Notable Quote

We are what we repeatedly do. Excellence, therefore, is not an act but a habit. Aristotle

Music Sometimes Trumps the Written Word

Rather than opine on economics, investments, or other things personal finance I thought I would let this blog entry speak for itself.

Seasons Greetings,



Sexy, Edgy, and Hot: What a Combination

Before you get too excited, the reference is to the Tesla Model S.

It’s all of those things, and candidly, I would love to own one, even though “hot” in this case is both an apt metaphor and a reference to the fire-prone battery system.

Tesla will get its battery problems sorted out. It could have happened to anyone. Oh wait, it did . . . Boeing, and they have the best engineers in the world.

Since this is an article about finance and investments let’s “change gears” and discuss Tesla Motors (TSLA) as a proxy for investing in general.

The stock trades around $135 per share, down from $194 just a few short weeks ago. Its price hovered between and $20 and $40 per share for most of its short lifespan until April of 2013 when it began a meteoric rise to the high levels of recent weeks. To its credit, the car got a very favorable safety report which contributed to the march upward in the stock price. The car is beautiful. Sometimes we even refer to vehicles in the “feminine” by saying, she is beautiful.

Now let’s look under the hood (pun intended), not at the engine (it’s beautiful) but at the financials. The stock rose 338% from April through October. The S&P 500 is up about 9% over that same period. The price/earnings ratio of TSLA is non-existent because there are no “earnings” yet. In fact the company is losing about $1.95 per share. Schwab projects a forward P/E next year of 241, which compares to about 17 for the S&P 500.

Sexy, edgy and hot might be good reasons to purchase a car, a tuxedo, or an evening gown but they are terrible reasons to purchase investment assets. In that part of your life, stick to boring, steady, and proven over time.

Disclosure: TSLA stock is not in my personal or any client accounts. It has never been and there is no intention to purchase any in the foreseeable future.

Government Shutdown: Constitutional Crisis or Political Gamesmanship?

The Congress seems compelled to take this game of chicken right down to the wire.  An 11th hour agreement, even if only resulting in a temporary delay, will allow many members of Congress to discreetly wipe the egg off their faces.  Neither side can acquiesce now. After all, there’s still a whole day before disaster strikes.

I’ll leave the T.V. networks and newspapers to make the case of whether the Republicans or the Democrats bare 51% of the responsibility (or maybe 80%) for driving the country to this economic pain point.

The problem is, we’ve already thrown the proverbial “baby out with the bathwater”.  The U.S. has become the laughing stock of the world.  America has been the world’s one true economic super-power for a hundred years. Antics like risking a government default jeopardize the likelihood of maintaining that position into the distant future.

If an actual default occurs, the damage to the U.S. reputation would take a long time to repair, if it were repairable at all. The rest of the world (with few exceptions) looks to the U.S. as the fortress of economic strength and stability. The threat of default is making foreign governments question our position as that fortress to the world. An actual default might be the tipping point that leads the rest of the world away from the purveyor of “full faith and credit” to the world.

Imagine a conversation with Treasury Secretary Jack Lew if the country defaults on its debts come this Friday. “Mr. Secretary, what’s the priority for paying the bills of the country? Will it be paying interest on Treasury Bonds or paying Social Security recipients? The Chinese won’t be happy to miss an interest payment, you know. But wait, the Chinese are only the second largest owner of U.S. Treasury debt. The largest owner is the Social Security Trust fund. Can we hold-off paying U.S. service member salaries for a while”?

I haven’t heard a single person in the news say they think the U.S. will default. That’s why the stock market has virtually shrugged off the risk of default. The “smart-money” says this is all political gamesmanship. If the smart money is right, the economic damage to the U.S. will be contained but the damage to U.S. credibility has already begun.

If the country defaults and misses important payments, the short and long term results will be unthinkable. Are we a government “of the people, by the people and for the people”, or are we a government, “of the Republicans, of the Democrats, and of the Tea Party”?

Retirement Advice or Not: What’s Best for You?

Deloitte (the accounting and financial services firm) recently released the results of a study that asked people about their decision to engage professional help in retirement planning. With millions of Baby Boomers entering or nearing retirement, planning for it will be a hot topic for years to come.

The study found that about 66% of people don’t consult professionals for advice. Of those with more than 15 years until retirement the number is about 75%.

A third of respondents felt they didn’t need professional advice, yet only 22% of all respondents feel confident that they can meet their financial goals in retirement.

The obvious question then, is: why do so few people seek professional retirement advice?  Unfortunately, the answer is much less obvious. Only 13% said they had a bad experience in the past. Another 12% said they couldn’t afford to hire a professional.

Many people simply don’t want or feel they need professional advice.  Maybe they have not saved enough and don’t want to hear “the answer”. Others (think entrepreneurs, executives, other 50 hr. work-week professionals) simply don’t love the elements of personal finance enough to make the time to do it. They hope it’s enough to contribute to their 401k or profit sharing plan at work.

The majority of “boomers” don’t have a pension plan in retirement (like their parents). Social Security should be there but it is not enough.  The majority of retirement income will still need to come from invested assets, or from continued employment (which is not always a bad thing).

Regardless of the reasons to engage, or not to engage professional retirement advice, most people agree that retirement planning is critical and complex.   It’s not terribly hard but it does take time, effort and a great deal of interest in the subject.

Here’s a list of competencies and interest areas for the “do-it-yourself” retirement planner. If that’s not you, then use this list to qualify a professional who can demonstrate expertise in these areas:

  • Interest in Economics (domestic and international)
  • Enjoyment of the study and application of personal finance
  • Strong familiarity with asset allocation models and portfolio diversification (i.e. stocks, bonds, real-estate, natural resources, art, collectibles, etc.)
  • Ability to construct Time Value of Money scenarios on a financial calculator
  • Comfort analyzing and modeling future market returns and rates of inflation into calculations
  • Ability to project income needs in the 10,20, or even 40 year time horizon
  • Factoring the effects of inflation on purchasing power and investment returns
  • Ability to identify the strengths and weaknesses in an estate plan
  • Determination of a family’s insurance need (i.e. Long Term Care) and its impact on retirement
  • Running retirement simulation scenarios using various calculators (many are available online)
  • Regularly reading the financial press and comments from smart people around the world
  • Time and interest  in researching  assets and asset classes for your portfolio
  • Measuring and tracking results and adjusting when necessary

This IPO is a Guaranteed Payoff

2012 will not be a record year for the number of initial public offerings but it certainly will be a memorable one.

Data compiled by Renaissance Capital indicates there were 128 IPOs this year. That’s about the average over the past ten years. The amount of capital raised however, at $43 billion, was the second highest for a year in that same ten year period. Of course, about $16 billion of that came from the Facebook (FB) IPO. FB stock is down about 29% since its frantic and problematic debut in May of this year.  

Outside of people cutoff from modern technology, everyone heard of the Facebook IPO but most of this year’s IPOS are not known to the general public. The stocks of some are up while others are down. Data from Renaissance Capital shows Guidewire Software and Intercept Pharmaceuticals are up more than 130% while Envivio and Café Press are both down more than 70% this year (I don’t own, nor am I recommending these).

I rarely recommend anyone buy a stock at its initial public offering. Nevertheless, I have finally found an IPO I can recommend without hesitation, and it is fitting for investors of all types and risk tolerance.  You see, it’s not an Initial Public Offering at all; it’s an Initial Puppy Offering (IPO) and it’s from Canine Companions for Independence.  That’s right, if you watched CNBC yesterday morning (Dec. 20th) you would have seen Canine Companions for Independence ringing the opening bell on the New York Stock Exchange along with their longtime partner Eukanuba Dog Foods.

Canine Companions for Independence is a national non-profit organization that provides highly trained assistance dogs, free of charge, to children, adults and veterans with disabilities. They created the Initial Puppy Offering, to help meet the skyrocketing demand for assistance dogs across the United States.

Eukanuba Dog Foods (A Division of P&G) is an “Angel Investor” in this IPO with their generous donation of $100,000. But anyone can be an angel investor with as little as a fifty dollar investment in the Initial Puppy Offering. I have the IPO certificate hanging on my office wall and it’s quite a conversation piece.

This is one IPO that is guaranteed to pay-off.


The 7 harmful vices

In his new book, Behavioral Finance and Wealth Management, Michael M. Pompian highlights seven primary biases he thinks can be keeping investors from achieving their financial goals.

Pompian polled 178 individual investors about 20 key behavioral biases. The following ones had a greater than 50% affirmative response rate:

1)      Loss Aversion Bias: The pain of losses is greater than the pleasure of gains

Have you ever lost sleep thinking about your winning investments?

2)      Anchoring: Getting “anchored” to a price point when making an investment decision

Buying or selling at a particular price point is often a good and disciplined strategy. The key is whether the price point is part of a strategy or a figure determined out of emotion or psychology.

3)      Hindsight Bias: Believing that investment outcomes should have been able to be predicted

A lot of people missed the Apple opportunity. Stop kicking yourself.

4)      Recency Bias: Taking investment action based on the most recent data or trend rather than putting current situations into historical perspective

Facebook anyone? The craze for that stock at the IPO far exceeded logical decision making based on traditional metrics like price/earnings ratio and the amount of revenue they were generating.

5)      Representativeness Bias: Making current investment decisions using the result of past similar investments as a frame of reference

You had investment success with an asset that has risen steadily over the past few years. Now that same investment is overpriced by historical standards yet you want to buy more. This one is often closely related with “anchoring”.  “I think I’ll wait ‘til the price hits 100 and then sell’.  Never mind at $87 the stock has a P/E ratio of 100!

6)      Status Quo Bias: Not taking action to change one’s investment portfolio (i.e. doing nothing when prompted to do so)

‘The market is up; I think I’ll wait to get in’. ‘The market is down; I don’t want to get in now’.

7)      Regret: Past (poor) decisions affect future investment decisions

Did you buy just before the 2008 crash and become so shell-shocked you never got back in?

If so, you missed out on reversal of all the paper losses (i.e. in the S&P 500) and further gains.

Pompian also identified a series of 19 secondary biases. He asked questions of the survey respondents to determine which biases seemed to correlate in higher percentages. One such case was those with the ‘status quo’ bias had a high tendency to have ‘regret’ as their secondary bias.

He writes it this way, ‘The major implication for status quo and regret is that these biases often keep otherwise good-intentioned investors out of a market that has recently generated sharp losses or sharp gains. Having experienced losses, our instincts tell us not to invest. Yet periods of depressed prices may present great buying opportunities. And we’ve all also been guilty of cutting risk out of fear of gains evaporating only to see the markets continue to run–especially when the Fed is so accommodating’!

It’s probably too much to ask that we, as investors, not have biases. Instead, it might be best to recognize our biases and work at not letting them get in the way of achieving our financial goals.


“Three reasons why you shouldn’t try to time the market”

#1:  Modern Portfolio Theory holds that markets are efficient and investors are rational. Given long enough periods of study this theory holds up very well. In fact, scholars have won the Nobel Prize putting forth their work in this area.

Of course the shorter the timespan the more likely it is that markets are inefficient and investors are completely irrational. After all, that’s how traders make money. They exploit hourly or even momentary events that represent a chance to make a score by jumping on a pricing inefficiency, a delay in data, etc.

Still, in an investor’s (not a trader’s) frame of reference, years vs. minutes, markets are pretty efficient and we can conclude investors (as a whole) are rational. If you’re already convinced just read the rest for fun.

If you don’t buy the Modern Portfolio Theory, consider reason #2: Behavioral Economics. Behavioral Economics (also called Behavioral Finance) is the study of how cognitive and emotional factors affect the economic decisions of individuals. Time after time we see people do just the opposite of what they should. It is not the goal to “buy high and sell low” yet that’s exactly what the average investor does all too often. They let their emotions dictate their behavior.

Baron Rothschild, an 18th century British nobleman made a fortune buying in the panic after Napoleon’s Waterloo. He is believed to have coined the phrase:  ”Buy when there’s blood in the streets, even if the blood is your own”. 

We all had our own blood (investment losses) in the streets during the financial crisis of 2008. Yet, how many people were buying? Very few. Many were selling, and in dramatic fashion.  They were driven by behavioral economics to do exactly the wrong thing at the worst time. Staying out of the market for most of 2009 and 2010 helped cement losses, while remaining fully invested eventually reversed all the paper losses.

Really, how can you time this stuff?

OK, you’re still not convinced? Let’s look at #3…Simple statistics. From January 2008 through July 2012 there were 55 months. The S&P 500 was up more than 5% for 9 of those 55 months, or 16% of the time. There were 18 months that were up over 3% (33% of the time).

There were 16 months where the S&P was down at least 3% (29% of the time) for the month. In 13 of those months it was down by more than 5% (24% of the time).

A person might guess right once, or even a few times in succession but not over the long haul.

Just for fun, try this game. For each of the next six months predict if the S&P 500 will finish up or down, and by how much for the month. If your track record is pretty good then try it for another six months.

By that time, hopefully you will have concluded that trying to time the market is a fool’s game. If so, you very likely would have saved yourself money, or not left much of it on the table due to poor market timing.

Will somebody take Sandy Weill’s temperature?

Sandy Weill could be running a very high fever. How high does it take for a person to hallucinate…105, 106? Could that explain why in a recent CNBC interview Weill called for the break-up of the big banks? The so called, “too-big-to-fail” banks.

His call is not extraordinary in itself (many happen to agree with it). The noteworthy part is that Sandy Weill was the father of the “bank supermarket” model. As CEO of Citigroup in the late 1990s he was the principal architect of the effort to allow banks to be the one stop shop for consumer and commercial finance. He recruited Gerald Ford and Robert Rubin to join his crusade and in less than two years paved the way for Citibank (and many others) to become retail lender, commercial lender, brokerage business, credit-card provider, insurance outfit, and investment bank, all wrapped up into one. In effect he created the “too-big-to-fail” global banking super-center.

Lots of people are speculating on Weill’s motivation to call for this 180 degree turnabout from the model for which he gets most of the credit. Some say it’s vintage Sandy, who ten years after retirement is longing to make headlines again. Others say it took courage for the guy to reverse course and that he truly believes the model doesn’t fit today’s business climate. The best explanation was from “Ace” Greenberg, former head of Bear Stearns. Greenberg thinks Sandy Weill didn’t actually make those comments but rather it was Sacha Baron Cohen (Borat) in a Sandy Weill disguise on CNBC.

It doesn’t much matter what Weill’s motivation is. There is something to be said for a financial world where community banking is once again built on relationships, investment banks limit their reach to dealings on Wall St. vs. Main St., and Insurance companies prudently manage risk and make money the old fashioned way, one policy holder at a time.

Hey Sandy, check the thermometer. Maybe it reads 98.6 after all.

Is Buy and Hold Investing Dead?

The time for buy and hold investing is dead! At least that’s what its critics say. My response…nonsense. The concept just needs a little clarity of definition and purpose.

Its critics would have you believe that buy and hold is synonymous with “buy and forget about it”.  Any serious investor who subscribes to buy and hold (professional or amateur) would never equate it to buy and forget about it. 

Don’t get hung up on the terminology, “buy and hold”. The philosophy in practice is:

1)      Buy

2)      Monitor Periodically, and

3)      Sell (or adjust) based on some objective criteria.

The critics will have you believe that today’s markets are different and the only way to succeed is by shuffling in and out of assets and whole asset classes. Clearly some things are different today than in 1950. The internet gives us near instantaneous access to information and Wall St. has less patience for a company that misses an earnings target. Nevertheless, we still can’t predict the next market move with certainty much less the date that a bull or bear market will begin or end. 

Next time you hear someone say, “Buy and hold is dead” investigate their frame of reference. Do they come from a position of day trader, T.V. panelist of an options trading show, subscription newsletter editor, or active portfolio manager trying to debunk the value of indexing as a strategy? People in these kinds of roles have a vested interest in trading in and out of stocks (or recommending you do so).

Market volatility has been the fuel for this debate, especially after the market downturns of 2008 and  Q3 of 2011. The fact remains; there is no empirical evidence to show that trading in and out of stocks, bonds, and Funds produces better results than sticking with a disciplined strategy that includes having a reason for buying an asset and criteria for selling it.  The proof is in years of data showing that most mutual fund managers don’t generate better returns over the long term than the benchmark index against which they are measured. Just read the literature from Standard and Poor’s, Ibbotson and Associates, Morningstar and Vanguard, to name a few.

Is buy and hold investing dead…not on your life.

The Dow Crosses 13,000, now what?

For the first time since May of 2008 the Dow Jones Industrial Average closed above 13,000. Hopefully many readers held firm since the day of Dow 6547 in March of 2009 and have been able to enjoy the recovery in their investment accounts.

Those that have been waiting for the 2012 “pullback” to put their money to work have missed out on a nearly 8% run in the S&P 500 since the start of the year.  This investor may miss out on another two percentage point rise,  or catch a lucky break and get in when things drop a few percentage points. None of us can predict these,  or an infinite number of other possible scenarios.

So,  what’s a smart approach if you are either fully invested or if you have been sitting on the sidelines with a pile of cash?

If you are fully invested,  stay that way. You’ve heard it said countless times;  “don’t try to time the market”.  Instead,  look carefully at how your current assets are allocated. Thus far this year the market has been very kind to the stocks of large company domestic stocks. Chances are,  that part of your portfolio may have risen above its target range. You might be saying,  “but I don’t have a target range”. In that case, step back and create an asset allocation target. The end of Q1 is a great time to evaluate the asset allocation across all your investments,  in and outside of retirement accounts. It’s also a good time to rebalance if things have gotten too far out of target range.

For those with someone managing your money,  keep him on his toes by asking questions about your asset allocation during your Q1 portfolio review. If you don’t have an investment policy statement that outlines your allocation targets,  encourage your advisor to create one for your review and approval. You would never build a house without a set of plans;  similarly,  you should never invest without an investment policy statement.

What about the person who is sitting on cash waiting for the right time to get back into the market?  You should take a measured approach. Start coming back in but not all at once. Why,  because this run-up of the last eight weeks is not likely to continue for the rest of the year.

Sometimes,  when a market index crosses a big psychological barrier (like Dow 13,000) professionals start taking some profits. Institutional investors may want to lock in some profits and good performance figures for Q1. This could lead to downward pressure on stock prices due to institutional selling in the coming weeks. Not to mention the possibility of a negative effect on stocks from the newly looming concern (again) over gas prices.

Who knows which we’ll see first,  Dow 14,000 or Dow 12,000. In the long haul it won’t matter if your portfolio is created with care and managed with discipline.