China

• China’s first bond default could be good market medicine http://t.co/8ShFniYM Bond trader: “We don’t really have a credit risk culture.” $$ Mar 31, 2012
• Is China’s slowdown worse than previously estimated? http://t.co/CkZw8tLK Could b business conditions that are worst since 2009. $$ Mar 31, 2012
• China Banks Said to Underestimate Local Government Risks http://t.co/qpPicyEe China has a clever bureaucracy; always has; big CYA $$ Mar 25, 2012
• Chinese capitalism is just another knockoff http://t.co/w2hSozQL China is not Capitalist; it rewards Party members, not citizens. $$ Mar 25, 2012
• Debating a “Hard Landing” http://t.co/NMnYk2XX friendly debate – Andrew Batson & Patrick Chovanec over China facing a “hard landing” in 2012 Mar 25, 2012
• I Am Jordan’s Complete Lack of Surprise: Chinese Co’s Forced to Falsify Data http://t.co/BMj7ux0T Command & control economy, not free $$ Mar 25, 2012

Market Dynamics

• The Nature of a Crowded Trade http://t.co/sf1phJjP A July 2008 article of mine where I reflected on the high correlations of the prior 3 yrs Mar 31, 2012
• A Market Lacking Diversification http://t.co/khXUVjaL Correlation conditions similar to 2006-2008, only diversifier hi-qual long bonds $$ Mar 31, 2012
• Pension Deficit for 100 US Company Plans Increased 41% in 2011 http://t.co/FdIZTltW Low long hi-qual rates & cruddy returns on risk assets Mar 31, 2012
• 2277 Stocks and Still Not Diversified? http://t.co/iu0Pw8Ty Recommended solution is similar 2a levered version of the Permanent Portfolio $$ Mar 31, 2012
• New from Aleph Blog The Rules, Part XXXI: The offering of liquidity through limit orders is a real service to th… http://t.co/ZiuzWIo5 Mar 30, 2012
• Passive Aggressive: Index-Linked Securities and Individual Investors http://t.co/ZrjMCKCz Curbs stock picking, encourages factor timing $$ Mar 29, 2012
• Bankers are telling corporate clients this is their chance to refinance http://t.co/Eh9tHEX6 The window of cheap junk financing is open $$ Mar 28, 2012
• New from Aleph Blog Replacing Defined Contributions: I think that it is pretty certain that defined contribution… http://t.co/Dis34ql2 Mar 27, 2012
• What Will Replace the 401(k)? http://t.co/miLAuoYc How about DB pensions where it depends on how much the employee kicks in plus match? $$ Mar 27, 2012
• US Stocks Advance Following Bernanke’s Comments http://t.co/D7sORuIU Stox react 2 increases in inflation expectations. TIPS & Bonds fall $$ Mar 26, 2012
• Hedge Funds Capitulating Buy Most Stocks Since 2010 http://t.co/XHwxzxNO Short-term money alert! Will propel mkt 4 a while, then… $$ Mar 26, 2012
• If Bloomberg Business Week is a better magazine than old Businessweek (I think so), what magazine should we use now 4 a dumb $$ indicator? Mar 26, 2012

Asset Management

• Nontraded REITS should be a nonstarter for clients http://t.co/O1ZuMvX8 And here’s one that just announced a 72% loss: http://t.co/la8d29my Mar 31, 2012
• Oaktree IPO Could Pay 2 Founders $117.2M Each http://t.co/Yufla6Jk The Most Important Thing is getting rewarded 4 building AUM $$ Mar 31, 2012
• The Trouble With Exchange Traded Notes http://t.co/ZL7dVpjO Unsecured credit, total return swaps, low level of regulatory protection $$ Mar 31, 2012
• Good 4 all of us RT @frankvoisin: My interview Research Magazine’s April issue: http://t.co/zioono6R Also features @VitaliyK @alephblog $$ Mar 30, 2012
• Bain Gave Staff Way to Swell IRAs by Investing in Deals http://t.co/4LlAExBt Letting employees in on the fun shares the wealth. Good $$ Mar 30, 2012
• Lying By Omission: Mutual Funds, Track Records & Departing Managers http://t.co/4MUyNRYs Track recrds shuld b suspended when critical ppl go Mar 29, 2012
• New from Aleph Blog A Pox on Promoted Stocks (2): By this time, I would think that it would be worth the the tim… http://t.co/DJkH6E4W Mar 28, 2012
• The Measured Approach to Value http://t.co/XiZOUMOn Features investors Vitaliy Katzenelson & Croft-Leominster, & smaller Frank Voisin & me Mar 28, 2012
• GoodHaven Realizes Its Vision http://t.co/zJVmCFMa The CIO of Markel, Tom Gayner showed them favor and invested with them. Good for them. $$ Mar 27, 2012
• What This Industry Needs is a Good Disruption http://t.co/imKDcElR There r a few areas of the financial industry that justify their fees $$ Mar 27, 2012
• Found PDF slide presentation: http://t.co/0GfhME7m The Market for Financial Advice: An Audit Study $$ Worth a read, paper not free @ SSRN Mar 26, 2012
• Treasuries Rise for Fourth Day on Global Growth Concern http://t.co/JYpanHTu Funny how the sentiment has reversed; who is surprised? $$ Mar 25, 2012

Monetary Policy

• @kyles09 No, not a believer in MMT, MMR, or neoclassical macro. 2 much aggregation, not everything happens at once, goods/services central + Mar 30, 2012
• @kyles09 and $$ only facilitates goods/services. Debt is important, but not central, some goods owned outright, w/no liabs. Money is a + Mar 30, 2012
• @kyles09 creation of a culture, not the government, because @ the edges, FX & commodities will crowd out bad currencies. MMT -> inflation $$ Mar 30, 2012
• What Does Bernanke Know? http://t.co/LydpOqk1 Introduces “The Guy Rate” http://t.co/zNVeUYmP Unemployment of older guys has hi costs Mar 29, 2012
• Demand for U.S. Debt Is Not Limitless http://t.co/NWKHcpCD In 2011, the Fed purchased 61% of Treasury issuance. That can’t last. $$ Mar 29, 2012
• Bitter Money Fights Shaped U.S History http://t.co/36jWnkQq Abandoning Gold Helped Dollar Gain Preeminence http://t.co/QbYMkTNL $$ Mar 28, 2012
• For the last tweet, those r2 good articles by Simon Johnson & James Kwak, authors of “13 Bankers” & co-founders of The Baseline Scenario $$ Mar 28, 2012
• Housing bubbles and interest rates http://t.co/9TfzMpt2 Makes my point that asset price levels should be part of monetary policy $$ Mar 31, 2012

Banking & Finance

• FiveBooks Interviews > @Ritholtz on Causes of the Financial Crisis http://t.co/RQQZfHTz Many good perspectives from 6 authors on the crisis Mar 31, 2012
• Geithner’s Math Puzzle Beyond Numbers for DeMarco http://t.co/Eg9BjcgE Principal forgiveness would have moral hazard impacts. $$ Mar 30, 2012
• Why not make LIBOR off of binding offers of the banks to borrow/lend to any of their group $10M short-term unsecured? Avg — LIBOR/LIBID $$ Mar 30, 2012
• Libor Links Deleted as UK Bank Group Backs Away From Rate http://t.co/HOy8TOof British Bankers’ Association distances itself from LIBOR $$ Mar 30, 2012
• Branson’s Virgin Money Seen Disrupting U.K. Retail Banks http://t.co/bPcD8im7 Always been a Branson skeptic; he have audited financials? Mar 30, 2012
• Why not make LIBOR off of binding bids/offers of the banks to borrow/lend to any of their group 10 million dollars sh… http://t.co/wK3HyopV Mar 29, 2012
• Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness? http://t.co/AUEVqxWQ Both. $$ Mar 29, 2012
• The Birth (and Death) of the Moral Age of Wall Street http://t.co/eStszd7i At one point the moral code of $GS had some meaning, not much now Mar 29, 2012
• @BarbarianCap More subtle than that; for insurance accounting &the concept of release from risk, it is the conservative side of realistic $$ Mar 27, 2012
• A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market http://t.co/WYQGAVVx +1 $$ Mar 26, 2012
• But, disagree. Would b simpler and more effective to disallow repo financiers unrestricted access to collateral even in counterparty default Mar 26, 2012
• Obama Relies on Debt Collectors Profiting From Student Loan Woe http://t.co/pYWwgLq2 How independent debt collectors get people 2 pay $$ Mar 26, 2012
• A Bailout by Another Name http://nyti.ms/GRTNMM GSE writedowns would constitute a direct & sizable gift from taxpayers 2 the largest banks Mar 26, 2012
• Banks’ preemptive strike against Dodd-Frank http://t.co/wjHW0nyv Banks adjusting strategies in order to keep doing as much biz as possible Mar 26, 2012
• MF’s Corzine Ordered Funds Moved to JP Morgan, Memo Says http://t.co/cYaT9sHy The most likely cause may prove to b correct $$ #corzine Mar 26, 2012
• BOE’s Tucker: Rehypothecation Consequences ‘Under the Radar’ http://t.co/0X8ZQMMH Good. Rehypothecation should b reviewed, perhaps limited Mar 26, 2012
• @EpicureanDeal @dsquareddigest I would still lay the blame @ the door of $GS mgmt. Could have grown via retained earnings &stayed private $$ Mar 26, 2012
• @EpicureanDeal @dsquareddigest Also, there r real advantages 2 partnership culture in an investment bank; risk control works a lot better $$ Mar 26, 2012
• The Age of the Shadow Bank Run http://t.co/deJRQGgy Borrow short, lend long; clip a spread. Surprise! During the crisis you lose big! $$ Mar 25, 2012
• The Interest Rate Swaps that Are Bankrupting Local Governments http://t.co/yHQZ1r3u Not true. Gov’ts tried to minimize taxes w/swaps, failed Mar 25, 2012
• Three’s a Crowd http://t.co/KHtbrqpe Disagree w/the conclusion, because $GS did not have to go public; problem is mgmt, not shareholders $$ Mar 25, 2012

Pensions

• Brazil’s pension system http://t.co/90O97tQ4 They allow people to retire too early & offer too much. More unsustainable than Medicare $$ Mar 30, 2012
• @AlexRubalcava Perhaps a cash balance plan would do that. DB plans are not expensive because of explicit costs. They r expensive b/c + Mar 28, 2012
• @AlexRubalcava during boom times benefits look free and get set too high, leading to high costs in the bust phase & plan terminations. $$ Mar 28, 2012

Politics

• Obama Is a Loser Who Wins, Like FDR in 1936 http://t.co/K0x9go0T Don’t assume a bad economy insures the defeat of Obama. FDR won in ’36 $$ Mar 31, 2012
• The Rejection of Austerity Begins http://t.co/CgWKa9x6 Until failure, ppl vote 4 politicians who promise magic prosperity thru govt fiat $$ Mar 30, 2012
• Germany: The Final Frontier… Whose True Debt/GDP Is Now 140% http://t.co/KgW2d76E When you add up the guarantees, doesn’t look so good. $$ Mar 29, 2012
• Justices Suggest Parts of Health-Care Law May Be Thrown Out http://t.co/cMvKHR20 B best 2 throw the whole law out; let Congress start over Mar 29, 2012
• Contra: Court Can’t Let Broccoli Get in Way of Health Care Law http://t.co/5Yp2o8tB Sup Ct is moving 2 define interstate commerce better Mar 26, 2012
• Death Tax Defying http://t.co/FrkL5yLB Eliminate the estate tax; Tax everyone on unrealized capital gains. $$ Same result. Mar 25, 2012
• Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years http://t.co/PCM7ldiG Stinks; call the ACLU $$ Mar 25, 2012

US Economy

• Why Natural-Gas Prices Could Fade to Red http://t.co/GApb0xie When everyone tries 2 frack @ once, there is too much natgas, price falls Mar 30, 2012
• US coal production declines as industry faces further stress http://t.co/l3WpZtDC Fracking has unpredictable consequences; affects energy $$ Mar 29, 2012
• Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls http://t.co/JsgIdewr In certain locales, & on the low end, there r bidding wars Mar 29, 2012
• The Biggest Bellwether In The World Is Giving Some Ominous Comments About Growth http://t.co/vHWs9lwB $FDX says things r slowing down $$ Mar 29, 2012
• Planned Pipelines to Rival Keystone XL http://t.co/qQZ1Dsj2 Enterprise Products Partners & Enbridge may build competing pipelines $$ Mar 28, 2012
• ‘Pink slime’ producer suspends operations http://t.co/CvptYPhU Goes from 4 factories to 1. 600 people will probably lose their jobs $$ Mar 28, 2012
• @valuewalk @The_Analyst It is better for students to start small businesses. Forget economics, it is a waste. Profit/loss best teacher $$ Mar 27, 2012
• The Economic Surprise Index is now trending down http://t.co/eJCEEdvy @soberlook reminds us that not everything is going well $$ Mar 27, 2012

Miscellaneous

• Like it? I’ve actually bought cars that way! RT @mprobertson: http://t.co/UHdFL0Eu How to buy a car using game theory. very interesting. $$ Mar 31, 2012
• Eating Chocolate Regularly May Make You Leaner, Survey Suggests http://t.co/l8c6MMpA This means one dark chocolate Dove promise/day $$ Mar 27, 2012
• The second most dangerous people in the world are smart people with wrong postulates. Mar 25, 2012
• The most dangerous people in the world are politicians who peddle the views of the smart people with wrong postulates. $$ Mar 25, 2012
• Madoff FBI Files Reveal How He Fooled His Own Employees http://t.co/lmq2AoZG Gives hope to those accused; Madoff controlled data tightly. Mar 25, 2012

I think that it is pretty certain that defined contribution [DC] plans 401(k)s, 403(b)s, 457s, much as they have grown to be dominant, have been a failure.  Many, though not all people like the illusion of control, and seeing their cash balance — makes the pension plan tangible, even if they don’t get what they will really need at retirement.

Pension plan reform has to face three realities.  The first is people don’t know how much to put away for retirement.  I’ll give you a hint: for almost all people, it should be over 10% of your gross pay.  The second is that people don’t know how to invest, so hand it off to advisors who will do it for them, and cheaply.  The third is silent, and leaves a lot of money on the table — most people would be better off taking an annuity from their pension plan than a third party, or trying to manage a lump sum on their own.  This is usually an option only for defined benefit [DB] plans.

On the last point, annuities from insurance companies will almost always be inferior to those from DB plans — the investment policy of the DB plan will likely yield more than the investments of the life insurance company.  The DB plan has more ability to take risk, and its expenses are lower.

And speaking of lower expenses, that’s another reason to replace DC plans.  Not only do DB plans provide better security, they have lower expenses.

But employers don’t want to fund expensive DB plans, particularly in a low interest rate environment.   Fine, that’s not what I am arguing for.  I am suggesting an odd sort of DC plan:

• Participants can contribute what they wish
• Employers can contribute what they wish
• Professionals manage the assets; no asset management by participants.
• During active employment, the cash balance can transfer with a change of employment.
• At retirement, it converts to a DB plan, and an annuity is granted, more generous than could be obtained privately.  The retiree does not get the agony of managing a lump sum.

I think this would lead to much better results for plan participants.  The case would have to be made to participants that they have not done well managing their own funds — they will underperform by less through third party managers.  Also, few are good at managing lump sums for income.

This is the sort of plan that would yield better results for most, given that DB plans are out of favor, and participant-directed DC plans lead to high expense lousy results.  Best to have a hybrid plan.  Trustee-directed DC plan for accumulation.  DB plan for distribution.

That’s how I would structure it at present.  Better ideas are welcomed.  Thoughts?

This should be a short post, because my comprehensive view on tax reform is found here.  The summary is that the problem is not tax rates.  The problem is the definition of income.  Just as in ancient times, people would make themselves look poor when the taxman came, so do the wealthy do today.  “Income? I hardly earn any income.”

And that is because of loopholes in the tax code for social engineering purposes, but even more for the ability to defer taxation of what should be income.  My view is that we should all be taxed like traders, with no opportunity to defer taxation.  No tax deferral for IRAs, HSAs, 401(k)s, DB pensions, insurance, annuities, endowments, stock (even private stock will have to report transactions).   As asset prices rise, you would get taxed.  No deferral.

You might think this is an ugly system, and it is, though Zillow would have one amazing business when the government uses it to tax increases in housing values, with a true-up at the eventual sale.  They might even find new business by creating pricing grids for other sets of illiquid assets.

The idea is that taxation should follow value creation, which is income, even if it is not cash income.  Gone would be the days where one has an appreciating asset, and borrows against it, and pays no tax.  All increases in value would be taxed, and assets where the increase can’t be measured would assume a 15% annual return for taxation purposes, with a true-up at the sale of the asset.

Deferred tax liabilities would be made payable in a few years, and deferred tax assets would receive payment in the same period.  Deferred gains in stock would be immediately taxable.  Hello, Mr. Buffett, you want the rich to pay taxes, here is your bill.

This would include an elimination of all deductions, corporate and individual.  And, I would beef up the IRS to enforce this.  Once the concept of income gets simple and immediate, enforcement gets easier.  The IRS could focus on one question: how much are they prospering?  Tax in proportion to that.

A proposal like this could rapidly balance the budget without raising tax rates.  Now none of the midgets running for President would adopt such an idea — it offends both the left and the right.  But it would raise taxes on the rich, unlike what an otherwise bright guy like Buffett proposes.  Rates aren’t the question, the question is the definition of income.

And until we focus on the definition of income, we will continue to drift as a nation, at least until a crisis hits that reveals our weakness.

I have long wanted to see a book that would teach ordinary investors how to avoid being cheated by those that create/sell financial products.  If this book isn’t it, the one that surpasses it will be astounding.  If Wall Street is a show, this book gives you a peek behind the curtain.

This book is really four mini-books in one:

1) How the author became a broker, and the ethical difficulties that were forced on him in the process.

2) The difficulties faced by do-it-yourself  investors, and the benefits of exchange-traded funds [ETFs].

3) On Brokerages, and all their conflicts of interest, culminating in the straight line pitch.

4) Investments to avoid, and advice from the wise.

That it is four in one is not a weakness but a strength.  Wall Street has many ways to skin investors, and each section provides insights that different people will benefit from.  It is a more comprehensive book in its short 240 pages as a result.

On Brokers

The first part of the book describes Wall Street as it was and is, with all of the players and their motives.  Josh spares no one; the tone of the book is cynical, but not unduly so, noting all of the problems with a profane sense of humor.  Some of the funniest bits of the book are recollections of conversations with greedy parties seeing an edge.

There is a certain level of despair for young brokers as they “cold call,” knowing that if they don’t succeed, they will be let go, but driven by the possibility of riches should they succeed.  Those who are successful gain money, prestige, bragging rights, and some level of freedom from tight control.

I have my own experience with this. though mostly on the institutional side where I told such brokers “Why would my client want that?!”  It’s astounding what level of deception those who sell investments will engage in, until they realize you can’t be conned, and then they use your ideas to con others.  (The institutional brokers only make money on transactions; if they know you are smart, they facilitate your ideas at the expense of those less talented.  Ugly, I know, but I didn’t invent this.)

On Do-it-Yourselfers

Now, if you are a total “do-it-yourselfer” like I was in the ’90s, where I researched and bought my own stocks for myself, with some success, this is not for you.  This is for those who research and use mutual funds and ETFs.  It goes into the history and development of asset management fund structures, explaining why they are how they are.

He also describes how the modern era came into existence with discount brokerages in the ’70s, and how during the bull of the ’90 it morphed into anyone can make tons of money, just buy stock!  One thing Josh does not talk a lot about, but was significant, was how when fixed commisions ended, the real reason for maintaining research staffs died.  And, when tick sizes moved from a eighth to a sixteenth to a penny, the reasons for having market makers and specialists dried up.  But you can’t cover everything.

One particularly funny part is page 110, with its real-life definitions of fund types.  Josh is at his best in the section where goes after leveraged and inverse ETFs, where a lot of investors lose money because they are meant to track daily performance of indexes, and generally lose money for those that hold them long-term.  He is similarly good when he criticizes the proliferation of ETFs that are too unique, and will never get a broad following.

On Brokerages

Brokers position themselves as experts, when they are really order-takers.  They hire analysts that are not that good on average, and issue more buy than sell opinions, which facilitate the investment banking and trading businesses.  It talks about the stories that brokerages tell in order to captivate people and make them invest.

And then, Josh discloses the “Straight-Line Pitch,” which has been used on many investors to make them invest with the brokerage.  I have to admit, given some of the initial publicity on this point, and my own experience with brokers, I was dubious about this part of the book, and, Josh leaves it to the end — this is the climax!

I was pleasantly surprised, and I would recommend that all investors read chapter 20.  Why?  To immunize yourself from the clever talk that boxes you in as they offer slick answers to your objections.  That is a major reason why I read books on marketing: I can’t be tricked!  (But it does force me to do my own research.)  If you don’t want to be tricked by clever brokers, read chapter 20.  It isn’t necessarily the best chapter of the the book, that will depend on your own needs, but chapter 20 is unique.

Oh, and why have I not experienced this? Being a total do-it-yourselfer, I told brokers that I knew better than they did; it led to some weird conversations as they found I knew more about it than their talking points.

Investments to Avoid — Advice from the Wise

Most bad investments are either volatile or illiquid.  Why do brokers sell illiquid investments?  Because they get high commissions.  Same for insurance agents.

Then there are investments that sneak between the regulatory cracks, like Chinese reverse mergers, Special Purpose Acquisition Corporations, and anything with secondary guarantees, or the sale of options to enhance income.

Ask the broker this: who can I sell this to if I don’t like it someday?  Who makes an active market in this?  Any pause on this, and don’t buy.  No pause, but an answer — write it down, and check it out.

In one sense, part of the answer to the problems this book brings up is to realize there is no urgency.  If it is a good idea today, it will be good a week from now, let me talk with smart friends and figure out if the idea makes sense.

As for advice from the wise, he invites about eight of his friends to opine on a variety of topics.  Most of them are well-known, but at least a few of them are obscure, unless you are in the business.  I found the counsel to be sound, aside from an obscure former actuary who writes on investments.

Quibbles

On page 118, he talks about how Vanguard would have been a natural for the ETF business, and how Bogle delayed them from getting in.  This is true, but Bogle resigned in 1999; I was at a dinner for his retirement in 1998 in Philadelphia, and met him and Brennan, his successor.  The first Vanguard ETF was created in 2001, VTI is the ticker.  Vanguard did not play a large role in ETFs until 2005, but to say they weren’t in the business is not correct.

Also, ETFs are not as good as they seem, because average investors in them trade them wrong, buying high and selling low.  ETFs do not correct for bad investor timing, even if they are lower-cost.

Who would benefit from this book: If you aren’t a total Do-it-Yourselfer in investments, you can benefit from this book, because it will teach you about the motivations of those who try to sell investments to you, and those who manage money for you.  If you want to, you can buy it here: Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments.

Full disclosure: The author is a friend of mine, so I asked for the book.  He said “yes” and he sent it to me.

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.

Don’t buy what someone wants to sell you.  Buy what you have researched, and know that it is what you want to buy, because it is valuable.

I have an irregular series on penny stocks, largely off of advertisements mailed to me, or things found on the web.  Every promoted penny stock I have run into has done badly.

Now for all of my prior penny stocks that I have been written about, all have done horribly.

• Bonanza Gold
• GTX Corp
• Bioneutral
• Uniontown Energy Inc.
• Obscene Jeans Corp
• AER Energy Resources, Inc

Today’s gem is iTrackr [IRYS], which the advertiser says is the “Groupon Killer,” complete with a cover page that has a dinosaur labeled “Groupon,” being hit by meteors labeled “iTrackr” and “IRYS.”  Now, this time I got a full 16-page shiny brochure, which had quotes on iTrackr from two notable publications, but in 2006 & 2007, long before Groupon was prominent… and iTrackr did not gain in profitability since then, rather, it had larger and larger losses.

In five-point (or so) type, near the back of the brochure, there is the disclaimer.  I scan it with OCR so that you can read it at a normal size:

Disclaimer:

The xxx Newsletter and/or its publisher, Author Inc., dba blablabla.com did not receive any direct compensation (other than future subscription revenues, the amount of which is not known at this time) with respect to the publication of this Advertisement. Author Inc. has received ten thousand dollars in cash compensation to assist in the writing of this advertisement. BHB Marketing paid eight hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this report, including printing and postage, in an effort to build investor awareness. BHB Marketing was paid by non- affiliate shareholders who intend to sell their shares.

 This publication does not provide an analysis of a company’s financial position. iTrackr Systems, Inc.’s financial position and all other information regarding iTrackr Systems, Inc. should be verified with the company. Information about many publicly traded companies and other investor resources can be found at the Securities and Exchange Commission’s website at www.sec.gov. Investing in securities is speculative and carries risk. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. This mailing piece is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy securities, nor should it be construed as the provision of any investment-related advice or services tailored to any particular individual’s financial situation or investment objective(s). The xxx Newsletter is a bona fide publication of general and regular circulation offering impersonalized investment-related research to readers and/or prospective readers and is not an investment adviser. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. The xxx Newsletter is not a registered broker dealer. Staff members of The xxx Newsletter and its affiliates may hold positions in investments mentioned herein, and may buy or sell their interests on the open market at anytime. The xxx Newsletter presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. Additionally, it includes forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding expected growth of the featured company. Any statements that express or involve discussions with respect to predictions, expectation, beliefs, plans, projections, objectives, goods, assumptions or future events or performance may be forward-looking statements. The forward-looking statements contained herein (which include all statements other than historical information) involve significant uncertainties. Factors that could cause actual results to differ from the results or implied in forward-looking statements include the size and growth of the market for the Company’s products, the Company’s ability to fund its capital requirements in the near term and in the long term, pricing pressures for the Company’s products and services, the Company’s ability to obtain needed resources, and the local, regional and global markets. Forward-looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties that could cause actual results or events to differ materially from those presently anticipated. Past performance does not guarantee future results.

Emphasis mine. I wanted to split and highlight the juicy stuff.

Now, let’s think about the math of the scam: they pay the author $10,000 to sell his limited credibility to pump a penny stock.  They put $800,000 into the production and mailing of the glossy brochure.  But the market cap of the company is only $6.7 million.  They think the advertisement will create a lasting 12%+ rise in the stock that they can sell into.  Pump-and-dump.  Proclaim a biased story in big print; offer retractions in small print.

No surprise to me, this company has negative earnings (which are getting worse) and a growing negative tangible net worth.  For fun let’s look at the risk disclosures from the 10-K:

• Because there is doubt about our ability to continue as a going concern, an investor may lose all of his investment in our company.  [Oh yeah, the auditors don't believe in us.]
• iTrackr has a history of losses and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability.
• iTrackr’s cash on hand and anticipated near term sales may be insufficient to fund operations for the next 12 months.
• If iTrackr is unable to fund its operations and capital expenditures, iTrackr may not be able to continue to develop and market its products and services which would have a material adverse effect on its business.
• iTrackr is dependent upon key personnel whose loss may adversely impact iTrackr’s business.
• iTrackr’s management systems and personnel may not be sufficient to effectively manage its growth.
• If we are not competitive in the market for online sales, marketing and customer service solutions, or online consumer services our business could be harmed.
• We are dependent on technology systems and third-party content that are beyond our control.
• Our services are subject to payment-related risks.
• We may be liable if third parties misappropriate personal information belonging to our clients’ Internet users.
• Our products and services may infringe upon intellectual property rights of third parties and any infringement could require us to incur substantial costs and may distract our management.
• Technological or other defects could disrupt or negatively impact our services, which could harm our business and reputation.
• Our promotion and marketing of our websites may not result in generation of significant revenue which may cause our business to fail.
• Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems or otherwise, could expose us to protracted and costly litigation and cause us to lose clients which may result in our going out of business and for you to lose your investment.
• Competition in the social networking, online marketing and e-commerce industry is intense and our competitors have greater financial resources and development capabilities than we have, and we may not have the resources necessary to successfully compete with them.
• Our services may become obsolete and unmarketable if we are unable to respond adequately to rapidly changing technology and customer demands.
• The loss of our executive officers or directors, could adversely affect our business.
• Our Controls and Procedures may not prevent misstatements.
• Our Financial Statements for the year ended December 31, 2009 and the quarterly periods ended March 31, 2010 and June 30, 2010 were Restated as a Result of a Re-Audit by our New Independent Accountant Which was Necessitated Due to Revocation of our Former Auditor’s Public Company Accounting Oversight Board (“PCAOB”) Registration.
• There will be a substantial number of shares of iTrackr’s common stock available for sale in the future that may be dilutive to its current stockholders and may cause a decrease in the market price of its common stock.
• Our common stock is considered “a penny stock” and may be difficult to sell.
• iTrackr may be unable to receive a listing of its securities on NASDAQ or another national securities exchange, and this may make it more difficult for its stockholders to sell their securities.
• One stockholder owns a majority of our common stock and may act, or prevent certain types of corporate actions, to the detriment of other stockholders.
• If we issue additional shares of common stock in the future this may result in dilution to our existing stockholders.
• There is currently no market for trading our common stock, and when such a market does develop, the trading price of our common stock may be volatile, with the result that an investor may not be able to sell any shares acquired at a price equal to or greater than the price paid by the investor.
• The trading price of iTrackr’s common stock is likely to be volatile, and you might not be able to sell your shares at or above the public offering price.
• The concentration of iTrackr’s capital stock ownership with insiders will likely limit your ability to influence corporate matters.
• The Company does not expect to pay any cash dividends for the foreseeable future.

Not too optimistic, as you can see, and one looking through the financials would note that they are running out of cash.

Do the large holders think that they will dupe enough people to buy their shares from them, and at advantageous prices?  Hmm… maybe any price above zero is an advantageous price.  As with many promoted penny stocks, it usually looks like a future zero.

Even if the scam is legal, I don’t get how the math works.  They really think they will get a sustained 12%+ rise in the stock, adequate to turn over the entire capitalization of the company into the hand of suckers?

Which makes this double-dumb.  When even the scammers don’t make money, it is one really dumb scam.

Main lesson: don’t buy promoted stocks, and particularly not penny stocks.

Those that have read me for a long time know that I am a proponent of immediate annuities.  Though they pay a fixed stream of income, they are more useful than bonds, because they provide longevity insurance; they can be tailored to prove an income that you can’t outlive, for you and your spouse.

But I got really annoyed when I saw an ad that said the following:

• 7% Income Guaranteed
• No RISK of Principal

And if you click on it, it takes you here, where they talk about 8%+ returns.  Total garbage.

Yes, if you are old enough, when you buy an immediate annuity, the annual payment may be 7% or more than the amount that you gave to the insurance company.  But with the yield on long low-investment grade bonds  hovering above 5%, I can tell you with certainty as a life actuary that the life companies are not providing a 7% return to retirees — it is far, far less, more like 4%, or maybe less.

So why the difference?  Immediate annuities work off of the idea that a lot of people will die, and money from their annuities is reallocated to the living (minus a profit for the insurer, on average).  The insurer earns 4.5% on its investments, and additional money of 3.5-5.0% from deaths of annuitants supports the payments of those living, with 1% to cover commissions, administration, and profits.

So, they advertise that they are paying you 7-8%+, when they are really paying you 4.0-4.5%, and exposing you to the risk of inflation, because that payment will never rise.  Ask them for payout levels on inflation-adjusted immediate annuities, and watch your jaw drop as you see how relatively low the payments are.

This is dishonest advertising, because not only are they not giving you the true level of returns, but they tell you there is no risk of principal.  Guess what, though I like immediate annuities, the only reason there is no risk of principal with them is that you surrender your principal when you buy one.  Your principal is gone, and you have a payment stream that will disappear at death (or death of you and your spouse).

This advertisement was probably put together by an independent agency, but blame still goes to the insurers that allowed themselves to be involved in such a scam:

• Allianz
• Aviva
• Fidelity Investments
• Genworth Financial
• ING
• Metlife
• Midland National
• New York Life
• Pacific Life
• Prudential (US)

Shame on all of you.  This is deceptive advertising that defrauds those who trust the representations of your agent.  State Insurance Commissioners, please take note.

If something seems too good to be true, it usually is, and this is another example of that.

When I wrote my piece last night, I did not write it to say one ought to buy and never sell.  In investing, I encourage the concept that one must look to relative valuations and trade assets that are worth less for those that are worth more.  In doing so, one maintains exposure to the overall risk of the markets, but shifts to more promising areas.

But what if valuations get so strained that future returns from most risk assets are tepid?  At that point, buy-and-hold turns into sell-and-wait.  It’s like being a bond manager — if the excess returns are small from taking additional risk, you don’t take additional risk.

I tend to turn over my portfolio once every three years.  That to me is a good tradeoff between holding for a long time and recognizing that opportunity changes over time.  But my trading is driven by analyzing relative opportunity, selling what I think are lower future cash flow streams for larger cash flow streams.  Do I have a crystal ball to tell me which is better?  No, just business judgment.  As Buffett says, “I am a better businessman because I am an investor, and I am a better investor because I am a businessman.”

My business judgment has done well for me over my career, but I don’t pretend that it is infallible, because I make significant mistakes.  Humility is an asset to the investor, because we don’t always know the right course.  That said, let diversification handle uncertainty, and within risky assets trade away less promising assets for those with more promise.

A reader wrote me, one who works for a prestigious university and he said:

Since 1926, the minimum inflation-adjusted total return of the S&P 500 (or its predecessor index) has been over 4%, annualized, over every 40-year rolling period.  For 20-year periods, the returns are typically either high (say 9%) or low (say 2%).  Thus, the buy-and-hold investor is best off with the 4-decade hold time.  Fortunately, 40 years matches the typical work life of a person, so workers ought to be shoveling retirement money into equities, and leaving there when they retire, if history is any guide.

 Your thoughts?

Yes, so long as your government holds together, over longer periods of time we do better.  But the tough part for retirees is “What is my situation like when I retire?  Yes, I built up a pot of assets, but what will that buy in terms of continuing income, and will that do well against declining purchasing power?”

There is no magic bullet.  I try to solve this by shifting industries over time, aiming at the most promising current opportunities, but not leaving the market in entire.  I limit cash to 20% of the portfolio when valuations are strained for he market as a whole.

Back to the question, yes, I think most people should buy-and-hold, if they can’t analyze the asset markets.  That’s like the Biblical proverb that a fool is counted wise if he is silent.  But for businessmen/investors there are often relative opportunities to do better.  Analyze those opportunities and take the best of them.

Yes, have some exposure to risky assets for your career, but vary the amount of exposure, and where it goes relative to likely opportunity.

I appreciated Jonathan Burton’s piece Speed kills, but so does complacency.  Like me, he is trying to strike a balance between hyper-trading and permafrost.

My mother is a good example here, though she does things differently than I do.  She holds stocks for a decade or so on average, and analyzes to see whether they have long-term prospects.   She buys, holds, and occasionally adjusts.  She spends more time painting, for which she has a degree of reputation.  She beats average asset mangers regularly.

The main idea should be one of relative value: trade to improve.  Look at the underlying cash flow streams if you can, and trade smaller for larger.

Here’s one more tool to help you.  When the amount of money into an asset goes parabolic, it time to leave.  It is rare that large amounts of additional money will yield excess returns.  This simply admits that there are times when it is wise to reduce exposure to risky assets.  just as bond managers look at yield spreads to commit capital, so should investors in risky assets aim for a margin of safety in what they invest.

As a final note, buy-and-hold is a fundamental strategy in investing.  It presumes that you spent the time analyzing whether this asset was undervalued.  If it becomes overvalued, it does not mean you should hold it.  Always look for better relative value.  In the end that leads to better portfolio performance.

I am considering making this an end-of-the-week feature as a news recap.  Comments?

Financials

• BofA’s Clash With Fannie Intensifies as Insurers Reject More Loan Claims http://t.co/fKgxwcVO Originators need to bear UW error results $$ Mar 03, 2012
• Life as Libor Traders Knew It Seen as Abusive http://t.co/H5o5cH3G An inside look at the problems of LIBOR. Collusion & marketless numbers Mar 03, 2012
• $AIG Earnings an Illusion of a Bend in US Tax Laws http://t.co/GCZHUKsu IRS gives AIG special treatment by allowing it to use NOLs post-BK Mar 03, 2012
• You have a good point, and I may reference it when I write this evening, but valuations have compressed for all insur… http://t.co/BRTuHnvf Mar 01, 2012
• Fannie, Freddie and the $180 billion hole http://t.co/Lnoh7VPH F&F transferred wealth to early investors from taxpayers & late investors $$ Feb 25, 2012
• Make losses and prosper, AIG edition http://t.co/EYykmbmZ Hey Q: how much $$ will $AIG make in the future in order to not pay taxes? $$ Feb 25, 2012

Berkshire Hathaway

• Contra: Warren Buffett on Investing http://t.co/OH0dQxXP Buffett has not been a deep value investor for 30 years; this article misses it $$ Mar 02, 2012
• +1 RT @valueprax: Thoughts On Mergers, Acquisitions And Conglomeration From Rothbard And Buffett (@AlephBlog, $BRK) http://t.co/khZH5Uiq Mar 01, 2012
• The Truthiness of Berkshire’s Performance http://t.co/5iSsrAHL Don’t think Buffett anticipated the P/B squeeze in insurance stocks. $$ Mar 01, 2012
• Buffett Plans More Solar Bonds After Topaz Deal http://t.co/pjrAKQub Buffett doesn’t give suckers an even break, no guarantees on solar $$ Mar 01, 2012
• RE: @TheStreet_News When I wrote for RealMoney, I was often critical of Buffett, but I have shifted.  He is a great e… http://t.co/r4z14uUC Feb 29, 2012
• When you think you made a great purchase (Warren Buffett edition) http://t.co/ME9RwqFf I was surprised to learn about this $BRKa sub also $$ Feb 28, 2012

Home Schooling

• Question of priorities, could conserve RT @ReformedBroker: “How am I supposed to live on $350,000 a year?” – you’re right, kill yourself $$ Mar 01, 2012
• @ReformedBroker Have his wife call my wife; can save lots of $$ if u go from private school 2 homeschool, & it is easier than 1 would expect Mar 01, 2012
• @ReformedBroker The downside is that it is a lot of work, but not hard work, and the challenge is controlling your children frequently $$ Mar 01, 2012
• @merrillmatter I know you’re kidding, but the mothers I know who homeschool would be fearsome in the business world were they redirected $$ Mar 01, 2012

Municipal Finance, or lack thereof

• If Stockton Is Broke, Then Why Isn’t San Diego? http://t.co/dzCE9FjX Govt Unions fight to keep benefits govts shouldn’t have granted $$ Mar 03, 2012
• Pension Pain Mounts, Low Rates Boost Liabilities http://t.co/NZndpR5g More evil results of Fed policy substituting debt 4 organic growth $$ Mar 01, 2012
• To Pay New York Pension Fund, Cities Borrow From It First http://t.co/feOXK8E3 Shell game at best; net contributions needed to DB plans $$ Feb 29, 2012
• Raiding the coffers http://t.co/5h2Fx5ZL State pension plans r borrowing from their pension plans 2 fund their own pension contributions Feb 29, 2012

North Korea

• @LSilverspar You made me laugh, yes, all of these have impacts on us… but given their counterfeiting, some action should be taken $$ Feb 29, 2012
• @dpinsen And access of the Dear Leader to his favorite Scotch… hitting him where it hurts. $$ Feb 29, 2012
• @dpinsen Agree, bigtime. We got them to the bargaining table last time by cutting off their financial access to the rest of the world. $$ Feb 29, 2012
• Then once NK starts to counterfeit it, go back to new $50s & $100s; make their life tough. Feb 29, 2012
• How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill http://t.co/DkXUZsy7 This is worth doing, and create a $75 bill $$ Feb 29, 2012

Eurozone

• Greek PSI exchange summary – an offer you can’t refuse http://t.co/K4OUOqm3 Yes, we all voluntarily give up 70% of the value of r claims $$ Mar 03, 2012
• Greek Crisis May Test the Value of Swaps http://t.co/hG27iIak ISDA wimps out and does not declare a credit event; will destroy Sov CDS mkt Mar 03, 2012
• A Primer on the Euro Breakup http://t.co/OB2sdwzB Explains why the Euro will break up, at least at the fringe &y this should not surprise $$ Mar 02, 2012
• ECB Free Money May Carry a Cost http://t.co/g1bNl281 Makes governments relax & ignore structural problems, & banks arb the ECB $$ Mar 01, 2012
• ECB Allots €529.5 Billion in Long-Term Refinancing Operation http://t.co/8o0OE7XO Higher than anticipated takeup of cheap funding $$ Feb 29, 2012
• More signs of Draghi’s “stabilization” http://t.co/zdFol9Vj euro area banks show material tightening conditions in the banking system $$ Feb 28, 2012
• On PIGS on Drugs http://t.co/VtOZYdwt European states owe €12-15 billion to the pharma industry; they stop paying suppliers b4 cutting staff Feb 28, 2012
• http://t.co/wQYFVFWH “Amused – Italian banks figured it out. An hour before LTRO results, 5 Italian banks issued & bought their own bonds.” Feb 28, 2012
• Europe Gets Ready for Round 2 of Bank Loans http://t.co/N0rpX9O7 Heightening the dependence of stressed banks and govts on the ECB. $$ Feb 28, 2012
• You may want to hold off on buying that Italian villa http://t.co/EP92Zd4m 66.5% of agents report a fall in housing prices during 4Q $$ Feb 28, 2012
• @japhychron Can’t think of anyone, btw, there is a theory that a decent # of stressed banks used LTRO 2 buy in their own debt… $$ Feb 28, 2012
• LTRO programs’ impact on sovereign bond purchases by banks (past and present) http://t.co/ffbNfY3B Indirect way of financing fringe govts $$ Feb 28, 2012
• Mario Draghi reveals the Grand Plan http://t.co/Dal4wEDo & http://t.co/KNj9mhgx Good austerity results in freer mkts, more growth $$ Feb 28, 2012
• Merkel torn by conflicting pressures in Greek vote http://t.co/0iCZV4kQ Any other Firefox users noticing that Reuters pages format badly? $$ Feb 27, 2012
• @moorehn Good piece, I think many will benefit @soberlook has been writing some good stuff also http://t.co/tAlkFpXR & http://t.co/jcLBc04c Feb 24, 2012

China

• China’s Billionaire Lawmakers Make US Peers Look Like Paupers http://t.co/d2haqyDc China’s lawmakers r absolutely more wealthy than US peers Mar 01, 2012
• China May Double Rare Earth Exports as Demand Rebounds http://t.co/MaDQX4rc Quite a change from prior, makes u wonder why they change… $$ Mar 01, 2012
• Why China Will Have an Economic Crisis http://t.co/xn3W2Wxa This is getting very mainstream, makes me think I could be wrong. $$ Feb 29, 2012
• Fortress’ Michael Novagratz on Lessons from OWS, and China http://t.co/yTSqXqYR Cronyism raises the odds of domestic violence in China $$ Feb 25, 2012
• Evil Overlords or Lucky Devils: The Men Who Rule Hong Kong http://t.co/BEqw7Z0Z Long but interesting, re the influential wealthy in HK $$ Feb 25, 2012

Credit

• Junk Isn’t http://t.co/olYEeOGe Spreads are down and investor interest is up; this is my biggest intermediate-term concern at present. $$ Mar 02, 2012
• Junk vs. Loans http://t.co/JbIHAFtt & http://t.co/tccF8pML Loan participation funds cheap compared 2 junk, but downside still there. Feb 29, 2012
• The rating agencies are the farm teams for credit analysts, in the same way that Value Line is for stock analysts.  A… http://t.co/Qfj1lYhu Feb 29, 2012

Upcoming Book of Josh Brown

• I invite you to read his website http://t.co/Qom9t2Zy .  He writes a lot of clever stuff there.  One of … http://t.co/r34pi1pR Feb 29, 2012
• Confessions of a Reformed Stockbroker http://t.co/B4dkJ5XI Another preview article 4 @reformedbroker ‘s forthcoming book $$ Feb 29, 2012

Personal Investing

• Dividends Rise Again http://t.co/gT6AcZXq Their coffers bulging with cash, companies are increasing the once out-of-favor common dividend $$ Mar 03, 2012
• IRAs Get Sexier http://t.co/XVG5u56g All manner of illiquid assets can b crammed in2 an IRA if you have a friendly custodian $$ #beware Mar 03, 2012
• Treasury yields and credit spreads divergence is not sustainable http://t.co/LvfHNU4t Ordinary times credit spreads r inverse 2 Tsy yields Mar 02, 2012
• The Myth of Commodity Diversification http://t.co/ZoMhgv7M A defense of why gold is a true diversifier of portfolios versus commodities $$ Feb 29, 2012
• Conflict of All Conflicts http://t.co/RgZmO3nv from @reformedbroker I rarely get angry, but this one annoyed me; skewed incentives $$ Feb 29, 2012

Accounting rules (yes)

• Standard Setters Strain 2 Avert More Revenue-Recognition Angst http://t.co/jRlnmLPa Industry-specific revenue policies r better; reject IFRS Mar 03, 2012
• Another “Case” of Terrible Decisions Borne of Terrible Accounting Rules http://t.co/wb2PB5BF Don’t compromise on revenue recognition. $$ Feb 29, 2012
• Mark-to-Market Pensions Show Brutal Year http://t.co/NhwMePZG Some companies are biting the bullet and moving pension acctg to mark2mkt $$ Feb 25, 2012

Corporate News

• Natural Gas Renaissance Sparks Favorable Chemical Reaction http://t.co/G0QHxkVu Petrochemicals benefit from cheap fracking feedstock $$ Mar 02, 2012
• Apple Dividend May Return Part of $98B Cash http://t.co/FzFTTr2X If $AAPL can’t use all of its cash then give it to shareholders $$ Feb 29, 2012
• @PlanMaestro Operating profitability is poor, and given their business mix, their P/B is fair for a company with a 5% anticipated ROE. Feb 29, 2012
• @ToddSullivan Now if they can achieve a decent ROE, and not have weak reserving… I was wrong regarding Maiden Lane when I wrote about it. Feb 29, 2012
• CNA: A P&C Insurance Turnaround Story http://t.co/WRwhf5sV A fair analysis of $CNA, worthy for insurance investors 2 read. O, he cites me $$ Feb 29, 2012
• One thing that is not mentioned frequently is that shale gas production profiles tend to peak and decline rapidly. Th… http://t.co/flnQvRwt Feb 28, 2012
• ‘Hope Phase’ for Stocks May End in Tears Again http://t.co/z6Sbfu7n Markets anticipate sustained US growth & soft landing for China $$ Feb 28, 2012
• Confronting a Law Of Limits http://t.co/kIFgxwk8 How does $AAPL grow into its valuation? Especially where obsolescence moves rapidly? $$ Feb 25, 2012

Miscellaneous

• FDA Warns on Statins http://t.co/7K37iJVe Every drug has side effects, w/statins it may be diabetes. Be wary, & avoid all drugs if u can $$ Mar 01, 2012
• Seriously? Any reason to avoid it? RT @kasie: Days since Mitt Romney has taken questions from the national traveling press corps: 17. Feb 25, 2012
• Slavery should be an issue where liberals and conservatives could agree for policy, and maybe apply the Palantir technology 2 root it out $$ Feb 25, 2012
• Fishing as Slaves on the High Seas http://t.co/0Bakkir5 Another place where slavery still exists; sex trade, Dubai construction & more $$ Feb 25, 2012
• Why Doctors Die Differently http://t.co/e3rnOTz8 Careers in medicine taught them the limits of treatment & the need to plan for the end Feb 25, 2012
• ‘Japanese Madoff’ Flagged http://t.co/U7vgrOap Industry Newsletter Warned in 2009 About Firm’s ‘Unnaturally Stable Returns’ $$ #ponzi Feb 25, 2012
• Killer App http://t.co/kUT8X9Ji Have a bunch of Silicon Valley geeks at Palantir Technologies figured out how to stop terrorists? Palantir. Feb 25, 2012
• At 35, I was a devoted Husband and Dad of 5 children, with the oldest being 7 years old.  Nominally, I was the invest… http://t.co/AYUuRMsi Feb 25, 2012
• War with Iran:Would you go bankrupt for your country? http://t.co/d5rVA9Ww War does not stimulate the economy, contrary 2 popular belief $$ Feb 25, 2012

Economy

• Is Japan Doomed? http://t.co/qZev2jSA What? There’s a free lunch where the Govt can borrow indefinitely? NO! Cash flows about 2 shift b wary Mar 02, 2012
• Core inflation is once again above expectations http://t.co/uxjbXofE There is inflation coming; stagflation even; bad policy begins to bite Mar 02, 2012
• A Wake-Up Call for Japanese Watchdogs http://t.co/r1JMhnM2 Bigger than MF Global, smaller than Madoff; how do you say Ponzi in Japanese? Feb 28, 2012
• Oil denominated in EU currencies is at record highs; demand destruction likely http://t.co/KwWkFvJM Wonder where breaking point is? $$ Feb 28, 2012
• Gundlach warns U.S. stock market vulnerable http://t.co/g8hKrNSJ Investors concede rally almost over; still expect to earn coupon-> danger Feb 28, 2012
• Architecture Billings Index indicated expansion in January http://t.co/nZV1OCdw leading indicator 4 new Commercial Real Estate investment $$ Feb 28, 2012

We would all like our practical decisions to go easily, and bear quick positive results.  That’s not reality.  As for me, I needed to decide whether I would:

• borrow against my home at 3% for 15 years.
• liquidate a portion of my taxable brokerage account
• liquidate shares in best private manufacturer of commercial lawn mowers in the world.

I decided on the flexible and probably low-cost solution, selling some of the taxable brokerage account.  I have two accounts, an IRA and the taxable account.  They were invested differently, but my investors get a blend of the two accounts.  I used to put the higher income names into the IRA, while the taxable account would take the lower income names.

That has been changed. Both portfolios have the same proportion of names (companies). In the process, gains have been realized, but not so much as overwhelm the deferred losses of the past.

But for this exercise, one salient result was that both portfolios, which are the model portfolio in aggregate, would become like the model portfolio.   They are now clones of each other, as is true of all client portfolios that I manage.  My promise to clients is that they get what I get, so I create a clone of my portfolio for each client.  It certainly aligns my incentives with theirs.  Even after today, my next-largest client is 20% of my aggregate portfolio.  So, yes, I eat my own cooking, and in general, my cooking has been tasty over the last twelve years, even though the last year has been less than inspiring.

On the bright side, with the market up, it has allowed me to harvest an amount that will take care of my family for a year, while leaving my portfolio up considerably from one year ago.  That helps a lot when revenues from managing money are still light.

Hopefully, within a year, I will have enough clients that my revenues support my family.   We’ll see; but if that doesn’t happen I know there are a number of firms that would like to employ me, so my downside is limited.

One final note: one reason why this was a difficult decision was that the low rates for mortgaging my home were more difficult to obtain while self-employed.  Aside from my investments, I am not earning as much as I used to.  The fixed costs of liquidating part of my portfolio were 6% of the fixed costs of obtaining the mortgage.  Beyond that the question remains as to how well equities will do in the future, a question for which I have no good answer.

I think I made the right move here; I usually do, generally, but we will see whether this was the right decision over the next few years.

I have many software robots that scan for responses to what I write.  Most come directly to me.  Some do not like this one at Seeking Alpha:

Merkel’s reasons are, to be blunt, stupid.

1: Its too crowded and there is too much competition: While his goals may be to outperform many of us just want to build wealth.
2: Too much information: Just ignore the stuff that is unimportant. More information the better it certainly beats how things were decades ago.
3: “We are in a macroeconomic environment where we are delevering. That is not the best environment for making money”
For someone claiming 20 years of experience that is incredible naive.

First, we build wealth in competition with others, and the competition has grown, not shrunk.  The anomalies the allowed smaller investors to prosper are for the most part well-known.  Whether they are over-fished is another matter.  I think that previously profitable strategies still have value to the degree that they are ignored as no longer valuable.

Second, yes there is way too much noise, and I even create some of it.  Yes, I try to filter the information I receive, but I receive a ton of it, and filters are not perfect.  Please tell me how to construct a perfect filter, because mine are imperfect.  If we could create perfect filters we would be very, very rich, unlike me and the commenter.

Third, I don’t get the last comment, except that the person does not understand that periods where lending is expanding usually offers the highest returns for risk assets.  Presently we are contracting.

If I am naive, it is that I am an idealist.  I want better economic policy, and see lousy governance at the Fed, Treasury, and State levels.  As a result, on average, I see low real returns for assets over the next 5-10 years, unless policy changes dramatically.