Two million or so words ago, I started this blog.  I wanted to do something different; something that reflected my character, and would be an aid to many.  I wanted it to be a bit of a “brain dump,” so that I could impart what I have learned to many.  After seven years, I think the task is mostly complete.

Tonight I would like to thank one group of people I have not thanked before — my clients.  I don’t advertise my services, at least I haven’t so far, though that may change in the future.  My clients provide me with my living, and I appreciate it.

Aleph Blog is fun, and it turns a profit, but is enough to fund my family for three weeks per year.  Those that blog for a living have to be far more promotional than I would like.  I’m happy writing about the things that move me the most, and hopefully, provide the best information for readers.

But if anyone would have asked me where my readers would be coming from seven years ago, I would have said almost entirely from the US & Canada.  That’s almost true — 30% of my readers, as measured by Quantcast, hail from outside those two nations.  Here’s a table, based off of January blog activity:


Uniques %

Uniques Index

United States






United Kingdom















Czech Republic






Hong Kong










































New Zealand






South Africa















Korea, Republic of















United Arab Emirates













































Rest of the World



The “Uniques Index” adjusts to show how popular I am per capita in each country.  100 would be the average popularity.

I’ve been impressed over the years with how many people have written to me from across the Earth, asking questions, thanking me, etc.  Many I have turned into blog posts.  Don’t be shy to write; I may not respond — I can’t get to everything.  I read them all, and about half become blog posts, because they address ideas that many need to hear about.

The Future as I see it Dimly

I have more book reviews to write.  I would like to write a piece asking what is the most fragile significant element on the global economic scene, but so many things are fragile that it is hard to pick one out.

This may take more than one part, but I want to do a review, category by category, of the main ideas I have tried to propound over the last seven years.  I’d like to start that series over the next month.

I’m almost finished with my “The Rules” series — only 1-3 to go.  As I get closer to the end, I find my remaining topics aren’t so compelling.  I used the best ones first.

Aside from that, Buffett season is here, so expect to see an analysis of his letter, annual report, and 10-K.  Lord helping me, and with aid getting the statutory statements, maybe 2014 is the year I write the piece that details his holding company structure.


Wherever you live in the world, whatever your first language is, thanks for reading me.  I am grateful and humbled that I have such a large audience.  I only hope that I can continue to earn your trust by writing great stuff month after month, year after year.

Finally, thanks to those who link to me, and those who mention me on Twitter.  May the Lord Jesus Christ bless you all.


Here’s a letter from a reader on insurance topics:

Hi David. I’ve been following your blog. Just want to say thank you for willing to share your knowledge in the public domain.

I have a question for you – as you know, “climate change” is happening… whether human caused or not, it certainly feels like we are seeing more extreme weathers of late.

How do you see this affecting P&C insurers? Does this give them the chance to start rising prices?  

Lastly, just wondering if you have an opinion about Markel and Lancashire and Allied world. I owned allied for a long time. Made some gains. But the recent blow up at tower and short attack at Am Trust prompted me to really stick with firms that have a much longer record. Which lead me to Markel and Lancashire. Not that this verifies these guys are clean. I’m not an accountant and nor do I think accountants can catch anything. Nonetheless, their long term record offers me a better sense of security in my mind. 

First, I *don’t* know that climate change is happening, except that it always happens.  Evidence for climate science is weak, like that for economics.  We don’t have a good model yet.  If we had a good model, we would have better predictions on hurricanes, which have been uniformly lousy for the last ten years.  And as for warm climates, the Earth has been warmer than now in the past, and far colder, if the history books are correct.

As to how it affects P&C insurers and reinsurers, for that we do have a simple and reliable model.  Look at industry surplus relative to the past — when it is high, as it is now, premium rates will be lower than the risk demands.  Most P&C pricing is weak now — I have been decreasing exposure to P&C insurers.

Markel and Allied World I know and respect.  Good companies both, though I own neither of them.  I’ve heard of Lancashire, but I do not know them in any detail.  To analyze, look in my On Insurance Investing series.

Thanks for writing.

I would like to add one more idea to my piece, Conservation of Liquidity, under most Conditions.  This is the concept of an asset-liability liquidity mismatch.  When absolute return managers like Buffett, Klarman, etc. start building up cash, the market should get a little nervous.  They don’t commit capital unless they can meet certain return targets.  When they aren’t investing, it means the markets are likely overvalued.

Think about it: long-term investors accumulating cash.  They are mismatching short with respect to time, and long with respect to liquidity.  Since the world in aggregate is always matched, who is mismatched long with respect to time, and short with respect to liquidity?  I can’t say for certain, but I would look at hedge funds and mutual funds that have to justify their existence quarter-by-quarter.  When they are fully invested, it is a time to be cautious, because a downturn in the market could turn them into motivated sellers.

And so, be wary when valuation-sensitive investors pull back.  It is not a good sign for the markets.

Have you ever seen the graphs showing “Look at all the money sitting on the sidelines!  This market has to go up!”  Those analyses are bogus.  Why?

Several reasons, but the leading one is that much cash has to be held as part of portfolio margining, securities lending, or derivative agreements.  What would be valuable, maybe is a graph of cash that is free to be spent on new securities.

The word “new” is important.  With most trading, liquidity does not disappear.  Instead, liquidity moves from the account of the buyer to that of the seller.  When is that not so?

With initial public offerings, where the proceeds are not solely going to selling shareholders, liquidity disappears into the coffers of the new company, that it can do business.   That’s not a bad thing, aside from periods in the ’60s and late ’90s where there was a craze that led people to invest in bogus businesses that sounded cool.

When there is too much liquidity available to invest, Wall Street produces new companies to absorb the liquidity, many of which will be of dubious value, because there is money to be made.  Trot out the speculative stocks and bonds, especially near the end of the boom phase of the credit cycle.

Liquidity disappears into new corporations, and reappears when corporations are bought for cash.  Aside from a few other similar events, secondary trading has no effect on liquidity.  So when you hear that there is a lot of liquidity on the sidelines, review the above arguments and say, “There is almost always a lot of liquidity on the sidelines, but is it buying up new stock issues?”

Therefore, look at the quality of new IPOs.  Quality is a thermometer for whether the market is cold to overheating.  The same applies to corporate M&A to a lesser extent when they purchase poor assets for cash.  On the other hand, if corporate M&A is finding inexpensive assets that they buy for cash, the market as a whole may be cheap.

Secondary trading does not inform us much about market valuations.  Look to the primary markets, where cash creates new assets, and where old assets get sold for cash.  Valuations are on display there, and should inform our investing.

Facebook & WhatsApp


  • Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook’s New $19B Baby Background on WhatsApp founders $$ Feb 22, 2014
  • WhatsApp Shows How Phone Carriers Lost Out on $33B Perhaps consortium of telephone companies should have bot them $$ Feb 22, 2014
  • Whatsapp and $19B Explains why $FB decided 2 get into mobile, & how WhatsApp may benefit their mobile push $$ $GOOG Feb 22, 2014
  • Zuckerberg Bonded With WhatsApp CEO Over Coffee and Dinners Promise made to respect the unique culture of WhatsApp $$ Feb 22, 2014
  • Facebook’s horrible, stroke-of-genius IPO @felixsalmon Makes point that overvalued $FB stock can b currency 4deals $$ Feb 22, 2014
  • How Much Sequoia Made On WhatsApp The funny part is how Zuckerberg pranked Sequoia 10 yrs ago, & regretted it $$ $FB Feb 22, 2014
  • Facebook Investors Shrug Off Concerns About $19B Deal also & $$ $FB Feb 21, 2014


US Politics & Policy


  • Companies bracing for 1-2 retirement punch Unlikely that Obama’s proposals would b enacted; hurts powerful people $$ Feb 22, 2014
  • White House to Propose New Limits on Overseas Corporate Tax Avoidance This will be difficult 2 enforce; complexity $$ Feb 22, 2014
  • Gold Rush Ghost Town Bodes Ill for California Power Flow Interesting article on how the drought is affecting CA $$ Feb 22, 2014
  • Peggy Noonan: Whose Side Are We On? We can have a “Cold War” vs those who hate democracy & human rights $$ $SPY $TLT Feb 22, 2014
  • NSA Official Warned About Threat 17 Years Before Snowden Warned computer system administrators had too much power $$ Feb 22, 2014
  • Fannie Mae Payments to US Will Exceed Bailout 2 bad, b/c government owns $FNMA & will keep it as a piggy bank $$ Feb 22, 2014
  • An anti-tech backlash in San Francisco Note to politicians: don’t bite the hand that feeds u 2 support malcontents $$ Feb 21, 2014
  • Good: Bumper profits threaten US ethanol support Time to free *all* energy sources from subsidies adj 4 pollution $$ Feb 21, 2014
  • Bottlenecks along the Industrial Revolution There is $$ 2b made in expanding energy infrastructure in America $$ Feb 21, 2014
  • CBO Is Right: Minimum Wage Hike Can Kill Jobs Suggests raising the Earned Income Tax Credit, which would add jobs $$ Feb 21, 2014
  • Obama Keystone Pipeline Review Roiled by Nebraska Judge Governor & Legislature bypassed Public Services Commission $$ Feb 21, 2014
  • Obamacare’s Latest Surprise for Taxpayers? @Asymmetricinfo says Obama Admin may extend risk corridors past 3 years $$ Feb 19, 2014
  • Detroiters Without Cars Seek Jobs in Vain as City Shrinks Cities r organic & they can die, like Detroit. Give up $$ Feb 19, 2014
  • UAW’s Devastating Defeat at a Tennessee Volkswagen Plant: 4 Blunt Points Give workers credit 4 rejecting bad deal $$ Feb 17, 2014


Market Impact


  • Frontier-Market Funds Pour in Boosted by Fixed Currencies 2 much $$ flowing into immature mkts via ETFs; avoid $$ Feb 22, 2014
  • Learning From a Literary Legend: The Importance of History Argues that 10-year stock returns will b below average $$ Feb 21, 2014
  • Income As The Outcome: Reframing the 401(k) Plan Int rates fall, 401(k) bond values rise, but future income falls $$ Feb 21, 2014
  • Wall Street Bond Dealers Renounce Treasuries That Lure Pimco This is a mess, &no one knows, but I remain long $TLT $$ Feb 19, 2014
  • FX Traders Facing Extinction as Computers Replace Humans True if all u r doing is matching trades not if profiting $$ Feb 19, 2014
  • Information asymmetry, bad incentives and Taibbi @izakaminska does an excellent takedown of Tabibi’s recent piece $$ Feb 15, 2014


Rest of the World


  • Japan Record Trade Gap Shows Risk of Abenomics Losing Steam High debts, trade deficit due 2 low yen, disaster $$ $FXY Feb 22, 2014
  • For Chinese, It’s Going to Cost More to Become Canadian Pity those that want to escape China 2 Canada w/their loot $$ Feb 22, 2014
  • Nigeria’s Delta Oil Thieves Scrape Out a Precarious Living Long piece shows a vignette of the troubles in Nigeria $$ Feb 21, 2014
  • Foreign Investors Scoop Up New Treasuries Even as Fed Cuts Buying Weaken your currency. Help exporters. Buy US Tsys $$ Feb 21, 2014
  • India Hedging at Two-Year High as Polls Shroud Outlook Fears of a minority govt have hedgers buying puts on Nifty $$ Feb 21, 2014
  • Samsung Investors May Discover World of Possibilities Pity about Sarbanes-Oxley. Samsung shares used 2 trade in US $$ Feb 21, 2014
  • Emerging Stocks Rise to Three-Week High on Record China Lending W/China overlending already a problem, not helpful $$ Feb 21, 2014
  • Invading Switzerland? Try Before 8 or After 5 The Swiss Air Force likes to have the evenings off. War can wait $$ Feb 21, 2014
  • UN warns North Korea’s Kim Jong-un w/a strongly worded letter Few things crueler than making a Mom kill own child $$ Feb 21, 2014
  • Bank of Japan Surprises Markets Expands Loan Programs, Keeps Main Policy Unchanged, builds bigger debt bubble $$ $FXY Feb 21, 2014
  • Japan’s GPIF Should Own $600B of Stocks, Ito Says Angling 4a nomination 2 the coveted “Putting in the top” award $$ Feb 21, 2014
  • As World’s Kids Get Fatter, Doctors Turn to the Knife Bariatric surgery on a 3-yo, as parents can’t say no re food $$ Feb 21, 2014
  • China Fund Shifts Focus Away From Energy to US, European Recovery Plays CIC shifts out of power & into real estate $$ Feb 21, 2014
  • Japan Growth Figures Disappoint GDP Increase Comes in Well Below Expectations, perhaps Abe will think twice $$ Feb 21, 2014
  • China Overtakes India as Gold Consumer When your property can b confiscated by gov’t, helpful 2 have gold 2 carry $$ Feb 21, 2014
  • US to Face G-20 Pressure Over Tapering If the emerging market nations are properly financed, US $$ policy won’t harm Feb 21, 2014
  • At Asia Air Show, Plenty of Competition for Sales of Drones Many uses 4 drones to monitor areas that r hard 2get2 $$ Feb 21, 2014
  • Russians Return to Cyprus, a Favorite Tax Haven But they won’t put $$ is Cypriot banks after losing much of it b4 Feb 21, 2014
  • Billionaire Niel Trains Geeks to Fix France’s Talent Mismatch Sets up a school in France that teaches programming $$ Feb 21, 2014
  • Elliott vs Argentina: 3 possible resolutions @felixsalmon Sovereign immunity, pari passu & bondholders’ ransom $$ Feb 20, 2014
  • Europe Mending as Markets Signal Even Portuguese Get Work Less clear than it seems, but Europe is getting better $$ Feb 20, 2014
  • Sochi Olympics: Vic Wild, American-Born Snowboarder Competing For Russia, Wins Gold Far better he got a good wife $$ Feb 20, 2014
  • What the Heck Is Going on in Venezuela? (Could the Maduro Regime Fall?) Yes, it could fall, but what will replace? $$ Feb 19, 2014
  • China Digs Itself Deeper Into Dollar Trap Buying Dollar assets supports the cronies of the party that export $$ $FXI Feb 19, 2014
  • Asia Has Crisis to Thank for Gains in Emerging Rout Emerging Asia, minus China, in better shape than 1997-8 $$ $FXI Feb 19, 2014
  • Swiss Fault Lines Exposed as Villagers See Risk to Postcard Life Urban vs rural & the “last settler” syndrome $$ $FXF Feb 17, 2014
  • Salmond Says Forcing Scotland to Drop Pound to Hurt UK Seriously doubt UK would giveup the seigniorage if Scots go $$ Feb 17, 2014
  • A Rebuke to Japanese Nationalism Japan needs 2 give up any sense that what they did in WWII was honorable $$ Feb 17, 2014
  • Indonesia Says Australian Defense of Spying Is ‘Mind Boggling’ My, but Snowden opened many cans of worms w/leaks $$ Feb 17, 2014
  • Saudis Agree to Provide Syrian Rebels With Mobile Antiaircraft Missiles Proxy war between Wahabis & Shia continues $$ Feb 15, 2014


Financials & Personal Finance


  • Wall Street Landlords Buy Bad Loans for Cheaper Homes Color me skeptical; when investors own homes, mkt overvalued $$ Feb 22, 2014
  • Energy Holdings Nears Bankruptcy After Creditor Talks Falter They overpaid & the debt was huge, even Buffett lost $$ Feb 22, 2014
  • Tender Offer for Insurer Divides a Boardroom $AFG ‘s offer for $NATL is more than generous, just tender yr shares $$ Feb 22, 2014
  • Putting Your 401(k) on Autopilot Would b better if we made plans where employees could buy defined benefit units $$ Feb 22, 2014
  • The growing case against ETFs Makes same point that Jack Bogle & I make, ETFs get traded badly by most investors $$ Feb 22, 2014
  • Americans Ramp Up Borrowing US Household Debt Posts Largest Quarterly Increase Since Before Recession $$ #seenthisb4 Feb 21, 2014
  • Has Small-Business Lending Really Improved? Qty available may b high, but yields r steep @ nontraditional lenders $$ Feb 21, 2014
  • The Current Opportunity Set Valuation-sensitive mgrs see fewer & fewer places 2 put $$ 2 work, so cash balances grow Feb 21, 2014
  • These Wells Fargo robbers were also tellers Comments, some think if banks r dishonest they should b stolen from $$ Feb 21, 2014
  • I, Claudius, caller of bank bonds Memo 2 bond investors: if you buy an odd bond, b sure 2 read the prospectus $$ $TLT Feb 15, 2014
  • When One Spouse Saves and the Other Spends I do not get how this person can be a financial advice columnist $$ $TLT Feb 17, 2014
  • Debt-Market Chill May Leave Banks Out in the Cold–Heard on the Street No January bounceback 2 make up 4 December $$ Feb 15, 2014

Companies & Industries


  • 10-Gbit Google Fiber is already real, just not from $GOOG $VZ has tested it & others 2, coming 2 biz, not home $$ Feb 22, 2014
  • Charter Seen Eyeing Cox After Time Warner Loss Cox family is pretty cagey; $CHTR would have 2 pay through the nose $$ Feb 21, 2014
  • ‘Candy Crush Saga’ Maker Files for an IPO Put King Digital in the “too hard” pile, hard to predict future success $$ Feb 21, 2014
  • Google to Push Its Fiber Rollout on Comcast’s Turf $GOOG experiments, $CMCSA will have hard time competing w/fiber $$ Feb 21, 2014
  • My Goldman Sachs Post-Traumatic Stress Disorder (And Why I’m Grateful) Toughened her up, made her more cynical $$ Feb 21, 2014
  • Chevron’s Free Pizza Offer Only Feeds Public’s Distrust It was a cheesy way 2 compensate people 4 their troubles $$ Feb 21, 2014
  • The Coal Plant an Illinois Town Couldn’t Give Away $AEE pays $DYN to take over a coal plant. Now $DYN wants 2leave $$ Feb 21, 2014
  • Rarest of Rare Iridium Gains as Growth Spurs Demand Cheaper than gold, Iridium is used in industrial applications $$ Feb 21, 2014
  • Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year Listen to Buffett, his intuition is sharp $$ Feb 20, 2014
  • Steve Perlman’s Amazing Wireless Machine Is Finally Here If it works, it is a huge increase 4 mobile bandwidth $$ $T Feb 19, 2014
  • Actavis Agrees to Buy Forest Labs for $25 Billion Kudos 2 @Carl_C_Icahn Quite a string of victories $FRX $ACT $IEP $$ Feb 18, 2014


Fed Notes

  • Fed Puts Rate Increase on the Radar Move Before 2015 Unlikely, but Minutes Suggest Some Inflation Hawks R Circling $$ Feb 21, 2014
  • The Key Passages in the Federal Reserve’s Minutes Hawks start discussion on when the Fed Funds rate should rise $$ Feb 21, 2014
  • Yellen Leads Fed Damned Every Way by Emerging Market Angst Can’t win b/c developed mkt $$ policy swamps EM policies Feb 21, 2014


US Economics


  • Worsening US Divorce Rate Points to Improving Economy “We’re finally doing well, honey. Now we can afford2divorce” $$ Feb 21, 2014
  • Citi’s Economic Surprise Index Hits Zero As such, the economy is slowing & bond yields r falling. Who knew? $$ $TLT Feb 21, 2014




  • ‘Downton Abbey’ Is Downright Un-American If a servant wrote book about how nice her employer was it wouldn’t sell $$ Feb 21, 2014
  • Go Ahead, Let Your Kids Fail Fail & bounce back -> Kids gain skills & grit @asymmetricinfo is off on her book tour $$ Feb 21, 2014
  • I Took the GMAT With No Preparation. Here’s What Happened Journalist gets score good enough 2 go 2 biz school $$ Feb 20, 2014
  • Friedman and Hanke on Bitcoin But what happens when 1 party gets cheated in a Bitcoin transaction? Caveat emptor? $$ Feb 20, 2014
  • The Official Forecast of the US Government Never Saw This Winter Coming We don’t understand climate well $$ $TLT $SPY Feb 19, 2014



  • Wrong: In Buffett We Trust as Berkshire Annual Report Lacks Disclosure There is more than adequate info in the 10K $$ Feb 21, 2014
  • Wrong: Cut Off Harvard to Save America When u mess w/what is a nonprofit & not, u can’t tell what will b the result $$ Feb 21, 2014
  • Wrong: Is China at Risk of a Debt Crisis? Not Really,Bank Says China facing domestic banking crisis, like US 2008 $$ Feb 19, 2014


Comments, Replies and Retweets

  • “From what I glean, Zuckerberg romanced them & told them $FB wouldn’t touch their baby. We’ll see” — David_Merkel $$ Feb 20, 2014
  • “Well said. It is hard for China to give up forced investment and export promotion. It’s economic heroin” Merkel $$ Feb 19, 2014
  • Commented on StockTwits: This: and if I knew Spanish, could have seen it earlier:… Feb 18, 2014


Who wants to make the Fed a hero?  And by the agency of the IRS?

This would require a change in the law, because the Fed must remit its profits in excess of what it pays its stockholders to the US Treasury.  What if they remitted the profits to the taxpayers, in proportion to their taxes paid?

Optically, this would look good for the Fed, as their activities would seemingly benefit average Americans.  Practically, there would be little difference, because taxes or borrowing would have to make up the loss to the US Treasury.

All for now, but maybe the Fed should consider what looks good, even if it doesn’t change much.

How do you deal with a risk that has never been seen before?  I’m going to focus on financial risks here, but clever people can generalize to other classes of human risk, like war and terrorism.

By “emergent phenomena” I mean what happens when people act as a group pursuing the same strategy.  One person doing a given strategy means nothing.  But when millions do it, that can be significant.  Same for corporations, but the numbers are lower, because corporations are far bigger economically than the average household.

Here are some examples of emergent phenomena:

  • 1987 — Strategies for dynamic hedging became a large enough part of the market that the market became unstable, where parties would buy as the market rose, and sell as the market fell.
  • Tech stocks were the only place to be 1998-2000, until they weren’t 2000-2003.
  • Too much hedge fund money was playing the quantitative value plus momentum trade in 2007.  Many players borrowed money to goose returns in 2006-7.  It blew up in August 2007.
  • The fear of not getting “free money” caused many to overinvest in residential real estate 2004-7, until the free money was not only not free, but billing you for past indiscretions.
  • There was a frenzy among commercial real estate investor toward the end of the 1980s, which bid prices up amid more buying power from then-cheap commercial mortgage debt, leading to an overshoot, and fall in property value in the early 1990s.
  • In 2005, the CDO Correlation Trade led to a panic in the corporate bond market, and in auto stocks.
  • Into the late 1980s, Japanese households and some foreigners plowed progressively more liquid capital into the Japanese stock and warrant markets.  That was the peak, and few if any have made their money back.

Emergent phenomena stem from:

  • Many people and institutions doing the same thing at the same time.
  • Using debt to substitute for equity in a trade that has become a “sure thing.”
  • Multiple companies and industries pursuing the essentially same trade, but in different corners of the markets.  (Think of the real estate bubble.  There were so many different angles that the bulls played: mortgage insurance, financial guaranty, subprime loans and derivatives thereof, weakened lending standards on prime loans, etc.)
  • And it is more intense when economic agents borrow short-term to finance their efforts, because when things go wrong, the feedback loop is quick.

Everyone runs to the exits in a burning theater, and so, fewer get out amid the struggle, than if everyone patiently walked out.  In financial terms, this is why markets are more volatile than expected, particularly on the downside.  Too many people want to sell in a panic, after having pursued a well-known strategy that had been successful for quite a while.

But no tree grows to the sky.  The intelligent investor notes several things:

  • Where is the most new debt being applied, and to increasingly little effect?
  • What fad are players investing in, that you think can’t be maintained long-run?
  • What is happening that would not be happening if it were not for price momentum?
  • Where are players relying on price appreciation or else their levered positions will collapse?
  • Where is money being borrowed short-term to fund long-term assets?

People are prone to imitate past success, even when a rational person would conclude that it doesn’t make any sense to borrow money and buy an asset at a high price.  It’s easier to imitate than to think independently.

In the present market, I see large increases in government debt and student loans.  Beyond that, there is the income craze in investing.  Don’t look at the yield; look at the underlying business.

Be wary.  The stock market has run hard the last ~5 years, and I see valuation-sensitive investors retreating.  Even with bond rates low, that doesn’t mean stocks are better.

All for now.  Comments welcome.


Sometimes I think people forget that they are people; they think that somehow technology will eliminate their foibles.  ETFs have lowered costs for investors, but the greater ability to trade has enabled investors to more easily be greedy or panic.

Go ahead.  Make trading free.  Lessen further the frictions that inhibit bad trades.

If investing is free, would we create better asset allocation models?  Costs are pretty low now, and I don’t see many imitating GMO, which has the best models of which I know.

Costs are already low now for common trades, and if you are willing to deal with poor customer service, you can trade cheaply in many places using Interactive Brokers. [I like Interactive Brokers.  They are the cheapest, and where they are good, they are very, very good.  Where they are bad, well…]

There is virtue to having some “sand in the gears,” i.e., things that hold us back from making too many adjustments to investments.  If investing is free, then human nature will lack one more roadblock against bad decision-making.

Investors get fixated on explicit costs, and miss the implicit costs, which are often higher.  Honestly, on any investment decision, you want to take time, and ask whether the change is worth it.  Are you really on the right side of the trade?  Just because there is little to no cost to do the trade, does that mean it is correct to trade?

Over the years, with ETFs, I have found that people trade more, and lose in trading.  Jack Bogle was/is right regarding ETF clones of low cost mutual funds.  To the degree that we encourage people to trade because of low transaction costs, the more we enable unintelligent fear and greed.

But As For Me

How would free trading affect what I do?  It wouldn’t.  The cost of trading for me is so low, that it does not figure into what I do.  It is better in investing to think hard about your decisions, and make fewer of them.  Thus I constrain myself to making major portfolio changes four times a year.  It’s a big process, and I do it at mid-quarter.  I think hard about the changes I make, and I make few of them, realizing that I am not immune to fear and greed.

This was written partially with an eye to an article at Abnormal Returns, which I rarely disagree with.  My main point is that human nature is a much bigger factor in investing than costs.  First learn to control human nature, if you can.  Then control costs.

A few days ago, I was reading Felix Salmon’s piece Pension politics.  (Nice title, the type that Tadas likes — the shorter the better.)  I wrote a short response in the comments, largely agreeing with Felix.  Here it is:

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren’t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts are prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Pensions have always been a bit of a compromise.  In order to get employers to create Defined Benefit [DB] pensions, the government allowed for funding methods that were liberal — a plan sponsor wouldn’t have to put in as much at the beginning; it can catch up over time.  More than that, the assumptions that DB pensions could use were far more liberal than what life insurers could use for similar contingencies.  Life insurers had to use best estimates and then add risk margins.  Pensions could dream of returns, with no risk margins.

The 401(k) was an accident.  It was tossed into a much larger bill, and no one noticed.  After passage, some benefits consultants, notably Ted Benna, found ways to use it, creating the boom in Defined Contribution [DC] plans.

Corporations initially added DC plans to their DB plans, but as the 90s ended, and equity performance sank, many terminated their DB plans.  Part of it was the asset markets, but another part of it was aging workforces, because the funding rules were weak (unlike life insurance).  Sponsors realized that they would have to spend a lot more on DB plans in the future than they would otherwise want to.  Now stingy corporations cut back on their DC matches, or accept kickbacks out of investment manager fees.

There are two great virtues in defined benefit plans: 1) Investing is handled by professionals.  2) Level payments are made.  Most people can budget.  Few can invest.  Yes, there is the problem of inflation, should it occur, but pensioners should have assets outside of their pension to deal with inflation.  They need longevity insurance, so that they avoid outliving their assets.

Though it might be hard managing a fixed income versus uncertain inflation over an uncertain lifespan, it is much harder to manage a lump sum over a full retirement.  When finances are tight, it is much harder to make the right decisions.  Hope biases average investors in favor of taking chances, whether the market favors taking chances or not.

Add in the troubles with defaults of DB plan sponsors, and significant benefits can be lost, particularly if you have been highly paid.

I would want to tell most asset allocators that there is little to no magic in alternative investments.  The alternatives face the same risk factors as ordinary investments, and they are not underinvested by pension investors.

Closing Notes

Sorry, I forgot to blame the IRS for limiting overfunding for tax reasons, when the overfunding was really funding, and would have been useful today.

Even without the introduction of the 401(k), corporations would have cut back on DB pensions because of costs.  A lot of that was due to bad funding methods, but without those bad funding methods, many DB plans would never have been done.

Just be grateful you don’t live in other parts of the world, where governments are more graspy, and pension assets are a target to plug holes in the government deficit.

I’ve done a number of articles on dollar-weighted returns in mutual funds.  There are rare cases where the shareholder base is smart, usually in value funds, where the shareholders add more money on declines, and lighten up when things are going too well.

Tonight’s target is the Gold ETF SPDR Gold Shares [GLD].  As with most volatile mutual funds, people tend to get greedy or panic.  They chase performance.  Consider this list of inflows and outflows from GLD. Cash flows are assumed to occur at mid-period.


Cash Flow































Versus a buy-and-hold investor, the average holder gives up almost 3% of returns via market mistiming.  Technicians may talk down buy and hold, but buy and hold usually outperforms the average trader.  This is similar to what my friend Josh Brown talks about in his article Flows Don’t Follow Value, They Follow Performance.  Very few investors are rational businessmen, estimating likely returns over their funding horizon.  Rather they chase past success, and flee past failures.

Such has been true of the SPDR Gold Shares ETF.  Say what you will about the cheapness of large ETFs, people will still misuse them.  They will buy late in a bull phase, and sell late in a bear phase.

And so I say to all: Guard your emotions.  Be forward-looking.  Analyze likely value five years out.  Don’t make snap decisions out of regret.  Think about risk control before you buy shares, bonds, whatever.

Now, as a personal aside, it took me around eight years to learn to control my emotions.  Over the last 20 years, I have made at most a handful of errors reacting to bad market events.  I learned to analyze rather than panic back in the 90s.  It doesn’t mean that I am always right, but it does mean that I act.  I almost never react.

As for GLD, be wary about paper gold.  Is it really fully collateralized by audited gold in a warehouse?  There are lots of promises of gold being traded, but how much physical gold could you have delivered to you, should you want it?

That’s all for now.  Be careful in all of your investing; it is easy to err.