Ron’s Reading List
February 14, 2020
Ron's reading list for life and investment fundamentals includes recommended books on the topics: the way things work; why you’ll never understand the other sex; values; the evolution of moral standards; the difference between modern liberals and conservatives; how the best and the brightest can be totally wrong. Recommended authors include: Macaulay, Wanniski, Tannen, Pirsig, Sowell, and Halberstam.
Some Things I Would Have Liked To Have Known Sooner
February 15, 2019
Here is a collection of items published by Ronald H. Muhlenkamp, including: • “Reading List For Life And Investment Fundamentals 101” • “Basic Financial Maxims I Want My Kids to Know” • “Muhlenkamp’s Musings on Economics” • “Employment Costs” • “U.S. Personal Consumption Expenditures” • “Reflecting over 40 Years—Lessons Learned and Changes Observed”
Yield = Income = Caution!
June 8, 2016
This essay gives examples of why you should completely understand what you are buying before you buy it. Be sure to read the fine print—check the numbers and check the underlying assumptions!
Let’s Get Real: Understanding Your Purchasing Power
June 8, 2016
You must understand the difference between a nominal interest rate and a real interest rate to determine your purchasing power. This essay was originally published in Muhlenkamp Memorandum Issue 108, October 2013.
Learning the Difference between Price and Value: Take Your Child to an Auction
June 7, 2016
Price vs. Value—there is no better place to learn the difference in these commonly used terms than by participating at an auction! This essay was originally published in Muhlenkamp Memorandum Issue 107, July 2013.
The Frugal Consumer: Will It Last?
November 1, 2009
Any time you talk about recession, be aware there are multiple definitions — and if you are using one definition and listening or talking to someone with a different definition, you are not going to come to a common ground. Regardless of definition, it’s my observation that during a recession people tend to work a little harder, spend a little less, save a little more, and the pattern tends to heal itself.
How Much Money Are You Willing to Lose for a Theory?
May 20, 2005
There are a lot of theories that people use when choosing investments for their portfolio. Unfortunately, they are only theories, meaning they are not always accurate or helpful. The challenge is to determine which ones are and which ones are not. The criteria are simple: Does this theory help me make better investment choices (does it make me money?), or does following this theory lead me to poor investment choices (does it cost me money?). There are currently several very popular theories that are costing people an awful lot of money. I’d like to discuss four of them.
January 5, 2003
Consumer spending and consumer debt are often used as indicators of the health of the economy. If consumer spending is strong, the economy continues to grow. If consumer debt is under control, then the consumer spending is sustainable. In this essay, Ron takes a look at consumer spending over the last 55 years to gain perspective not only on the strength of the economy overall, but to evaluate changes in spending patterns over those 55 years.
The Basics of Investing
December 20, 2002
This booklet is a brief overview of the fundamentals of intelligent investment management — an attempt to answer the following questions: What works? What doesn’t? and Why? The Basics of Investing is the survivor’s guide to investing. We find that if you don’t get too far from the basics, you won’t get tagged too far off base.
December 20, 2002
Just as many investors fail to take changes in inflation into account when evaluating investment choices, many also fail to take currency exchange rates into account when investing outside the United States. In this essay, adapted from a presentation delivered in December 2002, Ron takes a sharp look at foreign investing by tracking not only foreign stock performance, but tracking currency exchange rates as well.
How to Choose a Money Manager
July 20, 2001
One of the most common mistakes that investors make is that they move their money from one manager to another frequently, and often at the wrong times. There is a tendency to choose a money manager based on good performance in the last year or two. But then when the manager has a bad year, the investor takes his or her business elsewhere. The problem with this approach is that, in essence, the investor has bought high and sold low. The solution is to do a better job choosing your money manager in the first place so you are confident staying with him or her in the down years. Ron shows us how.
Muhlenkamp Musings on Economics
January 5, 1998
Themes include free will and the government, the effects of inflation and recession on spending patterns, the effects of investment on the economy, and the effect of income taxes on work incentive. There is no free lunch. Prices are set by the buyer. We are all volunteers.
Competition for the Consumer
October 20, 1997
We often hear the argument that a company or a country must do certain things “to compete” or “to be competitive.” This goal “to be competitive” is stated as the rationale for much of the cost cutting and downsizing in industry, as well as the privatizing of various tasks previously done by government, both in the United States and in other countries.
Review of “What Works on Wall Street”
July 20, 1997
A friend asked me to review the book What Works on Wall Street, by James P. O’Shaughnessy. The book was published in 1997 by McGraw-Hill and is subtitled A Guide to the Best-Performing Investment Strategies of All Time. These are my comments: It is a useful book—chock full of data; the book is limited in scope, focusing on the “Wall Street” in the title instead of the “Investment Strategies” in the subtitle; the book is all hindsight. It should be titled, “What Would Have Worked on Wall Street.”
Problems With Investing for Income
October 20, 1996
In “Estate Planning for Generations,” we began a discussion on the effective integration of good investing and good estate planning. In this essay, Ron shows how investing for “income” is flawed. What investors should do is invest to grow their assets. Though it may seem like semantics to some, it is a fundamentally different approach to investing and will lead to better investments and lower taxes.
Fund Your IRA or How to Retire Wealthy by Driving Used Cars
April 2, 1995
Recently, I commented to a friend that most investors buy stocks the way teenagers buy clothes. He responded, “How should they buy stocks?” Being a slow thinker, I didn’t have a ready answer then, but I do now. Buy stocks the way you would buy used cars. The truly amazing fact is, if you also buy used cars, you can get rich on these two actions alone. It is not hard to save $2,000 per year by driving a used car.
The Game of the Stock Market vs. The Business of Investing
January 20, 1995
I entered this business in 1968. At that time, I had never owned a stock or bond, and I had never taken any courses in Wall Street finance. (I had taken courses in corporate finance.) So I began my studies with a clean slate. I soon learned that there are an unlimited number of people with ideas about how to invest your money, and all the ideas sound good at the time. Some of these people are paid to sell newspapers and magazines; some are paid to entertain on radio or television; some are paid commissions to sell financial products; and some are actually paid to manage other people’s money. Only this last group publishes the results of their advice.
Diversification: Too Much of a Good Thing
October 20, 1994
We often hear the phrase “Don’t put all your eggs in one basket.” We think that’s good advice. We always use at least 20 baskets, never putting more than 5% of our assets into any one of them. But it’s still important to check the quality of the baskets. Not all baskets are well constructed. Easter baskets are designed to be pretty. They are okay for carrying a few eggs which are already hard-boiled, but they are not suited to carrying a full load of fresh eggs on a daily basis. Not all baskets are appropriate in all climates or for all purposes.
Are Stocks Too High?
January 2, 1994
This essay, written in January 1994, looks at the assumptions behind stock valuation models and why they often mis-price the stock market. Using the same data, but modifying the model, Ron creates a new valuation model that better anticipates stock prices. Same data—different perspective.
What Is Risk: Part II
October 2, 1993
"What is Risk: Part I" was written in October 1989 and discuss two categories of risk: the risk of volatility and the risk of losing money. In October 1993, one of Ron’s largest clients (a pension fund) was being told by a stock brokerage firm to increase its investment allocation to bonds, since bonds were “guaranteed” and the returns for the prior 10 years had been nearly as good as the average for stocks. Ron didn’t think the prior 10 years was the appropriate time to consider. In this essay he looks back to 1952 to examine the long-term performance of stocks and bonds. In doing so, he illustrates why the brokerage firm’s advice to invest in more bonds was misguided.
Beware of Good Yields
April 20, 1993
This essay, written in April 1993, was published as investors had just come through a period when many of the risks of fixed-income securities had become apparent, but this did not stop them from continuing to look for high yields in fixed-income securities. This essay explains the yields and risks of fixed-income securities so that investors can know what to expect and what to watch out for. Remember, if it seems too good to be true, it probably is. Look for the hidden risks.
Mom: The Squeeze On Your Income Will Continue
January 20, 1992
Mom: since November 1990, you’ve seen the interest rate paid on one-year bank CDs fall. Many of your friends are waiting (hoping) for these rates to go back up, but it isn’t going to happen. To understand why, you really need to look no further than the actions of your children. Today your children are paying down their debts and refinancing their mortgages, often for a shorter term.
What is Risk
October 1, 1989
This essay discusses risk in two categories: the risk of volatility and the risk of losing money. It also discusses long-term investing and diversification as preventive measures to these risks. The 2005 update suggests a third, and often overlooked, risk: paying too much for a stock in the first place. The preventive measure is knowing how to value stocks.
Defusing the Inflation Time Bomb
July 1, 1989
The intent of “The Inflation Time Bomb” was to point out that long-term investment planning that focuses only on dollars and income, while ignoring purchasing power and assets, can be a trap. Dollars must be adjusted for inflation to get purchasing power, and incomes must be adjusted for the loss of purchasing power. Without these adjustments, assets will be depleted and so will income. The problems that arise from neglecting to make these adjustments have come to the fore over the last 30 years as inflation created large differences between nominal and real interest rates.
The Inflation Time Bomb
June 1, 1989
The very rules that we were taught to conserve principal have become a trap. People are desperately trying to maintain their “incomes” by buying investments with high yields, believing that if they “spend only the income—don’t touch the principal,” the value of their assets and their incomes will remain intact. But it’s a trap!
Wake Up America – Houses Don’t Make You Money!
January 1, 1987
In the 1970s (when inflation rates were higher than mortgage rates), one of the best investment strategies was to borrow money. The easy way for people to borrow money was on real estate. It worked in housing, in farmland, and in commercial real estate (which was also an effective tax shelter). People continued to believe in the strategy through the 1980s, even though the economic climate had reversed in roughly 1981. Ron wrote “Wake Up, America—Houses Don’t Make You Money!,” in July 1987, to point out that change.
Why The Market Went Down
January 1, 1979
This essay was written in 1979 for Ron’s peers in the investment industry. Price-to-earnings (P/E) ratios on stocks had declined from 17 to 7 in just seven years, and no one seemed to understand why. A short glossary has been added at the end of the essay for easy reference.