How to Easily Beat 80% of Hedge Funds – Just Buy the Market

You see all the talking heads on TV, explaining how they are long xxx stock and short xxx stock. They toss out complicated terms like forward EPS, tangible book value and so forth. Many have analysts on the payroll to help them pick the very best investments. Yet in 2014 about 80% of Hedge Funds are reportedly underperforming the overall all US market, namely the S&P 500 index (SPY). SPY is an ETF sold by State Street Advisors that is commonly referred to as the “market”.

Just to clarify a common misconception, many investors think the Dow Jones Industrial Averages “the Dow” is “the market”. It isn’t predominately because it is a very small sampling of 30 very large companies. In addition it is know as a “price weighted” average. This means that a 1% change in a $100 stock has twice the imp[act as a 1% change in a $50 stock. Therefore, if IBM at $155 and Visa at $258 have bad days the Dow average will be down sharply, but the overall market could be up nicely.

Today it is really easy to have a “market performing” investment portfolio, just buy the market. Arguably the great investor of all time, Warren Buffet suggests that people who don’t want to take the time to actively manage a portfolio just buy the S&P 500 Index. The S&P 500 Index is actually 501 stocks, and 500 companies. It just so happens that Google is listed twice due to a split into type types of shares for the same company (voting and non-voting).

If you put all of your investments in just the SPY ETF or the Vanguard S&P Index ETF “VOO” you would have made over 14% in the last 12 months. In addition you would have collected 1.9% in dividends.








You can choose either fund, it just so happens that VOO has a smaller annual expense fee of 0.05% vs. the SPY at 0.09% expense ratio. If you had a $1,000,000 investment the SPY ETF would costs you $400/year more in fees than the VOO.

If you want to beat the Hedge Funds and most other investment managers, it is simple, just invest in the “market”.


How to Measure Your Stocks – A Simple Technical

We all have investments in both taxable and tax deferred accounts. Many people however are unsure exactly how to measure whether their stock or fund is doing well or not. Professional investors have dozens of tools by which to judge performance, I’ll just show you a simple one.

This measurement is to compare your investment to the S&P 500 Index, commonly referred to as “the market”. The S&P 500 is made up of the 500 largest companies listed on the NYSE or NASDAQ stock exchange. When you hear comments like a stock or fund “beat” the market, it normally refers to its performance against the S&P 500.

One simple and common measurement to judge the performance of your stocks is to compare it to the overall market, and then look at a comparison to its own “moving average”. I like to use both a 50 day and 200 day MA (moving average). The moving average quickly shows growth or decline over a longer period of time.

 We’ll look at two stock charts. The first chart is for one of my favorite holdings, Kroger (KR). It is almost the perfect stock from a “technical” point of view. In stock lingo, “technicals” refer to the analysis techniques from a chart. “Fundamentals” by comparison refers to looking at a stocks PE, beta, PEG ratio, last earnings report and so forth. Yahoo Finance has a simple easy to use chart capability.








This chart shows Kroger’s has substantially outperformed the market over the 12 months. In addition it has consistently stayed above its 50 day and 200 day moving average, the price keeps going up in a nice smooth, consistent way. Also notice that the gap is widening between the 50 and 200 day MA, the rate of growth is increasing. In the last 12 months the S&P has gone up 9.64%, and Kroger has gone up 82%.

 The next stock is Goldman Sachs (GS). I bought GS on August 7th at $183.90, just after the 50 day MA crossed above the 200 day MA, it looked like the stock was on the rebound and would outperform the market. Last week they reported disappointing earnings and the stock has slid down every day since. It finally crossed the 200 day MA and I sold it this morning for small loss. Part of my decision to sell was that almost all of the big banks and financial services companies are reporting weaker than expected earnings and the entire sector looks in trouble for at least the 1st half of 2015. I also own a position in Morgan Stanley (MS), it too dropped but only below the 50 day MA, not the 200 day.








Comparing your investments to the market and their own moving averages will help you determine if you have chosen the right investments in your accounts. In a future post I’ll give you a few more things to look for.



I Promise this will Change Your Life – Learn from Boeing

One thing I can promise you, after reading this book you’ll never have a medical procedure without first asking the doctor about their “check list” …just take my word for it. This is one of my favorite books, The Checklist Manifesto How to get things Right. The author,  Atul Gawanda,  is a surgeon and associate professor at Harvard Medical School. This book was so meaningful that I have bought quite a few copies for my friends and associates.

So what does this have to do with Boeing? Just keep reading.

In 1935 at Wright Patterson air field in Dayton, Ohio the US Army held a flight competition for the next generation of long-range bombers. Boeing was assumed to be the winner since they showed up with an aluminum alloy plane that could carry five times as many bombs and fly twice as far as the Army spec had required. There was a potential order for 65 or more of the winning aircraft, the Boeing entry was dubbed the “flying fortress” because of its size. So on that October day as all the executives and Army brass watched, the 103 foot wingspan plane with 4 engines, taxied down the runway, climbed to 300 feet, stalled and crashed. Two of the five crew members died including the pilot.

The investigation revealed that there was nothing mechanically wrong with the advanced plane; it was “pilot error”. The new plane had tons of new features and the newspapers said it was “too much plane for one man to fly”. Maybe the plane needed a few more pilots and more training ….. not really. This plane became one of the most successful planes ever used in combat logging over 1.8 million without a single accident; it was called the B-17 “Flying Fortress” and was in instrumental in the Second World War.

The only thing that Boeing did to successfully fly the B-17 was develop a pre-flight checklist. Keep in mind that even in 1935, asking a pilot to use a check list would be like asking you and me to use a “back the car out of the driveway checklist”. No good pilot would ever use one, why should they, they already knew how to fly. With the Pilot’s checklist being used the Army ended up buying almost 13,000 of these planes that were deemed “too much plane for one man to fly”. So what might have been on the checklist, dumb stuff like flip this switch, check this gauge, close the window, release the brakes. Not a single item on the checklist was difficult or beyond what all pilots thought they did everyday on every flight. Even today not a single military or commercial flight takes off without the pilot and co-pilot going through the pre-flight checklist, as dumb as it might sound. Why, even simple mistakes and oversights can have a very large impact, like the crash of the first Boeing B-17 test plane.

In addition The Checklist Manifesto points out many other real life examples of doctors, hospitals, and architects that use checklists of simple everyday tasks that in fact save lives or costs lives when not followed.

All businesses and many of things we do in our lives can benefit from the lessons learned in the Boeing B-17 story above. We all work on simple, complicated or complex matters all the time and many times simple things that get overlooked have huge consequences.

Airline Company’s today have extensive checklist to handle every possible contingency. An emergency onboard a flight, the engine flames-out, the pilot immediately grabs the huge catalog, looks for the checklist on engine flame-out and follows the process exactly. Why is this different in a law firm, it isn’t.

Just as a side note: not only did I buy The Checklist Manifesto for many of my past employees; they took it on themselves to begin using checklists within my former business. They had checklists for dozens of everyday processes; they too just don’t want to make mistakes that effected customers.


6 – New Years Retirement Planning Resolutions for 2015


New Years is always a great time to prioritize the things that are most important in our lives, not just the “urgent” things that will always distract us. As Stephen Covey says, “Most of us spend too much time on what is urgent and not enough time on what is important.” As you age, and either contemplate retirement or are actually retired, financial planning is one of the important tasks you need to continually address.

Here are 6 “important” steps to get your retirement investments and plans in order for 2015:

  1. Take responsibility, become active, plan and manage your investments.
  2. Develop or update a written financial plan.
  3. Learn how to choose and analyze investments like a professional.
  4. Take action with your investments, set up rules for adding and eliminating.
  5. Set-up or revise your “In Case of Emergency” document.
  6. Determine if you need a Revocable Living Trust.

Take Responsibility.

The finances that you and your family will live on once you leave the workforce won’t just automatically fall into place; you need to make it happen. Your retirement is your responsibility, you need to take charge. You need to become a “Vice President of Financial Responsibility”. Many older workers just don’t feel comfortable or may not have the skills to plan and manage their retirement. This however is their responsibility and they either need to develop the skills or get someone they implicitly trust to help them. The internet, including most brokerage sites like Fidelity, have tools and educational materials to also provide help.

Written Plan.

Almost everyone I speak to about retirement planning and investing claim they have a “plan”, very few can honestly say they have a written plan. A written plan can help take you from concepts to an actual roadmap. The plan should include a written description of your current situation, your short and longer term plans, tax planning strategies and investment goals. In addition to the written descriptions it should also include annual goals for income to be generated, living costs, emergency funds and yearend portfolio values. If you just have a spreadsheet and no written document, you don’t have a plan.

Analyze Like a Professional.

You don’t need to be a day-trader or professional advisor to use the basic analytical tools to help choose and manage your investments. When I trade in my professional account I might look at a 60 and 5 minute stock chart, RSI and MACD indicators and “futures” charts. However when I review my retirement investments I’m looking at completely different set of metric’s. Why? Because my goals and time horizons are different. In a future blog posting I’ll give you the tools I use for managing the stocks and bonds in my retirement accounts.

Take Action.

One of the biggest mistakes people make in their investments is to “Buy and Forget”, see my story on this here. Most people know how to buy but don’t know how or when to sell or rebalance. You need to set up rules that will help you decide how to manage your investments. The poor people that couldn’t endure the pain anymore and decided to sell their key holdings in March 2009, and then sat in cash for the next few years as the market completely rebounded.  Those that stayed with blue-chips did well, those in cash will never again recover their losses.

“In Case of Emergency” Document

Everyone who is married or has any assets whatsoever needs to have a “In Case of Emergency” document.  Check here for a detailed list of what should be in your document and how to manage it.

Revocable Living Trust

Why would you need a Trust, the new federal estate tax exclusion has been raised to $5,340,000 per person and twice that much for a married couple. Most people don’t have assets that exceed these amounts. Maybe you should just have a simple will. The issue isn’t about federal estate taxes, it about the other benefits of a trust. Here are some reasons to consider a Revocable Living Trust:

  1. Protection for or from your beneficiaries and their creditors. Do you have a 20-30 year old “child”, should they just be given the money outright, might hey spend it foolishly?
  2. Control of your wealth beyond just a will. How should the money be distributed and when. What can it be used for?
  3. Keep your privacy and money out of state probate court and avoid the high cost of probate. In general most states require a will to be implemented through the probate process and can include some substantial fees, along with being public. A Revocable Living Trust does not need to go through the probate process.
  4. Manage or avoid state estate taxes. 20 states currently have various forms of estate taxes and a Revocable Living Trust may help you batter manage or even avoid these extra costs.
  5. Always seek the help of a qualified attorney who specializes in Estate Planning and Tax law to help you determine if a trust is right for you.

1st Thing to do in 2015 – Develop an “In Case of Emergency” Document

2014 was a big year for me personally. It was my first full year in retirement, we moved from Pennsylvania to Florida and I focused a great deal of time fine-tuning my retirement plans. This included an updated Revocable Living Trust, and a written 5 year financial, income, tax and expenses plan. One of the most important tasks was to create an “In Case of Emergency” document.

EmergencyThe “In Case of Emergency” document is a complete explanation of everything someone (like my wife, family or executor of my estate) would ever need to know about everything in my/our lives. It also includes immediate specific steps to take in case something happens to me or “us”. Keep in mind that the emergency may not be your death, but may be you becoming incapacitated, there is a difference.

It is an on-going document that is constantly being updated and enhanced. This document is stored on my computer, on a secure web site and in our safe deposit box. Every family member knows about it and understands what it is.

An “In Case of Emergency” document should include:

  • The location and attorney involved with the creation of our Revocable Living Trust, individual Wills, Durable Powers of Attorney, Healthcare Surrogate and other legal documents.
  • The names, account numbers, and contacts information for all bank accounts, investment accounts, pensions, and past/current employers. Also confirm the structure of each asset and in the case of IRA’s the beneficiary since these may fall outside of your Revocable Living Trust.
  • How income is generated, what steps are necessary to keep income coming in. Budget for living income and expenses. If you are still working, who at work to contact and what benefits might a spouse of a deceased worker get, like unused vacation pay, life insurance etc.
  • Location of safe deposit box and the location of the keys. It might be best to give multiple family members access to the box.
  • Business owned (if applicable) with complete details on tax and ownership structure, location of stock certificates and other important documents.
  • Birthdates, social security numbers and contact information for all family members.
  • The location of Tax records, past returns and contact information of tax preparer.
  • Social Security information. Explain if any benefits are currently being provided and the strategy for future benefits including how to file for Survivor benefits.
  • Your digital information including all login and passwords information, it’s best to have a software program or web site where these are stored and protected. All family members email accounts, your digital photographs, music, key documents on your computer and location of all back-ups.
  • Your home information, mortgage holder (if applicable), how payments get made, contact and account information for utilities, trash collectors, newspapers, landscaping and other service providers. How are property, school and other taxes paid?
  • Insurance information, including location of policies, account numbers, contacts, etc. Be sure to include homeowners, car, healthcare and life insurance
  • Automobile information, including loans (if applicable), location of title, registration #’s, license plate #’s etc.
  • List all healthcare providers like family doctors, insurance policy renewal information and an updated history of healthcare issues. Reference any Durable Powers of Attorney, Healthcare Surrogates and other healthcare information.
  • Credit Cards, loans and other obligations. List all account numbers, and toll free numbers to call to cancel cards or pay off balances.
  • Family cell phone accounts and structure of plans.
  • Churches, Clubs and organizations along with contact information
  • Neighbors and friends that should be notified with full contact information.

Finally, include a list of specific steps to immediately take in the days after an emergency.