I don’t know.  You don’t know.  He doesn’t know. We don’t know. You all don’t know, and all of y’all don’t know either. They don’t know.

Conjugation complete. No one knows.

I am in the odd position of being relatively bullish regarding the debt ceiling in DC, which is near me, and affects my local economy.  I think a deal will be struck, and that it will be passed by both houses, and signed by Obama.  At least, I give that 60% credibility.

Though I don’t like the t-party, I admire their adherence to principle, which is usually lacking in DC.  In general, we want more principled congressmen, except when they are more principled than we are.  We are hypocrites, and delusional believers in magic.

Most people think that there is an easy solution that will not affect them, but will hit all of the evil people who sponge off our government.  Sorry, the easy solution does not exist.  There is a tough solution that will make the rich pay, and will eviscerate the Bush tax cuts, but not change tax rates.  Change the definition of income such that improvements in economic position can’t be delayed.  Make Warren Buffett pay his fair share now, and me too.  Move back to the Tax Reform Act of 1986, and eliminate all of the deductions, and then go further, tax us all like traders, and make us pay each year on the net increase in unrealized gains.

With such a change, the inheritance tax would not be needed, because the rich, and corporations trying to avoid taxes by keeping cash overseas would all be taxed, at least for a little while, before they move to Ireland or Bermuda.

In 2013, no one expected that the US Military would descend on all of the tax havens of the world to reclaim their fair share. I jest, but what could be simpler than to force them to raise taxes, and remit them to the US.


In the present situation, my bond portfolio is largely in foreign bonds, the next part in inflation-protected securities, and the last part in long nominal US Treasury Bonds.

What I see here is an unstable situation with potential for goods price inflation or real deflation, making long dated claims valuable.  Whatever.  It is uncharted waters, and are there monsters here?  Maybe.  We’ll soon see whether there is some sort of agreement, or whether we get to find out the consequences of a drop in liquidity, or aggregate demand, combined with a drop in future claims on wealth.

This post is different, therefore it has to start with a disclaimer.

I am not a lawyer. Yes, I am good at reading legal documents, such as securitization agreements, structured securities, insurance contracts, insurance laws and regulations, etc., but that is not the same as having legal training.  I make mistakes, and how much more so when I am operating near the edge of my field of competence?

So don’t rely on this.  This is not legal advice. This is just my faltering attempt to figure out a legal question that faces my business.  For all the small investment advisers out there who face similar problems, use this as a springboard in your discussions with your lawyers, or for your own research if you don’t employ a lawyer.  I am providing links to laws that I think, but don’t know, are current as of today.  Use them at your own risk.

I make no representation or warranty that this is accurate. I did my best.  Since my website is free, please realize that you get what you pay for.  You’re paying nothing, so don’t expect miracles, and don’t sue me, please?

There. I feel better now.  Here’s the question: if you are a State-registered investment adviser, how many clients can you have in a state where you have no physical presence before you have to register with the state?

This is an important question for me, because I am best known for what I have written at Aleph Blog and RealMoney.com.  I get most of my clients “out of the blue,” e-mailing me and asking what I am doing.

When I was at a meeting with the head of the Maryland Division of Securities last February, she asked if any of us were “internet only” advisors.  I was the only one that raised my hand.  I have far more clients outside of Maryland than inside Maryland.

That ‘s the reverse of most small RIAs that I interact with in Maryland.  They tend to be Maryland-centric.  Good for them.

Back to the question: if you are a State-registered investment adviser, how many clients can you have in a state where you have no physical presence before you have to register with the state?

For most states, the answer is you can have five clients.  Before you take on client number six, on a one year rolling threshold, you must register, which means a lot of paperwork and the payment of fees on an annual basis thereafter.

Note: when you register in 15 states, you have the option of moving to Federal regulation, even if you are still below the $100 million Asset Under Management limit.

Now, unlike other sites that have tried to answer this question, I am giving you links to the state laws that answer this question.  But state laws change.  Links get broken.  Sometimes links don’t get broken, and you get an old version of the law.  Use this as a springboard for your own research, not as a substitute for it.

Here are the states that have the five client “de minimus” limit:

Wyoming does not have registration of investment advisers, as far as I can tell.

Here are the states that require registration on the first client:

I am less certain about Maryland, because other non-governmental sources say it is a “de minimus” state.  I can’t find it in the law or regulations, though.  I have e-mailed both Louisiana and Maryland to clarify their positions, but I haven’t heard back from them yet.  I find it funny that I am registered in two of the odd states, Maryland and Texas.

One more note: occasionally states cite section 222 from the Investment Advisers Act of 1940, which gives a national “de minimis” standard.  But that’s not a national standard, and thus Louisiana, Maryland and Texas require filing on the first client, and in Wyoming, you never file.

On the journey to gather this data, I found that some states have very good websites and some are quite poor.  Some go out of their way to help investment advisers, and some seem to have little interest in that.  Some follow the model law in one of its historical variations, and some are eclectic, or even weird.  Still, there seems to be more standardization in securities law for investment advisers than for life insurers.  That’s not saying much.

For those reading this, let me know about errors, broken links, law changes, etc.  I might repost this someday.

And remember, this could all be wrong, outdated, etc., so do your own due diligence or hire a lawyer.


This book is the opposite of the book Interest Rate Markets, where bond markets were described, but there was no math.  This book was written by an academic who has done many seminars for bond professionals so that they could understand the math behind bonds.

The math rarely transcends algebra, except where he used calculus to briefly explain duration and convexity.  Perhaps he could have consulted with actuaries who use discrete approximations.

One more virtue of the book is that if you use Bloomberg, which is common for bond professionals, the book explains the nuances of how Bloomberg does many of its detailed bond calculations.  It even explains why you have to interpret some of what you get from Bloomberg with caution, because it may use different assumptions than you would expect.

So if you want to learn the bond math, this book is a congenial way to do so.  I recommend it highly.


Now, the writer is an academic who has never managed bonds.  As such, he can’t help a great deal with bond selection or portfolio management issues.  But that’s not the main goal of the book… he’s here to teach us the math, and nothing more.

Who would benefit from this book:

Anyone who wants to learn the bond math would benefit from this book.  Go learn and conquer.


If you want to, you can buy it here: Bond Math: The Theory Behind the Formulas (Wiley Finance).

Full disclosure: I asked the publisher for the book and he sent me a copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

I thought it was bad enough to try to dissuade people from buying life contingent cash flows.  Now I get to talk about Non-Traded REITs.

This is the first time I heard about them.  Doing a little digging, there is controversy around them.  But let’s talk about the benefits first:

  • You receive a high and steady income.
  • The stated value of your holdings remains stable, thus insulating investors from the chaos of the market.
  • Professional management of commercial real estate is now available to small investors, with high returns.

But then there are the limits:

  • Liquidation through the sponsor is limited.  (Dated, but gives you some idea…)
  • You likely can’t cash out in full except through illiquid secondary markets where you take quite a haircut.
  • If the underlying real estate does not do well, your income will shrink or disappear.
  • You have little data on how the underlying real estate is doing.  Is the dividend they are paying coming from income or return of capital?

Long-dated, illiquid assets exist for two reasons:

  1. To illustrate high yields to non-knowledgeable investors.
  2. To pay large commissions to those that sell them.

It’s hard to tell which of those are more important, but this is another reason why I continue to talk about illiquid investments, and why most people should avoid them.  It is much easier to cheat people when there is no liquid market available to validate what is happening with the investment.  It is not that Non-Traded REITs protect investors from volatility, as much as they hide volatility from investors.

Large commissions on investments are only possible when there is a lock-in where surrender charges pay off the commission.  Where there are large commissions, misguided investing is more likely.

Look, I could set up 10-year stock trusts.  I will tell you what I will invest in, but since you have no withdrawal rights, you’ll have to wait 10 years for liquidity.  That does not sound like a better investment than going to Vanguard.  But many don’t go to Vanguard because they will not do their homework.  Should we begrudge those who sell to the fools that will not do their own homework?

I wish that we could.  Hey, the SEC is going after them.  Why not?  It is a reply of the limited partnership era of the ’80s.  Illustrate high returns — deliver capital losses.  I could not get why my first boss bought his limited partnerships, because of the losses taken in the era.

It follows the paradigm for illiquid investments — Offer high yields, suck in money, pay high yields, and if things go bad, deliver large capital losses.

With publicly traded REITs low yields have returned better then high yields.  The attempt to generate high yields requires a strategy where everything must go right.  That doesn’t work.  The low yield strategy does work, because there is more flexibility to manage, and raise payouts only after strategies have succeeded.

It is the same for Non-Traded REITs.  They offer high yields after paying high commissions.  Those high yields rely on capital gains on the properties.   Relying on capital gains is poison.

I will say it plainly: unless you are an expert who knows more than the seller, avoid buying illiquid investments.

Closing notes

There are many well-dressed people in this business.  But none discuss the scandal surrounding it.

This an example of those that prey upon small investors to get them to invest in non-traded REITs.

This is a growing area of investment, as people seek yield.

Pricing of Non-Traded REITs is controversial.

Here’s an example of a Non-Traded REIT that failed.

Look, my view is that that value of liquidity is usually underrated.  Liquid investments allow you to shift when opportunity favors such a move.  Whether you are ready for such a move is another matter, but whether you are ready to give up liquidity should require a similar degree of thinking.

I would not invest in Non-Traded REITs, the protections are lower than comparable investments.  Avoid illiquidity.

We can’t rely on US Treasuries?  If so, what can you do to preserve purchasing power?  I will ignore a variety of exotic strategies/derivatives and focus on things that can be executed by individuals and small institutions.

The first idea that comes to mind is gold, silver and commodities.  Commodities don’t lie, they just sit there.  But the prices don’t just sit there.  They go up and down with demand and supply.  I’m not an expert there, so I would say keep positions small, enough for diversification relative to volatility.

Idea two is foreign debt of unquestionable solvency.  Well, that takes much of the world off the table, leading to investment in the developed fringe currencies — Canada, Australia, New Zealand, Norway, Sweden, and the Swiss Franc.  Toss in the Yen, though it isn’t fringe.  Not a very large group, and their currencies have run like mad.  Could they fall?  Imagine a US default, where aggregate demand drops across the world because the Treasuries in the banks of other nations are only worth 70% of face value.  Deflation would drive commodities and fringe currencies lower.

Idea three is an echo of two — buy the debts of emerging markets with more orthodox economics than the US, Eurozone, and China.  Nice, but their currencies are high as well.  Same problem as two.

Idea four is buy high quality equities that pay dividends.  There’s a plus and a minus here.  Minus: Equities are highly sensitive to confidence / trends in aggregate demand.  Plus: equities, if conservatively financed have positive optionality, subject to the same problem you have: what is a good store of purchasing power?

Even buying needed resources ahead might not work because demand conditions might be lower going forward.

Idea five is buying high quality non-Treasury domestic debt.  Along with ideas 2, 3 and 4, this seems to be Pimco’s strategy.  But our payments system is interconnected.  Any non-payment, or serious threat of non-payment will disrupt the ability and willingness of others to pay.

Idea six is stay in US Treasury debt — where else can you go?  You’ll get paid back eventually, with interest, most likely…  Hey, TIPS could work in an inflationary scenario.

Idea seven is hold physical US cash.  That should retain value of a sort until the debt ceiling situation is settled.

My main point is that there is nowhere to hide with certainty.  There are places to diversify into, and maybe you should consider some of them as part of a broader asset management strategy.  But avoid changes motivated by panic.  They almost never work.

In a debt-driven world, with fiat currencies, everything is confusing because there is no obvious store of value offering some small (but not near-zero) yield.  A small positive inflation adjusted return is healthy for savers, and good for the economy.  Let the Fed adjust its policy, and then the hiding place would be simple — CDs.

Broker: “I’ve got a block of X Corp bonds offered cheap.  You interested?”

High Yield Portfolio Manager: “X Corp bonds are going to be downgraded by (S&P/Moody’s/Fitch — pick one or many) soon. We think the bonds have further to fall, but we will be interested after the downgrade.  It’s not a bad story, just a little misunderstood.”

Broker: “Gotcha.  I understand.  Call ya after the downgrade.”

HYPM: “Thanks.”

-==-=–==-=-=-=-=-=- Two weeks later, the downgrade happens -==–==-=-=–=-==-=-=-

HYPM: “Thought you were going to call me after the downgrade.  We are looking for bonds of X Corp.”

Broker: “Hey, been busy.  I would have called, but there aren’t any X Corp bonds to buy at levels you would have liked — the bonds are at least 0.30% tighter in spread terms than when I last called, and I’m not sure that I can produce bonds here.  Post-downgrade, holders are less concerned.”

HYPM: I guess many were waiting for the downgrade to buy.

Broker: Seems that way.  Ooh, gotta jump, see ya.

HYPM: Uh huh.


Broker: I’ve got a block of AAA GE finance debt at a tremendous spread to Treasuries.  Interested?

Investment Grade Portfolio Manager: Sorry, don’t own any GE Capital, not interested.

Broker: Why not?

IGPM: Guarantees are weak, and they are overly levered relative to their rating.  They always trade like a single-A, and for good reason.

Broker: That they do.  Catch ya later.


Contrary to popular opinion, bond ratings are opinions, nothing more, nothing less.  In general, those opinions do not affect bond prices to any great degree, with a few exceptions.  Why?  Bond investors do their own due diligence, and do not depend on bond ratings for their analysis.  Only fools depend on bond ratings and that includes regulators, and those that buy CDOs.

We had a saying in our bond shop — Read the writeup, ignore the rating.  The writeup would contain all sorts of valuable data, which would sometimes be at variance with the rating — that variance is what is possibly most valuable about the rating agencies.  Analysts get to write, but they can’t independently choose the rating.  That is done by a committee, and so that changes slowly.

For a big question like the rating of the US Government, the language has been negative for a decade or more, ever since we went deep into permanent deficit mode.  The agencies would talk down the US in its verbiage, but still assign the AAA.  (By permanent deficit, I exclude the flows for the entitlement funds — we haven’t a surplus year in a long time.)

Some of that is size.  Rating agencies are reluctant to downgrade large entities, and often give a premium rating to large borrowers because they supposedly have more financing options.  More often the large borrowers get in over their heads because they can, partly aided by the ratings, and partly due to bond indexes giving them large weights because they are large.  (The indexes are right to do so, but the smart manager underweights the big names.)

Compare the US balance sheet and income statement, properly marked to market, and the downgrade should have happened a decade ago.  Smaller nations had similar balance sheets and income statements, and they were lower rated only because they were smaller.

But here’s the thing: the problems of the US are well-known.  Like bad accounting rules that analysts adjust for, the market has already digested the bad situation of the US.  As such, I am not worried about a downgrade.  Market prices incorporate a downgrade.

Now, downgrades occasionally make a difference where it forces institutions to hold markedly more capital, or when a large amount of buyers must sell. (“Our investment policy requires that we sell junk bonds.”)  But for large situations, often those policies get adjusted.  If policy would force large obviously noneconomic actions, odds are that the policy will be changed.  The US getting downgraded from AAA is one of those — too large to let policy remain static.  All of the Stable Value Funds that insisted on AAA will now insist on ratings as high as that of the US Government.

So I am not worried about a downgrade.  I am concerned about a default, though, for several reasons.

1) It leads to an increase in presidential power, because Congress gives up control of spending.

2) Hard to tell who will or will not get hurt.  I don’t think they will stop paying bondholders, but the second order effects of closing down large portions of the government are uncertain.  There are many areas of the US Government that we could shut down, and few would notice.

3) A  default is likely to be transitory, so any additional costs from the default will have to be made up afterwards.

But generally, a default will hit Americans that depend on the Government.  That’s where the penalties should go.  The Government offers no guarantees, entitlements can be altered with a vote of Congress, with the President not vetoing.  If you rely on the government to support you, you made a bad bet.

But that effect of non-payment is uncertain.  In a default, who knows who will get paid, or whether Obama decides to stiff all creditors, or all international creditors.  (Both not likely, but then who does get paid?)


I don’t think the actions of the rating agencies of themselves will create a problem for the US.  Default would be messy and lead to a great deal of uncertainty.  A lot would depend on how the US Treasury reacts.

PS — maybe we have one more month to haggle over?

PPS — What do we do about growing FHA losses?

From reading your blog, it isn’t clear whether you are a value investor or a valuation based investor. When you wrote that you would sell something only if you had a better opportunity, it sounds different from a traditional value investor (buy at a discount to fair value and sell when it approaches fair value, all assuming you can determine a fair value that the market is not properly recognizing). That is, perhaps you have x% in equities, split among a variety of holdings, and you are generally keeping an eye out for new opportunities, so that when a stock become really attractive, you will sell your least attractive (from a future returns perspective) holding in order to fund the new purchase.

Elsewhere, though, you wrote about the benefits of holding cash.

Perhaps you could write a post clarifying how these might relate. If you have cash, you don’t need to sell something (potentially good, or you wouldn’t have been holding it in the first place) in order to buy when a good opportunity comes along. When do you deploy cash (change the % of equity vs cash or bonds) rather than swapping equities? Or raise it? Do you have a macro view that governs when to increase/decrease your equity exposure? Or would you consider selling stock to “buy” cash (ultra short duration fixed income) as a “better investment opportunity”?

Are moves like this more selling driven (i.e. time to lighten up on equity, or this stock has gone up to a level of very low future returns)? Or are they buying driven (i.e. ABC is a great opportunity at this price, how should I pay for it? Cash or swapping out a position?)? Or is it just a complicated circumstance based mix?

Thanks for considering these issues.

ps I really appreciate the honesty and integrity you appear to bring both to your investing and your writing about investing.

pps Do you index at all? Or only hold individual securities?

This reader asks some interesting questions, and I want to give him some answers.

First, I am a value investor — I try to buy equities that have a margin of safety, with some potential for positive surprises.  I don’t buy securities where the balance sheet is weak.  But I have a more expansive view of value, because I am willing to buy into industries that have good growth prospects relative to their valuations.  In 2002, my biggest sector was technology.  Today, with big company technology so cheap, it is my third largest sector.

I do vary my stock holdings versus cash, but I limit my cash to 20% of my stock portfolio at maximum because I have been generally good at picking stocks over the years.  Cash is useful, but I try to vary it in proportion to valuations.

Take a look at my eight rules, they will tell you a lot.  One of my main ideas is that people aren’t good at making decisions when they have a big menu in front of them, but they are good at binary comparisons.  They can say, “This is better than that” with reasonable accuracy.

So most of the time, I do swap trades, trading things I like better for things I like less, much like a bond trader would.  When I am more bullish on the market, I add in an extra buy, and when I am bearish, I add in an extra sell.  But I stick with the essential idea of swap trades, because it forces the idea of the binary tradeoff.

That’s how I do it.  Now I wish it were working better for me over the last year, but I’m not worried because my methods have worked well for a long time.

PS — I never index.

In the book This Time Is Different, Reinhart and Rogoff take a more expansive view of default.  So do I.  To them/me, massive inflation is a type of default.  Any means of paying off a debt burden by handing off something less valuable than what was received, plus interest, is a form of default.

Yes, the Zimbabwe option is available.  Print money with abandon, issue debts with abandon in your own currency.  Use what you get from that to finance your budget deficit.  That has been done, but it is a form of default.

I give no credibility to those who say a sovereign nation can always issue more debt in their own currency, particularly when there are large voting blocs in society that will oppose inflation, or the fear of higher taxes from additional indebtedness.


I really enjoyed this book.  It taught me a lot regarding the four main central bankers and the problems that they faced between WWI and WWII.  Add in Lord Keynes and you have real party.

WWI Reparations were too large for the Germans to afford.  But worse, France and England relied on those repayments so that they could repay America on their loans.  That made the squabble over reparations far worse.

What is more fascinating is how WWI with reparations helped lead to WWII.  The resentment of the Germans to occupation, reparations, etc., led to a fighting spirit, combined with antisemitism because of hatred of bankers, and you have a lot of what drove the war.

You will learn a lot if you read this book.  It is long, but valuable.  I recommend the book highly, subject to my disagreements.


Crises do not come as a result of a gold standard but from overly levered banking where liabilities are short and assets are long.  The book showed minimal understanding of basic principles of banking.

As a result, don’t listen to Keynes as much as Fisher.  Fisher understood the real cause of the Depression: too much debt.  Once debt came back to normal levels in 1941, the economy normalized.  WWII did not get us out of the depression, rather, it prolonged the suffering for those at home.

Who would benefit from this book:

Those wanting a good historical understanding of the financial facts between the First and Second World Wars will get it here.  You will understand the players and their motivations.

If you want to, you can buy it here: Lords of Finance: The Bankers Who Broke the World.

Full disclosure: I asked the publisher for the book and he sent me a copy.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

At AIG in the early ’90s on the life side, some of the actuaries had a phrase “economically rational.”  When a new person would come into some position of power that we had never dealt with before, we would ask others who knew him better, “Is he economically rational?”  (“He” applies to females as well as males.)

Now economically rational could mean two things:

  • He is economically rational for the company, and thinks like an owner.
  • He is economically rational for himself, and thinks like a worker.

When we/I used the phrase, we meant the former, not the latter.  It implies a very different standard of behavior than merely trying to get the best for yourself — you are trying to faithfully serve the company that employs you.

Insurance is the most complex industry in accounting terms.  In simple terms, that is because when a sale is made, you have little idea what the “cost of goods sold” is.  The cost varies in time and severity.  That complexity meant that there were a lot more games that could be played with the accounting, and the games could go on for a long time.

If you were out for the good of the company, you would aim for organic growth where it made sense, but close down lines of business where it did not make sense.  Now, when you are trying to close down another person’s line of business because it does not earn enough, you might run into some opposition.  And so I did, several times on flawed business that had been, and was being written by the domestic life companies.

It may seem lousy to shut businesses down, but when the underwriting is losing large amounts of money, it is a mercy to the company and its shareholders.

I have known many people in insurance that talk a good game, but in reality, they aren’t doing much.  They may play with the accounting to make things look good.  They may cram sales out the door in the short run, but the quality is bad.  They may boast of big sales in the past, but they don’t deliver when you hire them.  They claim to be a good claims manager, and they settle a lot of claims, but then you find that all the tough cases are stagnating in their bottom left hand drawer.

But the worst is when it reaches to a CFO or a CEO.  The Peter Principle propelled him into office, and the CFO manipulates the earnings, or the CEO takes actions to make it look like he is doing something, when it is not adding to value.  Worse is when the incentives are misaligned, and they sacrifice real profitability to meet incentive targets.

That’s why I believe that pay incentives should be based on growth in book value plus dividends over 3-5 years, with book value being “old style” book, not taking in market value elements.  It has to be long enough to take in a full economic cycle.

Now the phrase “economically rational” does have utility in this respect — the first definition would mean the same thing for everyone — acting like an owner.  The second definition is every man for himself.

I ran into the same situation at companies I served before and later.  Were financials being managed for the good of the owners, of the good of the leading managers?  Sometimes it was owners, sometimes it was managers, and sometimes it was greedy managers.  I remember being disillusioned when the guy who hired me for my first job had used me to tweak earnings higher (I didn’t get it until a years later).  He had left to start something new.  I never saw him again.

I liked my work most when we were acting like owners.  It forced us to be more creative, and take prudent risks.  On imprudent risks, I remember a boss praising me for not putting the company at risk on floating rate Guaranteed Investment Contracts, when I proved it was too risky.  When several of my competitors failed shortly thereafter, I was vindicated.  But being a good businessman, I called those who would want floating rate GICs but no one was willing to lower their yield demands for the contracts.  They weren’t economically rational, and we abandoned the market.

At another company, a chief actuary who would eventually be shown the door for malfeasance, said to me, “We are losing business to these five companies.  Why can’t the investment department make money like they do!?”

I did heavy due diligence.  It was a perfect question to ask me, because my skills on both sides of the balance sheet were significant.  I came back to him and said, “Four of the companies are taking risks far beyond what anyone else in the industry is taking.  In a bear market, they will die.  The last one has a weird holding company structure that allows them to lever up more.  If you want the ask [the parent company] for a similar deal.

Within one year, two of the competitors died, and my explanation of it put me on Jim Cramer’s radar; he even posted what I wrote. Within three years, another had died, and one merged into another entity.  After seven years, the last merged into another entity.  They all were gone.

So what is the value of all this?  I think of it as training to understand managements — see if they act like owners maximizing long-term profits, or as workers aiming to maximize their pay packets.  You will earn more with companies that think like owners.

Now after all of this, it’s not so much a question of rationality but ethics.  Who will do the right thing for the one he ultimately serves?  Working for those people is a joy, and is beneficial to those that own. Doing right does well for many.