The Risk/Reward Question. How much risk should you take? The right answer is different for everyone, but too many people choose “zero.” These investors do not follow the Buffett advice of buying when others are fearful. Then, when the market rallies, they are afraid that they are “too late.” I wrote a recent article, Stock Prices and the Fundamentals: Don’t be Fooled, showing how to avoid this trap. The answer is not going “all in” since most of us have to pay more attention to short-term risk than does Mr. Buffett!
If you have been following our regular advice, you have done the following:
- Replaced your bond mutual funds with individual bonds (bond funds are very risky!);
- Sold some calls against your modest dividend stocks to enhance yield to the 10% range; and
- Added some octane with a reasonable allocation of good stocks.
There is nothing more satisfying than getting yield and call premiums, even if stocks move sideways.
If you have not done so, it is certainly not too late. We have collected some of our recent recommendations in a new investor resource page — a starting point for the long-term investor. (Comments and suggestions welcome!)
Final Thoughts on Employment
Current economic data reflect the weakness in business investment. While consumer confidence is higher, business confidence is still lacking. I am specifically referring to established businesses considering expansion — and I do not mean all of them. At the margin, there are some businesses that simply find it easier to be conservative, waiting until after the election to commit to expansion or new hiring. This is the key source of the recent soft patch in manufacturing.
Companies have no incentive to make positive earnings forecasts and may well choose to delay expansion. It is the price we pay for a political process that creates long periods of uncertainty with brief windows of opportunity for fixing problems.
The jobs picture is actually a little better than we thought. This week the BLS announced the preliminary benchmark revisions for payroll employment. Net job creation was actually about 350K better than previously reported and private job creation was 400K better for the twelve months ending in March, 2012.
Here are the key takeaways:
- Those disparaging the BLS estimate as adding phantom jobs have once again been proved wrong. The basic process has been very accurate over the years, with an average error of only 0.3%. You should be hearing a correction from some commentators, but do not hold your breath!
- Revising data is a fact of life. Consumers demand timely reports, which use partial data and estimates. When complete data become available, the BLS reports it, as we would expect. The smart-Alec know-nothings who have never had the responsibility of developing data use this as an occasion for criticism. When you read someone making a sarcastic comment about the BLS suddenly “finding” another 350K jobs, you have discovered a biased and misleading source of commentary.
For a balanced explanation see the WSJ. For further discussion and examples of the revision process, see Bob Dieli’s new blog, No Spin Forecast.
I am not expecting major job gains, especially given the other indicators and the manufacturing weakness. I will discuss this further in my regular monthly employment preview.
Enjoy Wednesday’s debate, which will definitely not be using any replacement referees!
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About the Author
Jeff Miller has been a partner in New Arc Investments since 1997, managing investment partnerships and individual accounts. He has worked for market makers at the Chicago Board Options Exchange, where he found anomalies in the standard option pricing models and developed new forecasting techniques. Jeff is a Public Policy analyst and formerly taught advanced research methods at the University of Wisconsin. He analyzed many issues related to state tax policy and provided quantitative modeling which helped inform state and local officials in Wisconsin for more than a decade. Jeff writes at his blog,A Dash of Insight.