Before I start, thanks to all those who e-mailed me over my “sorted weekly tweets.” ?I am likely to continue doing them. ?That will start next week, because I have had a flood of new clients, and other obligations.
On Fixed Payment Annuities
How often do you run into articles in quality publications talking about annuities that will pay a fixed sum over your life, or over your life if you live past a certain age? ?Not often, right? ?Right. ?Well, today I got two articles on the same day:
Longevity insurance is an important topic, and everyone should consider getting an income that they can’t outlive. ?That said, there are two problems with this:
Inflation, and
Credit risk (will the insurer survive to make the payments?)
It is possible to buy inflation-protected annuities, but at a cost of a lower initial payment. ?With credit risk, consider what the state guaranty funds will cover in insolvency, and realize that any payments over that amount could be lost due to insurer insolvency. ?If you have a large payment, only buy from strong insurers.
Then there are the deferred fixed payment annuities. ? You are 50 years old, and you want a payment stream that kicks in when you are 80, should you live so long. ?You can buy a lot of income that far out, which will help you if you survive, subject to the same two main risks: inflation and credit risk. ?I am not aware of any deferred inflation-adjusted payment annuities.
Now, you can think of your annuity as a replacement for long-dated fixed interest bonds. ?A portfolio of fixed payment annuities, cash, maybe some commodities/gold, and stocks could be very stable, balancing the risks of inflation and deflation, and of high and low real rates.
There is the added benefit of the regular income which is useful to average people, who are okay with budgeting, but really don’t understand investments. ?Just beware inflation and credit risk.
One more note: most insurance agents will never suggest immediate annuities to you because when you buy one, that’s the last commission the agent ever gets. ?They would rather you buy a deferred annuity, where they can gain another commission when the surrender charge period is up, and roll you to a new product.
Summary
Longevity insurance is good, but be sure you avoid credit risk, and have other assets to compensate for potential inflation risk.
Are some Baby Boomers retiring because the current value of their assets is?high? ?This article from Bloomberg gives an ambivalent answer to the question. ?Personally, I don’t know the answer to that question, but I can answer a related question: In the current market environment, where interest rates are low and stock valuations?are high, should Baby Boomers accelerate their retirements?
The?answer is no. ?Here’s why: in retirement, you aren’t earning income from wages. ?You need income to be able to pay for expenses. ?If?interest rates are low and?stock valuations?are high, you won’t be able to create much income relative to your assets.
It’s like owning a long bond that you intend to buy and hold for the income. ?Do you care that interest rates have fallen, and the value of your bond is above where you bought it? ?No. ?It doesn’t give you any more income. ?If you sold it, where would you reinvest to get more income at equivalent risk?
Let me digress: rather than looking at asset values, look at anticipated cash flow streams. ?Have you grown you anticipated cash flow stream? ?In a bull market, many look like geniuses, but if it is only due to a rise in valuations, it means that the cash flow streams are unchanged.
I realize this is a harder way to look at the markets, but for those that have managed the interest rate risk at life insurers, this is the way the best do it. ?Have you created a higher income rate over the funding horizon? ?That is true improvement of the economic position.
Don’t merely look at the current value of your assets. ?That is an illusion of the true value in terms of income. ?Think of it this way. ?Say that you have surpassed your prior peak assets of 2007 recently in 2014. ?Now look at the income you could have purchased in 2007 (use the long bond as a proxy — 5%), versus what you could buy today — 3.4%. ?The ability to generate income is reduced by 30%+.
You might argue that the long bond is the wrong proxy — too long, too safe. ?I would argue that the safety is necessary. ?If you want to take more risks in fixed income, go ahead, but that is an option. ?As for length, the length?is close to what is needed, but if you used 20-year bonds, the argument would not change.
Final Notes
You might think you have a lot of money, but how much income can it generate? ?Are you protected against inflation? Deflation? Credit risk? ?Don’t assume because the asset balance is high that you are necessarily better off, because you might not be able to earn as much income off your assets.
Roger Babson warned people about how high the stock market was, while Irving Fisher talked about stocks hitting a ?permanently high plateau.?? The South Sea Bubble had many in the 1700s media stoking the flames of speculation.? Joe Granville was hot stuff in the late ?70s and early ?80s, but was dead wrong the rest of the time.
Harry Dent, Charles Kadlec, and the crew that put together Dow 36,000 created their own sensational predictions which proved to be controversial and very wrong.? Martin Zweig was right about the 1987 crash, while Jim Cramer controversially was right during much of the 2008 crash.
How to understand modern pundits
Then comes the basic advice to help us weather the storm of advice that floods the media.? The main topics are:
How to use financial media intelligently?
Need for humility
Hedge fund managers that talk to the public
People who act certain attract belief
Wall Street maxims often contradict each other
Making predictions that are squishy (surprises lists)
There are no experts
Using financial media intelligently means limiting the intake, and limiting its effect on you.? We must be humble in what we understand and accept, and we should listen to those that are humble in what they say.
When hedge fund managers speak publicly, realize that they are speaking their own interests.? They may not be right.? Also, those who speak with certainty on TV tend to attract more belief than those who are more humble and nuanced.
There are many soundbites in financial television, radio and writing.? For every maxim, there is a counter-maxim.
There is an art to making predictions that can?t be falsified, such as surprise lists.? It would help us all if we all realized there are no experts in investing, and that even includes me.
Interviewing modern pundits
Jeff Macke, Josh?s Co-author interviews the following pundits:
Jim Rogers ? former manager of the Quantum Fund, author of many books.
Ben Stein ? speechwriter for Nixon, written a scad of books, etc.
Karen Finerman ? founder, owner & head of Metropolitan Capital, on CNBC?s Fast Money
Henry Blodget ? Internet stock analyst 1998-2002, and now the editor and CEO of?The Business Insider, a business news and analysis site, and a host of Yahoo Daily Ticker, a finance show on Yahoo.
Herb Greenberg ? wrote for the San Francisco Chronicle?s business section, for theStreet.com, and has appeared on CNBC many times.
James Altucher ? Entrepreneur and blogger.? He contributes content in many journalistic outlets.
Barry Ritholtz ? Writes for Bloomberg.com and his own popular blog.? Also writer of the excellent and early crisis book Bailout Nation.? Josh Brown works with him at their firm.
Jim Cramer ? Former hedge fund manager, founder of theStreet.com, host of the show Mad Money which appears on CNBC.
Jeff Macke ? Josh?s co-author, currently working for Yahoo Finance, who relates a tale of when he screwed up badly as a pundit.
These are good interviews, and it gives the readers an internal look as to what it is like to be in front of the media, particularly amid controversy.? Each of the nine interviews sheds light on being a pundit, but in different ways.
Jim Rogers has talked about macro issues, and with a varied track record in the short-run.? Ben Stein has said many controversial things over time.? Karen Finerman has the story of being invited onto CNBC?s Fast Money, and taking a sip from the firehose as the first woman, one with no TV experience, and surviving.
Henry Blodget goes through his errors in the Internet Bubble, and how he has found redemption in writing about finance.? Herb Greenberg, the consummate skeptic, describes what it is like to take unpopular positions versus popular stocks.? James Altucher oozes blood over much of what he writes, telling of his own failures and successes in excruciating detail.
Barry Ritholtz, skeptic par excellence, describes the attitudes of interviewers, and the limited range of thought they have.? He delights in giving them answers that trouble them, like, ?I don?t know.?
Jim Cramer is perhaps the most controversial of all.? I have known him, albeit distantly for 15 years.? He is very bright, but falls into the trouble of making too many predictions.
And so it is for most pundits.? Amount of predictions is inversely proportional to their quality.
The last ?interview? is where Jeff Macke relates a failure of his on CNBC, tells a story of how pundits are human.? They have stresses in their lives.? They make mistakes.? They are people, humans, like you and me.
Summary
This is a good book, and will educate average people regarding financial media.? You will see the financial media from an insider?s view.?If you want that, you can buy it here:?Clash of the Financial Pundits.
Full disclosure: I received an advance copy of the book via NetGalley.
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.
There’s a puzzle of sorts in asset allocation, and it falls under the rubric of uncorrelated returns. ?When a new asset class arrives, and it is small and few invest in it — lo, it is uncorrelated!
But then the word spreads, and more investors begin investing in the alternative asset class. ?This has two effects:
It drives up the price of the alternative assets, temporarily boosting performance, and
It makes the asset class returns more sensitive to the actions of large institutional investors, such that the correlations rise with stocks and other risk assets.
How an asset is funded matters a great deal as to future price performance. ?I often talk about strong hands and weak hands in investing, but I can make it simple:
Strong Hands — Well capitalized, little debt, and what debt there is, is long-dated. ?Such people can buy assets and ride out storms, not worrying about mark-to-market losses.
Weak Hands — Poorly capitalized, much debt, and what debt there is is short-dated. ?A storm will capsize them, making them forced sellers of the assets they acquired with debt.
Buffett understands this. ?His insurance companies have relatively low underwriting leverage, but they benefit from high allocations to stocks. ?He can own stocks because there is a core amount of liabilities that will fund the stocks that he owns.
Think of housing for a moment. ?Asset prices were highest when the ability to use short-term low-cost financing was abundant. ? Eventually, there was no demand for housing when prices would lock in losses for buyers who would rent the property out.
If an asset is owned by entities that have weak financing, there is a real risk of loss if the financing can’t be maintained. ?You become subject to the credit cycle, which governs much of investing. ?Invest when credit spreads are wide; don’t invest when they are narrow.
I know that advice is vague, but that’s a part of the game. ?You have to adjust the riskiness of your portfolio to overall conditions, and resist trends, if you want to make money over the long run.
How people and other entities fund the assets that they own has an effect on the future price performance, because it affects how they might buy or sell.
Much as I appreciate those who like what I write at this blog, I don’t write to be loved. ?I don’t write to be hated, either. ?I am sensitive to what people think of me, but not to the degree that it changes what I write.
I may have nonconsensus views on:
The Federal Reserve
Gold
Social Security & Medicare (and their cousins around the globe)
The current Bull Market in Stocks and Corporate Bonds
Long Treasuries
and more…..
But I write what I write to disclose the truth. ?I am an active equity manager, but I encourage people to use passive investing via index funds, unless they can find a manager who can reliably obtain outperformance.
I don’t blog for economic advantage. ?If I wanted to do that, I could channel a wide variety of ideas on investing that are popular, but I know are marginal at best in terms of effectiveness.
Some friends of mine have told me, “Why don’t you write about companies that you own, or companies that look attractive to you?”
I’ve been burned by doing that. ?For every ten that you get right, you get the same response from every one you get wrong. ?As with most of the web, the complainers dominate. ?That’s why I don’t trot out many individual stock ideas. ?It’s not that I don’t have them, but I only share them as a group, not as a single idea, most of the time.
Summary
I’m here to tell the truth, even if it cuts against my own short-term economic interests. ?Most of the time, I adjust my portfolio so that it is ready for everything, but sometimes I delay, because I know that changes in the market usually happen slowly.
I do not write to be popular. ?I write to change the consensus, unlikely as that will be. ?Finance is a perverse area of life where fear and greed take over. ?And with academics, they have these lame models that are fit for Vulcans (maybe) but not humans (and certainly not Ferengi).
We need new models that reflect the fear-greed cycle, and make valuation a significant input in risk assessments.
I’m not in this for love; I only want to change the way that we view investment decisions.
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.
Date
Cash Flow
9/30/2004
???????????? 13,081
3/31/2005
?????? 2,902,381
3/31/2006
?????? 3,152,826
3/31/2007
?????? 4,129,118
3/31/2008
?????? 5,163,301
3/31/2009
??? 10,326,761
3/31/2010
?????? 8,197,457
3/31/2011
??? (3,046,769)
3/31/2012
?????? 5,499,978
3/31/2013
? (18,958,700)
11/15/2013
??? (4,320,084)
12/31/2013
? (30,887,920)
Dollar-weighted
8.20%
Time-weighted
11.13%
Difference
-2.92%
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.
Companies Squeeze 401K Plans From Facebook to JPMorgan http://t.co/2glTizHOjm This should not surprise, many companies shrink labor costs $$ Feb 15, 2014
Wells Fargo edges back into subprime as US mortgage market thaws http://t.co/s8AJCKuzOH Isn’t a problem now, problem comes w/imitators $$ Feb 15, 2014
Homebuyers Get Break as Loan Rates Defy Fed Tapering http://t.co/i7PdmGThdz Housing & general economy weakened, so mortgage rates fell $$ Feb 13, 2014
Pension politics http://t.co/3NaaI61AxM @felixsalmon points out how defined benefit plans r in general better 4 workers. Mind the PBGC $$ Feb 13, 2014
Colleges Raise Record $33.8B Exceeding US Peak in 2009 http://t.co/PRjlMrKM9i Donations always follow creation of unrealized cap gains $$ Feb 12, 2014
Some Lines Say Maybe the Stock Market Will Go Down http://t.co/FdkJdRT9qe @matt_levine correctly criticizes the 1928-9 $SPY graph overlay $$ Feb 13, 2014
1929 Stock Market Crash Chart Is Garbage http://t.co/PyPIulerCH Unequal left & right scales make the relationship look tighter than it is $$ Feb 12, 2014
?When to Ignore the Investment Experts http://t.co/K2vyHgb1gv ?When all the experts &forecasts agree ? something else is going 2 happen.? $$ Feb 11, 2014
Comparing Economic Recoveries http://t.co/5za6QtEFKD In 1984-2006, growth was borrowed from future by increasing debt levels-> #payback $$ Feb 11, 2014
Aluminum Lines Still Trouble the London Metal Exchange http://t.co/f5OyWC5EHC Aluminum inventories will b a prob, til short intrates rise $$ Feb 11, 2014
Ten Stocks to Own During a Market Correction http://t.co/RzBdaNf1ff Good list. I own a few of them. $$ Feb 11, 2014
Does trend-chasing explain financial markets? http://t.co/3Mkg4R99dx Partly. Difference between investment IRR and total return is big $$ Feb 10, 2014
?Security. Safety. Stability.? http://t.co/VfKVcGgMRJ from @reformedbroker Gold is useful at certain points, but only when it is hated $$ Feb 10, 2014
Flows Don?t Follow Value, They Follow Performance http://t.co/9oIJ4M7HMo @reformedbroker wrote this little gem. Learn & internalize it $$ Feb 10, 2014
Long Term Charts 2: Western Markets Since The Middle Ages http://t.co/lsBfIot8pi Interesting charts from very messy data at Zero Hedge $$ Feb 10, 2014
Most Expensive Place to Find Out Who You Are http://t.co/szQfeKFZxT @jasonzweigwsj : Your reaction 2 minor crisis shows yr risk tolerance $$ Feb 10, 2014
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Companies & Industries
AIG Takes $832 Million Charge on Death Bets as Hedge Funds Gain http://t.co/JmI7hBy9MH Life settlements should b illegal $$ $MET $AIG $PRU Feb 14, 2014
To Stop the Coffee Apocalypse, Starbucks Buys a Farm http://t.co/CPkyVAUnsR $SBUX helps create a variety of rust resistant Arabica trees $$ Feb 13, 2014
Former BlackRock Manager Finds Billions on Rice Energy http://t.co/aBPTo3u4Ky Few investment mgrs have operating talent; Daniel Rice does $$ Feb 13, 2014
Buffett’s Pal Munger Heads a Very Weird Company http://t.co/ztr3XizpKM Growth of $DJCO thru investing leads 2 # of growing pains & 13F $$ Feb 13, 2014
Here?s Why the Biggest Cable Company in the Country Thinks It Can Get Bigger http://t.co/04cdg1J9VP Feds tolerant of cable re antitrust $$ Feb 13, 2014
Why AOL ended up spending millions on ‘distressed babies’ http://t.co/d2lWs8eJit $AOL chose 2b in healthcare biz 4 its employees & lost $$ Feb 13, 2014
3 High-Yielders To Buy On The Pullback http://t.co/8SUBI1M0ut In total $SNH issues more stock than it pays in divs. Divs -> cap losses $$ Feb 13, 2014
Who is John Thompson? A look at Microsoft’s new chairman http://t.co/W7SrXqxtwm May have right stuff to protect new CEO from meddling $$ Feb 10, 2014
US Politics & Policy
Runaway Drones Map Land, Film ‘Wolf,’ Knock Down People, FAA Gives Chase http://t.co/rcTnjug8w1 Drones r here 2 stay; time license them $$ Feb 15, 2014
Teacher Tenure Put to the Test in California Lawsuit http://t.co/XP5fx6HpR3 Tenure has outlived its usefulness; older teachers can b lazy $$ Feb 15, 2014
Lincoln’s Foreign Policy in Today’s World http://t.co/t2RELj7uRB Kept England & France from joining Civil War; otherwise pragmatic $$ $SPY Feb 15, 2014
What Would Lincoln Do? http://t.co/hi6n4Rb8hl A clever man w/principles, who did not cease to be pragmatic pursuing 1 main goal – Union $$ Feb 15, 2014
Harvard Professor Attacking Google Thrives as Web Sheriff http://t.co/g1W7KXH94K At some point, lack of disclosure will blow up on him $$ Feb 14, 2014
The $2.2B Bird-Scorching Solar Project http://t.co/hIYWhJpUwQ Get used 2 idea: almost every form of energy imposes environmental costs $$ Feb 13, 2014
Obamacare Damage-Control Teams Seek to Calm Complaints http://t.co/bPU95rVMxM Things r tough when u r trying to avoid media embarrassment $$ Feb 13, 2014
Billionaire Musk Gets Brownsville to Pay for SpaceX http://t.co/eoAiygs9mq Like a football owner bargaining 2 get taxpayers buy a stadium $$ Feb 13, 2014
Snowden Swiped Password From NSA Coworker http://t.co/1mJ5D6vGH3 & it cost him his job. Snowden denies it; NSA is Not Saying Anything $$ Feb 13, 2014
Puerto Rico Legislators Amend Bill Calling for Bank-Deposit Shift http://t.co/fMaCvMi7ab Provincial govt’s attempt 2raid cookie jar stopd $$ Feb 13, 2014
Obamacare Will, in Fact, Encourage Employers to Cut Jobs http://t.co/D3vaCFHOZY As the employer mandate comes into force, jobs will b cut $$ Feb 12, 2014
Tea Party Scorns Republicans as House Lifts Debt Ceiling http://t.co/fPohsF6Kbi t-party can b “pure” as Dems raise ceiling w/few GOP $$ $TLT Feb 12, 2014
A Lame Duckish Calm Falls Over the Capital http://t.co/u6bG2cg1nL Parties in DC act as if the next event is the November elections $$ $TLT Feb 12, 2014
Obama Rewrites ObamaCare http://t.co/Ym3CtHt3pI Another day, another lawless exemption, once again for business; WSJ bangs populist drum $$ Feb 11, 2014
The US Senate Again Insists on USPS Saturday Mail Delivery http://t.co/YnzmKE5Xrh 2 timid; end Wednesday & Saturday delivery $$ $UPS $FDX Feb 11, 2014
US firms ?paid effective tax rate of 2.2% in 2011? http://t.co/f2T5Qnrhri More than a tax haven, Ireland helps insurers shave reserves $$ Feb 11, 2014
No Honeymoon for Janet Yellen http://t.co/86QPfTcVE0 QE withdrawal will bite, & what will become of all the deposits? $$ Feb 11, 2014
Please Hold Your Bernanke Applause http://t.co/DCKPttFHNU Remember, when Greenspan left, he was viewed as a success, same as BB now $$ $TLT Feb 11, 2014
Sounding the Tax Alarm, to Little Applause http://t.co/r9JQmmaeLB IRS stiffs whistleblowers who often lose employability 4 being a tipper $$ Feb 10, 2014
Rest of the World
Putin is Playing a Game of His Own http://t.co/19Arh0aJOH Not so fast. Russia has significant resources & influence in Eastern H’sphere $$ Feb 15, 2014
Boy?s Life Hanging on 8-Hour Trip Shows Why Venezuelans Protest http://t.co/8G8CgGwGST Socialism is like a cancer that spreads til death $$ Feb 14, 2014
Let’s Watch Venezuela Destroy Itself http://t.co/g1Uy3zk1W3 Logical extreme of Socialism falls apart; pity that Chavez never lived 2c it $$ Feb 14, 2014
Chinese Join Winklevosses in L.A. Luxury Home Hedges http://t.co/TUdw4AItw8 Amazing what the wealthy will pay 4a fancy foreign retreat $$ Feb 14, 2014
Next crisis won?t come from the emerging markets http://t.co/Jei7oKJ8BD Argues France, Germany, Britain, Australia & Canada-> 2 much debt $$ Feb 13, 2014
Mister Donut, Pan Am and Friendster Found Alive and Well http://t.co/vDaGi33cEN Old brands never die, they just move overseas & make $$ $SPY Feb 13, 2014
Bank of England points to 2015 rate rise, blurs guidance http://t.co/AWhyd8GZmd More precision than 1 can know; the world is messy $$ $FXB Feb 13, 2014
Italy Pays Record Low to Sell 3-Year Debt at Auction http://t.co/PWmUhXufjb Let the leverage build for the next crisis $$ Feb 13, 2014
Fink to Mobius Touting Emerging Stocks Fails to Stem Outflow http://t.co/8PFKbOH8Lg A time 2 nibble, not a time 2 gulp $$ $EEM Be wary Feb 13, 2014
Greek Truckers Show Plight as Groceries Show Up Frozen http://t.co/XgAM737A7h Freeing up the labor market will work as attitudes change $$ Feb 13, 2014
Tunisians Bolt Doors Even After New Constitution Passed http://t.co/lBhXz8iqWb Constitutions cannot create cultural change; asks 2 much $$ Feb 13, 2014
Israel Desalination Shows California Not to Fear Drought http://t.co/BFidhnEF7S When resources r tight there are incentives 2 create tech $$ Feb 13, 2014
London Walkie Talkie Owners to Shield Car-Melting Beam http://t.co/76TP0u2tuT Reflective parabolic curve of building melts cars @ a spot $$ Feb 12, 2014
Rouhani Seeks Economic Fix as Iran Commemorates Revolution http://t.co/EDNL5WLOvB Will have to get the agreement of unelected true rulers $$ Feb 11, 2014
Argentina to Replace Bogus Inflation Index to Mend IMF Ties http://t.co/iSzQizrgnF Argentina tries 2 find cheapest way out of this mess $$ Feb 11, 2014
Who Should Pay for Trusts that Go Bust? http://t.co/aOXFbDltCZ If China is smart, protect depositors, but let banks & WMP holders fail $$ Feb 11, 2014
Iceland Girds for Fight as Suit Targets Half $14B GDP http://t.co/hX6M12PZ48 Icelandic taxpayer will refuse the bill; UK will b stiffed $$ Feb 11, 2014
Mobius Says Emerging-Market Rout Near End as Valuations Lure http://t.co/MMLjlAmN49 I dunno, a 4% earnings yield premium seems small $$ $EEM Feb 11, 2014
Rehabilitating Portugal http://t.co/tFy3GnIwRQ Long; Argues that a Greek-style bailout should b done, or Portugal will eventually default $$ Feb 11, 2014
Iranian TV Shows Rare Broadcast of Band Playing Music http://t.co/jTBFNcRsHJ Christianity has always been easier on music than Islam $$ Feb 11, 2014
Work Trends
Sheep-Shearing Wells Fargo Banker Bridges US Income Gap http://t.co/utMe1ekmir Sells coffeemakers too; many in US work multiple jobs $$ $TLT Feb 13, 2014
Workers Shed Caution, in a Healthy Sign for Labor Market http://t.co/zTq0NgbO0f When workers r willing 2 quit, labor mkt is healthy $$ $TLT Feb 11, 2014
Practical
A Little Valentine’s Day Straight Talk http://stks.co/j0I6p Sage counsel 2 younger women if they want to get married: start early $$ Feb 15, 2014
The Sex Question Readers Want Answered Most http://t.co/kRhYIgwI2Z Even Long-Married Happy Couples Ask, ‘How Can We Have Sex More Often?’ $$ Feb 11, 2014
Ten Ways You’re Probably Leaving Money on the Table http://t.co/KkjetkJsp9 Simple list of ways to save money for avg upper-middle class $$ Feb 11, 2014
Why Mom’s Time Is Different From Dad’s Time http://t.co/0Xr4IMsFfs Husbands, u can win if u reduce chaos for your overburdened wives $$ Feb 11, 2014
Other
US Scores Fusion-Power Breakthrough http://t.co/h6wDtXHcVj Bad news is Tritium very expensive @ $100K per gram; takes much energy 2 make $$ Feb 13, 2014
If Ocean Heat Pump Switches On, Expect to Feel It http://t.co/FlsYni5c62 Speculative; we don’t understand climate or hurricanes well $$ Feb 11, 2014
Who is Steven Reisman? Meet Hip-Hop VIPs’ Favorite Lawyer, The Man With The $2 Bills http://t.co/B3v87YDWrt Weird. Very, very weird $$ $SPY Feb 11, 2014
Skeptical: Blackstone-Fueled Single-Family Home Boom Lifts Chicago http://t.co/sETcWifBGx In past hi levels of investor ownership bearish $$ Feb 15, 2014
Wrong: Pros Panic, Retail Investors Stay Cool on Emerging Markets http://t.co/QXXpOcqKYw Too short a period time to judge $$ Feb 14, 2014
Wrong: Social norms: The indignity of no work http://t.co/6isHJo9fkw New technologies will create new jobs & make the whole world better $$ Feb 13, 2014
Wrong: Warren Buffett is laughing at you for selling http://t.co/S5LFS3jUk5 Poorly thought-out piece glues 2unrelated ideas together $$ $EEM Feb 13, 2014
Wrong: The #1 High-Yield Investment Of America’s Elite http://t.co/FUVyBblQpZ Spammy article that talks about REITs as if they r a secret $$ Feb 11, 2014
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Replies, Retweets & Comments
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10 miles west of Baltimore, MD, we got ~15 inches of snow over the last last 2 days. #snow #weather #pax $$ Feb 14, 2014
“Administrative Services Only” plus individual stop loss protection is in general the smart way2?” ? David_Merkel http://t.co/fPV6fQo1i1 $$ Feb 13, 2014
“This is a common confusion in statistics — you can have a high correlation and a low beta. Second?” ? Merkel http://t.co/sa6PLqEhdU $$ Feb 13, 2014
@davidgaffen that would only be a temporary fix. I wrote this 3.5 yrs ago on the topic: http://t.co/q3lbyELN9d The internet eats USPS Feb 11, 2014
@quakkelaar I miss you too. If you are ever near Baltimore/DC, let me know; we can get together, brother. Last few years have been hard Feb 11, 2014
RT @ReformedBroker: Please explain how the wording of this investment advertisement on the Washington Post site could be legal: http://t.co? Feb 10, 2014
‘ @quakkelaar Hail old friend. Yes, same old mistakes, b/c those wishing to retire are making the money sweat, until it rebels on them $$ Feb 09, 2014
Strategy One: “Consistent Losses, with Occasional Big Gains when the Market is Stressed”
Strategy Two: “Consistent Gains, with Total Wipe-out Risk When Market is Highly Stressed”
How do these two strategies sound to you?? Not too appealing?? I would agree with that.? The second of those strategies was featured in an article at Bloomberg.com recently — Inverse VIX Fund Gets Record Cash on Calm Market Bet.? And though the initial graph confused me, because it was the graph for the exchange traded note VXX, which benefits when the VIX spikes, the article was mostly about the inverse VIX?exchange traded note XIV.
Why would someone pursue the second strategy?? Most of the time, it makes money, and since January 2011 we haven’t a horrendous market event like the one from August 2008 through February 2009, it makes money.
I would encourage you to look at the decline in the second half of 2011, where it fell 75% when the VIX briefly burped up to around 50.? But given the amazing comeback as volatility abated, the lesson that some investors drew was this: “Volatility Spike? Time to buy XIV!”? And that explains the article linked above.
You might remember a recent book review of mine — Rule Based Investing.? In that review, I made the point that those that sell insurance on financial contracts tend to win, but it is a volatile game with the possibility of total loss.? To give another example from the recent financial crisis: most of the financial and mortgage insurers in existence prior to 2007 are gone.? Let me put it simply: though financial risks can be insured, the risks are so volatile that they should not be insured.? You are just one colossal failure away from death, and that colossal failure will tend to come when everyone is certain that it can’t come.
But what of the first strategy?? How has it done?
Wow!? Look at the returns over the last few weeks!? Rather, look at a strategy that consistently loses money because it rolls futures contracts for the VIX where the futures curve is upward-sloping almost all the time, leading to buy high, sell low.
Does it pay off in a crisis?? Yes.? Can you use it tactically?? Yes.? Can you hold it and make money?? No.
Back to the second strategy.? People are putting money into XIV because they “know” that implied volatility always mean-reverts, and so they will make easy money after a volatility spike.? But what if they arrive too early, and volatility spikes far higher than expected?? Worse yet, what if Credit Suisse goes belly-up in the volatility?? After all, it is an exchange-traded note where owners of XIV are lending money to Credit Suisse.
Back to Basics
Do I play in these markets?? No.
Do I understand them?? Mostly, but I can’t claim to be the best at this.
What if I try both strategies at the same time?? You will lose.? You are short fees and trading frictions.
What if I short both strategies at the same time?? Uncertain. It comes down to whether you can hold the shorts over the long term without getting “bought in” or panic when one side of the trade runs the wrong way.
Recently, someone pinged me to speak to CFA Institute, Baltimore, where he wanted to talk about “not all correlations of risky assets go to one in a crisis” and pointed to volatility investing as the way to improve asset allocation.? Sigh.? I’m inclined to say that “you can’t teach a Sneech.”
I favor simplicity in investing, and think that many exchange traded products will harm investors on average because the investors do not understand the underlying economics of what they own, while Wall Street uses them as a cheap way to hedge their risk exposures.
There may be some value to speculators in using “investments” like strategy one for a few days at a time.? But holding for any long time is poison.? Worse, if you are accidentally right, and the world comes to an end — this is an exchange-traded note, and the bank you lent to will be broke.? That will also kill strategy two.
So, my advice to you is this: avoid either side of this trade.? Stick with simple investments that do not invest in futures or options.? Complexity is the enemy of the average investor.? I can understand these investments and they don’t work for me.? You should avoid them too.
This is a special book.? It’s special because it explains investment concept in simple language, and tries to give average people an ability to understand how the markets work.
The author shares from his life experiences, where not everything turned out right.? With bonds in the 1970s, what was ordinarily a safe investment turned into “Certificates of Confiscation,” as inflation and interest rates rose.
The author is careful to point out the difference between fake diversification and true diversification.? False diversification has a large number of positions that are related, like owning many tech stocks from 1998-2003, or many financial and housing stocks 2005-2009.
True diversification means there is not some hidden factor that can affect your whole portfolio.? The author argues that we need a broad array of investments in the portfolio to diversify results, reducing volatility, so that the investment program can continue? until the target is reached.
Th author also argues? that investors need to dig into the guts of what they are investing in.? Who is the custodian?? Are my assets safe from commingling with the assets of others?? (Think of MF Global or Madoff.)? Is there any factor that could cause a substantial fraction of my assets to be significantly impaired?? As an example, what if you live to an old age?? Will you outlive your assets?? For most Baby Boomers, that is a significant risk that is under-appreciated.
The author, who managed two significant asset management firms in his career, encourages readers to do detailed checks on any active managers they hire (like me).? Analyze their methods, their incentives, their character, and more.? Passive investing does away with many of those questions, but still you have to set up an asset allocation.
As for active managers, they often buy and sell to make it look like they are doing something for clients, when frequently less activity would be in the best interests of clients.? Active management often works better at lower turnover rates.
Investment performance analysis has its own pathologies.? There is the need to buy an outperforming fund.? Why buy a fund that has done poorly?? An investor could ask two questions: 1) is the manager just benefiting from the current cycle, or are his picks good aside from that? 2) Has the manager gotten so large in that strategy that there is no place to place money to achieve an above average return.
The author also notes a strategy that many rich employ: hold safe assets and risky assets, but not the stuff in-between.? Few have made their wealth on the stuff in-between.? Preferred stock has made no one rich, nor investment-grade corporate bonds.? Junk bonds when carefully chosen may be an exception.
Now, that said, I think the author is too optimistic on emerging markets.? As in the current mini-crisis, many of them have immature financial systems, and are mis-financed.? Long assets are being financed by short loans.? This can goose growth in the short-run, but not in the long run.? I think that emerging markets have a place in portfolios, but smaller than the author implies.
Three Pockets
The author posits three pockets for assets — a large one for savings (don’t lose this), a medium one for investing (moderate risk), and a small one for trading (high risk).? He is trying to channel male actions in a good way.? You want to gamble?? Gamble with a small amount of money.? Keep the main body of your assets in ordinary hands that you do not touch.? Set it, and mostly, forget it.
This is an interesting way to try to get people to take limited risks, and have most of the portfolio be safe or have limited risks.
Passive vs Active
The author does not take a stark position on this, but points people toward passive funds if active fees are too high, and track records do not validate good investment choices.? That is how I feel about my own investing.? If I can’t outperform, I don’t want you investing with me.? The book’s position is only invest with active investors that have an edge.? That is more common with smaller cap stocks, international investing and junk bonds.
When to Adjust Portfolios to Reduce Risk from Aging
This book has risk positions lasting longer than most books, and generally, I think that is right, unless markets have gone to such high levels that intelligent investors should lighten up.? I think we are in one of those moments now.? Walk, don’t run, to reduce risk assets, and don’t go all the way, just lighten up.? I rarely make big moves, and the book would not advocate tactical big moves either.
I thought the book’s chapters on choosing advisors were well-written.? It gives you adequate ways to check out financial advisors like me, and those much larger than me.
Summary
The summaries at the end of each chapter are very useful.? I can endorse almost everything in the book.? Just be more careful about emerging markets than the book is, they have a lot of risk embedded at present.
Full disclosure: The PR people offered me a book, and I accepted it.? I am glad that I did.
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.
One of the most important things I am here to teach readers is that there is no such generic concept as risk. ?There are risks, and they must be handled separately. ?Generic measures of risk such as standard deviation of returns, beta, etc. are unstable. ?This was driven home to me when I heard a presentation from endowment investment advisors, where they talked about their models, and how the models translated current economic statistics into investment decisions.
I’m sorry, but the models can not be that good. ?The financial markets are only weakly related to the real economy in the short-run, though the tie gets strong in the long-run.
Economies are unstable; get used to it. ?The concept of equilibrium is also not useful, and it holds economics in thrall, because it makes the math work, even though equilibrium never occurs.
It is far better to look at your investment in an oil refiner and ask “What are the possibilities for where crack spreads will be a year from now,” than to look at the beta, correlations to anything, standard deviations, etc. ?The coefficients aren’t stable.
Many advisors would rather follow a false certainty, than have to think for themselves, and have to deal with the complexity of the markets.
I am a quantitative analyst, and a very good one. ?That is why I pay attention to the limitations of models, and the possibility that past data might be special, and not so relevant to the present. ?It is far better that you pick over your portfolios, and ask what risks they are subject to, than to look at standardized risk measurements that describe the past or present.
Be forward looking. ?What can go wrong? ?Analyze each company. ?Find the three most pertinent risks — read the 10-K if you are having a hard time. ?See if you think the risks are worth taking.
But be assured of this. ?Merely by looking at market price derived variables for stocks, you won’t learn anything valuable about the risks of what you own, or might own. ?You need to think like a businessman, a sole owner, and ask whether the risks can be ably faced.
To the Consultants
Your models are garbage. ?You need to review your managers at the holdings level, or you are doing no good at all. ?All of the aggregate statistics hide the instability. ?Far better to understand the qualitative methods of managers, and analyze whether they have a durable competitive advantage or not.
That may not seem so scientific, but science is put to bad ends in areas where there is no good science.
If I were hiring managers, I would spend a lot of time on process and people, and ignore a lot of other items.
Summary
Mathematics is of limited use in analyzing investments and investment managers. ?It is far better to look for those that have good business sense, and invest with them.
