A typical fund/investment manager at a bank puts together a model portfolio where he has say, 20 per cent in dollars, 30 per cent in Yen, etc. Then the dollars are divided up into demand deposits, bonds and stock and the same with other basic currency groups. The main object of the investment manager is to do what everybody else does. By following the crowd he can’t be criticized if something goes wrong.
HIS JOB AS HE SEES IT IS NOT TO GO OUT ON A UMB AND MAKE SOME CONTRARIAN INVESTMENT.
The second goal is to generate as many commissions for his employer as he can without being accused of churning by a client.
Where does the “smart money” go? It does not go to the typical fund or investment manager at a bank unless pure low interest preservation is wanted.
Our own personal feelings are that there are far too many variables to be able to go where the mythical “smart money” is. The fact is we personally know all kinds of people whom one would think were “smart money” and they make all kinds of horrible mistakes on their personal investments. They make their money on sure things like underwriting and company takeovers, or whatever their business is. I doubt if there is or ever has been anyone in the world who made a really sizeable fortune on just TRADING. Unless of course he had a pipeline to insider information – which it is illegal to trade upon.
Sure, there are lucky people who keep throwing sevens on the corner outs at the crap table. But they are rare and they never make as much as the guy who owns the casino.
We have yet to meet the reader who made serious money by picking out consistently winning stocks or currencies. Playing the markets is nothing more than a crap shoot. Of course, with AAA investments or conservative stock portfolios you can usually “preserve” your capital – which is about all we expect to do. Passive investments (stocks, bonds, currencies) are what you have to have, after all you don’t want the hassles of an active business anymore!
But you can’t expect to make the same return as you got by buying some land with 5 per cent down and putting a spec house on it with borrowed money. When a friend of ours did that, he could make US $25,000 on an investment of zero (or less than zero if he borrowed enough). With State laws like those of California insulating you from personal liability on real estate loans, it can even be done completely without risk. But there are always hassles and the need to put time into “deals”. Once you have had enough of deals, it is an unrealistic expectation that you can make a consistent 50 per cent a year on your money.
NOBODY DOES. The historic real return on capital over inflation is more like 2-3 per cent per year.
Sometimes you can see something obvious like we saw the decline of the Tokyo stock market coming for 3 years before it happened. But timing to take advantage of the obvious is impossible to get right consistently. If we had followed our instincts and sold short Nippon Telephone when it was issued at a p/e ratio of 300, we would have lost our shirts. Because it went up! We would have had to cover our short sales. When our predictions finally came true, we wouldn’t have made enough just to cover our loss of interest. In the stock market, if you want a profit, the answer is to take a course in the Graham & Dodd Fundamentals. Then wait patiently for a buying opportunity (crash) and buy and hold a stock until the market value catches up with the true value – even if it takes ten years.
Our sure bet is some choice real estate in places like East Berlin, Germany, Prague, Budapest. Prices are now 20 per cent of nearby countries and you can get a good return on rents. The risk isn’t great and you can probably get mortgages to cover most of the risk. Why don’t we do it? Frankly we don’t want the hassle of dealing with tenants who don’t pay, frozen pipes, insurance claims, etc. We have enough money to meet our simple needs for such things as travelling anywhere we want to go, getting massaged regularly, eating anywhere and living in a pretty nice place. So why should we get into doing administration work on projects to make more money? And above all, with real estate, you spend half your time screwing around with bureaucrats. Its a living, but if you can get along without becoming part of the system, who needs the aggro?