Here is this month's update of the Buy and Hold Forever Dividend Portfolio. This and all future updates will be posted here. The spreadsheet tracking the portfolio is available on the original post and here.
In accordance with the results of a poll, where I asked whether Coors (TAP) should replace BUD in the portfolio, TAP has been added at Friday 12/12/08's closing price. The $350 that was originally used to buy BUD was used to buy TAP. The rest of the BUD sale proceeds ($41.47) will count as a dividend.
Disclosure: At the time of writing, I owned JNJ and have a limit order for FRO.
Bernard Madoff, former chairman of the Nasdaq, has apparently been running a Ponzi scheme. According to some, he stole $50 billion--$1 billion for each of his 50 respected years on Wall Street.
The news coverage of this latest Wall Street scandal amuses me. It's shocking, commentators say, that something like this could have happened. The only shocking thing is that more individuals and firms on Wall Street haven't been accused of/caught running Ponzi schemes. After all, what types of individuals work in the financial sphere? Isn't greed one of the primary qualifications? Finding a fraudulent investment business on Wall Street is about as surprising as finding a liquor cabinet empty after entrusting it to an alcoholic.
A Ponzi scheme is a simple thing. The thief sets up a fake investment enterprise, and persuades his friends, coworkers, etc, to invest in it. He then sends them statements or even cash dividends, showing that the investment is going well. This attracts more money from the original investors and new ones. Should any investors wish to withdraw their money (in normal circumstances most won't, because their statements show that their investment is doing well), the money from newer investors is used to pay them. Early investors who decide to withdraw their money are paid by the funds new investors deposit. On it goes, until the thief's greed is satisfied and he makes off with the money or there aren't enough new investors to fund the redemptions of earlier investors.
The latter is what happened to Madoff. Losing money everywhere else, too large a number of his investors were forced to redeem their deposits. If the markets hadn't crashed, it's quite possible Madoff's scheme would go on much longer, and some of his investors could have made money (if their orderly withdrawals coincided with equal or larger new deposits).
This brings me to some of the Ponzi-like schemes almost all of us participate in.
Social Security: The money deducted from our paychecks isn't put away for our future use. Rather, it is used to fund currently retired workers. When we retire, those who work then will fund our SS payments. If this isn't a Ponzi scheme, I don't know what is: early investors are paid by the contributions of new investors. The entire thing is based on the premise that there will be more and more workers in the future. It's far from certain that this premise is true.
Our Economy Before the Credit Crisis: People took out loans on their houses and bought junk. When their houses rose in value, they took out larger loans, repaid the old loans (early investors paid off with the deposits of later investors), and bought more junk. Repeat this a few times. Then some of the loans reset at higher interest rates and couldn't be paid back (more redemptions than can be funded by new investors). This triggered more loan defaults, and the buying of less junk, which resulted in more defaults.
Government (and Corporate) Bonds: You buy a government bond. The interest the government pays you comes from the money it borrows from others, that is, other bond buyers (and to a lesser and lesser extent tax revenues). When your bond matures, the government pays you with more borrowed money (and to a lesser and lesser extent from tax revenues).
Insurance (car, medical, loan default, unemployment, stock broker, etc): This is just like Social Security. We pay a premium to the insurer in exchange for compensation when an event insured against occurs. When the event insured against happens (doctor's visit, stolen or damaged property, etc), the insurer funds our compensation from others' premiums. That is, it's like having new investors pay for the redemptions of earlier investors. If the insurer has too many claims, it won't be able to pay all its clients. Some state unemployment funds are facing this problem. As unemployment rises, they have to pay out more benefits while the premiums they collect get smaller. The last workers, while paying everyone's benefits, will get nothing when they lose their jobs.
Bank Deposits: Not quite a Ponzi scheme, but close. We put our money in the bank, and the bank is supposed to invest it. Put another way, the bank borrows money from us and lends it to others. At some banks we get interest for our trouble. Withdrawls are funded mostly by new depositors, or with other borrowed money. Should a large enough percentage of depositors want their money back at once, the bank will fail. Assuming there's no insurance, not all the money will be returned, as some of the bank's investments will not be good ones.
There are many more Ponzi schemes, I'm sure.
As long as there is confidence, a Ponzi scheme can work for a long period of time. Nevertheless, its design is such that it cannot work indefinitely. Either confidence is lost or it grows too big to be sustainable, and the whole thing collapses. Ponzi scheme collapse isn't just possible. It's inevitable.
So what do we do? Press our policy makers for reforms. Build systems that aren't pyramid schemes. And if you're forced (or choose) to participate in Ponzi schemes, try to get paid in cash or real assets that you can use even if no one wants to buy them from you. For example, if investing in stocks, prefer dividends. Convert some of that cash into stuff you can use just in case cash becomes worthless, etc.
There are three general opinions of technical analysis: (1) it is a science that works, (2) it's a pseudoscience that works because its practitioners all do the same thing when a chart is a certain way, or (3) it's a bunch of hogwash.
I'm somewhere between (2) and (3), but am more open to (1) after tracking Adam Hewison's predictions on spot gold for a couple of months. I would like for (1) to be true, as would most people, for obvious reasons.
Certain chart and volume patterns are supposed to foretell a stock's (commodity's, ETF's, etc) future price movement. Occasionally, if I come across such chart patterns I'll post about them. Then, I'll check back after a while to see how the predictions turn out. With enough such experiments, it'll hopefully be possible to either confirm or deny (3).
Since a stock can go either up or down from any given point, there's a 50% chance for each prediction to turn out correct (I'm ignoring the possibility that it'll stay the same). If technical analysis doesn't work, predictions should be right around 50% of the time. If it works, predictions will be right or wrong the significant majority of the time. What constitutes a significant majority of the time will be determined by the number of predictions made. If it seems wrong to say that technical analysis works if it's wrong almost all the time, remember that it is just as hard to be wrong most of the time as it is to be right most of the time when you have a 50% chance of being right or wrong. Put another way, if it's wrong most of the time, technical analysis can be very useful, as we can do the opposite of what it predicts.
A major thing that can skew results is that I can easily misread charts. For this reason, I'll stick to the so called archetypal patterns: double top, double bottom, head and shoulders, cup and handle, etc, that are easy enough to identify with software.
Today, I'll look at two chart patterns, the "double top" and the "double bottom."
The double top chart has two peaks that are roughly around the same level, with a moderate dip in between. It is supposed to be a bearish signal when the stock goes below the level of the dip between the two peaks.
Here's one stock that has a double top chart: American Capital Agency (AGNC). The pattern manifested over the last seven or so days, in the right corner of the image below. AGNC closed at 19.13 on 12/10/08. Let's see where it will be at the end of next week.
A double bottom is essentially the opposite of a double top. It is two about equal dips with a moderate peak in between. The chart is supposed to be a bullish indicator when the stock's price goes above the peak.
So, let's see how these stocks do in the near future. We're looking for DSCM to go up and AGNC to go down.
Disclosure: I hold no positions in the securities mentioned above.
The Model ETF portfolio's original description and list of holdings is here. All updates, like this one, are available here.
As of this update, the ETF portfolio and the S&P 500 are about even, each down almost 30%.
The best performer in the portfolio has been the Vanguard Total Bond Market ETF (BND). It has returned almost 2% since the portfolio was started in August.
The portfolio's inflation protected bond holding, IPE, did not pay dividends since October, although it is supposed to pay monthly. Say hello to deflation. The Consumer Price Index has been negative or zero since August.
If the current deflationary environment continues, BND will probably go up a little. Worried investors are driving long term bond yields lower almost each day.
In the longer term, it's hard to see how we won't have major inflation. At that point BND will probably fall sharply, while IPE will do well. The portfolio's commodities holding, RJI, should also do well when inflation reasserts itself. In the near term, however, it looks like it's going lower.