Sunday, November 10, 2013

When you read this blog, you’re likely a ‘one percenter’

Last month I visited Europe -what I learned was that many Europeans are still pretty down. Yet, statistics indicate that Europe is on the mend; over the last year and half, European Markets have been on a roll! So where are now all those analysts, in particular the all-knowing North American analysts, who predicted the demise of Europe, scaring us into a panic?  Most Europeans could have told you that Europe would not collapse, contrary to the all-knowing pundits.

That is another great lesson!  The man on the street often knows the facts in his heart, while the pundits create nonsensical headlines to help journalists sell newspapers and to create commissions from panic selling and hysterical buying binges for their financial institutions. The market is a gong-show with the excitement of a casino.  Look at all those day traders and high frequency traders – they thrive on market volatility. But we, true investors, we invest in profitable and predictable companies; we only buy (or are supposed to buy) when the price is good. In fact, we like volatile markets as well when we’re buying or selling – for the rest we ignore the market. 
With all this casino noise around us, it is sometimes difficult to keep your head cool. It is tough to say in the dark of a bear market, “IBM is trading close to book value and it is very profitable and has virtually no debt and… it pays a decent dividend at an acceptable payout ratio.  Wow, I like to own a portion of that company and at today’s depressed prices.”  When everyone is shouting that the market keeps going up to ever more crazy prices, it is difficult to sell a part of your portfolio (at prices too good to be true) - maybe you can sell for even more says your greedy inner voice. But you must sell, because the risk of a market crash is increasingly likely the higher the market goes. So don’t be afraid to take profits when you can sell for prices beyond your wildest dreams; sell to build cash so you can buy in the next down turn. Apart from buying when good companies are ‘on sale’ and selling when prices are beyond your wildest dreams, investing is not difficult.  What is difficult is ignoring the noise of the stock market.

Here is another thing to consider when you feel that in spite of a high savings rate; in spite of following the above strategy, you see your neighbours buying expensive cars and buying ever bigger houses while you feel ever more cautious. It is not you who is crazy, it are your neighbours who are nuts. It is tough to think that all those people around you are nuts and that your caution is justified. Alas, you likely are thinking correctly. Today I read that in the U.S. 6.7 million households have a net asset value over $1million in 2009. “$1 million dollar! Wow!“, you may shout. But really, when you live in a $600,000 house and you and your wife have saved another $400,000 are you really rich? Can you live in your house and from your money for the rest of your life, even if you may not die until you are 107 years old?
No. Not likely. 6.7 out of 125 million households (2.6 persons per U.S. households in 2012) or 5.3% of households have a net asset value over $1 million. In 2007 there were 1 million households worth $ 5 million or more; that is less than 1% of all households. So how little does the overall population in North America have? You think North America is bad?  Well, then check out Europe were things are worse! When I stayed for the night in Munich this year, I noticed the conspicuous absence of single family dwellings in the inner city. In fact, as far as I could determine 90% of Munich lives in two-bedroom apartments! After walking around many European cities, I can only conclude that the bulk of Europeans have virtually no net assets.  Only 7% of the Dutch own stocks! Then who controls all those mighty European industries?  Pension fund managers and foreigners, I guess.  Talking about a disappearing middle class!

Upon returning from my European vacation, I landed in Calgary and realized that yes European food is good; but many North Americans live a life of luxury in comparison to Europeans; Europe may have beautiful architecture from the past, but we in North America live in a majestic country with awesome landscapes and in houses that most Europeans can only dream of!  Homeownership, in spite of 2008, is the norm in North America (in Europe most people rent an apartment); 54% or so of North Americans invest in stocks directly or indirectly through mutual funds. And a full 100 persons in the world can now afford to visit the ‘Canadian Diversified Investor’ blog daily – Oops! Where did that come from? J
So, it is not that all your big-house-neighbors and expensive-car-leasing-friends are so much richer than you. Changes are that when you read this blog periodically, that you are part of the 5% or even better, part of the 1%. -When you spend big then your emphasis in life likely is on consumption and living from pay-cheque to pay-cheque. If, on the other hand, your lifestyle promotes saving and investing in profitable assets then you either are a ‘one-percenter’, or you are on your way to the ‘one percent’.  Isn’t that great, before you know everybody around you is going to blame you for all the misery in the world!  Oops!


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