Luck Has a Lot to Do With It

I seem to be on a niceness streak lately. Yesterday brought another item written by somebody other than me which I nevertheless liked. Try as Investors Might, So Much Depends on Chance, from The Wall Street Journal, tells us that a person’s lifetime of investment returns is dependent primarily on  accidents of birth rather than skill.

We spend a lot of time wrestling with investment selection angst. This mutual fund or that one, active or passive, 20% in bonds or 50% in bonds, and so on. Those are important and hard questions, but there is a forest-for-the-trees danger here.

The biggest driver of long-term investment returns is not an investor’s skill but the overall market returns over the period. In other words, whether you wind up living large or living modestly at 70 is largely luck.

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The Mysterious Cash-In Refinance

Today I am going to explain something complicated, so pay attention. Particularly if you write for the Wall Street Journal. My topic has to do with the exotic topic of homeownership.

Many homeowners owe money on a special type of loan collateralized by the house, called a mortgage. Sometimes, they “refinance” these mortgages, often to take advantage of a lower interest rate. Generally, that is no more complicated than paying off lender A with money borrowed from lender B.

However, and here is where it gets really confusing, sometimes the money from lender B is not the exact same amount owed to lender A. If more money comes from lender B, then the refinancing is termed “cash-out.” It is called that because the borrower actually leaves the closing with more cash than they had previously.

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Should You Invest in Gold?

By now, you have either put a little of your precious savings into gold or you have thought about it seriously. With the advent of gold ETFs (technically a misnomer, they are not truly Fs) it has never been easier to buy and sell the stuff. And at around $1200 an ounce, gold is up an impressive 50% or so since the fall of ‘08 and has gained an annualized 12.4% a year for the past decade.

Of course, for most investors, the fact that gold has done well lately is more or less the entire argument in favor of buying it. Subtle justifications are available, but, let’s face it, none of them are as powerful as the primal urge to join the party while you still can.

But when you get down to it, gold is one the more peculiar investments out there. Although it is an exaggeration to say that it is a substance of no intrinsic value, it has several industrial uses and would undoubtedly have many more if it were not so expensive, gold lacks some basic characteristics of a typical investment.

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The Flash Crash Plus Two Months

By 2pm on May 6, 2010, it was clear that the stock market was having a bad day. The Greek Crisis was going through one of its spasms of fear and uncertainty. It was also the day of the UK general election, and by mid- afternoon in New York it was becoming clear that the result would be some flavor of a hung parliament. The S&P 500 was down –2.9%, a decline that only a few years ago would have been considered headline news but is now mundanely bad.

Then over the next 46 minutes, the decline accelerated to the point where it became severe, then horrendous, and finally absurd. At about 2:46 the S&P was down about –8.6%. I say “about” because at that point the basic fabric of the marketplace was breaking down and exactly what the S&P was trading at, and when, is not clear even months later.

And then, as if the market fairy who had caused this twitched her wand in the other direction, the market staged its best ten minute rally in history. By 2:55 the S&P was down only -3.9% on the day. It would close down –3.2%.

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I Have No Confidence in the Consumer Confidence Index

On the last Tuesday of every month two pieces of data are released. We get the monthly update on the Case-Shiller Home Price Index, which is based on thousands of real estate transactions, in which real families spend what is often their life savings. And we get the monthly number from the Conference Board’s Consumer Confidence Index, which is based on a short questionnaire sent to 5000 households asking them how optimistic they feel.

Yesterday the C-S 20 City Composite showed a nice little uptick, +0.8% for April, +3.8% year on year. That reversed a few months of downticks and was reassuring to those of us rooting for stability in the housing market.

The CCI, on the other hand, was down to 52.9 from 62.7. That undoes two months of gains and returns us to a point just above the March level.

How did the stock market react? Was it cheered by what households actually did with their money in April or depressed by what they said to pollsters in June? The S&P was down –3.1%.

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