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A Brief Conversation About Money Print
Monday, 15th January 2007 (by J.D.)This article is about Interviews, Investing
10:58 AM
Sparky: are you truly making boxes?
J.D.: No, we’re bitching about stuff.
11:00 AM
Sparky: gotta get back to rewiring
11:10 AM
Sparky: i made my own mutual fund last night and backed tested it from January 6, 2006
Sparky: it came back with a 30% increase to-date.
J.D.: Nice.
J.D.: GM? MSFT?
Sparky: no, that’s the JD mutual fund
Sparky: 12.3% Consumer Discreationary
Sparky: 8.5% Consumer Staples
Sparky: 11:15 AM
Sparky: 23% Financials
Sparky: 11.5% Health Care
Sparky: 11% Industrials
Sparky: 15% Information Tech.
Sparky: 3.3% Materials
Sparky: 3.5% Utilities
J.D.: This is very, very detailed. Could you not find an existing mutual fund that satisfied your needs?
Sparky: One company from each of those categories
Sparky: those companies were the best of the best for each category
Sparky: Mutual funds in general are too slow.
J.D.: Too slow for what?
Sparky: they can’t buy and sell quick enough to get rid of laggers and add better companies
Sparky: they also don’t tend to return 30%
Sparky: those that do are usually specialty funds
Sparky: and those are not diversified like this one
J.D.: How would your fund have performed over the past ten years?
11:20 AM
Sparky: I didn’t check.
Sparky: but that idea is considered a mistake by Charles Schwab.
J.D.: Which idea?
Sparky: judging a fund by its 5- or 10- or 3 year record
J.D.: He’d rather judge it by its one-year record?
Sparky: no
Sparky: is it diversified
Sparky: does it match your risk tolerance
Sparky: tenure of the manager
Sparky: high MorningStar ranking
J.D.: Ah, right. That I can understand. It’s just that you mentioned the one-year return, which is nice, but seems irrelevant.
J.D.: Why not look at index funds?
Sparky: index funds suck
Sparky: they are intended to match the broad market
Sparky: I don’t want to have my investment to rely on the average of the bad and the good
Sparky: I want the good and the good
J.D.: Index funds outperform managed funds 80% of the time. And over the long term, their record is even better. Index funds have low management fees, which makes their performance even better.
Sparky: I agree.
J.D.: You should see the entry I’m writing for Thursday.
J.D.: Or Friday (can’t remember the day)
Sparky: i pick mutual funds that beat index funds
Sparky: but I want better than just beat
J.D.: It’s based on this.
J.D.: Nobody can do better than just beat over the long term. Unless you’re Warren Buffett.
J.D.: Here’s my current philosophy:
Sparky: a lean individual mutual fund should
J.D.: should, but rarely does…
J.D.: for stocks, invest in index funds (maybe keep money to invest in some stocks)
J.D.: also tuck some into bonds (about which I know very little yet — this is for diversification)
Sparky: Bonds are for retirees
Sparky: more risk!
Sparky: please
J.D.: Well then do real estate.
Sparky: more risk = higher return
J.D.: more risk = more risk
Sparky: thus diversification
Sparky: temper risk with diversification
Sparky: not with built in stagnation like a bond
Sparky: real estate could be a component, but it was not listed as by Chuckie Schwab
J.D.: From my perspective, you’re trying to get things out of the stock market that you can’t realistically expect to get unless you’re working full-time at it and have the natural gifts of Warren Buffett.
J.D.: There are certainly ways to diversify and add risk to your portfolio.
J.D.: Your personal mutual fund is one, and I actually hope that it succeeds. (I’ve been quite pleased that my stock picks over the past year have had such excellent returns…)
J.D.: Phone
Sparky: i think what I am doing is Buffetish
J.D.: If you’re looking to increase risk, then consider real estate. I personally think most real estate — especially in Oregon — continues to be overvalued, but many smart people disagree with me.
J.D.: You might look at precious metals, too. I believe they’re even *more* overvalued than real estate right now, but again: many smart people think they’re a good buy.
Sparky: like really buying a piece of property
J.D.: If you really want to diversify, look at other investment types.
J.D.: Yes, like really buying a piece of property.
J.D.: I’ll admit that I’ve been watching my neighborhood for deals. There was a home for sale up the street that I would have loved to purchase, but it was way overpriced at $150k (it was a piece of junk). And I want to get all my debt eliminated before I start messing with non-stock investments.
Sparky: haven’t you watch Flip This House on Discovery or TLC
J.D.: No.
J.D.: I don’t watch TV!
J.D.: (I watch some shows, but I download them from iTunes.)
Sparky: Maybe on You Tube
J.D.: Good point. There’s something else I’m supposed to look for on YouTube. I’ll have to add this to my list.
Sparky: not really
Sparky: flipping a house looks easy on tv
Sparky: are you familiar with the concept
J.D.: Sure. Here’s how not to do it.
11:45 AM
Sparky: the tv show makes it look so easy and you don’t have to be handy
J.D.: I have mixed feelings about flipping. I’m sure it’s possible to make money at it, but I suspect that like Case in the site I linked above, many (most?) people fail to profit.
Sparky: just subscribed to having a text message sent to me when a web site is updated
J.D.: What’s more, it is not a value-added service. By which I mean, flipping inflates housing prices without adding commensurate value to the economy. I think this is immoral. (This is a half-formed opinion, so don’t hold me to it. )
Sparky: making money is almost immoral in its practice
Sparky: just ask marx
J.D.: Ha! Now you’re getting into nitty-gritty philosophy. What would Adam Smith say? What about Ayn Rand? Rand would say that *not* making money is immoral.
J.D.: (I don’t necessarily agree with Rand, but her ideas sure are fascinating — you should read her.)
Sparky: i am with ayn
Sparky: we live in a market economy, might as well partake
J.D.: I think it’s a vast, complex social system, and there’s no one right or wrong answer. I don’t believe making money is evil, but I certainly don
J.D.: oops
J.D.: don’t condemn social programs designed to help the poor. (Nor do you, I suspect.)
11:55 AM
Sparky: I should go play family
Sparky: i will check back later
J.D.: k
January 15th, 2007 at 2:10 pm
Sparky: i made my own mutual fund last night and backed tested it from January 6, 2006 / it came back with a 30% increase to-date.
Well done. I just picked last year’s Superbowl and World Series winners. Nailed ‘em.
January 15th, 2007 at 2:25 pm
Though I disagree with some of Sparky’s viewpoints, I like that he’s a deep thinker about money. He’s usually a conservative investor, not a risky one. This is a new side of his investment personality. It was also a chance for me to think about some of the things that I’ve learned, and to realize that I’m not happy with where i have my money now (individual stocks). I’m a point where I’d prefer to be invested in index funds.
January 20th, 2007 at 7:40 am
I think the investment talk was a bit over my head (I put 10% of my paycheck into the “moderate risk” section of my 401k…beyond working on nudging that up to 15%, I try to not think about it), but the bit about the philosophies of money I found very interesting. Any chance you could expand on that in a future post JD?
By the way, it’s posts like this that make you seem so accessible and real, in my opinion. I think it’s great!
January 20th, 2007 at 5:33 pm
I just can’t believe you only made *one* typo in the whole exchange!
January 20th, 2007 at 6:30 pm
Oh, I make *lots* of typos. I just go back and correct them before I hit enter most of the time.
Actually, I’m fairly new to IM. My friends make fun of me. I write so much every day that proper writing style is burned on my brain. I can’t make myself do lower case. I’ve played plenty of World of Warcraft, so I know some of the standard abbreviations, and I’ll use them, but I have this burning compulsion to create well-formed English sentences.
IM’s handy, though, and I can see why so many people use it…
January 21st, 2007 at 9:43 pm
How does Sparky know if this newly created mutual fund will Get Rich Slowly if it has only been tracked back one year? How will this fund do in the years to come?
January 22nd, 2007 at 6:19 am
I would disagree with your claim that flipping a house “inflates” housing prices without adding value. The way I see it, a pleasant place to live is more valuable than an unpleasant place, so transforming a house from an unpleasant place to a pleasant place does add value.
January 22nd, 2007 at 1:36 pm
It seems like Sparky is thinking carefully and doing research, and you’re just telling him that because he’s not Warren Buffet, he could never possibly succeed, so just give up. Why not tell him to just be cautious and make sure to only invest a little bit to try it? I read several personal finance blogs and this is the first time I’ve ever heard “you can’t possibly handle your own money, it’s way too hard.” What the heck kind of philosophy is that?
Flipping a house adds lots of value, whether it be from the cost of raw materials, the labor, the effort put into that particular location, or even the “vision.” Also, banks are not stupid or cavalier about how much a house is worth; it’s doubtful you’ll be able to get a loan for a substantially inflated house price. It has to appraise for the higher value.
Dusitn: If anyone could know how mutual funds would do in the future, we’d all be rich.
January 23rd, 2007 at 1:36 pm
Flipping is not easy. Me and my partner just lost 12K on the first house flip we attempted. They don’t even show you on those shows, if you have to carry the house and the 10-20K your agent is gonna take from you.
April 1st, 2008 at 6:39 pm
Hey J.D. I know this entire post is a little old, but I just happened to find it while doing some research/reading about index investing.
Anyway, I wonder what your friend Sparky would think about a strategy like the one FundX.com teaches. Sparky mentioned wanting “the good and the good”, which is basically what FundX does.
They rank mutual funds and ETF’s every month, and then provide a list of recommended picks based on their scoring model. You basically buy their top picks until those funds/etf’s are no longer ranked above a certain mark. At that point, you “upgrade” by getting rid of the ones that have fallen out of favor and replace them with new ones from the top of the list.
You end up holding most funds/etf’s for a minimum of 3 months, and most are held much longer. You might end up only doing a handful of “upgrades” each year.
There’s a little more to it than that, but if you check out fundx.com you’ll see what I mean. They also have a chart showing past performance of their strategy.
I’m seriously thinking about moving my investment portfolio around in a major way so that 25-30% of my funds are indexed, 25-30% in good dividend paying companies (via funds or ETF’s) and then with the rest of my money, I was going to do the FundX thing.
Waddya think?
Dave
November 26th, 2008 at 6:36 am
[...] everyone believes that index funds the best choice for personal investors. A week ago I shared a brief conversation about money with Sparky, a friend to whom I often go for investment advice — he reads widely on the [...]
January 21st, 2009 at 1:11 pm
@Ryan: they don’t show you the flipping when the flippers are a professional chef and his attorney wife. So far the “improvements” include the masonry wall they knocked partly down parking the van they used to carry the sofa they brought into the house, knocking a ROW of holes into the drywall, the bathroom wall cabinet that is only a few inches narrower than the hole they cut for it, the sink cabinet which is not actually attached to the wall behind it … or anything … the paintjobs that go ALMOST all the way up to the ceiling, but in several different directions on the walls themselves, the faucets that leak when they’re turned on, wiring that was apparently done by the cat …
Yeah. Good job!