course, Camarda is likely to get a lot of new clients out of it, as people learn about the benefits of the methods, but choose to have someone (like us) do the work instead.  
            What follows is a philosopher’s stone of sorts, but one that really works, and has been proven over a very long time.  Like most “alchemy” in the real world, it is really a collection of tools and techniques found to be effective in most situations most of the time, but only when properly applied.  Sadly, unlike the magic of fable, ours requires a bit of work to pull off.  Knowledge is power (or money in our case), but needs three elements to be valuable.  First, it must be understood before it can be applied; read the material a few times, and even do some outside study on your own.  Two, it has to be applied unemotionally, even if your guts (or your broker) are screaming that you should bet the ranch on some hot investment “special of the day.” Finally, it must be consistently maintained; things are constantly changing, and you have to stay on top of the moving pieces and adjust them accordingly.
            Don’t be discouraged; you can do this!  It requires a bit of work and dedication, it is true, but so does a good game of golf or an effective diet.  You may never hit them like Tiger Woods, but you can learn enough to play a competent game.  And even though you may ultimately choose to hire someone like Camarda because you think they can do it better with less effort and time commitment on your part, it is important to know the basics so you can hire competent help.
            So understanding these concepts is also enormously important, whether you choose to go it alone or use a financial professional.  Employing academically-established rules of finance can help you attain wealth and peace of mind.  Ignoring them – like the existence of gravity at the edge of a cliff – can ruin your life.  Even though most of these “secrets” are based on principals that institutional money managers have been successfully using for over half a century, they are still widely unknown by the vast majority of professional advisors like stockbrokers, insurance agents, and financial planners, as well as most do-it-yourselfers.  While you will usually hear a lot of buzzwords like “asset allocation” and “risk tolerance,” the unfortunate reality for most is a superficial vocabulary rather than an effective working knowledge. Since it’s your money, it is incumbent upon you to be sure the principles are at work for you. 
            One final note before moving on to the First Secret.  While things are slowly changing, it is still perfectly legal for an investment products salesperson, working for a brokerage, bank, insurance company, or themselves, to call themselves a “financial advisor,” and to offer advice that amounts to little more than selling products that pay them commissions, for which they have very limited liability to actually get right for your situation. In this arena – in which the vast majority of investors find themselves – it is obviously vital that customers understand the basics of portfolio management, as I try to explain in this report.  “Fiduciary” advisors have a legal duty to know what they are doing, and to put your interests first. Non-fiduciary advisors – again, the vast majority – do not. The best way to tell the difference is by looking at a Federal disclosure document called the “ADV.” If the advisor can not supply one, this is a strong indication that the advice is non-fiduciary.  We will get into this issue in more detail later in the report.

Our firm, Camarda Financial, is a fiduciary advisor who makes its ADV – and its actual track record with client money – readily available on request.

“Seven Secrets” of Habitually Successful Investors

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I’ve written a new report, modestly called “The 7 Secrets of Habitually Successful Investors,” which details the common traits I’ve discovered among those investors (like institutions) who seem to fare well in the markets. Over the next several weeks, I’ll post a “secret” here on the blog for you to peruse; if you want a complete paper copy mailed to you (at no cost), go to camarda.com, and request your report in the “Get Jeff Camarda’s FREE Reports” section, in the center column of the front page.  The banner ad at the top of this blog page will also take you there.  Hope you find profitable use for the information.

Homes’ Prices Plunge

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Data continues to accrete; the real estate market’s in real trouble. Price declines in August and September were the worst in 38 years, and many experts feel we have yet to see the worst; SunTrust’s chief economist doesn’t expect us to find the bottom until 2008.  (It should be noted that the National Association of Realtors’ chief economist feels that “the worst is behind us” and that it’s time to start buying again; few others share his view). In some markets, the collapse of euphoria to fear is already having ghastly effects:  last week, a waterfront home in Naples brought only $440K at auction, a huge, 36% plunge from its sale price of $690K little more than a year prior.

            A new Wall Street Journal study paints a cloudy-to-bleak picture for Jacksonville: despite its strong employment outlook, Jax had the 7th worst inventory build up of the 27 major metro areas studied (half of those areas with even worse inventory numbers were in Florida; all were in the sunbelt), meaning that homes for sale are stacking up way faster than people are buying them.  Basic supply/demand economics forecasts falling prices, and that is in fact occurring in Jax according to the Journal study. Jax also has the 10th worst “loan payments overdue” score of the group of 27, an ominous sign of more foreclosures to come, which would dump even more inventory on a soggy market, farther depressing both buyers and prices.

            So far the march of carnage is confined to the residential (housing) market, but the first glimmers of trouble on the commercial front have begun to appear as well.

            With few exceptions, this story is playing out across the nation, with a lot of blood yet to be let into the streets of commerce, before optimism and buyers return, and prices start bouncing. US real estate – like NASDAQ before it – had soared to unsustainably overvalued levels by many measures, and the air is rapidly fleeing the balloon; prepare for a nasty landing.

            What to do?  In my opinion, those who must sell (for whatever reason) in the next 2 years would be wise to do so now; swallow your pride, and take what you can get; buyers are getting scarce.  Don’t bemoan that you’ll get less than a year ago; that time’s gone; you’ll still get far more that a few years ago.

            For those who have no need to sell, hang on; prices will dip scarily before eventually rising again; they always do.  Investors should carefully evaluate their “cost of carry” (interest, taxes, maintenance, lost rent/vacancy, and the opportunity cost of what the capital could earn elsewhere if not time up in real estate) before making this determination; adding your carry costs (as you properly should) to what you have “in” the property can give you a very steep price-hill to climb, indeed, to eventually walk away with a profit.

            Those few who still wish, like me, to buy? Stand pat, and keep your wallets dry.  The gettin‘s gettin’ to be a whole lot better. As this thing unwinds, buyers will again wield incredible pricing and negotiating power. You should be able to get a whole lot more for a whole lot less, on your terms.  And make a decent “cash flow” return on the rent, something that has not been  widely possible with the bubble prices we’ve seen over the last many years.

Stocks soar on large cap rotation – a huge 2006?

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I hate to say I told you so (almost as much as you hate hearing it) but, well, I did.  In January of this year (check my forecasts here on this blog) I predicted a resurgence in the major US stock markets, which have for awhile been outpaced by foreign equities, to be led by the largest American listed companies, which have languished these several years past.  Apparently, no longer. The DOW 30 made a new, all-time high on Tuesday, then soundly punched through it to major gains and another record on Wednesday. While the balance of 2006 has yet to unfold, I continue to be wildly optimistic amid a flurry of giddy facts:  1) Even with the new highs, we’re still about where we were way back in January of 2000, nearly seven years ago.  After inflation, we are actually down 20% in real terms. Other major indexes are still behind even before inflation, with NASDQ far behind. It is time for a major move upward.; 2)  Recent economic data  point to balanced, “Goldilocks” growth and lower interest rates on the horizon, along with lower commodities prices (looked at how gas is dropping?) prices, all great for stocks and the economy; 3) We are now looking right down the barrel of the 4th quarter, historically the best time of year for stock gains.  The drivers of points 1 and 2 could really supercharge the Q4 rally that I expect. Of course, I could be wrong, which is why we spread our clients’ investments over many different asset classes, to control risk.  But I expect that I am right, and that it will be a very merry Christmas, and a happy new 2007, indeed. Cheers!