Tag Archives: 3% signal

Closed-end funds in the simplest possible terms

Side benefits of having a blog: when you get tired of trying to explain a concept, you can use the platform to explain it in the simplest possible terms.

Let me also begin with a promise. As this essay gets more involved, I will let you know at those points, so you can say “nah, we done now” rather than go further. It looks long. It need not be.

Because we live in dumbth nation, I must include the disclaimer that nothing herein should be construed as investment advice; that all investments should be evaluated through one’s own research; and that the aim of this article is to promote the understanding of how investments work, not to encourage investment in any specific security or security type. And that, therefore, the author assumes no liability or responsibility for nincompoopery in anyone’s investing.

God, how I hate that. One day tire irons will come with warnings saying “DO NOT EAT.”

A substantial part of my investing energies goes into closed-end funds, which many people seem not to know exist. I try to explain them, and how they differ from conventional open-end mutual funds, and eyes go vacant.

All right. This is too simple to be eye-glazing.

Cora, Eve, and Clark offer to invest your money. Each will give you his or her own branded poker chips representing shares. How much each share (white chip) costs depends on the day. Hear out their plans.

If you go with Cora, she accepts your money, manufactures the proper amount of chips, and issues them to you through your broker. Some may be fractional; in fact it’s rare for anyone to hit a perfectly round number. Cora will invest your money, along with that of others, according to guidelines she publishes. Cora’s value lies in her perceived market savvy and expertise. She has a prestigious degree, lots of whizbang charts, and other marketing hoo-hah to convince you to buy and hold onto her chips.

The price of a Cora chip is based on the total value of her investments divided by the number of her chips that exist, so that changes every day and is determined about two hours after the markets close. Sometimes the government makes Cora pay you dividends or capital gains, so they can get tax from you sooner. To fire Cora, before the trading day is over you tell your brokerage to sell however much $ worth of her chips. This occurs at the price that is determined after market close. Cora gets your chips back and melts them down, then pays you based on that day’s price. If you don’t place your order with the brokerage before market close, your order happens tomorrow. Note that you lack firm control over the price you pay. Market went nuts in last five minutes? Could be good for you. Could be bad.

 

Eve has a different plan. She is like Cora in that she invests other people’s money, and she does publish a base chip price determined in the same way Cora does, but you don’t do business directly with Eve nor at that base price. You pay a brokerage to find someone to sell you his or her Eve chips. The amount of Eve chips stays the same, unless Eve makes one of her rare new chip productions.

Eve’s guidelines say that she has to mimic a given stock or bond index to the best of her ability. Therefore, the market price never gets far from the base price Eve calculates (referred to as an NAV). Eve pays regular dividends, and you have to pay tax on them. Unlike Cora, though, who coughs up the tax bomb as a Christmas present, Eve pays them regularly throughout the year with little suspense. Because Eve gets a small fee for her work, she never quite beats the index she tries to mimic. But she comes damn close without fail and, about 60-70% of the time, Eve’s results pummel Cora’s.

Cora gets very good at filling up her regular chipowner reports with great excuses for why she again underperformed her target index. Oh, and Cora’s annual fees are ten times Eve’s. She hopes chipholders won’t stop to think about that. She also hopes the people holding her chips won’t stop to ask why, during a year in which she actually lost them money, they still had to pay a bunch of tax on gains. If bugged about it, she blames the government and the law.

 

Clark’s program resembles Eve’s. When he started up, like Eve did, he made a bunch of chips and sold them into the market through an investment banker; thereafter he doesn’t create or destroy or transact them. Like Eve’s, you buy Clark’s chips from someone who wants to unload theirs. Because Clark is not trying to mimic an index, his chips’ market price can swing well above or below the base price he calculates. His job is as hard as Cora’s. He can screw up.

Clark only invests in bonds with moby payouts, and he buys hundreds of them. High-risk bond issuers have to offer high interest to attract buyers. Because some are at risk of not being repaid, Clark spreads the money out very thinly. He pays chip owners high yields, often 10-12% per year in monthly installments. Sometimes the money comes out of interest on the bonds, sometimes out of profits from selling bonds, and at times out of uninvested cash. Clark’s chip owners will have a shit fit if he cuts the payout, so he does his best to avoid that. However, Clark is human, and if he screws the pooch, the payout could go down. If he does that, his base value might go down, and his chips will probably trade for a lot lower price than his base value.

 

Cora manages a conventional open-end stock mutual fund. Eve manages an exchange-traded stock index mutual fund. Clark manages a closed-end bond mutual fund.

If you want to, keep reading for more details. If you just wanted the simplest possible explanation that I promised you, I hope I succeeded, and thanks for giving me a chance to explain it.

 

It’s important to know what the terms mean. Without definitions, one wanders blindfolded through an explanation.

A security is a (nowadays mostly virtual) piece of paper that says you own something. In conventional investing, one buys shares of securities in pursuit of growth (one hopes to sell them later at a profit) and/or income (one wants to be paid just for owning them). Sometimes both goals are in play, and obviously anyone seeking income at least wants his or her original money back in the end.

There are other rational goals, but those are the two big ones. It’s foolish to buy securities without knowing what you want from them.

What are securities? Many types: common stocks (you own a little piece of a corporation), bonds (you own a little piece of a loan), preferred stocks (you own a weird hybrid of stock and bond), publicly traded partnerships (like stocks, but instead you own a little piece of a limited liability company), mutual funds (you own a little piece of a whole bunch of securities someone else picks out), and some more.

If you are following the main thrust of this post, it has registered with you that this makes a mutual fund a security of securities. True.

Most individuals and many professionals lose money buying individual stocks. Buying individual bonds is sometimes risky and usually cumbersome for individual investors. Thus, someone proclaims him or herself an expert, files an ocean of paperwork, and says: “I will invest other people’s money according to some preset guidelines. I know what I am doing.” This results in what we call a pooled investment–as in ‘your money is pooled with others’– commonly called a mutual fund.

The three major sorts of mutual funds all work differently. That’s why I began this article with that poker chip explanation. I believe it is the least understood, most-needed-to-be-understood aspect of modern personal finance. I believe that understanding liberates you from bad decisions. Here’s the less simplified version, which I hope the first example made easier to follow.

First, you need to know what is meant by ‘ticker symbol.’ Stocks, mutual funds, and stock-like securities all go by shorthand labels called ‘ticker symbols,’ consisting of letters. Microsoft is MSFT. Alaska Airlines is ALK. Long ago, Continental Illinois Bank was CIL. RCS is the Pimco Strategic Income Fund, a closed-end bond fund.

Conventional mutual funds (CMFs; Cora’s fund) work like this. All shares are bought and sold through the fund manager or its agent. All CMFs are distinguished by five-letter ticker symbols ending in X. Thus, FCNTX happens to be Fidelity Contrafund. VFINX is Vanguard S&P 500 Index Fund, and so on. Thousands exist. They usually trade by dollar amounts rather than numbers of shares, which are recorded to three decimal places. (Going back to our starting example, imagine Cora, Eve, and Clark’s chips stamped with their ticker symbols.)

When you buy CMF shares, the company accepts your money and issues (creates) the shares to you. When you sell them, the company redeems (destroys) the shares and pays you their market value, which is based on that percentage of every security the fund owns. A CMF’s share price is referred to as its net asset value (NAV). That distinction matters because they are not stocks and must not be viewed as stocks. The number of shares of a CMF in existence thus changes daily.

If CMF shareholders sell (redeem) enough shares at once, the company may not be able to pay the sellers from free cash. Those following along very well have registered that the company might have to sell some of its security holdings to fund very large redemptions, thus demonstrating one of CMFs’ biggest problems: their mechanics can force them to trade when its managers might not prefer to do so, which means your highly paid professionals aren’t allowed to use their full best judgment, which in turn is what you (yes, you) pay them for. It’s like a computer managing a baseball game that calls for a bunt even when a slugger–and a lousy bunter–is at the plate. The slugger can only shrug and attempt the bunt, knowing it’s a bad idea.

I used to work for a company that managed CMFs. The big money situation works in both directions. What if a huge pile of money comes into the fund at a time when it’s a lousy time to buy? And yet the fund guideline says that it will be no more than 5% in cash? There is no choice. Disobey their own guidelines and they will be in big trouble. They must pick the least unpromising choices available in compliance with their guidelines. It’s like hiring a contractor when there’s too much work for contractors (or at any time in Portland): all the best options are booked six months out. Only the inferior builders will even come out to look at your job, and they will charge too much for crappy work.

Ever hired a house-sitter? If that person was an adult, you probably set out some guidelines, but ultimately you realized that the reason for having a house-sitter was to have a responsible adult keeping an eye on your place. If the adult could not contact you, or detected an emergency, you would have to trust that adult to do intelligent and prudent things to protect your property. Owning a non-index CMF is like hiring a house-and-pet-sitter but with such extensive rules as to paralyze the sitter’s best judgment. Who hires a house-sitter without trusting that judgment? This is stupid.

Index CMFs, a variation on the above, take the judgment out of the equation by attempting to imitate a stock or bond index (fictional investment portfolio meant to represent some portion of the market for benchmarking purposes). A Standard & Poor’s 500 index fund buys, in proper proportion, all the stocks in the S&P500. If S&P ditches a stock, so does the fund. (This may sound to you like Eve’s method. It is. Think Cora’s chip issuance mechanics combined with Eve’s investing plan.)

In workplace 401ks, an index CMF is often the least doggy of the ten or twelve dogs on offer. And if it’s a conventional 401k, there won’t be an annual tax hit. Most 401k CMF offering lists I have seen were full of mediocre funds. I believe that most are selected by the 401k custodian through kickbacks. I am also convinced that the 401k custodian often pays off the employer’s representatives in order to be selected. It’s the most logical reason for such laggard choices.

Index ETFs represent the same basic idea as index CMFs, but with different mechanics since one buys or sells them on the open market at a price negotiated with another investor by brokers. Either way, the NAV (and thus your price) goes up and down in lockstep with the index. Both charge low fees because this doesn’t take that much brainpower. If Slave Labor & Prostitution, Inc. (ticker: SLAP) gets big enough for Standard & Poor’s to include it in the S&P 500, the index fund managers of S&P 500 index funds will obediently buy the correct proportion of SLAP shares to mimic the new composition of the index. Since Rust Belt Decay Corporation (RBDC) got thrown out of the index to make room, the managers dump its shares. All of them. Eve’s ETF does it this way.

Index ETFs can attempt to imitate bond indices, or in fact any imaginable security index. So can index CMFs, of course, and they do. In the case of bonds, pooled investments represent the primary way individual investors park their money in fixed income (the sophisticate term for bonds, but which includes some other investments that also pay a, wait for it, fixed income).

CEFs, like Clark’s, are the main subject of this article; however, to understand them, one needs to understand how they differ from their lookalikes. Most invest in bonds, but there are stock CEFs and perhaps other kinds. Maybe there are some that invest in partnerships, or preferred stocks, or gold coins. My focus here is on high-yield fixed income CEFs, because I’m impatient and greedy and don’t have much faith in long-term promises or institutions. I have faith in what can no longer readily be taken away from me.

CEFs interest me because if I buy them intelligently, I get distributions amounting 10-12% per year, paid in monthly installments. I may even get a capital gain if I ever sell them–but the goal is not growth. It is income, paid now and not later, which means two things I like:

  1. It’s too late for them to screw my money up or take it back. I got it. Not theirs anymore.
  2. Because I get it now, not later, I can use it now. I can buy more shares now and increase the amount of money that’s paying me that 10-12%.

At this point, I consider CEFs well explained. Everything after this para expounds my experiences and observations, and may herewith wander from the topic. If all you cared about was the topic, school’s out. Thank you!

 

Most people investing in the stock market would figure 12% a reasonable goal, year over year on average. They would accept major declines, and might stay invested for years without having actually locked in most of their gains (i.e. sold the shares). And 12% is in fact a very rational goal based on long-term historic performance. But I want my money now, not later, so that I have it to reinvest.

That’s what I do with CEFs. I buy them, at a discount to NAV where possible. I hold them unless/until they decrease the distribution, or I find better options. If they cut the distribution far enough to make them unattractive, I find better options with ease. I may take a capital loss doing so, but remember that all along–for years, even decades–I got my 10-12%. And all along, therefore, I had that money to use for something else–such as more CEF shares.

Yeah, I paid tax on those distributions…except when I did not owe any. Those CEFs in my traditional IRA were not subject to tax. I got that money every month. When enough of it piled up, I looked over my CEF universe (current holdings plus potential holdings of interest), decided which would pay me the most money without being too overweighted in a given CEF, and bought shares. Those shares then started to pay me money.

Now and then, I’d see a major share price dump in a CEF. I’d go to find out why. Usually it was that they’d cut their distribution, absorbed another CEF, experienced shareholder drama, or otherwise done something excitingly harmful to my pleasantly dull regular payments. Most commonly, I’d just dump the CEF shares regardless of capital gain or loss. I would redeploy that amount into the best available option at the time.

A surprising percentage of the time, thanks to cheapskate buying practices, I’d realize a capital gain from selling the shares. Now that was fun. Pay me monthly for eight years, then a parting bonus for firing you? Yes, please.

This took me minimal work. Every month or two, I’d go to my spreadsheet comprising my CEF watch list. I would update current market values, current NAVs (so I could see whether it was trading at a premium or discount, and what magnitude), monthly payouts, and my own original cost for the shares. The latter numbers were essential to me knowing what I was currently being paid. The rest of the numbers related to what I would be paid if I bought shares now. I would also seek to add a CEF to my universe, searching my brokerage for the best paying bond CEF, then reading up to filter out the ones that seemed unsustainable or outlandish. If it looked too good, probably was. The biggest dog in my universe, after all the updating? I’d cease tracking it. If I actually still owned it, I’d place a sell order. If I knew I could get 11%, why would I even follow something offering 7%? No need.

Some years, the stock market would eat flaming death. Many people would freak out. Many would panic-sell their stock shares, mutual fund shares, everything, eek, the sky is falling, sellsellsell. I would go shopping. When my CEFs looked to be down about 25%, I’d update my spreadsheet and blow every dollar of cash in my account on dirt-cheap shares. I knew what I was seeing was panic, irrationality–and opportunity. I didn’t buy on margin, but I bought with every real dollar that had been piling up. Since I paid less for the shares, I got much higher yields, some almost embarrassing.

I would be paid those grotesque yields for years and years, until they either cut the distribution or I sold the shares.

Eventually I no longer bought separate issue securities at all. With money I couldn’t afford to have bounce up and down to any degree, I bought conservative bond index ETFs. With money I wanted to grow, I put part of it into CEFs, and part into a rough 80/20 mix of small-cap stock and conservative bond ETFs called the 3% Signal. I no longer even cared what high-flying tech stock the pundits touted. I stopped reading financial pundits, none of whom ever paid a penalty for being wrong. I decided that I was never again going to take advice from a Jim Cramer unless he was putting in writing to reimburse me any potential losses. If the market were to crash, I would make a lot of money and it would recover within a couple of years. History supported me.

Only a total collapse of the national economy, including the dollar’s value, would wreck me. If I ever came to believe that was likely, I would have invested in some other way that was immune to such a cataclysm. All those ways are very big bets on very unlikely outcomes. I realized that everyone who bought any form of securities, no matter how preppy he or she talked, didn’t really believe in this impending disaster. I have pure contempt for the concept of professing a philosophy one does not in fact believe, be it religious, economical, what have you. If you believe it, your actions will prove it.

How you invest money you can’t afford to have vanish is what you really think about the economic future. What one says means nothing. If you buy gold, but you leave it on deposit at Edward Jones, evidently you think there is a greater risk of home burglary or theft than of a cataclysm causing Edward Jones to close its offices. If you put money into your 401k, but talk big about how everything is going to be destroyed, you are lying. If you were that sure of your outcome, you wouldn’t put one dime into a 401k even if your employer matched it. Double nothing is still nothing.

There could still be a total collapse that renders everything irrelevant. If there is, it’ll also nullify most of my potential protective measures and screw me (and nearly everyone else) up real bad. It doesn’t make sense for me to prepare for something that has been predicted annually going way back, without happening or punishment for the wrong predictors. It is more logical for me to prepare for recurrences of what has been demonstrated to occur.

I’ll keep collecting my 10-12%.

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Excellent books you may not even know exist

Other day, I was sitting out with a cigar and a book about how to avoid speeding tickets. It was insightful and well worth the re-read. It occurred to me that I had read a number of such books, profited from what I’d learned, yet never shared these hidden gems with you all.

That’s no way to treat all the nice people who take the time to read my blog.

What these all have in common: they all conveyed to me some form of important understanding, be it practical, geopolitical, financial, historical, whatever. After reading them, I felt more like a motorboat and less like an inner tube on the choppy waters of life.

Eagan, James: A Speeder’s Guide to Avoiding Tickets. It’s not that I habitually speed, because I do not. It’s that if by chance the police are thinking about stopping me, I hope they won’t, and if they do, I hope they won’t give me a ticket. Some of the technological tips may be dated, but I doubt that the insights into police mentality and habits are obsolete. This twenty-year veteran of the New York State Police got his most helpful possible endorsement when some police-connected official condemned the book. If the police do not want you to read it, obviously, it’s the first thing you should be reading.

Poundstone, William: Big Secrets. Poundstone, an investigative reporter and student of the human mind, dug into many subjects such as Freemasonry initiations, Colonel Sanders’s recipe, and all those supposed backward messages in records. (For those, he rented a studio and split the tracks, playing them both forward and backward.) It is a bit dated, but very interesting and mostly remains relevant. There are two sequels, with no decline in interest level or quality.

Kelly, Jason: The 3% Signal. Most of you who invest are still either picking your own stocks or paying expensive professionals (to underperform more often than not) through conventional mutual funds. The evidence is in, and it says most of you are doing this wrong. Kelly is a very interesting fellow, a Colorado Buff English major who lives in Japan and writes a financial newsletter. Not only does he write well, his market insight is spot on and his investing plan is so simple that even a self-declared financial boob could probably handle it. I’ve been using it for three years and it has made me feel much better about my investing methods.

Anderson, Kurt: How to Back up a Trailer…and 101 Other Things Every Real Guy Should Know. Anderson is that guy we all need to know. He’s like my father, who could have taught me all this stuff had I shown the slightest bit of interest, had I not been practicing the development method of “ignore adulthood and hope it will never arrive.” Unlike many who are gifted in the area of life’s physics, Anderson can write and never comes off as a horse’s ass about it all. The irony, of course, is that the people who should rush out to buy this book are majority female. Girls and women aren’t taught enough of this in life, especially growing up in cities (whereas your average farm girl could have written this book), and capability equals independence. Anderson’s book is their liberator.

Cahill, Tim: A Wolverine Is Eating My Leg. A world in which Bill Bryson sells more books than Tim Cahill is a world with lousy taste, a world that lets people with vested financial interests tell it what to like. The travel genre has many subsets, and one of my favorites is adventure travel. Cahill, a Sconnie now living in Montana, has a laconic descriptive method that knows how to let the humor speak for itself. Unlike some travel writers, he also seems like a man who could safely go back to most of his adventuresome haunts. One of the nicest things my bro John ever did was give me a copy of this book, which opened the way to the other seven-odd Cahill travel books.

Loewen, James W.: Sundown Towns. Prof. Loewen’s name is better known for his studies of mendacious monuments, but I consider this his most important work because it answers a question about how African Americans came to be concentrated in cities. It explains the difference between Southern and Northern post-Civil War racisms. As someone who used to live in a former sundown town (Kennewick, WA, which has never come to terms with this racist past and has instead chosen to avoid the conversation as the eyewitnesses die off), this book supplied a crucial lack in my understanding of American history. If we are ever to repair this ongoing rent in the national fabric, we must arrive at that understanding.

Horwitz, Tony: Baghdad Without a Map. It’s hard to pick a favorite book with authors who always do it right. In cases like these, I choose the one that first drew me in. Horwitz may be best known for Confederates in the Attic, his study of Civil War re-enactor culture, but a Jew traveling all over the greater Middle Eastern region shows me serious chutzpah. Like Cahill, Horwitz knows how to let the reader find the humor. All his books are good, including his historical take on John Brown’s Harper’s Ferry seizure, Midnight Rising. I find him an exception to the rule that journalists should be kicked in the groin if they start making moves toward writing history books. (“But I checked three sources! I can write it!”)

Perkins, John: Confessions of an Economic Hit Man. When you look at a globe, you may not see the strings by which the United States manipulates the world. Perkins explains how we weave them, how we reeve them, and how we yank them to make less fortunate countries do our bidding. If you’ve ever watched a documentary about how drug dealers work hard to develop new addicts because addicts are customers and can be controlled through their addictions, this book will show you how effective (if heartless) that business model can be on a larger scale.

Eskeldson, Mark: What Car Dealers Don’t Want You to Know. The fine art of screwing the auto-purchasing public is an evolutionary game, so books will tend to become dated. So is this one, but much of its content is still relevant. The essential lesson is that the process of buying a car is a three-card monte game with the dealer making a cameo. An updated version for the Internet buying era would be especially helpful, but no matter the timeframe, the fundamental mentality does not change; when it proclaims itself kinder, honest, and forthright, that is when it is the sleaziest. Car dealers hate when you are not forthright with them because deceit is supposed to be their playground. Definitely a good guide to how they think.

Sullivan, Bob: Stop Getting Ripped Off. I’d like to give a copy to every young person graduating from high school. Thanks to the time value of money combined with ignorance and naïveté, the first twenty years of independence are when the mistakes are likeliest to be costly when all is calculated with eyes wide open. One must learn to be one’s own advocate, and that advocacy must evolve, because what worked for your mom and stepdad may no longer be feasible for you. While the title is a bit misleading, at least in the body of the book Sullivan admits that there are areas where you are going to be ripped off and cannot stop the process. My view: at least if you know what the ripoff is and who does it, you’ll know who to hate.

Molloy, John T.: Molloy’s Live for Success. Okay, so you want to get ahead in the office/corporate world, but you don’t have the right connections, the right personality, the right clothes, the right vibe. You keep wondering why lazy, stupid assholes get promoted and you do not, in spite of your competent diligence. This resentment builds on itself, because you are an honest hard worker who tries hard to get along with others and go the extra mile, thus worsening the gap between you and success. That resentment hits close to my home, because the dawning of reality shortened my naïve, selectively brilliant, industrious father’s life. It would have shortened mine too, except that I decided I didn’t want that type of career. But if I had–if I’d been willing to subordinate my basic identity to a perfectly manufactured persona that kissed the right butts, appeared at the right places, and otherwise gave off the vibe of being a club member–at least I would have had the right textbook. I read it in my early twenties and it helped me to decide that I wasn’t the type to reach the executive suite. It helped me to understand the warm, affectionate, grandfatherly smile of the Sears executive whom I am certain vetoed their hire of me (a great kindness, now that I understand the world better). But if you are that type, the only things that have changed are the technologies and clothes. Even if you are not, if you work for a hierarchy, reading this will help you understand how that hierarchy got where it is (and why, at the rate you’re going, you aren’t getting a slot in it unless you are already slotted by genetics and upbringing to join it). Molloy is much better known for his Dress for Success books, but this is the book that will enumerate the rest of the entry fee.

Happy reading.

Old friends, and an investing epiphany

Live long enough, and even the somewhat socially awkward will accumulate a network of old friends with decades of experience in various fields. This is great for getting answers. When I have a question about physical science, I can contact a professor of physical science. Question about U.S. military history? I’m fortunate enough to know someone who teaches it at the collegiate level. Want to understand how a given firearm works? I can choose from multiple enthusiasts, none of whom need any encouragement beyond a hint of interest. Need an antique valued? One of the best men at my wedding has been in the business for thirty years. Question about the workings of a suburban police department? How about the deputy commander of a well-respected suburban police force? Real estate? In addition to agents I’ve worked with in three states, I could also call a friend and past client who made his career in the field. My uncle is a civil engineer, one cousin a retired petroleum chemist, another cousin a speech therapist, and so on.

The question is not whether one can locate the expertise, but whether one may fairly impose upon the friend. I’m not unique in this, nor even above the curve. I have this only because I lived to my mid-fifties without spending it all in a shack somewhere out near Glenallen, Alaska. Everyone else my age, except those who live in shacks near Glenallen, has at least as great a network. Those who got out more than I did probably have far greater networks, but I’m very satisfied with my folks. I wouldn’t trade any of you.

For them, it follows, I’m the old friend who edits. When they begin to consider doing some writing, it is quite natural that they ask me about it. I’m glad, because gods know I’ve bugged all of them often enough about this or that. If it comes to an actual project I’ll charge something, but advice is always free to old friends. Truth told, I don’t mind a bit. It’s rather nice that people would think I could help them understand something.

One old friend of mine is named Randy, and with some admitted contact gaps, we’ve known each other since college. Randy retired as a stockbroker with one of the big brokerages, and while in most people that might not mean as much, I’ve always known him as a maverick immune to peer pressure where he knows he is right. That tends to be true of me as well, so I found it easy to believe that he had knowledge and instincts on behalf of his clients that the average full-commission broker might not have had. Put another way, there aren’t very many such brokers I’d have steered anyone toward, but Randy would be the one.

Not long ago, Randy and I had a long conversation about investing. We agree in substance, especially in matters such as that people should remain within their comfort/knowledge zones. I told him I no longer buy separate issue securities, because while it’s possible I could develop the knowledge to do well at it, I know that I will not, and thus shouldn’t fool myself. I received a precious pearl of approval, which I will have set into a suitable mounting in a place of honor.

Maybe it’ll distract everyone from all the little tombstones representing my dumber investing mistakes.

While schooling me, Randy crystallized a realization that explains so very much: winning vs. losing, and the arithmetic. The instinct and habit is to look at an investing choice as one decision, to get right or wrong. It isn’t. Most investing decisions are based on some stated goal, even one as nebulous as “make money.” There are two decisions to make, and for an investment to meet or exceed expectations, both decisions must be right. There is the decision to buy (when/what/how much), and the decision to sell (when/how much) or hold (some or all). That’s a thing to consider: not to sell is also a decision.

If you are wrong 50% of the time, you will probably like your results 25% of the time because that represents the percentage of the time you will do what in hindsight turned out to be the right thing both times. That means that two times out of four you will likely be disappointed, and once out of four, you’ll probably take a straight-on bath.

If you are right 60% of the time, you will get satisfactory results 36% of the time, same reason. You are taking a hosing. About half the time, you will get one decision or the other wrong, with disappointing results. You’ll go splat big time about one time in six.

If you are right 70% of the time, all other factors being equal, you should be happy 49% of the time. You are still losing, though not by much. Slightly less often, one decision or the other will be wrong enough to disappoint. About once in ten, the disappointment will be great.

You have to be right just over 70% of the time just to be pleased more often than not. If you can arrange to be right 75% of the time, you will get a favorable result about 57% of the time. Not many people are that good. I’m not even close.

In the meantime, of course, the overall market does whatever it does. Goals can vary, as can strategies. This is a rabbit hole of exceptions, and I have felt the need to oversimplify this (yes, I am aware I am doing so), but the key takeaway is that there are two opportunities, not one, to screw up a given investment. A mistake in either case will probably cause disappointment.

Thus: even then, even being right three-quarters of the time, you’re pretty happy just slightly more often than not. Enough to matter, of course; enough to be meritorious, and definitely enough to offer a shot at outperformance over time. Your good decisions should outweigh your bad ones. And I guess if you are confident enough to feel you will be right 75% of the time, you probably should carry that through.

The minority of people who can achieve that success is small indeed. I have learned that I am not one. Many of the rest are more or less playing the slots in a different format. Whenever I find myself tempted, nowadays, I remind myself how much I despise gambling, and ask myself whether those glitzy casinos were built with the money people won. I suppose it’s like a former smoker who, when tempted to lapse, looks at graphic images of cancerous lung tissue: if that helps, go ahead.

And how often does one get to make an analogy between casinos and cancerous tissue? You’re very welcome.

For the rest of us, it’s buy and hold index ETFs all the way. We will generally not outperform, but we will get the market return less (very bearable) expenses. Even Jason Kelly, a noteworthy author and manager who has an excellent track record with stocks, has shifted entirely to a mechanistic method involving index ETFs. I’ve been running it in two different portfolios now for a couple of years, and I think it stands a good chance of outperforming because it takes the emotion out of the decision. The only free choice one makes is when to add more cash to the plan. From there, the entire course of events can be handled with a pretty simple spreadsheet and two trades per quarter per portfolio. You can learn more from his book on the topic.

Jason’s writing is entertaining and straightforward. My favorite part is the way he begins by politely butchering out the pundits who bray frequent predictions for which they are never held to account. It’s hard to imagine they can even keep writing, much harder to imagine anyone still wasting time on them, after Jason hits them with the literary equivalent of a fire hose loaded with ice water. He calls them “z-vals,” as in “zero validity,” and when he’s done with them they look like Leroy Brown at the end of the famous song.

You want to hate the media? Don’t hate the ones who are trying to tell you what has happened around the country and world. Start with the mainstream financial media, because they have hate coming. They get to tell you what will happen, be wrong on a consistent basis, and never suffer. They don’t even lose readers. Were you able to confront one, he (most of them are men; for some reason, it appears harder to find intellectually dishonest women) would tell you that doing your own research was your problem, and not to blame him. “If you believed me, it’s not my fault you were that big an idiot.”

Even the salesiest full-commission broker at Merrill Lynch has more accountability than that.

As for me, if I have to be right three-quarters of the time in order to do well, maybe I’d better keep my decisions in the comfort zone.