I know this is late notice, but I wanted to try to have a lunch with local readers last year.  This year, I will do it.  The date is 12/29/2010, and the restaurant is The Mongolian Grill of Columbia.  We will do it on 12/29 at 1:00 PM.

Please e-mail me if you intend on coming.  If I get a small number (<10), I will pay for the whole thing.  If a large number, I will subsidize.  I will have a presentation for those who come, and it will not be about my business, at least not in any direct sense.

I look forward to seeing those who will come.

UPDATE 12/24

Time change — we are meeting at Noon.  So far, ten attendees.

I often have to deal with practical “small institution” problems, because of the church I belong to.  Here are two of them:

1) The pastors have a defined contribution plan.  There are two questions.  Are the funds the best that we can get?  Are the asset allocation options that draw from those funds properly calculated? (Two-thirds of the pastors use those.)

For the first question, we have a board member who works for a major fund consultant.  He will easily be able to answer the question.  As for the second question, I have analyzed how the offered funds have done over the last 20 years.  Those allocations have done well in the past.  The problem is, when did the consultant do the look backwards and set the percentages?

The tendency is that once the percentages are set, future performance tends to decline.  Select managers who have done better than they normally would, and watch them regress to the mean, or worse.

My view is select managers that have done well for reasons that are not common to the environment that they were in.  There are often trends that benefit certain managers, then once the trend goes, they are gone as well.  But who did well in spite of the trend?  Those are managers to look at.

2) Recently, four members of my congregation came to me and said, “Here’s the list of managers in my401(k), who should I invest with?”  and “Here’s the portfolio my husband left me (after death), what should I do?  I can never turn down a friend, and particularly not a widow.

This was interesting.  As I looked into the mutual funds, I relied less and less on the performance statistics, and Morningstar stars, but looked at the actual portfolios in concert with performance, and decided that those with unusual portfolios with reasonably good performance were better choices.  Why?  They aren’t following the market.

Today, I ran into a name for that concept: Active Share.  How much does a manager vary from the index?  If you’re going to be an active manager, you ought to vary from the index quite a bit.  That is what you should be paid to do.

“But wait,” says the fund marketer, “Beating the index is the best, but missing the index is the worst.  We survive best with performance that is out of the fourth quartile.  So hug the index as you make modest bets against the index.”

Those are the portfolios I want to avoid.  An article in the WSJ concurs.  Don’t pay active fees for index-like performance.

I feel that way about my own investing.  If I am not looking at stocks that are less considered than most, then what am I getting paid for?  I would rather fail unconventionally than succeed conventionally.

And yet I know that managers that have high active shares, though they may do well on average, get excluded by fund management consultants, because they are too unpredictable.

Look, I am trying to make money for clients.  Consultants are a necessary evil in that process.   Clients would be better off without consultants, but that will never happen, because clients want to stay out of the fourth quartile.

My active share is large, and I have done well.  Does that mean that a lot of people will invest with me?  Probably not, because they are not willing to endure an odd portfolio that isn’t mainstream.  Well, that is their loss.

Meir Statman wants to tell us about the human condition.  We make bad economic decisions regarding investments.  That comes mostly from having multiple desires regarding investing that are inconsistent.  What are our problems?

• We look for free lunches.
• We think he past is prologue.
• We get hopeful.
• We want to look like a winner for friends.
• We follow the herd.
• We are reckless with money not easily earned.
• We save too little.
• We want an option on riches, and a guarantee against poverty.
• We are loss averse.
• We are tax averse.
• We want to be accepted into exclusive investments.
• We want our investments to reflect our values.
• We want fairness.
• We want our progeny to thrive.
• We don’t know what we are doing, can someone teach us?

The spirit of the book says to me that most people don’t have the vaguest idea on what to do with investments.  They invest for many reasons, many of which are not economic.

This is a reason why pension plans should strip the investment authority away from participants, and put it in the hands of trustees.  Face it, only 20% of people at most know how to invest.  Amateurs have a hard time  distinguishing between the long-run and the short-run.

My take is that one has to unemotional, Vulcan-like, in investing, in order to be successful.  Our feelings, whether of fear or greed, deceive us.  We must resist and suppress our feelings in order to be good investors.  And as for me, it took me 5-10 years to get there.  By the time I was done, I created a system that tied my hands when I would be tempted to make a rash decision.

Quibbles

Page 84 demonstrates how short-sighted people pay up for flexibility, paying credit card rates for extra cash. On pages 96-97, he managed to convince me by bad arguments that the old system of segregating capital and income is correct.  Truth, a market-base spend in rule would float with the 10-year Treasury yield, with adjustment for how optimistic we are about the stock market.  Unless the income taken from an endowment floats with the market, it is not possible to be fair across eras.

The book describes our problems in economic decision-making, but provides no cure.  The last chapter tries to make up for it, by suggesting that an intelligent mix of paternalism and libertarianism would be the best solution.

Yes, that would be the best solution, but the devil is in the details, and the author spells out few of them.

Who would benefit from this book:

Anyone wanting to understand why he makes bad economic decisions would benefit from this book.  That would include most of us, and me.  As you read it, think of how you would change your behavior for your good.  Personally, I have designed my buying and selling methods in the stock market to avoid these troubles, but it means I have to have no emotions in the market, and that is tough to do.

If you want to, you can buy it here: What Investors Really Want.

Full disclosure: This book was sent to me, because I asked for it.

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