First Quarter

The quarter that ends today marks the first 1st quarter in 3 years where the broad stock market has shown gains. The S&P 500 Index is up almost 6% for the quarter and the smaller stock indices are up more than that. The NASDAQ Index has been up for 4 straight quarters. From the March 9,2009 lows the S&P is now almost 73% higher. Sadly, many investors have missed this and stayed on the sidelines waiting for the "right " time to buy.

Old Fashioned Investment Advice

A very good article on John Bogle-Vanguard founder in LA Times. His homespun credo- diversify, watch taxes and costs, don't waver. Simple enough and matches what we have preached for 28 years. It all comes down to behavior. We want to micro-manage, out-guess, follow short term trends etc. that take us off the proper path. A good read for uncertain times.

Capitalism& Markets

An excellent article/interview in WSJ today on Professor Gary Becker. He is considered the co-father , along with Milton Friedman of the Chicago School of Economics (at the U of Chicago). In a week where many have been dour and sanguine about the future , Becker is more upbeat. About midway in the article a paragraph that starts "Capitalism has produced..." is the essence of his philosophy.

VAT and other trends

A good piece on VAT particularly the end where the author (Charles Krauthammer) points out that in the U.S. this is likely going to be on top of existing taxes. Little doubt in my mind this is the trend.

Just saw an expose of the student loan nationalization that is a part of the new health care law. Before Tuesday there were 2000+ lenders...now just 1- Uncle Sam. The upshot is students are in effect paying a new tax (by virtue of higher interest rates) to pay for the new law.

One more time

Here is the correct article mentioned in the post below on Social Security. Mea Culpa!

Social Security turns negative

The NYT has a piece on Social Security and how expenditures will exceed receipts this year...6 full years earlier than the most recent appraisal done by the Congressional Budget Office ( in 2008 when Peter Ortzag -now aide to President Obama, headed the office). Seems the economic variables have moved around just too much since then. Doesn't give one much comfort in the numbers coming from these vaulted sources and underscores the depth of financial issues facing the U.S.

New Tax Increases

Economists might disagree about the exact formula for restoring growth but few would support the massive tax hikes coming our way. Starting next year the top marginal bracket increases by 13% (from 35% to 39.6%). Capital gain tax rates increase by one-third (15% to 20%) but once the new health care law unfolds will bump up another 3.8% for a total % increase of 59%! Also, the Medicare tax rate will also move higher by 62%. My guess is even with all of this we are looking square in the face of a national sales tax or VAT to pay for this new entitlement.

Economics Obviated

One of the more interesting aspects of the health care legislation that is about to be signed into law is the role of economics. The allocation of relatively scarce resources is the primary core of economics. To a very large extent, many components in the new law seek to suspend or obviate the natural laws that govern economics by government fiat. History is replete with examples of this being attempted but almost none where it has worked. Markets tend to work and interfering (as we sometimes want to do) with their functions can often lead to nasty unintended consequences.

Our STAT piece this week concerns the 2 stages of life- the savings stage and the consumption stage. There are many things we can't control but one that we can is how much we save for future consumption. In our practice we see many issues ahead because of insufficient savings . A good piece was in Business Week on this recently. The natural laws of economics won't be obviated here either.

Men's overconfidence and investing

One of the more interesting observed outcomes we see with some men is overconfidence about financial/investment topics. A recent article in the NY Times looked at a study by Vanguard of 2.7 million IRA accounts of men in 2008 and 2009. The study found that men tended to react more to market noise and sold at lows as a result. The men bought high and sold low. These findings mirror a study in 2001 by Schwab that concluded men lose almost one percent per year to such behavior versus women. We don't yet know if the reason is biological or something else. Perhaps we will someday but this reflects some of what we have experienced over the years.

Evidence Based Investing

We follow a cogent and coherent philosophy of investing grounded in the science of the markets. This approach is far different than what is proffered by the myriad of brokers and "financial consultants" who cling mostly to the "out-selection/market timing" strategy. I saw a quote recently from the president of Morningstar,Inc. (the mutual fund rating service) where he said "not one fund ever has put together a successful record based on market timing." Yet, the grand majority of investors still ,in whole or in part, follow that path.

We , of course, take a quite different route . Markets work and most of our clients need the long term premium returns available in the market. That is why we provide discipline to stay the course through both good markets and the inevitable bad markets. As we have said before, not being in the market is somewhat akin to financial suicide on the installment plan...you lose more in purchasing power terms with each passing month.

Birthdays- Market bottoms and tops

Today marks the 12 month anniversary of the market bottom for the S&P 500 index. The 70% rise from March 9 last year puts this among the best 12 month timeframes since the index was created in the 1950's. In retrospect, given the overall fragility of the economy this is a feat worthy of celebration.

Of further interest, tomorrow will mark the 10 year anniversary of the Nasdaq index (tech bubble) peak. March 2000 began a 31 month long decline finally bottoming in October 2002 . The Nasdaq is now more than double that bottom but still far off the March 2000 peak.

Job 1...Not Wealth Creation

I have attended many professional meetings over the years where the focus comes down to how to assist clients with wealth creation. Well, on the white board in the conference room at present we have written "Job 1 is NOT wealth creation. Rather , it is helping clients avoid big mistakes". The degree to which we succeed largely depends on how "advisable" the client may be. The holistic and independent perspective we occupy provides us an advantage over most others.

We all are going to makes some mistakes but we must avoid large mistakes , particularly those that result from "big bets" on business and real estate ventures . These tend to be particularly harsh and can have totally wreck an otherwise sound financial plan. Wealth creation...long term wealth creation, is about discipline and diversification. Sometimes the best advice we can provide a client is three simple words "don't do that".

The Fragile Empire

a good piece recently from Prof Niall Ferguson (author of The Ascent of Money) here . He has an interesting, historic perspective . Towards the end of the piece he describes the role that perception plays in the outcome. Extreme? Perhaps...perhaps not.

The Retirement Conundrum

Here is a simple chart from Prof Greg Mankiw's blog (originally from the Economist) that quickly demonstrates the primary problem in funding retirement today. Over the past 40 years or so the period of time in retirement has roughly doubled in the U.S. All of this while savings have declined and lifestyles increased. Not exactly a formula for success.

What is required? Far higher savings both inside and outside retirement plans; postponing retirement until age 70 or so; avoiding huge costly mistakes (big bet business /real estate ventures, divorce ,etc.) ; and maintaining long term discipline.

Fannie & Freddie

Fannie Mae, Freddie Mac and FHA all continue to bleed tons of red ink. Fannie is the largest and recently tapped their unlimited government credit card for another $15.3 billion - the 10th straight quarterly loss. For the whole of 2009 the loss was $74.4 billion - about $200 million per day! These entities, chartered by the government to provide liquidity to the home mortgage market have become perhaps the single largest "time bomb" in the financial sector. The borrowings from the government are "off balance sheet" and therefore not considered part of the collective federal debt numbers that are repeated now with frequency. Yet , even a cursory glance at government bonds in the financial pages show these as government obligations. The companies have a huge negative net worth but guarantee over $5 trillion of mortgages. They have become corrupt political pawns that no one fully understands.