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The Coffeehouse Book

The New Coffeehouse Investor Book

The Coffeehouse Investor

How to Build Wealth, Ignore Wall Street & Get On With Your life by Bill Schultheis

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There seems to be quite a bit of handwringing over the economy and markets these days. 

Just this morning I read where some pundits are already recognizing the arrival of another recession. 

Whether or not we are in a recession is secondary to the realization that our country, and maybe the world economy, is in for a prolonged period of slower growth.  Even China is showing signs of a slowdown in economic activity. 

The stock market seems to be admitting the same, with a sharp downturn this past week suggesting a readjustment to lowered expectations of economic activity. 

I have long suggested that you do the same – lower your own expectations of future returns on asset classes. 

But lowering ones expectations doesn’t mean a capitulation, or liquidating of stock market investments to protect one’s portfolio from the possibility of future market declines.

What it does mean is you need to sharpen your pencil in reviewing your own financial plan for two reasons.

First, your financial plan creates clarity on the amount of portfolio risk you can absorb without a market decline negatively impacting your lifestyle.

Second, your financial plan should encourage a heightened awareness of your burn rate – specifically your saving levels (if you are working), or spending levels (if you are retired).

Yesterday I had an experience that drive homes the importance of the financial plan that I want to share with you, but am running out of time and running out the door, so will save for next time.

In the meantime, if you are struggling to put together your own financial plan, drop me a note and we’ll discuss.  Others might be able to benefit the same.


 

Yesterday, the Fed announced it will sell approximately $400 billion of its short term government bonds in the coming months, and with the proceeds purchase long term bonds, in an attempt to drive down long term rates to stimulate the economy. 

Some financial pundits are labeling this “the Twist.”    

What does that mean for investors?  For now, yields on virtually all fixed income (bond) investments are at or near long term lows, and uncertainty on when rates will start to rise. 

As with common stocks, it is also important to stay diversified across your bond holdings and especially the yield curve, owning both short and intermediate bonds. 

When rates do go back up, your bond portfolio will certainly endure temporary declines.  It is essential to recognize this, and stay committed to the design of your bond portfolio.  This is explained in an excellent report prepared by Vanguard, specifically the chart on page 3.  Although I have referenced this report in the past, in light of recent activity in the bond market, it is worth reviewing.


I came across an article the other day discussing the merits of index funds, and whether or not those of us who embrace the simple and successful approach to capturing asset
class returns get carried away in our “zealotry” of advocating the philosophy.

Interesting point to ponder, but I look at our “zealotry” in a different way.

In all the years I have worked on The Coffeehouse Investor, writing the book, writing a weekly column for eight years, writing this blog, working with clients at Soundmark Wealth Management, my intention has never been to convince, or persuade someone that the Coffeehouse way is better than the alternative – that of trying to beat the market through individual stock selection or active mutual fund management.

My goal has simply been to provide creative education, so that investors can make up their own mind after looking at the evidence, and applying a little common sense to their decision.

I am convinced that most investors, while they may be a little irrational at times with their money (hey, who isn’t?), are intelligent human beings who want to make the right decisions with their investment choices.

The Coffeehouse Investor is for them.  Take a moment to share our philosophy with someone you know.

Remember, it isn’t my philosophy.  It isn’t John Bogle’s philosophy, it is EVERYONE’S philosophy, to the extent they want to build wealth, ignore Wall Street, and get on with their lives.


 

In the short run, meaning day to day, the stock market is driven by the events of the day.  Or at least that is the way the financial media portrays it.  Throughout the day we are force-fed a barrage of headlines that suggest the ups and downs of the market. 

Bank crisis in Europe?  Stocks go down.

Employment numbers are stronger?  Stocks go up.

And on and on.    

The irony of the above is that most of us aren’t investing in stocks, day to day, unless you are a gambler. 

There is a big difference between gambling and investing. 

So, if you ARE a long term investor of common stocks, what can you expect from the stock market?

In an absorbing interview, Wall Street columnist Jason Zweig talks with Vanguard founder and retired chairman John Bogle about his expectations for future stock market returns.  He goes on to discuss a myriad of other topics surrounding the world of investing, including the proliferation of exchange traded funds – ETFs. 

I enjoyed the interview, and I know you will also.


Every once in a while, I come across a column written by a financial writer, and think to myself, “I wish I had written that.” 

In yesterday’s Wall Street Journal, Jason Zweig wrote one such column, titled “The Age of Macro Investing.” 

In this piece, he reflects on how our investing habits and intentions have been impacted, first from the lengthy bull market of 1982-1999, and more recently, the way we (constantly) view our portfolios in response to the never ending reports of global crises.   

In it, he writes,

A survey of investors last month by Decision Research in Eugene, Ore., found that 35% said they had spent at least two hours a day following the financial news during the turbulent markets of early August.

An earlier round of the survey in September 2008 found similar levels of obsession.

“The average person lives today in a virtually mediated reality,” says Sheldon Solomon, a psychology professor at Skidmore College in Saratoga Springs, N.Y. Thanks to the unfiltered spread of news over services like Facebook and Twitter, he says, “we all get a wide variety of instantaneous images that are likely to have more-inflammatory effects.”

Toward the end of the article, Mr. Zweig emphasizes the importance of embracing the Coffeehouse philosophy of low cost index funds, offering much broader diversification than individual stocks, especially in times of market turmoil.

His last comments are words we should all take to heart . . .

Today, however, every fibrillation is recorded in real-time pulses, making it unbearable for many investors to watch their account values fluctuate—and thereby shortening their horizons. But you will never be able to outperform professional traders who have high-speed computers and special access to market data. Instead of trying to shorten your horizon to compete with them, lengthen it.

Bear markets may be gut-wrenching, but they are the only means by which future returns can be raised.