Portfolio Management – Page 13

Ten Investing Books to Consider

Posted on 5 December 20156 December 2015 by David Merkel

Recently I got asked for a list of investment books that I would recommend. These aren’t all pure investment books — some of them will teach you how markets operate in general, but they do so in a clever way. I have also reviewed all of them, which limited my choices a little. Most economics, finance, investment books that I have really liked I have reviewed at Aleph Blog, so that is not a big limit.

This post was also prompted by a post by another blogger of sorts publishing at LinkedIn. ?I liked his post in a broad sense, but felt that most books by or about traders are too hard for average people to implement. ?The successful traders seem to have systems that go beyond the simple systems that they write about. ?If that weren’t true, we’d see a lot of people prosper at trading for a time, until the trades got too crowded, and the systems failed. ?That’s why the books I am mentioning are longer-term investment books.

General Books on Value Investing

The Intelligent Investor?(Ben Graham)
The Aggressive Conservative Investor?(Marty Whitman)
Margin of Safety?(Seth Klarman)
Accounting for Value?(Stephen Penman)

Don’t get me wrong. ?I like many books on value investing, but the first?three are classic. ?Graham is the simplest to understand, and Klarman is relatively easy as well. ?Like Buffett, Klarman recognizes that we live in a new world now, and the simplistic modes of value investing would work if we could find a lot of stocks as cheap as in Graham’s era — but that is no longer so. ?But even Ben Graham recognized that value investing needed to change at the end of his life.

Whitman takes more of a private equity approach, and aims for safe and cheap. ?Can you find mispriced assets inside a corporation or elsewhere where the value would be higher?if placed in a different context? ?Whitman is a natural professor on issues like these, though in practice, the?stocks he owned during the financial crisis were not safe enough. ?Many business models that were seemingly bulletproof for years were no longer so when asset prices fell hard, especially those connected to housing. ?This should tell us to think more broadly, and not trust rules of thumb, but instead think like Buffett, who said something like, “We’re paid to think about the things that seemingly can’t happen.”

The last book is mostly unknown, but I think it is useful. ?Penman?takes apart GAAP accounting to make it more useful for decision-making. ?In the process, he ends up showing that very basic forms of quantitative value investing work well.

Books that will help you Understand Markets Better

The first link is two books on the life of George Soros. ?Soros teaches you about the nonlinearity of markets — why they overshoot and undershoot. ?Why is there momentum? ?Why is the tendency for price to converge to value weak? ?What do markets look and feel like as they are peaking, troughing, etc? ?Expectations are a huge part of the game, and they affect the behavior of your fellow market participants. ?Market movements as a result become self-reinforcing, until the cash flows can by no means support valuations, or are so rich that businessmen buy and hold.

Consider what things are like now as people justify high equity valuations. ?At every turning point, you find people defending vociferously why the trend will go further. ?Who is willing to think differently at the opportune time?

Triumph of the Optimists is another classic which should teach us to be slightly biased toward risk-taking, because it tends to win over time. ?They pile up data from around 20 nations over the 20th century, and show that stock markets have done very well through a wide number of environments, beating bonds?by a little and cash by a lot.

For those of us that tend to be bearish, it is a useful reminder to invest most of the time, because you will ordinarily make good money over the long haul.

Books on Managing Risk

The Crisis of Crowding?(Chincarini)
Pandora?s Risk?(Osband)
Risk and the Smart Investor?(Martin) also?The Nature of Risk?(also Martin)
The Hedge Fund Mirage?(Lack)

After the financial crisis, we need to understand better what risk is. ?Risk is the likelihood and severity of loss, which is not constant, and cannot be easily compressed into simple figure. ?We need to think about risk ecologically — how is an asset priced relative to its future prospects, and is there any possibility that it is significantly misfinanced either internally or by its holders. ?For the latter, think of the Chinese using too much margin to carry stocks. ?For the former, think of Fannie Mae and Freddie Mac. ?They took risks that forced them into insolvency, even though over the long run they would have been solvent institutions. ?(You can drown in a river with an average depth of six inches. ?Averages reveal; they also conceal.)

Hot money has a short attention span. ?It needs to make money NOW, or it will leave. ?When an asset is owned primarily by hot money, it is an unstable situation, where the trade is “crowded.” ?So it was with housing-related assets and a variety of arbitrage trades in the decade of the mid-2000s. ?Momentum blinded people to the economic reality, and made them justify and buy into absurdly priced assets.

As for the last book, hedge funds as a group are a dominant form of hot money. ?They have grown too large for the pool that they fish in, and as a result, their returns are poor as a group. ?With any individual hedge fund, your mileage may vary, there are some good ones.

These books as a whole will teach you about risk in a way that helps you understand the crisis in a systemic way. ?Most people did not understand the situation that way before the crisis, and if you talk to most politicians and bureaucrats, they still don’t get it. ?A few simple changes have been made, along with a bunch of ineffectual complex changes. ?The financial system is a little better as a result, but could still go through a crisis like the last one — we would need a lot more development of explicit and implicit debts to get there though.

An aside: the book The Nature of Risk is simple, short and cute, and can probably reach just about anyone who can grasp the similarities between a forest ecology under threat of fire, and a financial system.

Summary

I chose some good books here, some of which are less well-known. ?They will help understand the markets and investing, and make you a bigger-picture thinker… which makes me think, I forgot the second level thinking of?The Most Important Thing, by Howard Marks. ?Oops, also great, and all for now.

PS — you can probably get Klarman’s book through interlibrary loan, or via some torrent on the internet. ?You can figure that out for yourselves. ?Just don’t spend the $1600 necessary to buy it — you will prove you aren’t a value investor in the process.

Ten Questions and Answers on ETFs and Other Topics

Posted on 3 December 2015 by David Merkel

I was asked to participate with 57 other bloggers in a post that was entitled?101 ETF Investing Tips. ?It’s a pretty good article, and I felt the tips numbered?2, 15, 18, 23, 29, 35, 44, 48, 53, 68, 85, 96, and 98 were particularly good, while?10, 39, 40, 45, 65, 67, 74, 77, 80, and 88 should have been omitted. ?The rest were okay.

One consensus finding was that Abnormal Returns was a “go to” site on the internet for finance. ?I think so too.

Below were the answers that I gave to the questions. ?I hope you enjoy them.

1) What is the one piece of advice you?d give to an investor just starting to build a long-term portfolio?

You need to have reasonable goals.? You also have to have enough investing knowledge to know whether advice that you receive is reasonable.? Finally, when you have a reasonable overall plan, you need to stick with it.

2) What is one mistake you see investors make over and over?

They think investment markets are magic. They don?t save/invest anywhere near enough, and they think that somehow magically the markets will bail out their woeful lack of planning.? They also panic and get greedy at the wrong times.

3) In 20 years, _____. (this can be a prediction about anything — investing-related or otherwise)

In 20 years, most long-term public entitlement and private employee benefit schemes that promised fixed payments/reimbursement will be scaled back dramatically, and most retirees will be very disappointed.? The investment math doesn?t work here ? if anything, the politicians were more prone to magical thinking than na?ve investors.

4) Buy-and-hold investing is _____.

Buy-and-hold investing is the second-best strategy that average people can apply to markets, if done with sufficient diversification. It is a simple strategy, available to everyone, and it generally beats the performance of average investors who buy and sell out of greed and panic.

5) One book I wish every investor would read is _____. (note that non-investing books are OK!)

One book I wish every investor would read is the Bible. The Bible eliminates magical thinking, commends hard work and saving, and tells people that their treasure should be in Heaven, and not on Earth.? If you are placing your future hope in a worry-free, well-off retirement, the odds are high that you will be disappointed.? But if you trust in Jesus, He will never leave you nor forsake you.

6) The one site / Twitter account / newsletter that I can?t do without is _____.

Abnormal Returns provides the best summary of the top writing on finance and investing every day.? There is no better place to get your information each day, and it comes from a wide array of sources that you could not find on your own.? Credit Tadas Viskanta for his excellent work.

7) The biggest misconception about investing via ETFs is_____.

The biggest misconception about investing via ETFs is that they are all created equal.? They have different expenses and structures, some of which harm their investors.? Simplicity is best ? read my article, ?The Good ETF? for more.

8 ) Over a 20-year time horizon, I’m bullish on _____. (this can be an asset class, fund, technology, person — anything really!)

Over 20 years, I am bullish on stocks, America, and emerging markets.? Of the developed nations, America has the best combination of attributes to thrive.? The emerging markets offer the best possibility of significant growth.? Stocks may have a rough time in the next five years, but in an environment where demographic and technological change is favoring corporate profits, stocks will do better than other asset classes over 20 years.

9) The one site / Twitter account / newsletter that I can?t do without is _____.

Since you asked twice, the Aleph Blog is one of the best investing blogs on the internet, together with its Twitter feed.? It has written about most of the hard questions on investing in a relatively simple way, and is not generally marketing services to readers.? For the simple stuff, go to the personal finance category at the blog.

10) Any other ETF-related investing tips or advice?

For a fuller view of my ETF-related advice, go to Aleph Blog, and read here.? Briefly, be careful with any ETF that is esoteric, or that you can?t draw a simple diagram to explain how it works.? Also realize that traders of ETFs tend to do worse than those that buy and hold.

Stocks That Can Double, Can Give You Trouble

Posted on 2 December 2015 by David Merkel

I haven’t written about promoted penny stocks in a long time. ?Tonight I am not writing about promoted stocks, only penny stocks as promoted by a newsletter writer. ?He profits from the newsletter. ?Ostensibly, he does not front-run his readers.

Before we go on, let me run the promoted stocks scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 12/1/15	Decline	Annualized	Dead?
GTXO	5/27/2008	2.45	0.011	-99.6%	-51.5%
BONZ	10/22/2009	0.35	0.000	-99.9%	-68.5%
BONU	10/22/2009	0.89	0.000	-100.0%	-100.0%
UTOG	3/30/2011	1.55	0.000	-100.0%	-100.0%	Dead
OBJE	4/29/2011	116.00	0.000	-100.0%	-100.0%	Dead
LSTG	10/5/2011	1.12	0.004	-99.6%	-74.2%
AERN	10/5/2011	0.0770	0.0001	-99.9%	-79.8%
IRYS	3/15/2012	0.261	0.000	-100.0%	-100.0%	Dead
RCGP	3/22/2012	1.47	0.180	-87.8%	-43.4%
STVF	3/28/2012	3.24	0.070	-97.8%	-64.7%
CRCL	5/1/2012	2.22	0.001	-99.9%	-87.2%
ORYN	5/30/2012	0.93	0.001	-99.9%	-85.4%
BRFH	5/30/2012	1.16	1.000	-13.8%	-4.1%
LUXR	6/12/2012	1.59	0.002	-99.9%	-86.3%
IMSC	7/9/2012	1.5	0.495	-67.0%	-27.9%
DIDG	7/18/2012	0.65	0.000	-100.0%	-100.0%
GRPH	11/30/2012	0.8715	0.013	-98.5%	-75.4%
IMNG	12/4/2012	0.76	0.012	-98.4%	-75.0%
ECAU	1/24/2013	1.42	0.000	-100.0%	-94.9%
DPHS	6/3/2013	0.59	0.005	-99.2%	-85.5%
POLR	6/10/2013	5.75	0.005	-99.9%	-94.2%
NORX	6/11/2013	0.91	0.000	-100.0%	-97.5%
ARTH	7/11/2013	1.24	0.245	-80.2%	-49.3%
NAMG	7/25/2013	0.85	0.000	-100.0%	-100.0%
MDDD	12/9/2013	0.79	0.003	-99.7%	-94.5%
TGRO	12/30/2013	1.2	0.012	-99.0%	-90.9%
VEND	2/4/2014	4.34	0.200	-95.4%	-81.6%
HTPG	3/18/2014	0.72	0.003	-99.6%	-95.9%
WSTI	6/27/2014	1.35	0.000	-100.0%	-99.9%
APPG	8/1/2014	1.52	0.000	-100.0%	-99.8%
CDNL	1/20/2015	0.35	0.035	-90.0%	-93.1%

	12/1/2015		Median	-99.9%	-87.2%

If you want to lose money, it is hard to do it more consistently than this. ?No winners out of 31, and only one company looks legit at all — Barfresh.

But what of the newsletter writer? ?He seems to have a couple of stylized facts that are misapplied.

Every day, around 45 stocks double or more in price.
Some wealthy investors have bought stocks like these.
Wall Street firms own these stocks but never recommend them to ordinary individuals
The media censors price information about these stocks so you never hear about them

Every day, around 45 stocks double or more in price.

That may be true, but most of those that do double or more in price don’t do so for fundamental reasons; they are often manipulated. ?Second, the stocks that do double in price can’t be found in advance — i.e., picking the day that the price will explode. ?Third, the prices more often fall hard for these tiny?stocks. ?Of the 30 stocks mentioned above that were not dead at the time of the last article, 10 fell more than 90% over the 10+ month period. ?13 fell less than 90%, 1 broke even, and 7 rose in price. ?The median stock fell 61%. ?This was during a bull market.

Now you might say, “Wait, these are promoted stocks, of course they fell.” ?Only the last one was being actively promoted, so that’s not the answer.

My fourth point is for the few that rise a lot, you can’t invest in them. ?The stocks that double or more in a day tend to be the smallest of the stocks. ?Two of the 30 stocks listed in the scoreboard?rose 900% and 7100% in the 10+ month period since my last article. ?How much could you have invested in those stocks? ?You could have bought both companies for a?little more than?$10,000 each. ?Anyone waving even a couple hundred bucks could make either stock fly.

So, no, these stocks aren’t a road to riches. ?Now the ad has stories as to how much money people made at some point buying the penny stocks. ?The odds of stringing several of these successful purchases in succession, parlaying the money into bigger and bigger stocks that double is remote at best, and your odds of losing a lot of it is high.

This idea is a less classy version of the idea promoted in the book?100 to 1 in the Stock Market. ?If it is difficult to find the 100-baggers 30 years in advance, it is more difficult to find a stock that is going to double or more tomorrow, much less a bunch of them in succession. ?You may as well go to Vegas and bet it all on Double Zero on the roulette wheel four times in a row. ?The odds are about that bad, as trying to get rich buying penny stocks.

The ad also lists three stock that at some point fit his paradigm — MeetMe [MEET],?PlasmaTech Biopharmaceuticals, Inc. (PTBI) which is now called?Abeona Therapeutics Inc. (ABEO), and?Organovo (ONVO). ?All of these are money-losing companies (MeetMe may be breaking into profitability?now) that have survived by selling shares to raise cash. ?The stocks have generally been poor. ?Have they had volatile days where the price doubled? ?At some point, probably, but who could have picked the date in advance, and found liquidity to do a quick in-and-out trade?

The author lists five future situations as a “come on” to get people to subscribe. ?I find them dubious.

As for wealthy investors, he mentions two: Icahn pulling of a short squeeze on Voltari (difficult to generalize from), and Soros with?PlasmaTech Biopharmaceuticals, Inc. ?It should be noted that Soros has a big portfolio with many stocks, and that position was far less than 1% of his assets. ?In general, the wealthy do not buy penny?stocks.

As for brokers and the media not mentioning penny stocks, that is being responsible. ?The brokers could get in hot water for recommending or buying penny stocks even under a weak suitability standard. ?The media also does not want to be blamed for inciting destructive speculation. ?Retail investors lose enough money through uninformed trading, why encourage them to do it where fundamentals are typically quite poor.

I’ve written two other pieces on less liquid stocks to try to explain the market better:?On Penny Stocks and?Good Over-the-Counter ?Pink? Stocks. ?It’s not as if there isn’t value in some of the stocks that “fly under the radar.” ?That said, you have to be extra careful.

Near the end of the ad, the writer describes how he is being extra careful also. ?Many of his rules make a lot of sense. ?That said, following those rules will get you boring companies that won’t double or more in a day. ?And that’s not a bad thing. ?Most significant money is made slowly — it doesn’t come in a year, much less in a day.

That said, I recommend against the newsletter because of the way that it tries to attract people. ?The rhetoric is over the top, and appeals to those who sense conspiracies keeping them from riches, so join my club where I hand out my secret knowledge so you can benefit.

In summary, as a first approximation, don’t invest in penny stocks. ?The odds are against you. ?Fools rush in where angels fear to tread. ?Don’t let greed get the better of you — after all, what is being illustrated is?an illusion that ?retail investors can’t generally achieve.

One Dozen Thoughts on Dealing with Risk in Investing for Retirement

Posted on 31 October 2015 by David Merkel

Photo Credit: Ian Sane || Many ways to supplement retirement income... — Photo Credit: Ian Sane || One of many ways to supplement retirement income…

Investing is difficult. That said, it can be harder still. Let people with little to no training to try to do it for themselves. Sadly, many people get caught in the fear/greed cycle, and show up at the wrong time to buy and/or sell. They get there late, and then their emotions trick them into action. A rational investor would say, ?Okay, I missed that move. Where are opportunities now, if there are any at all??

Investing can be made even more difficult. ?Investing reaches its most challenging level when one relies on his investing to meet an anticipated and repeated need for cash outflows.

Institutional investors will say that portfolio decisions are almost always easier when there is more cash flowing in than flowing out. ?It means that there is one dominant mode of thought: where to invest?new money? ?Some attention will be given to managing existing assets ? pruning away assets with less potential, but the need won?t be as pressing.

What?s tough is trying to meet a?cash withdrawal?rate that is materially higher than what can safely be achieved over time, and earning enough?consistently to do so. ?Doing so as an amateur managing a retirement portfolio is a particularly hard version of this problem. ?Let me point out some of the areas where it will be hard:

1) The retiree doesn?t know how long he, his spouse, and anyone else relying on him will live. ?Averages can be calculated, but particularly with two people, the odds are that at least one will outlive an average life expectancy. ?Can they be conservative enough in their withdrawals that they won?t outlive their assets?

It?s tempting to overspend, and the temptation will get greater when bad events happen that break the budget, whether those are healthcare or other needs. ?It is incredibly difficult to?avoid paying for an immediate pressing need, when the soft cost?is harming your future. ?There is every incentive to say, ?We?ll figure it out later.? ?The odds on that being true will be low.

2) One conservative estimate of what the safe withdrawal rate is on a perpetuity is the yield on the 10-year Treasury Note plus around 1%. ?That additional 1% can be higher after the market has gone through a bear market, and valuations are cheap, and as low as zero near the end of a bull market.

That said, most?people people with discipline want a simple spending rule, and so those that are moderately conservative choose that they can spend 4%/year of their assets. ?At present, if interest rates don?t go lower still, that will likely (60-80% likelihood) work. ?But if income needs are greater than that, the odds of obtaining those yields over the long haul go down dramatically.

3) How does a retiree deal with bear markets, particularly ones that occur early in retirement? ?Can?he and?will he reduce his expenses to reflect the losses? ?On the other side, during bull markets, will he build up a buffer, and not get incautious during seemingly good times?

This is an easy prediction to make, but after the next bear market, look for a scad of ?Our retirement is ruined articles.? ?Look for there to be hearings in Congress that don?t amount to much ? and if they?do amount to much, watch them make things worse by?creating R Bonds, or some similarly bad idea.

Academic risk models typically used by financial planners typically don?t do path-dependent analyses.? The odds of a ruinous situation is far higher than most models estimate because of the need for withdrawals and the autocorrelated nature of returns ? good returns begets good, and bad returns beget bad in the intermediate term.? The odds of at least one large bad streak of returns on risky assets during retirement is high, and few retirees will build up a buffer of slack assets to prepare for that.

4)?Retirees should avoid investing in too many income vehicles; the easiest temptation to give into is to stretch for yield ? it?is the oldest scam in the books. ?This applies to dividend paying common stocks, and stock-like investments like REITs, MLPs, BDCs, etc. ?They have no guaranteed return of principal. ?On the plus side, they may give capital gains if bought at the right time, when they are out of favor, and reducing exposure when everyone is buying them.? Negatively, all junior debt tends to return worse on average than senior debts.? It is the same for equity-like investments used for income investing.

Another easy prediction to make is that junk bonds and non-bond income vehicles will be a large contributor to the shortfall in asset return in the next bear market, because many people are buying them as if they are magic. ?The naive buyers think: all they do is provide a higher income, and there is no increased risk of capital loss.

5) Leaving retirement behind for a moment, consider the asset accumulation process.? Compounding is trickier than it may seem. ?Assets must be selected that will grow their value including dividend payments over a reasonable time horizon, corresponding to a market cycle or so (4-8 years). ?Growth in value should be in excess of that from expanding stock market multiples or falling interest rates, because you want to compound in the future, and low interest rates and high stock market multiples imply that future compounding opportunities are lower.

Thus, in one sense, there is no benefit much from a general rise in values from the stock or bond markets. ?The value of a portfolio may have risen, but at the cost of lower future opportunities. ?This is more ironclad in the bond market, where the cash flow streams are fixed. ?With stocks and other risky investments, there may be some ways to do better.

Retirees should be aware that the actions taken by one member of a large cohort of retirees will be taken by many of them.? This makes risk control more difficult, because many of the assets and services that one would like to buy get bid up because they are scarce.? Often it may be that those that act earliest will do best, and those arriving last will do worst, but that is common to investing in many circumstances.? As Buffett has said, ?What a?wise man?does in the beginning a?fool?does in the?end.?

6) Retirement investors should avoid taking too much?or too little risk. It?s psychologically difficult to buy risk assets when things seem horrible, or sell when everyone else is carefree. ?If a person can do that successfully, he is rare.

What is achievable by many is to maintain a constant risk posture. ?Don?t panic; don?t get greedy ? stick to a moderate asset allocation through the cycles of the markets.

7) With asset allocation, retirees should overweight out-of-favor asset classes that offer above average cashflow yields. ?Estimates on these can be found at GMO or?Research Affiliates. ?They should rebalance into new asset classes when they become cheap.

Another way retirees can succeed would be investing in growth at a reasonable price ? stocks that offer capital growth opportunities at an inexpensive price and a margin of safety. ?These companies or assets need to have large opportunities in front of them that they can reinvest their free cash flow into. ?This is harder to do than it looks. ?More companies look promising and do not perform well than those that do perform well.

Yet another way to enhance returns is value investing: find undervalued companies with a margin of safety that have potential to recover when conditions normalize, or find companies that can convert their resources to a better use that have the willingness to do that. ?After the companies do well, reinvest in new possibilities that have better appreciation potential.

8 ) Many say that the first rule of markets is to avoid losses. ?Here are some methods to remember:

Always seek a margin of safety. ?Look for valuable assets well in excess of debts, governed by the rule of law, and purchased at a bargain price.
For assets that have fallen in price, don?t try to time the bottom ? buy the asset when it rises above its 200-day moving average. This can limit risk, potentially buying when the worst is truly past.
Conservative investors avoid the areas where the hot money is buying and own assets being acquired by patient investors.

9) As assets shrink, what should be liquidated? ?Asset allocation is more difficult than it is described in the textbooks, or in the syllabuses for the CFA Institute or for CFPs.? It is a blend of two things ? when does the investor need the money, and what asset classes offer decent risk adjusted returns looking forward?? The best strategy is forward-looking, and liquidates what has the lowest risk-adjusted future return. ?What is easy is selling assets off from everything proportionally, taking account of tax issues where needed.

Here?s another strategy that?s gotten a little attention lately: stocks are longer assets than bonds, so use bonds to pay for your spending in the early years of your retirement, and initially don?t sell the stocks.? Once the bonds run out, then start selling stocks if the dividend income isn?t enough to live on.

This idea is weak.? If a person followed this in 1997 with a 10-year horizon, their stocks would be worth less in 2008-9, even if they rocket back out to 2014.

Remember again:

You don?t benefit much from a general rise in values from the stock or bond markets. ?The value of your portfolio may have risen, but at the cost of lower future opportunities.

That goes double in the distribution phase. The objective is to convert assets into a stream of income. ?If interest rates are low, as they are now, safe income will be low. ?The same applies to stocks (and things like them) trading at high multiples regardless of what dividends they pay.

Don?t look at current income. ?Look instead at the underlying economics of the business, and how it grows value. ?It is far better to have a growing income stream than a high income stream with low growth potential.

Deciding what to sell is an exercise in asset-liability management.? Keep the assets that offer the best return over the period that they are there to fund future expenses.

10) Will Social Security take a hit out around 2026? ?One interpretation of the law says that once the trust fund gets down to one year?s worth of?payments, future payments may get reduced to the level?sustainable by expected future contributions, which is 73% of expected levels. ?Expect a political firestorm if this becomes a live issue, say for the 2024 Presidential election. ?There will be a bloc of voters to oppose leaving benefits unchanged by increasing Social Security taxes.

Even if benefits last at projected levels longer than 2026, the risk remains that there will be some compromise in the future that might reduce benefits because taxes will not be raised.? This is not as secure as a government bond.

11) Be wary of inflation, but don?t overdo it. ?The retirement of so many people may be deflationary ? after all, look at Japan and Europe so far. ?Economies also work better when there is net growth in the number of workers. ?It will be tempting for policymakers to shrink what liabilities they can shrink through inflation, but there will also be a bloc of voters to oppose that.

Also consider other risks, and how assets may fare. ?Retirees should analyze what exposure they have to:

Deflation and a credit crisis
Expropriation
Regulatory change
Trade wars
Changes in taxes
Asset illiquidity
Reductions in reimbursement from government programs like Medicare, Medicaid, etc.
And more?

12) Retirees need a defender of two against slick guys who will try to cheat them when they are older. ?Those who have assets are a prime target for scams. ?Most of these come dressed in suits: brokers and other investment salesmen with plausible ways to make assets stretch further. ?But there are other scams as well ? retirees should run everything significant past a smart younger person who is skeptical, and knows how to say no when it is necessary.

Conclusion

Some will think this is unduly dour, but this?is realistic. ?There are not enough resources to give all of the Baby Boomers a lush retirement, without unduly harming younger age cohorts, and this is true over most of the developed world, not just the US.

Even with skilled advisers helping, retirees need to be ready for the hard choices that will come up. They should think through them earlier rather than later, and take some actions that will lower future risks.

The basic idea of retirement investing is how to convert present excess income into a robust income stream in retirement. ?Managing a pile of assets for income to live off of is a challenge, and one that most people?are not geared up for, because poor planning and emotional decisions lead to subpar results.

Retirees should?aim for the best future investment opportunities with a margin of safety, and let the retirement income take care of itself. ?After all, they can?t rely on the markets or the policymakers to make income opportunities easy.

Book Review: Financial Tales

Posted on 24 October 201525 October 2015 by David Merkel

This financial book is different from the 250+ other financial books that I have reviewed, and the hundreds of others I have read. ?It tells real life stories that the author has personally experienced, and the financial ramifications that happened as a result. ?Each?of the 60+ stories illustrates a significant topic in financial planning for individuals and families. ?Some end happy, some end sad. ?There are examples from each of the possible outcomes?that can result from people interacting with financial advice (in my rough large to small probability order):

Followed bad advice, or ignored good advice, and lost.
Followed good advice, and won.
A mixed outcome from mixed behavior
Followed bad advice, or ignored good advice, and won anyway.
Followed good advice, and lost anyway.

The thing is, there is a “luck” component to finance. ?People don’t know the future behavior of markets, and may accidentally get it right or wrong. ?With good advice, the odds can be tipped in their favor, at least to the point where they aren’t as badly hurt when markets get volatile.

The stories in the book mostly stem from the author’s experience as a financial advisor/planner in Maryland. ?The stories are 3-6 pages long, and can be read one at a time with little loss of flow. ?The stories don’t depend on each other. ?It is a book you can pick up and put down, and the value will be the same as for the person who reads it straight through.

In general, I thought the author advocated good advice for his clients, family and friends. ?Most people could benefit from reading this book. ?It’s pretty basic, and maybe, _maybe_, one of your friends who isn’t so good with financial matters could benefit from it as a gift if you don’t need it yourself. ?The reason I say this is that some people will learn reading about the failures of others rather than being advised by well-meaning family, friends, and professionals. ?They may admit to themselves that they?have been wrong when they be unwilling to do it with others.

I recommend this book for readers who need motivation and knowledge to guide themselves in their financial dealings, including how to find a good advisor, and how to avoid bad advisors.

Quibbles

The book lacks generality because of its?focus on telling stories. ?It would have been a much better book if it had one final chapter or appendix where the author would take all of the lessons, and weave them into a coherent whole. ?If nothing else, such a chapter would be an excellent review of the lessons of the book, and could even footnote back to the stories in the book for where people could read more on a given point.

I know this is a bias of mine regarding books with a lot of unrelated stories, but I think it is incumbent on the one telling the stories to flesh out the common themes, because many will miss those themes otherwise. ?In all writing, specifics support generalities, and generalities support specifics. ?They are always stronger together.

An Aside

I benefited from the book in one unusual way: it gave me a lot of article ideas, which you will be reading about at Aleph Blog in the near term. ?I’ve never gotten so many from a single book — that is a strength of reading the ideas in story form. ?It can catch your imagination.

Summary / Who Would Benefit from this Book

You don’t need this book if you are an expert or professional in finance. ?You could benefit from this book?if you want to improve what you do financially, improve your dealings with your financial advisor, or get a good financial advisor. ?if you want to buy it, you can buy it here: Financial Tales.

Full disclosure:?The author sent a free copy?to me directly. ?Though we must live somewhat near to one another, and we both hold CFA charters, I do not know him.

If you enter Amazon through my site, and you buy anything, including books, 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.

Too Many Vultures, Too Little Carrion, Redux

Posted on 22 October 2015 by David Merkel

Photo Credit: TexasEagle || A: Do you see any prey? B: No, I don't. Do *you* see any prey? — Photo Credit: TexasEagle || A: Do you see any prey? B: No, I don’t. Do *you* see any prey?

I was surprised to find that I wrote another piece with the same title — 8.5 years ago, before the housing bubble crashed. ?It was a short piece (with dead links). ?Here it is:

I had a cc post over at RealMoney called Too Many Vultures, Too Little Carrion . The idea was that there?s too much money ready to rescue dud assets at present. Yesterday, Cramer had his own blog entry suggesting that the absorption of subprime assets at relatively high prices implied that the depositary financial sector is a sound place to invest. I disagree. In the early phases of any secular change, there are market players who snap up distressed assets, and later they find out that they could have gotten a better bargain had they waited.

The good sale prices for subprime portfolios is not a sign of strength, but a sign that there is a lot of vulture capital looking for deals. The true problems will surface when the vulture capital gets burned through or scared away.

That last paragraph is the “money shot.” ?When there is too much vulture capital waiting to invest in distressed securities, marginal business concepts don’t get destroyed, clearing the way for a reduction in capacity, and healthy firms pick up the pieces. ?At such a time, you have to wait until the distressed players get hosed, or get smart.

Today’s topic is the debt and equity of companies producing energy, or providing services to them, all of which get hurt by a lower oil price. ?In the recent past, you have had marginal energy companies able to get financing amid decreasing opportunities for decent profits. ?Thus the article at the Wall Street Journal talking about hedge funds losing money on recently placed bets on energy.

Aiding the financing of marginal companies can pay off if the companies will be profitable within a reasonable window of time, or, if you are trying to buy assets cheap for a reorganization. ?But if there is too much capacity, and thus low prices for products, the profits after financing may never emerge, and the value of the assets may sag.

Let me talk about another group of oil companies on the global scene. ?They are relatively high cost players with large-ish balance sheets that are presently pushing to recover market share. ?Yes, I am talking about OPEC countries. ?Not the national oil companies of those countries, but the countries themselves.

Think of the countries as the companies, because the companies themselves fund the government of these countries. ?Consider this quotation from the Bloomberg article to which I linked, regarding one of the stronger OPEC countries, Saudi Arabia:

Saudi Arabia, the main architect of OPEC?s new strategy, will have a budget deficit of 20 percent of gross domestic product this year,?the International Monetary Fund estimates. While the kingdom has been able to tap foreign currency reserves and curb spending to cope with the slump, financial assets may run out within five years if the government maintains current policies and prices stay low, the IMF said Wednesday.

Less wealthy OPEC members have even fewer options. The threat of political unrest is mounting in the ?Fragile Five? of Algeria, Iraq, Libya, Nigeria and Venezuela, according to RBC Capital Markets LLC.

Think of the budget deficits that the OPEC countries have to fund in the same way you think about the debt service of a US E&P company. ?The deposits of oil being produced may be low cost in and of themselves, but any profits go to cover debt service of the greater enterprise, and whatever is not covered, more will be borrowed, should the markets allow it.

What’s the longest that this game could be played? ?Never say never, but I would be shocked if this could continue ?to 2020. ?That said, there are a lot of OPEC countries that won’t make it that far, and a lot of E&P and services businesses that won’t make it that far either. ?Now, the countries could face severe political turbulence, but eventually, they will have to reduce what they borrow and spend. ?That doesn’t mean the oil stops flowing, though a new government could decide to cut spending further, and save the patrimony (crude oil) for a better day.

The free market oil producers are another matter… they can go under, and production would likely stop. ?The question is what side of the solvency line you end up on when enough production capacity is eliminated. ?If you are still solvent, you will reap some reward for your fiscal rectitude as prices rise again, and the Saudis breathe a sigh of relief, congratulating themselves for winning a very expensive game of “chicken,” or, a Pyrrhic economic war.

As such, be careful playing in heavily indebted companies that benefit from higher energy prices. ?That they are limping along should be no comfort, because those that they presently rely on for financing will eventually have to give up, much as those snatching up bargains in subprime?had to give up when the financial crisis hit.

And for those watching the price of crude oil, this is yet another reason why Brent crude should remain near $50/bbl, for a few years. ?It is the uneasy equilibrium where producers are both entering the market and giving up. ?The Saudis don’t want it much lower — there are limits to the pain that they want to take, as well as impose on the rest of OPEC.

A Bigger Brick in the Wall of Worries

Posted on 17 October 201518 October 2015 by David Merkel

I have my list of concerns for the economy and the markets:

Unexpected Global Macroeconomic Surprises, including more from China
Student Loans, Agricultural Loans, Auto Loans — too much
Exchange Traded Products — the tail is wagging the dog in some places, and ETPs are very liquid, but at a cost of reducing liquidity to the rest of the market
Low risk margins — valuations for equity and debt are high-ish
Demographics — mostly negative as populations across the globe age
Wages in the “developed world” are getting pushed to the levels of the “developing world,” largely due to the influence of information technology. ?Also, technology is temporarily displacing people from current careers.

But now I have one more:

7) ?Nonfinancial corporations, once the best part of the debt markets, are beginning to get overlevered.

This is worth watching. ?It seems like there isn’t that much advantage to corporate borrowing now — the arbitrage of borrowing to buy back stock seems thin, as does borrowing to buy up competitors. ?That doesn’t mean it is not being done –?people imitate the recent past as a useful shortcut to avoid thinking. ?Momentum carries markets beyond equilibrium as a result.

If the Federal Reserve stimulates by ~~duping~~ getting economic actors to accelerate current growth by taking on more debt, it has worked here. ?Now where is leverage low? ?Across the board, debt levels aren’t far from where they were in 2008:

As such, I’m not sure where we go from here, but I would suggest the following:

Start lightening up on bonds and stocks that would concern you if it were difficult to get financing. ?How well would they do if they had to self-finance for three years?
With so much debt, monetary policy should remain ineffective. ?Don’t expect them to move soon or aggressively.
Fiscal policy will remain riven by disagreements, and hamstrung by rising entitlement spending.
Long Treasuries don’t look bad with inflation so low.
Leave a little liquidity on the side in case of a negative surprise. ?When everyone else has high debt levels, it is time to reduce leverage.

Better safe than sorry. ?This isn’t saying that the equity markets can’t go higher from here, that corporate issuance can’t grow, or that corporate spreads can’t tighten. ?This is saying that in 2004-2006, a lot of the troubles that were going to come were already baked into the cake. ?Consider your current positions carefully, and develop your plan for your future portfolio defense.

Book Review: 100 to 1 in the Stock Market

Posted on 15 October 2015 by David Merkel

How can a book be largely true, but not be a good book? ?By offering people a way to make a lot of money that is hard to do, but portraying it as easy. ?It can be done, and a tiny number succeed at it, but most of the rest lose money or don’t make much in the process. ?This is such a book.

Let me illustrate my point with an example. ?Toward the end of every real estate bull market, books come out on how easy it is to make money flipping homes. ?The books must sell to some degree or the publishers wouldn’t publish them. ?Few actually succeed at it because:

It’s a lot of work
It’s competitive
It only works well when you have a bunch of people who are uneducated about the value of their homes and are willing to sell them to you cheap, and/or offer you cheap financing while you reposition it.
Transaction costs are significant, and improvements don’t always pay back what you put in.

You could make a lot of money at it, but it is unlikely. ?Now with this book, “100 to 1 in the Stock Market,” the value proposition is a little different:

Find one company that will experience stunning compound growth over 20-30+ years.
Invest heavily in it, and don’t diversify into a lot of other stocks, because that will dilute your returns.
Hold onto it, and don’t sell any ever, ever, ever! ?(Forget Lord Rothschild, who said the secret to his wealth was that he always sold too soon.)
Learn to mention the company name idly in passing, and happily live off of the dividends, should there be any. 😉

Here are the problems. ?First, identifying the stock will be tough. ?Less than 1% of all stocks do that. ?Are you feeling lucky? ?How lucky? ?That lucky? ?Wow.

Second, most people will pick a dog of a stock, and lose a lot of money. ?If you aren’t aware, more than half of all stocks lose money if held for a long time. ?Most of the rest perform meh. ?Even if you pick a stock you think has a lot of growth potential, there is often a lot of competition. ?Will this be the one to survive? ?Will some new technology obsolete this? ?Will financing be adequate to let the plan get to fruition without a lot of dilution of value to stockholders.

Third, most people can’t buy and hold a single stock, even if it is doing really well. ?Most succumb to the temptation to take profits, especially when the company hits a rough patch, and all companies hit rough patches, non excepted.

Fourth, when you do tell friends about how smart you are, they will try to dissuade you from your position. ?So will the financial media, even me sometimes. ?As Cramer says, “the bear case always sounds more intelligent.” ?Beyond that, never underestimate envy. 🙁

But suppose even after reading this, you still want to be a home run hitter, and will settle for nothing less. ?Is this the book for you? ?Yes. ?it will tell you what sorts of stocks appreciate by 100 times or more, even if finding them will still be rough.

This book was written in 1972, so it did not have the benefit of Charlie Munger’s insights into the “Lollapalooza” effect. ?What does it take for a stock to compound so much?

It needs a sustainable competitive advantage. ?The company has to have something critical that would be almost impossible for another firm to replicate or obsolete.
It needs a very competent management team that is honest, and shareholder oriented, not self-oriented.
They have to have a balance sheet capable of funding growth, and avoiding crashing in downturns, while rarely issuing additional shares.
It has to earn a high return on capital deployed.
It has to be able to reinvest earnings such that they earn a high return in the business over a long period of time.
That means the opportunity has to be big, and can spread like wildfire.
Finally, it implies that not a lot of cash flow needs to be used to maintain the investments that the company makes, leaving more money to invest in new assets.

You would need most if not all of these in order to compound capital 100 times. ?That’s hard. ?Very hard.

Now if you want a lighter version of this, a reasonable alternative, look at some of the books that Peter Lynch wrote, where he looked to compound investments 10 times or more. ?Ten-baggers, he called them. ?Same principles apply, but he did it in the context of a diversified portfolio. ?That is still very tough to do, but something that mere mortals could try, and even if you don’t succeed, you won’t lose a ton in the process.

Quibbles

Already given.

Summary / Who Would Benefit from this Book

You can buy this book to enjoy the good writing, and learn about past investments that did incredibly well. ?You can buy it to try to hit a home run against a major league pitcher, and you only get one trip to the plate. ?(Good luck, you will need it.)

But otherwise don’t buy the book, it is not realistic for the average person to apply in investing. ?if you still want to buy it, you can buy it here: 100 to 1 in the Stock Market.

Full disclosure:?I bought it with my own money. ?May all my losses be so small.

If you enter Amazon through my site, and you buy anything, including books,?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.

Learning from the Past, Part 6 [Hopefully Final, But It Won’t Be…]

Posted on 8 October 20158 October 2015 by David Merkel

Photo Credit: Tony Webster || Bridges can collapse -- so can leverage... — Photo Credit: Tony Webster || Bridges can collapse — so can leverage…

This is the last article in this series… for now. ?The advantages of the modern era… I went back through my taxes over the last eleven years through a series of PDF files and pulled out all of the remaining companies where I lost more than half of the value of what I invested, 2004-2014. ?Here’s the list:

Avon Products [AVP]
Avnet [AVT]
Charlotte Russe [Formerly CHIC — Bought out by Advent International]
Cimarex Energy [XEC]
Devon Energy [DVN]
Deerfield Triarc?[formerly DFR, now merged with?Commercial Industrial Finance Corp]
Jones Apparel Group [formerly JNY — Bought out by Sycamore Partners]
Valero Enery [VLO]
Vishay Intertechnology [VSH]
YRC Worldwide [YRCW]

The Collapse of Leverage

Take a look of the last nine of those companies. ?My?losses?all happened during the financial crisis. ?Here I was, writing for RealMoney.com, starting this blog, focused on risk control, and talking often?about rising financial leverage and overvalued housing. ?Well, goes to show you that I needed to take more of my own medicine. ?Doctor David, heal yourself?

Sigh. ?My portfolios typically hold 30-40 stocks. ?You think you’ve screened out every weak balance sheet or too much operating leverage, but a few slip through… I mean, over the last 15 years running this strategy, I’ve owned over 200 stocks.

The really bad collapses happen when there is too much debt and operations fall apart — Deerfield Triarc?was the worst of the bunch. ?Too much debt and assets with poor quality and/or repayment terms that could be adjusted in a negative way. ?YRC Worldwide — collapsing freight rates into a slowing economy with too much debt. ?(An investment is not safe if it has already fallen 80%.)

Energy prices fell at the same time as the economy slowed, and as debt came under pressure — thus the problems with Cimarex, Devon, and to a lesser extent Valero. ?Apparel concepts are fickle for women. ?Charlotte Russe and Jones Apparel executed badly in a bad stock market environment. ?That leaves Avnet and Vishay — too much debt, and falling business prospect along with the rest of the tech sector. ?Double trouble.

Really messed up badly on each one of them, not realizing that a weak market environment reveals weaknesses in companies that would go unnoticed in good or moderate times. ?As such, if you are worried about a crushing market environment in the future, you will need to stress-test to a much higher degree than looking at financial leverage only. ?Look for companies where the pricing of the product or service can reprice down — commodity prices, things that people really don’t need in the short run, intermediate goods where purchases?can be delayed for a while, and anyplace where high fixed investment needs strong volumes to keep costs per unit low.

One final note — Avon calling! ?Ding-dong. ?This was a 2015 issue. ?Really felt that management would see the writing on the wall, and change its overall strategy. ?What seemed to have stopped falling had only caught its breath for the next dive. ?Again,?an investment is not safe if it has already fallen 80%.

There is something to remembering rule number 1 — Don’t Lose Money. ?And rule 2 reminds us — Don’t forget rule number 1. ?That said, I have some things to say on the positive side of all of this.

The Bright Side

A) I did have a diversified portfolio — I still do, and I had companies that did not do badly as well as the minority of big losers. ?I also had a decent amount of cash, no debt, and other investments that were not doing so badly.

B) I used the tax losses to allow a greater degree of flexibility in investing. ?I don’t pay too much attention to tax consequences, but all concerns over?taking gains went away until 2011.

C) I reinvested in better companies, and made the losses back in reasonably short order, once again getting to pay some taxes in the process by 2011. ?Important to note: losses did not make me give up. ?I came back with vigor.

D) I learned valuable lessons in the process, which you now get to absorb for free. ?We call it market tuition, but it is a lot cheaper to learn from the mistakes of others.

Thus in closing — don’t give up. ?There will be losses. ?You will make mistakes, and you might kick yourself. ?Kick yourself a little, but only a little — it drives the lessons home, and then get up and try again, doing better.

Full disclosure: long VLO — made those losses back and then some.

Notes on the SEC’s Proposal on Mutual Fund Liquidity

Posted on 7 October 2015 by David Merkel

I’m still working through the SEC’s proposal on Mutual Fund Liquidity, which I mentioned at the end of?this article:

Q: <snip> Are you going to write anything regarding the SEC?s proposal on open end mutual funds and ETFs regarding liquidity?

A: <snip> …my main question to myself is whether I have enough time to do it justice. ?There?s their white paper on liquidity and mutual funds. ?The proposed rule is a monster at 415 pages, and I may have better things to do. ? If I do anything with it, you?ll see it here first.

These are just notes on the proposal so far. ?Here goes:

1) It’s a solution in search of a problem.

After the financial crisis, regulators got one message strongly — focus on liquidity. ?Good point with respect to banks and other depositary financials, useless with respect to everything else. ?Insurers and asset managers pose no systemic risk, unless like AIG they have a derivatives counterparty. ?Even money market funds weren’t that big of a problem — halt withdrawals for a short amount of time, and hand out losses to withdrawing unitholders.

The problem the SEC is trying to deal with seems to be that in a crisis, mutual fund holders who do not sell lose value from those who are selling because the Net Asset Value at the end of the day does not go low enough. ?In the short run, mutual fund managers tend to sell liquid assets when redemptions are spiking; the prices of illiquid assets don’t move as much as they should, and so the NAV is artificially high post-redemptions, until the prices of illiquid assets adjust.

The proposal allows for “swing pricing.” ?From the SEC release:

The Commission will consider proposed amendments to Investment Company Act rule 22c-1 that would permit, but not require, open-end funds (except money market funds or ETFs) to use ?swing pricing.??

Swing pricing is the process of reflecting in a fund?s NAV the costs associated with shareholders? trading activity in order to pass those costs on to the purchasing and redeeming shareholders.? It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be another tool to help funds manage liquidity risks.? Pooled investment vehicles in certain foreign jurisdictions currently use forms of swing pricing.

A fund that chooses to use swing pricing would reflect in its NAV a specified amount, the swing factor, once the level of net purchases into or net redemptions from the fund exceeds a specified percentage of the fund?s NAV known as the swing threshold.? The proposed amendments include factors that funds would be required to consider to determine the swing threshold and swing factor, and to annually review the swing threshold.? The fund?s board, including the independent directors, would be required to approve the fund?s swing pricing policies and procedures.

But there are simpler ways to do this. ?In the wake of the mutual fund timing scandal, mutual funds were allowed to estimate the NAV to reflect the underlying value of assets that don’t adjust rapidly. ?This just needs to be followed more aggressively in a crisis, and peg the NAV lower than they otherwise would, for the sake of those that hold on.

Perhaps better still would be provisions where exit loads are paid back to the funds, not the fund companies. ?Those are frequently used for funds where the underlying assets are less liquid. ?Those would more than compensate for any losses.

2) This disproportionately affects fixed income funds. ?One size does not fit all here. ?Fixed income funds already use matrix pricing extensively — the NAV is always an estimate because not only do the grand majority of fixed income instruments not trade each day, most of them do not have anyone publicly posting a bid or ask.

In order to get a decent yield, you have to accept some amount of lesser liquidity. ?Do you want to force bond managers to start buying instruments that are nominally more liquid, but carry more risk of loss? ?Dividend-paying common stocks are more liquid than bonds, but it is far easier to lose money in stocks than in bonds.

Liquidity risk in bonds is important, but it is not the only risk that managers face. ?it should not be made a high priority relative to credit or interest rate risks.

3) One could argue that every order affects market pricing — nothing is truly liquid. ?The calculations behind the analyses will be fraught with unprovable assumptions, and merely replace a known risk with an unknown risk.

4)?Liquidity is not as constant as you might imagine. ?Raising your bid to buy, or lowering your ask to sell are normal activities. ?Particularly with illiquid stocks and bonds, volume only picks up when someone arrives wanting to buy or sell, and then the rest of the holders and potential holders react to what he wants to do. ?It is very easy to underestimate the amount of potential liquidity in a given asset. ?As with any asset, it comes at a cost.

I spent a lot of time trading illiquid bonds. ?If I liked the creditworthiness, during times of market stress, I would buy bonds that others wanted to get rid of. ?What surprised me was how easy it was to source the bonds and sell the bonds if you weren’t in a hurry. ?Just be diffident, say you want to pick up or pose one or two?million of par value in the right context, say it to the right broker who knows the bond, and you can begin the negotiation. ?I actually found it to be a lot of fun, and it made good money for my insurance client.

5) It affects good things about mutual funds. ?Really, this regulation should have to go through a benefit-cost analysis to show that it does more good than harm. ?Illiquid assets, properly chosen, can add significant value. ?As Jason Zweig of the Wall Street Journal said:

The bad news is that the new regulations might well make most fund managers even more chicken-hearted than they already are ? and a rare few into bigger risk-takers than ever.

You want to kill off active managers, or make them even more index-like? ?This proposal will help do that.

6) Do you want funds to limit their size to comply with the rules, while the fund firm rolls out “clone” fund 2, 3, 4, 5, etc?

Summary

You will never fully get rid of pricing issues with mutual funds, but the problems are largely self-correcting, and they are not systemic. ?It would be better if the SEC just withdrew these proposed rules. ?My guess is that the costs outweigh the benefits, and by a wide margin.