The emotions surrounding investing are interesting. After four weeks of articles on trend lines and five weeks on volatility, the mail ran heavy, positive and inquisitive. This is all logical, rational stuff. No fighting words were uttered.

But as I should have expected, the reaction to the article dissing index investing was not so completely and thoroughly sunny.  We got a yelp.

By way of apology, I have to say… gosh, I’m sorry I waited so long to write about index investing. Anything that sparks attack reactions has reached religious stature, and that’s not a good thing in investing.

Here’s what H.K., one of the nicer critics, said—

"The big New York newspaper is at it again. Instead of the usual full frontal praise, Mark Hulbert gave yet another subtle pat on the back to index funds this month… "

This is just plain sloppy thinking.  Why are you mad at the Times? This
is HULBERT's column, not the NY Times saying that.

And, sadly, your logic goes downhill from there.”

You do have a point that it was Hulbert speaking. And I am not mad at the NYT whatsoever. In fact, the Science section is far and away the best regular feature of any newspaper in the whole United States for my money. I also swear by the New York Times cookbook. Love the art coverage. For the record, I love NYT.

Perhaps I got into trouble looking for a hook. We writers have to start somewhere and I chose the NYT because it is good and because it is a New York paper with a very respectable financial section. It is authority with a capital A. So even if it’s Hulbert speaking, when it appears in the Times, it’s got clout. And this idea has appeared there before.

As for my logic going downhill? Well, what can I say, H.K.? I thought it through deeply, did my research, organized and capsulized it. Maybe your logic goes uphill where mine went down, but you see, you weren’t open enough to lay it out for me to examine. I’ll be glad to take your viewpoint seriously when I know what it is.

The gist of the index-investing piece was that the only thing you accomplish with it, beside great ease, is doing what the market does. And in a bear market that means taking losses for sure. Studies claim that funds don’t beat index investing, but they overlook the many funds that have done so for decades. In addition, the matter of individuals is quite a different thing. We do not have prospectus rules that constrain us. Funds must buy what they advertise. A small-cap fund must buy small caps even in years when big caps are doing best. Income funds must buy stocks paying dividends, even when growth stocks are better choices. You do not have to stay in such ruts, therefore you certainly do have a chance to beat the market, and it’s a fair chance, not extreme odds.

That said, I really thank L.R. for his letter, which makes my point much more eloquently than I did. Let him give you a good dose of confidence:

 Excellent article.  I was formerly a lazy Vanguard 500 Index fund investor for many, many years…stupid, stupid, stupid.  The media and the mutual fund companies continually feed the public the same old lies.  I finally wised up, started educating myself, and took control of my retirement funds…thank you William O'Neal and the IBD. Had I done this five years ago, I would be long retired and far wealthier. (For example, my self-directed seven-figure retirement account is up 10.8% so far this year…in a bear market using only long positions and no options).

Kids nowadays need to start learning about finances in high school so they know at least some basics when they enter the "real world"… and not be the poor schmucks preyed on by the large financial community of brokers.  Most of the world is quite financially ignorant despite college degrees.  I should know, I have 2 degrees (including my MD) and let many financial advisors take advantage of me for years because they were smart about financial matters! Yes, they were smart about how to relieve me of my hard-earned money. But not any more!

Thanks for your insightful columns.

Just to anticipate the next round of wails, note the praise for Investors Business Daily. Just pointing that out. It’s another mainstream financial publication that I use. I find the opinion pieces strange at times (even when I agree), but the data and news feed are great.

Another note from J.L. asks about ATR, average true range…

Thanks for explaining the ATR so clearly. Enjoy reading your articles.
I remember you've indicated how to calculate the ATR in a previous article, which I cannot find now.

Would you repeat how the ATR is calculated, or give the date of the related article? 

I wanted to make a link to the article on ATR in the last piece, but when I checked the archives, I found the page had been redesigned and old pieces were chopped off.  Nor is there any archive by date, topic search, or author. I asked how to retrieve it at the time I wrote, but there was no quick solution. So I will take this up with the webpage gods again. It has been my experience these past 11 years that readers do like to go back and read past articles. I will suggest we make that possible. Cross fingers.

Meanwhile, we do want Investors Daily Edge to be a source you love to use, so if archives are important to you, I encourage you to let the web gods know as much. They made a nice layout with cool sections, and on the whole, the new design is much better than the old. They are into quality, believe me, so let your needs be known.

Meanwhile, short version… ATR is how much a stock moves in a day. It can be calculated from the previous close to the next day’s high or low. Or it can be calculated from the range form high to low in a single day. Whichever is greater is the “true range.”

It is easily found by going to www.stockcharts.com and pulling up a chart on a stock that interests you. Just go to the “indicators” window and choose “average true range.”

Here is the average true range of True Religion (TRLG). (Couldn’t resist the consonance.)

There it is, all laid out to see clearly. One other thing you might want to do if you are thinking of investing for the long term and want a bigger picture is to switch the chart to weekly mode. You can do monthly as well, but that requires a subscription. The weekly chart will give you a nice long view, though.

As you can see, this is one seriously jumpy stock, with a weekly average true range of anywhere from $1.25 at its extreme low to $2.50 at its high. If it only went up, that would be charming, but when a $25 stock drops $2.32 (its current range), that’s a fast 9% loss. I expect to endure twice the true range value when I look at a stock, and that means an 18% loss in a couple of weeks is easily possible without the stock even turning seriously bearish.

Finally from this week’s mailbag, T.T., would like to know what order I use in analyzing possible options. Big topic, but a very good one. We’ll start on that next Thursday in the regular IDE pages.

Good luck to you,

Lynn

Dear Reader:

Those damn oil subsidies. Not here. I’m talking about Asia. You think subsidies will be discussed in the big oil pow-wow taking place in Jeddah this coming Sunday? I doubt it. You’ll probably hear the phrases “oil bubble, speculative trading, tight supplies,” and “dollar weakness.” You won’t hear the phrases “damaging subsidies” or “I’ll drink to that.”

It’s funny how some things get thrown into the global conversation and other equally important things are completely ignored.

John K. has a rather sinister theory about all this. In his own words…

“The countries that are shielding their people all have one thing in common in their form of government. Can you guess what it is? A hint, when driving their countries they all turn left. However, India seems to be noticing the error of doing that. Indonesia is beginning to suffer budget problems trying to maintain the subsidies.”

Thanks for your remarks John. However, I’m not convinced that the one thing these governments have in common is their leftist leanings. But let’s explore it for a moment.

Vietnam and China are ex-communist countries. They claim to be true believers, but as far as I can see, the only thing they believe in is the elitist privileges which come with membership in the communist party. Of course, given the pedigree of ex-communist countries, they’re not expected to worship at the altar of the free market.

And neither are ex-authoritarian countries such as Malaysia and Indonesia. The governments of these countries have a history of overreaching, interfering, rewarding and punishing according to their own self-interests and arbitrary lights. Prices and the private-sector are as subject to manipulation as anything else in the country. Nothing is sacred and nothing is beyond their greedy reach.

Whether ex-commie or ex-authoritarian, these governments have two things in common:

They undervalue the power and importance of free markets and free pricing.

They fear popular unrest from rising food and energy prices.

Nothing good happens when the government regulates pricing. We learned our lesson in the days of the Nixon presidency. Asia is still learning theirs. A case in point…

In Indonesia, they have not one, but two basic oil subsidy programs. One is for individual consumers. The less generous one is for commercial users of oil. In other words, an owner of a truck fleet has to pay more for gas than an individual driving a pick-up.

This leads to all kinds of mischief. Individuals could (and do) buy gas and drive to the local factory or commercial establishment and sell that subsidized gas at a small profit. Outrageous and despicable behavior – and completely predictable, yes?

I first came across these practices when doing some business in Indonesia years ago. Indonesia was a member of OPEC back then. It recently left this exclusive club. As a net importer of oil, their national interests now line up more with countries that rely on imported fuel. OPEC’s pricing policy was driving Indonesia into the poor house. And Indonesia’s subsidies only made things worse (I can’t be sure if they still exist. I hear they’ve cut back on subsidies.).

Western leaders could complain about Asian subsidies. But I doubt if it would do any good. This is political dynamite. These governments have good reason to be afraid.

Oil is costing much more these days, but it is still only six percent of our total wage income in the U.S.  In Asia it’s much more. If allowed to rise to its real price, tens of millions of people would instantly be unable to afford to travel. Governments get toppled for lesser things.

And that’s why subsidies will be the elephant in the room in Jeddah this Sunday. It’s there alright – in plain sight. But best to ignore what cannot be changed.

Rich speculators, on the other hand, are an easier and far less sympathetic target than the poor and very poor from Asia. Toppling governments isn’t on the agenda of speculators. They like things just the way they are.

Invest Well,
Andrew Gordon