“Should I Invest or Save?”

An easy question, not.  First, I need to know your time horizon.  If it is short, save.  The bank will invest your money, and you will get a little back from it.  Second, I need to know who you are?

Is it possible that you will need the money in six months?  Do you have three months of expenses saved?  If not, save, don’t take the chance on investing.

Investing is for those that can take losses.  Even if your goal is long term, I would have to ask how important it is to achieve your goals.  The higher the importance, the greater the funding need.  Fund assuming that returns in the market will be positive, but poor.  If the goal isn’t that important, contribute less, and assume a higher return on assets.

The main idea here is that you should invest more for goals that you care a lot about, because those goals will be achieved, most likely.  Goals that rely on high asset returns are not likely to be achieved.

Tonight, Santorum may be the not-Romney.  Ron Paul can never be the not-Romney because he is Ron Paul; he is something in himself, and not the competitor in relative terms.

My guess is that the not-Romney, whoever he might be, will win the nomination, and maybe the election.  My best hope is for a deadlock at the Republican convention, and they choose someone other than the midgets that are currently running.

Anyway, here are the tweets:

China’s Top 10 Business Stories in 2011 http://bit.ly/rRN3S0 Patrick Chovanec, professor in China gives his perspectives on a tough year $$

Job Creation Is Price for US Health Law bloom.bg/rK5s7R Inflexible mandates on business tend to decrease jobs in the economy $$ #yup

Spain says deficit bigger than expected, hikes taxes reut.rs/vF8gLj Spain goes for austerity amid large budget deficits. Surprise! $$

Fear Recoupling in ’12, Not the End of the World bloom.bg/unlphk Pesek on dangers from Asian economic 2nd-order effects in 2012 $$

Heterodox economics: Marginal revolutionaries econ.st/tGlNai The Economist on the effect economics bloggers have on the mainstream $$

Bonds Prove Best Financial Asset in 2011 bloom.bg/tvL3z5 Leave aside Shilling, Hoisington & a few others. Who called this? I didn’t.

Major Dubai companies ‘may need bail-outs’ tgr.ph/v00OEW It is usually not wise to lend money on projects that are grandiose. $$ #duh

Borrowing From ECB Jumps on.wsj.com/vFlbpR If banks wont lend 2 each other bit.ly/v42Tw7 then CBs must lend 2 banks $$ #liquiditytrap

SSgA Files For Short-Term Junk Bond ETF bit.ly/tZFizH A promising idea that will get overdone, leading to losses. Nonrated CP anyone?

The Germans have many conflicting goals $$ RT @calculatedrisk: Merkel: “Will do everything to strengthen the euro” goo.gl/fb/vxa3h

Maybe 2 cents in dividends? RT @BCAppelbaum: If you put $1 in the S&P 500 at the beginning of the year, you would end the year with… $1 $$

TED Spread on Watch for Breakout bit.ly/v42Tw7 Short-term lending getting tight, banks don’t trust each other; CBs 2 the rescue? $$

A Margin for Error in Hedge-Fund Filings on.wsj.com/sC7KAO Might some hedge funds b mismarking their less liquid stocks? bonds? X? $$

BIS Describes the Exposure of Emerging Markets to Europe bit.ly/vJ3w1a Credit slowing down from EZone 2 emerging markets, GDP slowing

Deepening Crisis Over Euro Pits Leader Against Leader on.wsj.com/v1pjlz Tale of how Angela Merkel undercut Berlusconi. Clever lady $$

Gloomy Picture for Banks in Europe’s Core on.wsj.com/vQftdv EZone Govt’s & banks depend on each other; 2 drunks holding each other up

The Q Ratio and Market Valuation bit.ly/tkbOnp Good article going over the Q ratio, what it means, how to calculate & forecast $$

California Barred by Judge From Cutting Medi-Cal Rates bloom.bg/uSFCCX Expect this pattern to repeat in a fight over priorities $$

Hospice Turns Months-to-Live Patient Into Addict bloom.bg/s0WCiH Misdiagnosis of time to live can create addicted elderly folks $$

Contra: Republicans, Lost in Moderation bloom.bg/vCrabB Did the Republicans win more elections b4 or after conservatives took over?

Banks Continue to Stockpile Agency MBS bit.ly/tOMvNz Nice credit-risk free asset to pair against cheap funds from the Fed. $$

Tough Markets: Punishing Hedge Funds Since 2003 on.wsj.com/vPf2UN Hedge funds in aggregate r yield hogs & abhor volatility $$

End of Corn Ethanol? bit.ly/v599bC US ended a 30Yr subsidy 4 corn-based ethanol that cost $6B/yr & ended tariff Brazilian ethanol $$

China is a Closed Communist Economy, concludes research bit.ly/ucMjsH The Party is still in control & directs the use of resources $$

What Deleveraging? bit.ly/vj9jmZ What is this deleveraging you continue to babble about . . . ? $$

ReformedBroker Downtown Josh Brown

Anytime I get nervous about the US economy, I just look over at how calm and stable China seems to be and I feel much better.

Retweeted by AlephBlog

The public sphere is different, where the ECB takes lower-quality collateral; that seems to be loosening things up a bit for now $$

European Bank Worry: Collateral on.wsj.com/sbkgGT In the private sphere, loans can only gotten by pledges of hi-quality collateral $$

The most stable, dividend paying sectors have the highest PEs, the most cyclical elements tand to have the lowest PEs now. $$ #fear #yield

S&P 500 PE 11.85, Industrials 12.37, Discretionary 13.71, Staples 14.59, Utilities 14.72, Telecom 16.84… do you see the pattern? $$

The S&P and Sector P/E Ratios bit.ly/rz4LKA Financials 9.68, Energy 10.26, Materials 11.37, Healthcare 11.46, Technology 11.67 $$

Forecasting Asset Price Booms bit.ly/tOwuNN The fool does at the end of the boom what the wise man does at the beginning $$

Spikes in Bank Stock Volatility Precede Economic Trouble, suggests research bit.ly/vhMdqz Volatility flows through banks 2 economy $$

Forecasting Oil Prices with Economic Data bit.ly/toKHW4 Real crude prices go up when global econ conditions r strong $$ surprise, not

Investment Advisers Likely To Bear Cost Of More Oversight on.wsj.com/s3REK0 Could put small advisers like me out of business $$

Lure of Chinese Tuition Squeezes Out Asian-Americans at California Schools bloom.bg/scxHZm State schools becoming more like private

India to Exceed Its Record Borrowing Target bloom.bg/tiMnMi Too many governments r caught on a borrowing treadmill; can’t get off $$

China needs new policy course as capital tide turns reut.rs/vmMWsx China will likely have to reduce the reserve ratio at its banks $$

Phantom firms bleed millions from Medicare reut.rs/uJOps5 Looong article on how fraud bleeds a lotta $$ out of Medicare->shell comps

Ron Smith was an intensely bright man.  He was an agnostic, though one that respected religious belief; his opinions outside religion were highly reliable.  He told me that I was doing “God’s work” for raising my eight children.

I will miss Ron.  He was the sort of person that I would have liked to have developed a deeper relationship with, but that was not possible because he was far more busy than I am. We corresponded over a number of issues over the years, and I always learned something from him.

Baltimore will be a poorer place without Ron Smith.

I would argue that the overall model for investment banking failed.  No major investment bank survived the crisis intact.  Goldman Sachs and Morgan Stanley had to seek banking charters to survive and receive help from the Treasury/Fed (one entity, but like Janus, two faces).  Everyone else needed help from the Feds, or failed, or merged.

I would also argue that the overall model for commercial banking failed, with many making loans that were horrendously underwritten.

So, what aspects of the crisis stemmed from the repeal of Glass-Stegall? Remember, the Fed was chipping away at it for some time.  Feel free to comment below, but if you don’t want to do that, email me.  Thanks.

At company A, everything was thin and entrepreneurial.  On one block of business that was clearly unprofitable, as actuaries, we thought the dividend scale should be reduced to zero.  The lawyer gave quick advice, saying that we could do so.  Later we find out it takes a board resolution to do so. Augh!

On a personal note, the in-house lawyer could be useful for personal advice, for which I was grateful.

At company B, the lawyers for the most part acted very professionally, but would hem and haw over advice.  More often than not, they would point me to the legal library.  Usually I did okay with that, but once I blew it looking over Florida’s annuity reserving regulations, where they seemingly allowed for a more lenient reserving table, only to find that the law defined the lenient table as the conservative table, without changing the name in the statute.

At company C, out of 7 lawyers, there was one really competent one, so competent that she had twins and took care of them and still got the work done.  When the competent one was recognized by the bigger lines of business, she was allocated to the biggest line of business.  The rest of the lawyers were a waste — again, I was pointed to the law library.

I needed to redraft the main set of contracts for our division.  They were over a decade old and flawed in the new environment.  We needed to be able to accommodate new products as well.  I was assigned to one lawyer whose social skills were outclassed by a clam.  I asked for help in drafting the contract.  He told me to do it myself.  I did it, and asked for a critique of what I had done.  I waited, and waited.  We needed to get this filed with the states.  I asked for a deadline, and I showed up on deadline day — he just told me it was fine.

I filed it with the states, and 47 of 49 accepted it — I knew New York would not approve.  But state approval is one thing… getting agreements to hold up in court is another.

In another incident, they deemed a derivative deal legal where there was no economic purpose to the deal… it just altered accounting and taxes.  In that situation, I was the only person in the room that understood all of the aspects of the deal, but made it known to all involved that I thought it was dishonest.  Five months later, FASB’s EITF validated that opinion, and the practice was ended.

At company D, the legal department was a lapdog to the management, but we drove a bill through the state legislature to modernize the state’s life insurance investment code.  Fifty years of improvement in one whack is something, especially when it is tweaked so serve the public interest.

During the dissolution, where our division was being sold off by the parent company, the head lawyer began talking to my employees on behalf of the acquirer.  I intervened, calling him, saying, “Why are you carrying water for E company?”  He blinked, and stopped.

At E, F, and G companies, I found securities company lawyers to be different.  They were much more concerned with compliance.  The lawyers at company F (Hovde) were particularly competent and businesslike, the others less so.

Hovde had a culture where inside information was not tolerated.  It happened to me twice, and I talked to the lawyers, and we refrained from trading in the names, which I heartily approved of.

My sense is that most of the company lawyers I dealt with were hacks, aside from the few entrepreneurial companies that I worked with, where they went the extra mile and then some.

But after all this, I know that my experience is limited.  Things could be very different for others than for me.

How do we do that?  Simple.  You need a computerized map of the political entity being divided, and the locations of the voters.  You give the computer a simple instruction: minimize the length of the internal boundary lines within the political entity, subject to the districts being roughly the same population.

No one can argue that such a method is not fair.  It produces compact, convex districts that look  fair, and no one needs to say a word — just accept the output of the computer.

What would be the benefit?  Districts would be a lot less polar, and seats would not be as safe for incumbents.  And when the new census comes out — boom! Many politicians would find themselves fighting for their lives in new districts that don’t fit them.

This could herald the return of the citizen-lawmaker, because it would be difficult to maintain a seat for a long time.  Perhaps with some help, such as permanently disallowing politicians from being lobbyists, it could make a genuine change in the way our government works.

PS — In my life, I have been approached by others to use my math skills to gerrymander a large state in the US.  I refused (at age 29), though I knew how it could be done.

The division had 3 senior executives, 4 junior executives (1 inactive due to a sickness of which he eventually died), and 30 rank-and-file.  That were four task forces, and so my group had 8 members, including my friend Roy, who was invaluable to the division — a kind of “Radar O’Reilly.”  Medium rank, but a lot of implied authority.  He had received a similar charge from the boss not to impose his authority.

Our team gathered together, and we learned that we were to analyze and improve the marketing of our division, which was a big task.  I had my ideas, and Roy had his experience, but we had been told to be quiet.  Let the rank and file show their competence.

We held the meeting and the group shared their ideas, summarized them, and then asked who would present them to the division next week.  One guy who was young and inexperienced raised his hand.  No one else did.  He was chosen.  The next week, he gave our presentation, and it was an embarrassment.  We came in last of the four groups. (One year later, the guy was collecting tolls on the Pennsylvania Turnpike.)

I hate losing.  I particularly hate losing when it was avoidable.  So while the other three cross-functional teams went into hibernation, I got to work.  (My boss said, “See, we knew the cross-functional teams wouldn’t amount to anything, we just wanted to prove it.”)  Shrewd judge of human nature, bad judge of me this time.

When the group got together, I said, “What does the field think about our products and services?”  I got the intelligent equivalent of a mumble.  I suggested, “Let’s survey the field and tell them what we think are issues, and ask them what they think are issues.”  Agreement, nods, and we are on our way after a short meeting.  (Free-form surveys are a great way to start.)

Two weeks later, we met again — the field has responded, and more than we expected.  They are frustrated.  They want new funds and help in selling those funds to pension clients.  By the time we are done with the meeting, we have 24 possible action items — too many to act on.  I suggest, “Let’s do survey #2, asking them how important each of these ideas are, and how urgently they are needed.” (Structured surveys are a great way to ferret out deeper thoughts of players.)

Two weeks later, we meet again — we have a pretty good idea of the needs of the field, but we are not perfectly sure.  What is most important, and what are representatives really asking for?  So I said, “Let’s do survey #3, which is deceptively simple but deeply informative.”  The survey would take the list of priorities, and say, “Pretend that we have made you the director of marketing.  You have a $100,000 budget.  In units of $1,000, allocate your marketing budget to the various priorities.”  One member of the team said, “But should we give the same weight to the opinion of little producers versus big producers?  If not, how do we track that?”  The room was in favor of tracking, so I said, “Random typos on the surveys we hand out.  We keep the list of random typos, and so we know who is who — worked on catching cheaters back when I was a TA.”  The collective reaction of the room was “Cool, let’s do it,” and so we did. (Note: good surveys force respondents to prioritize within a constraint, but few do such rigorous surveys.)

There were representatives that chose one option, those that chose a few, and those that allocated something to every remotely deserving idea on the sheet, but when we were done, and weighted the ideas by representative, it was clear — there was one main need, four smaller needs, and everything else was negligible.  So I asked the room, “Okay, by now you know the other three cross-functional teams are dead, but we got to the end of the process.  Who should present this to the marketing department?”  They pointed at me and Roy.  Great.  Actuaries telling marketers what to do.  It should always be so sweet.

One week later, after Roy and I turned it into a presentation, we arranged to show it to the senior executives.  At the end of the presentation, the Chief Marketing Officer said, “That makes so much sense, that’s how we should go.”  My boss, and his boss (who was the boss of the CMO) agreed.  Woo-hoo!

We went back to the team, and told them that we had won.  A job well-done.  We congratulated each other.

But what was the result?

The marketing department followed our advice, and sales improved dramatically, profits improved more dramatically — the division as a whole did well and became the star of the company.  Low required investment, high returns, and high growth.

What did the cross-functional team get?  The satisfaction of a job well done.

What did my boss get?  He left for a much better job elsewhere, after he got his CFA Charter.

What did the boss’s boss get?  A comfortable retirement.

What did I get?  After my boss left, I was assigned to clean up another division, which I did in 18 months, before I left to join the investment department of another insurer.

What did the rank-and-file get?  The company was merged into another mutual insurer, and most kept their jobs, but the work we did was made obsolete by the merger.

The merger might not have happened without our unrewarded efforts, because it increased profits so much.  Yes, there may have been some small bonuses.  As my boss said to me, “Your team surprised us.  You were the least promising, but the most determined to succeed.  How did you do it?”  Roy and I were determined not to tip our hands, so we just said that it was dogged persistence, which was the truth, but not the whole truth.

But what I learned from the experience was different.  I am not a natural leader, and neither was Roy.  I learned that someone had to direct and encourage the observations of others, and get real data, in order to make effective changes.  Leadership is not always delegation, but co-ordination with foresight.  I did not impose my rank in the division to make it all work, but enabled their insights through structure that they themselves could not impose.

So did I disobey my boss’s charge to not lead the group?  Formally, no.  Practically yes, with Roy grinning, and with the gratitude of the senior management team at the end.

My firm view is that middle management is the most critical aspect of how a company works.  Motivate them well, and you have a good company.  So it was in our division, aside from the experiment.  But that experiment accidentally propelled the division to great success, not that it will ever be remembered.

But that is why prior preparation is valuable.  Not that I have a anti-mess portfolio trading as an ETF.  That’s not the way I think.  Besides, it is very difficult to come up with negative plays of any significant size.  And that is the nature of the world.  With global trade so large, we are one big happy world.  Wars anywhere tend to produce losses, and even if you own energy equities in size as I do, the losses are still significant.

This is yet another reason why I argue that it is important to invest with a provision for adverse deviation.You can’t tell what the global situation will kick up.  So adjust your portfolios for flexibility, recognizing significant constraints, like energy and agriculture.

After a longish pause, the guy on the other end said, “Huh, it does multiply.  Cool, I wonder how common that is.”  I replied, “Good question.  I have known that my birthday multiplied since I was seven, but I never thought of that question until you asked it, and I must say that I don’t know.”

Well, now I do know.  Part of the question here stems from two digit date fields – mm/dd/yy, in the American system. 12 X 5 = 60.  How common is that?

Over a 400 year period, there are 146,097 days.  (365.25 * 4) – 3 days.  No leap years in 1700, 1800, and 1900, but yes, leap year in 2000.

In this situation, over 100 years, there are 212 days where the month and day multiply to be the year.   That’s 848 over a 400 year period.  February 29^th would work in XX58, but that is never a leap year.

Then I said, why limit it to multiplication, why not consider addition, subtraction and division?  With addition, any combination of month and year will produce a year, so over a 100 year period, there should be 365 additive special birthdays.  February 29^th would work in XX31, but that is never a leap year.  So, 1460 over 400 years.

Subtraction is more scarce for special birthdays.  The potential number of special birthdays in any month is the month number itself.  All of the special days would pack into the beginning of a century, for us ending at 12/1/2011.  78 per century, or 312 over 400 years.

Finally there is division, which is the rarest.  The number of days in a given month is equal to the number of factors for a month.  In order that would be 1, 2, 2, 3, 3, 2, 4, 2, 4, 3, 4, 2, 6.  That makes 35 over a century, or 140 over 400 years.

So how many mathematically special birthdays are there in total?  Wait, we have to net out double counting.  Without boring you with the math, double counting happens with multiplication and division when the day is one. 02/01/2002 is special for division and multiplication.  Addition and multiplication match for 02/02/2004.  Over 400 years, there are 52 days of overlap in total.

This brings us to the final table:

So, by my definition, one in 54 have mathematically special birthdays.  I’m sure there are other ways to view this, and I look forward to comments from those that will broaden my mind, and/or correct my errors.