Q: I have a 15 year-old grandson who I think is now ready to learn about money and how investing works. However, I would like to have him learn the right lessons to start so he can avoid some of the mistakes I have made over the years. I am not sure about how best to accomplish this and would like a few suggestions.

A: First, this is a great idea and I commend you for taking this step to provide your grandson with this type of an opportunity. He’s quite fortunate, in my book.

Before he commits too much money with hands-on learning, my thought is you should work to stress the right mindset of the world’s greatest investors. Speaking of books, thankfully there have been some wonderful books written that will help him develop good emotional habits for wise investing.

The late Sir John Templeton was one such great investor. One of his simple rules was to remind us that “an investor who has all the answers doesn’t even understand all of the questions.” Nothing could be truer with investing. The questions are never all answered and there is always something out there you may never know for sure. And, that’s okay to admit.

For me, Templeton’s rule is essentially a reminder to embrace humility and that developing the habit of asking questions is very far from being a sign of ignorance. To the contrary, as you likely know from your own life experiences, learning to confidently and freely ask questions is an important skill that will enable your grandson to become better at absolutely everything he does in his life, not just investing.

Next, Templeton urged people to, “Invest, don’t trade or speculate.” This rule stresses the importance of embracing the idea of evaluating and considering the probabilities of the various outcomes in any investing situation. Once you’ve taught him to double check his possible upside and downside – which includes the idea of reasonable diversification – investing won’t feel like a trip to the casino for him. If you can get this feeling to sink in at an early age, you’ll have done him a great service that will pay him dividends for a long time to come.

My list of recommended books always starts with Benjamin Graham’s, “The Intelligent Investor”. A master investor in his own right, Graham’s claim to fame is that his greatest pupil was Warren Buffett, the world’s most revered investor. The book isn’t too long and it begins by helping readers develop a framework for differentiating between speculation and investing.

Next, I thoroughly enjoyed an oddly named book written by Joel Greenblatt, “You Can Be a Stock Market Genius”. As you can see from the tone of the title, it is written from the standpoint of explaining real-life investment situations and is meant to be an entertaining read for regular people, not just investment analyst types! I do think you and your grandson might both like it.

April 2015 | Jason P. Tank, CFA

 

There is a real obsession afoot in the world. And, if it’s not about love, it must then be about money. More specifically, monetary policy.

Recently, the Fed’s Janet Yellen held a press conference to explain their widely-anticipated decision to remove one word – that is, patient – from their official policy statement on interest rates. Believe it or not, investors around the globe literally hung on a single word.

For the uninitiated, that might seem unbelievable. Yet, it’s true, one word from a central banker can drive the price of every asset around the globe.

With the elimination of the word, the Fed signaled that short-term interest rates will soon move above zero. To investors’ delight, Yellen also explained, given the weak start of the year, that the first rate hike might not start in June. With that, bets quickly shifted to their September meeting. And, both stocks and bonds jolted higher.

Now, let me note for the record that the difference between June and September is only three months. Why would any rational investor really care about a possible delay of ninety days? I know I don’t.

Beyond the obsession over ninety short days, there are three reasons I think the Fed is likely to remain very patient over the next few years.

First, the Fed’s short-term rate hikes – when they finally begin – will very likely be done at a snail’s pace. With interest rates having been held at zero for almost seven years – an amazing thing to write – a dangerous addiction to low rates has developed that will prove hard to break. If the Fed goes too quickly, I think the economy will feel it.

Second, since the last recession ended in 2009, the Federal Reserve has consistently overestimated the pace of the recovery. With the turn of each new year, they have anticipated better growth ahead, only to be disappointed by reality. It is happening yet again to start this year.

Third, the Fed recognizes that currency exchange rates are a difficult to control variable in a very complex equation for the global economy. While our Fed desperately wants to start raising rates, Europe, Japan and China are now doing the opposite. As a result, the US dollar has soared – and coupled with oil’s decline – is partly to blame for what’s expected to be the first decrease in quarterly earnings in the S&P 500 index since the recession.

After seven years of experimental and highly-accommodative monetary policy, the Fed’s air of invincibility is on the line. As silly as it is to ever focus on a single word, I am resigned to the idea that the obsession with the Fed may continue for some time to come. Now that, I must say, is really going to test my own patience.

March 2015 | Jason P. Tank, CFA