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Personal Finance, Part 5.1 ? Inflation and Deflation 2

Posted on 7 December 2007 by David Merkel

I wish that I had more time to respond to readers both in the comments and e-mail.? Unfortunately, I am having to spend more time working as I am in transition as far as my work goes.? I’ll try to catch up over the next week or so, but I am behind by about 50 messages, and I hate to compromise message quality just to clear things out.

That said, my inflation/deflation piece yesterday attracted two comments worthy of response.? The first was from James Dailey, who I would recommend that you read whenever he comments here.? We may not always agree, but what he writes is well thought out.? He thinks I attribute too much power to the Fed.? He has a point.? From past writings, I have suggested that the Fed is not all-powerful.? What I would point out here is that the Fed controls more than just the monetary base.? They control (in principle) the terms of lending that the banks employ.? With a little coordination with the other regulators, the Fed could restrict non-bank lenders by raising the capital requirements that banks (and other regulated institutions) must maintain in lending to non-bank lenders.? So, if credit is outpacing the growth in the monetary base, it is at least partially because the Fed chooses to allow it.? Volcker reined in the credit card companies in the early 80s, which was not a normal policy for the Fed; it had a drastic impact on the economy, but inflation slowed considerably.? (Causation?? I’m not sure.? Fed funds were really high then also.)

The other comment came from Bill Rempel.? He objected more to my terminology than my content, though he disliked my comment that “Inflation is predominantly a monetary phenomenon.”? I think we are largely on the same page, though.? I know the more common phraseology here, “Inflation is purely a monetary phenomenon,” and I agree with it, but with the following provisos:

If we are talking about goods, services, and assets as a group, or,
If the period of time is sufficiently long, like a century or so, or,
If we are talking about monetary inflation.? (Who disagrees with tautologies? 🙂 Not me.)

Part of my difficulty here, is that when we talk about money, we are talking about something that lies on the spectrum? between currency and credit.? By currency I am talking about whatever physical medium can be commonly deployed to effectuate transactions.? By credit, anything where the eventual exchange of currency is significantly delayed, and perhaps with some doubt of collection.? Because of the existence of credit, over shorter periods, the link between monetary inflation and good price inflation is more tenuous, which leads people to doubt the concept that “Inflation is purely a monetary phenomenon.”? My post, rather than weakening that concept, strengthens it, because it broadens the concept of inflation, so that the pernicious effects of monetary inflation can be more clearly seen.? I wrote what I wrote to distinguish between monetary, goods and asset inflation.? I think it is useful to make these distinctions, because most people when they hear the word “inflation” think only of goods price inflation, and not of monetary or asset inflation.

Now, onto today’s topic: how to protect ourselves from inflation and deflation.? With goods price deflation (should we ever see that under the Fed), the answers are simple: avoid debt, lend to stable debtors, and make sure you are economically necessary to the part of the economy that you serve.? You want to make sure that you have enough net cash flow when net cash flow is scarce.? You can use that cash flow to buy distressed assets on the cheap.? Economically necessary and low debt applies to the stocks you own as well.

On goods price inflation, take a step back and ask what is truly in short supply, and buy/supply some of that.? It could be commodities, agricultural products, or gold. ? As a last resort you could buy some TIPS, or just stay in a money market fund.? You won’t get rich that way, but you might preserve purchasing power.? In stocks, look for those that can pass through price inflation to their customers.? In bonds, stay short, unless they are inflation-protected.

This is not obscure advice, but there is an art to applying it.? There comes a point in every theme where prices of the most desirable assets discount or even over-discount the scenario.? Safe assets get overbought in a deflation toward the end of that phase of the cycle.? Same thing for inflation-sensitive assets during an inflation.? As for me at present, you can see my portfolio over at Stockpickr; at present, I split the difference, though my results over the last five months have been less than stellar.? I have companies with relatively strong balance sheets, and companies with a decent amount of economic sensitivity, whether to price inflation or price inflation-adjusted economic activity.

I don’t see the global economy heading into recession; I do see price inflation ticking up globally, and also asset inflation in some countries (China being a leading example). ? But we have a debt overhang in much of the developed world, so we have to be careful about balance sheets.

I may have it wrong at this point.? My equity performance over the last seven-plus years has been good, but the last five months have given me reason for pause.? Well, things were far worse for me 6/2002-9/2002; I saw that one through.? I should survive this one too, DV.

Personal Finance, Part 5 ? Inflation and Deflation

Posted on 6 December 2007 by David Merkel

This is another in the irregular series on personal finance.? This article though, has implications beyond individuals.? I’m going to describe this in US-centric terms for simplicity sake.? For the 20-25% of my readers that are not US-based, these same principles will apply to your own country and currency as well.

Let’s start with inflation.? Inflation is predominantly a monetary phenomenon.? Whenever the Fed puts more currency into circulation on net, there is monetary inflation.? Some of the value of existing dollars gets eroded, even if the prices of assets or goods don’t change.? In a growing economy with a stable money supply, there would be no monetary inflation, but there would likely be goods price deflation.? Same number of dollars chasing more goods.

Let’s move on to price inflation.? There are two types of price inflation, one for assets, and the other for goods (and services, but both are current consumption, so I lump them together).? When monetary inflation takes place, each dollar can buy less goods or assets than in the absence of the inflation.? Prices would not rise, if productivity has risen as much or more than the amount of monetary inflation.

Now, the incremental dollars from monetary inflation can go to one of two places: goods or assets.? Assets can be thought of? as something that produces a bundle of goods in the future.? Asset inflation is an increase in the prices of assets (or a subgroup of assets) without equivalent improvement in the ability to create more goods in the future.? How newly printed incremental dollars get directed can make a huge difference in where inflation shows up. Let me run through a few examples:

?In the 1970s in the US, the rate of household formation was relatively rapid, and there was a lot of demand for consumer products, but not savings.? Money supply growth was rapid.? The stock and bond markets languished, and goods prices roared ahead.? Commodities and housing also rose rapidly.
In? the mid-1980s the G7 induced Japan to inflate its money supply.? With an older demographic, most of the excess money went into savings that were invested in stocks that roared higher, creating a bubble, but not creating any great amount of incremental new goods (productivity) for the future.
In 1998-1999, the Fed goosed the money supply to compensate for LTCM and the related crises, and Y2K.? The excess money made its way to tech and internet stocks, creating a bubble.? On net, more money was invested than was created in terms of future goods and services.? Thus, after the inflation, there came a deflation, as the assets could not produce anything near what the speculators bid them up to.
In 2001-2003 the Fed cut rates aggressively in a weakening economy.? The incremental dollars predominantly went to housing, producing a bubble.? More houses were built than were needed in an attempt to respond to the demand from speculators.? Now we are on the deflation side of the cycle, where prices adjust down, until enough people can afford the homes using normal financing.

I can give you more examples.? The main point is that inflation does not have to occur in goods in order to be damaging to the economy.? It can occur in assets when people and institutions become maniacal, and push the price of an asset class well beyond where its future stream of cash flow would warrant.

Now, it’s possible to have goods deflation and asset inflation at the same time; it is possible to save too much as a culture.? The boom/bust cycles in the late 1800s had some instances of that.? It’s also possible to have goods inflation and asset deflation at the same time; its definitely possible to not save enough as a culture, or to have resources diverted by the government to fight a war.

The problem is this, then.? It’s difficult to make hard-and-fast statements about the effect of an increasing money supply.? It will likely create inflation, but the question is where?? Many emerging economies have rapidly growing money supplies, and they are building up their productive capacity.? The question is, will there be a market for that capacity?? At what price level?? Many of them have booming stockmarkets.? Do the prices fairly reflect the future flow of goods and services?? Emerging markets presently trade at a P/E premium to the developed markets.? If capitalism sticks, the premium deriving from faster growth may be warranted.? But maybe not everywhere, China for example.

The challenge for the individual investor, and any institutional asset allocator is to look at the world and estimate where the assets generating future inflation-adjusted cash flows (or goods and services) are trading relatively cheaply.? That’s a tall order.? Jeremy Grantham of GMO has done well with that analysis in the past, and I’m not aware that he finds anything that cheap today.

We live in a world of relatively low interest rates; part of that comes from the Baby Boomers aging and pension plans investing for their retirement.? P/E multiples aren’t that high, but profit margins are also quite high.? We also face central banks that are loosening monetary policy to reduce bad debt problems.? That incremental money will aid institutions not badly impaired, and might eventually inflate the value of houses, if they get aggressive enough.? (Haven’t seen that yet.)? In any case, the question is how will the incremental dollars (and other currencies) get spent?? In the US, we have another demographic wave of household formations coming, so maybe goods inflation will tick up.

We’ll see.? More on this tomorrow; I’ll get more practical and less theoretical.

Personal Finance, Part 4 — Health and Disability Insurance

Posted on 7 November 2007 by David Merkel

With health insurance, the main idea is that you should be covered in the event of a catastrophe.? First dollar coverage is nice if your employer is a sugar daddy (be sure and thank him, but not too effusively, lest he realize how much he is paying…), but insurance is not really effective at claims management; it is far more effective at risk-bearing.

To that end, high deductible plans can be effective for those that have to buy insurance privately.? Just make sure that you fund the deductible. Health Savings Accounts are triple tax free, and can be a particularly sweet deal.

Though this also applies to health insurance, with disability insurance, consider the claims-paying record of the insurer.? This is not a coverage where lowest premium payment wins.? Good companies do their underwriting on the front end, and pay legitimate claims.? Bad companies don’t do their underwriting on the front end, and deny legitimate claims.? This usually shows up in the complaint statistics at you state insurance department, so review those before buying disability insurance.

Also, with disability insurance, note the distinctions between “own occupation” and “any occupation” coverage.? With “own occ,” a surgeon who loses his steady hand could make a claim, but could not under “any occ.”? He could go flip burgers.? Also, note total and partial disability terms.? Under what conditions will they pay, and how much?

If you do become disabled, the insurance company may attempt to buy out your claim with a lump sum.? Don’t take the lump sum; they typically lowball the offers; claimants would receive a lot more over time if they were patient and took the payments gradually.

Now, not everyone needs disability insurance.? If you’re in a low-risk occupation, like me, odds are that you won’t be disabled to where you can’t earn money.? Analyze your own willingness to take risk in this area if you decide not to buy disability insurance.? Some risks are best self-insured.

Personal Finance, Part 3 — Buy The Life Insurance You Need

Posted on 6 November 2007 by David Merkel

Sorry that my posts have become more terse and less frequent.? A large part of that was recent computer troubles, which have largely been rectified.? I highly recommend the program and advice on this webpage if your computer is running slow.? Beyond that, I have had internet outages (thank you Verizon), and my efforts at obtaining long-term investors for my strategies have eaten up a lot of time.

Tonight’s post deals with life insurance.? My main advice: buy what you need, not what someone wants to sell you.? What most people need is protection for their loved ones from untimely death, which can be satisfied by term insurance.? Now, some wealthy people with complex estate planning needs can benefit more from other forms of life insurance, but that’s not common.? Also, people who aren’t so healthy can benefit from permanent insurance through an agent, because that may be the only way that they can obtain coverage on a reasonable basis.

Why do I favor term insurance?? It’s cheap.? It’s cheap because it is easy to compare the features of various policies against each other to find the best price.? But what if some company that is lower quality offers the best price?? The state guaranty funds stand behind the insurance companies, and no one has failed to receive a death benefit on a timely basis as a result.? (Note: agents are not allowed to tell you this, because the states don’t want lower quality companies to gain a marketing advantage by mentioning the guaranty funds.)

Term insurance offers another advantage: re-underwriting.? If after ten years, you are still in good shape, and you still need insurance, apply for a new policy at a lower rate over the same remaining term as your old one.? If you can get one, buy it and cancel the old policy.? If your health is not so good, keep paying premiums on the old policy.

Where do you buy the insurance, then?? Google the phrase “term insurance,” and a variety of comparison services will pop up.? Try a few of them, and buy from the cheapest.? The younger you are, the longer the term you should buy for, because the far-out years are cheaper.? The older you are, stick to ten years at most.

A few final points: don’t buy policy riders; they are an expensive way to obtain insurance.? Also, don’t buy convenience insurance policies that offer token amounts of insurance; they are expensive also.? Last, don’t scrimp on the amount of coverage.? Few people are overinsured when it comes to life insurance; 5-10x your salary is pretty standard, but analyze how much your loved ones will need in your absence, and buy that much coverage.

Personal Finance, Part 2 — Risks

Posted on 3 November 20076 November 2007 by David Merkel

I view personal finance through the prism of risk management. What can go wrong? Here are many of the threats that the average person faces:

Die too soon
Bad health
Disability
Inflation/Deflation
Unemployment
Property & Liability losses
Live too long
Not earn enough on investments

This list is not exhaustive; perhaps you can think of more. Each one reflects an aspect of life that we don’t fully control. ? Some of them can be fully or partially hedged through insurance (1, 2, 3, 6, 7), some can be fully or partially hedged through investment policy (4, 8 ), and some can’t be hedged at all (5).? My next few articles in the series will deal with the hedgeable risks, and what reasonable strategies can be for dealing with each one.

Personal Finance, Part 1

Posted on 2 November 2007 by David Merkel

This is the first in an irregular series of articles on personal finance issues.? I have only worked in two industries in my life — life insurance and asset management.? I have distinct opinions here, and ones that may prove to be controversial, because they will step on the toes of those who disproportionately benefit from how the system works at present.? All of that said, don’t take my word as gospel on these issues for your own personal situation.? Get personal, tailored advice from someone who knows your intimate financial details.

Tonight’s topic is on work.? Who drives your financial plan?? Either you can drive it, or, you can hire someone to drive it, or, you can let multiple parties take a “piece of the action” and end up with a crazy quilt.? The first option means that you have to work and learn.? The second option means that you have to learn enough to choose a good advisor.? The last option means that there is no organizing principle, but you end up with whoever successfully convinces you to part with money for a part of a financial plan on any given day.

I encourage the first two options.? They are cheaper, integrated, and you get better results.? When friends come to me for advice, my first question is “how much work do you want to do?”? It’s good to learn about financial topics.? Aside from the personal benefits, there are positive spillover effects into the rest of life.? It makes you more productive to those you serve, if you understand the basic economics behind the tasks that you do.

I understand enough about automobiles to be able to know whether my mechanic is likely lying to me.? The same is needed to be an intelligent user of financial professionals.? To not learn the modest amount needed to evaluate financial professionals is to invite financial salesmen to come and sell you on their product of the day, which may not be the best thing for you.

Twenty years ago, I? began spending an hour a day on average improving my knowledge of financial matters.? You don’t need to do that much, but you do need to learn about personal finance issues.? Future articles in this series will give my view of personal finance topics; I hope you can benefit from them.

The Rules, Part LXVIII

Posted on 7 November 20208 November 2020 by David Merkel

Picture Credit: m.robersonart || “When You Come to a Fork in the Road, Take It” attributed to Yogi Berra

Limit the timing of a person’s choice, and the person will think about choosing.

In 1992, I went to work in the Pension Division of Provident Mutual. It was a time of change as more and more pensions were being structured as defined contribution [DC] plans. Old products structured for defined benefit [DB] plans were being replaced at a slow rate. Immediate Participation Guarantee products were giving way to Guaranteed Investment Contracts, which would quickly give way to Synthetic Guaranteed Investment Contracts.

And for variable accounts, insurers were trotting out separate account products to try to challenge mutual fund companies as they competed for the business 401(k)s and other DC plans. Now old methods die hard. Many of the group annuities marketed to DC plans still had DB style features, which limited the number of times NAVs were calculated, and/or trading from one fund to another, which could only happen when NAVs were calculated.

As time went on NAVs were calculated with greater frequency, moving from annual, to quarterly, to monthly, to daily. Trading ability moved in lockstep, though some firms limited the total number of trades in a year that any participant could make.

And then a strange thing happened. When it was annual many people traded on the day it could be done. Moving to quarterly and monthly, not only did the percentage of people trading drop, the absolute amount dropped as well. Moving to daily, it was almost like people stopped trading. Because they could do it at any time, they stopped worrying about it and did not trade much until a panic hit. (Aside: when it moved to daily, a small group of people did trade frequently, but the grand majority would do nothing, or maybe do one rebalancing trade per year if they were disciplined.

Now, this applies in a number of other areas. Often companies want people to forget that they are paying them for service. This applies to many financial products where fees are paid on a daily basis. It’s tiny on any given day, but adds up over time. If a financial advisor offers direct billing, it is definitely more noticeable when you pay it quarterly.

Other companies want you to pay them on an auto-renewing basis. They may even offer a discount for doing it. I don’t like auto-renew, and so if I do it, I put a tickler note on my calendar to consider non-renewal one month before renewal.

Other companies want you to pay automatically from your credit card or bank account. They don’t want you to think about the money you are sending them. Even though it is a minor hassle to write checks for things, paying for them personally makes you think about the product or service, and whether you think you are getting value for your money.

Service contracts for HVAC equipment can be like that as well. Any sufficiently complex service has some stickiness to it, and you have to plan in advance to replace it. Notes in the tickler file help to get you ready for the renewal dates. This year, for the first time in 10 years, I bid out my E&O coverage. And as I have said before:

“For those that are short on time, my basic advice is this: bid out your auto, home, umbrella and other personal lines property & casualty insurance policies once every three years, or after every significant event that changes your premium significantly.”
Bid Out Your Personal Insurance Policies!

The insurance companies count on the fact that you are asleep to raise your rates at renewal. And, for those that buy deferred annuity products (don’t do it), I can tell you that agents keep their own tickler file of the date that the surrender charge goes to zero. Then they call the policyholder up, saying they have a much better policy for them. I can tell you that the single most important factor in annuity surrender is the end of the surrender charge period. In the two years following it going to zero, 30-40% will surrender, and go to a new annuity, where they are locked in for another surrender charge period. The only winner is the agent. Both the policyholder and company would be better off if they didn’t surrender.

But life insurance products are sold, not bought, for the most part. The policyholder is probably better off saving something, rather than not saving.

My simple advice to you is take a look at your finances, and think about the places where you money is leaving you quietly. Then make a plan to evaluate every every product and service that is auto-paid, and ask whether you can do better — lower cost, better quality, or even “I don’t need that anymore.” Sometimes you might even find fraud. If you aren’t thinking, and defending your finances, product and service providers will find ways to quietly take advantage of you. Don’t be an easy target.

The Best of the Aleph Blog, Part 39

Posted on 16 August 2018 by David Merkel

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In my view, these were my best posts written between August 2016 and October 2016:

What to do when Ethics are Discouraged

Eight ways to promote ethics where it is not popular.

On Pricing Grids, Part 1

On Pricing Grids, Part 1a

On how to price illiquid bonds, and why GAAP accounting does not matter for financial stock prices.

The Cash Will Prove Itself

On Donald Trump, during a time in 1990, when he said in the midst of a personal business financial crisis said:

?What I want to do is go and bargain hunt,? he said. ?I want to be king of cash.?

I even get to draw analogies to Warren Buffett, Elon Musk, and nifty finance poem that is less known today.

Dead as a Severed Horse?s Head

A lot of people got skinned by the bankruptcy of Horsehead Holdings, which was unfair to stockholders, but sadly, legal.? That said, those that owned the company missed several significant points regarding risk control, and that is why they lost.

Thinking About Monetary Policy: A Counterfactual

On a rare time that I agree with Paul McCulley — we both think the Fed in general should not invert the yield curve.? Also, how the Fed could be genuinely independent, unlike their “independence” that they talk of presently.

Practically Understanding Non-GAAP Earnings Adjustments

It ain’t all dirty, and it ain’t all clean.? Sometimes non-GAAP is a correction, and sometimes it is abusive of economic reality.? You have to analyze it carefully.

On the Decline of Lifestyle Employment

On the political fetishes that exist with protecting certain types of employment, when economies constantly change.

Watch Net Income Double in Two Years, Not

Remember, earnings estimates are off of non-GAAP earnings.? Do not confuse them with prior GAAP earnings for making an estimate of the growth in the value of corporations.

Of Milk Cows and Moats

“What municipalities lose businesses and people? ?Those that treat them like milk cows. ?Take a look at the states, counties and cities that have lost vitality, and will find that is one of the two factors in play, the other being a concentrated industry mix in where the dominant industry is in decline.

The more a municipality tries to milk its businesses and people, the more the businesses begin to hit their flinch point, and look for greener pastures. ?With the loss of businesses and people, they may try to raise taxes to compensate, leading to a self-reinforcing cycle that eventually leads to insolvency.”

Me Too!

How financial imitation helps create bubbles, if imitators don’t understand the risks they are taking.

The Plumbing of Investing

“Money does not flow into or out of assets. ?When a stock trade happens, shares flow?from one account to another, and money flows the opposite direction, with the brokers raking off a tiny amount of cash in the process. ?Prices of assets change based on the relative desire of buyers and sellers to buy or sell shares near the existing prior price level. ?In a nutshell, that is how secondary markets work.”

On Finding a Job in Finance

Posted on 19 December 2017 by David Merkel

I was approached by a younger friend for advice.? This is my response to his questions below:

Thank you for agreeing to do this for me. I would love to have an actual conversation with you but unfortunately, I think that between all of the classes, exams, and group project meetings I have this week it would prove to be too much of a hassle for both of us to try to set up a time.

1. What professional and soft skills do you need to be successful in this career and why?
2. What advice would you give to someone considering working in this field?
3. What are some values/ethics that have been important to you throughout your career?
4. I understand that you currently run a solo operation, but are there any leadership skills you have needed previously in your career? Any examples?
5. What made you decide to make the switch to running your own business?

Thanks again,

ZZZ

What professional and soft skills do you need to be successful in this career and why?

I’ve written at least two articles on this:

How Do I Find a Job in Finance?

How Do I Find a Job in Finance? (Part 2)

Let me answer the question more directly.? You need to understand the basics of how businesses operate.? How do they make money?? How do they control risk?

Now, the academics will show you their models, and you should know those models.? What is more important is understanding the weaknesses of those models because they may weakly explain how stocks in aggregate are priced, but they are little good at understanding how corporations operate.? The real world is not as ideal as the academic economists posit.

It is useful to read broadly.? It is useful to dig into a variety of financial reports from smaller firms.? Why smaller firms?? They are simpler to understand, and there is more variation in how they do.? ?Learn to read through the main financial statements well.? Understand how the income statement, balance sheet, and cash flow statement interact.? Look at the footnotes and try to understand what they mean.? Pick an industry and compare all of the companies.? I did that with trucking in 1994 and learned a boatload.? This aids in picking up practical accounting knowledge, which is more powerful when you can compare across industries.

As for soft skills, the ability to deal with people on a firm and fair basis is huge.? Keeping your word is big as well.? When I was a bond trader, I ate losses when I made promises on trades that went wrong.? In the present era, I have compensated clients for losses from mistaken trades.

Here’s another “soft” skill worth considering.? Many employers are aghast at the lousy writing skills of young people coming out of college, and rightly so.? Make sure that your ability to communicate in a written form is at a strong level.

Oral communication is also important.? If you have difficulty speaking to groups, you might try something like Toastmasters.

Many of these things come only with practice on the job, so don’t think that you have to have everything together in order to do well — the important thing is to improve over time.? Young people are not expected to be as polished as their older colleagues.

What advice would you give to someone considering working in this field?

It’s a little crowded in finance.? That is partially because it attracts a lot of people who think it will be easy money.? If you are really good, the crowding shouldn’t be much of a hurdle.? But if you don’t think that you are in the top quartile, there are some alternatives to help you grow and develop.

Consider developing your skills at a small bank or insurer.? You will be forced to be a generalist, which sets you up well for future jobs.? It also forces you to confront how difficult the economics of smaller firms are, and how costly/difficult it is to change strategy.? For a clever person, it offers a lot of running room if you work for a firm that is more entrepreneurial
Or, consider working in the finance area of an industrial firm.? Finance is not only about selling financial products — it is about the buyers as well.
Work for a government or quasi-governmental entity in their finance area.? If you can show some competence there, it would be notable.? The inefficiencies might give you good ideas for what could be a good business.

What are some values/ethics that have been important to you throughout your career?

Here are some:

Be honest
Follow laws and regulations
Work hard for your employer
Keep building your skills; at 57, I am still building my skills.
Don’t let work rob you of other facets of life — family, friends, etc.? Many become well-paid slaves of their organization, but never get to benefit personally outside of work.
Avoid being envious; just focus on promoting the good of the entity that you work for.
Try to analyze the culture of a firm before you join it.? Culture is the most important aspect that will affect how happy you are working there.

I understand that you currently run a solo operation, but are there any leadership skills you have needed previously in your career? Any examples?

This is a cute story:?Learning Leadership.? I have also written three series of articles on how I grew in the firms that I worked for:

There’s a lot in these articles.? They are some of my best stories, and they help to illustrate corporate life.? Here’s one more:?My 9/11 Experience.? What do you do under pressure?? What I did on 9/11 was a good example of that.

I know I have a lot more articles on the topic on this, but those are the easiest to find.

What made you decide to make the switch to running your own business?

I did very well in my own investing from 2000-2010, and wanted to try out my investing theories as a business.? That said, from 2011-2017, it worked out less well than I would have liked as value investing underperformed the market as a whole.

That said, I proceed from principle, and continue to follow my investment discipline.? It follows from good business management principles, and so I continue, waiting for the turn in the market cycle, and improving my ability to analyze corporations.

Nonetheless, my business does well, just not as well as I would like.

I hope you do well in your career.? Let me know how you do as you progress, and feel free to ask more questions.

The Best of the Aleph Blog, Part 29

Posted on 4 April 2017 by David Merkel

Photo Credit: Hanan Cohen?|| Anyone need a copy?

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In my view, these were my best posts written between February?and April?2014:

On the Structure of Berkshire Hathaway

On the Structure of Berkshire Hathaway, Part 2, the Harney Investment Trust

This set of posts is unique in going through how the insurance entities of Berkshire Hathaway allow Buffett to hold as much as he does of his stocks/businesses through his insurance companies. ?It also explains as much as can be publicly known about the secretive Harney Investment Trust.

On the ?770? Account

How to dress up Permanent Life Insurance as a sexy investment vehicle, and get guaranteed underperformance.

The Good ETF, Part 2 (sort of)

If you are investing in any levered, inverse, or non-equity fund exchange traded product, then read the fine print of the prospectus. ?If you fail to do that, you have no right to complain if you lose money.

Why it is Hard to Win in Investing

Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals. ?If there are no good deals, profitable investing sits on cash, and waits for a better day.

On Target Prices & Yields

It is better to measure investments against similar alternative investments in order to decide where to invest money, rather than using target prices or yields.

On Approximate Valuation Methods

I suggest different valuation metrics for four different types of stock.

An Expensive Kind of Insurance

Where I suggest that VIX-type products must be used tactically, if at all. ?(Note: the logic of this article is fine, but the graphs have not aged well.

On Intrinsic Value

On how it is difficult to calculate, but why a CEO/CFO might experiment with calculating it to have a better idea of when to buy back or issue stock.

On Emergent Phenomena

When are negative surprises more likely to happen? ?Leverage and other factors play roles.

Conservation of Liquidity, under most Conditions

Conservation of Liquidity, under most Conditions, Coda

Why the “money parked on the sidelines” (or lack thereof) argument is always bogus.

?Different from the Consensus?

What is the consensus anyway? ?When is it smart to think differently than the herd?

The Stock Market Is Rigged! The Stock Market Is Not Rigged!

Never allege a conspiracy when mere stupidity will suffice to explain the problem.

Limit Repo Financing

I am a lonely voice on this, but when repo financing fails, it fails colossally. ?It was a moderately large?factor in the systemic risk of 2008.

Peterson?s Guide to Financial Blog Commenters

Is it any wonder the most blogs and financial websites have eliminated comment sections at the end of articles?

On a Letter From A Younger Friend

Basic advice on personal finance.

Productivity Inequality

The unpopular truth as to why many people in the US (and other developed nations) are falling behind, and losing net wealth.

The Idea of Contributory Defined Benefit Plans

Solves two pension problems — participants don’t have to make investment choices, and they get an income that they can’t outlive. ?Gives them greater choice over how big of a pension to have.

Why are Pensions so Messed Up

Lists in short order the ten main problems with pensions.

And finally, I finished up the “Rules” posts. ?Though later, I added two more…

The Rules, Part LVIII

Can contingent claims theory for bond defaults be done on a cash flow/liquidity basis?? KMV-type models seem to fail on severely distressed bonds that have time to breathe and repair.

The Rules, Part LIX

Productivity increases are only so when they result in an increase of desired consumer goods purchasable at prior prices.

The Rules, Part LX

Rapid upward moves in volatility almost always presage a bounce rally.

The Rules, Part LXI (The End? of the Past)

Rule: every rule has exceptions, including this one

Full Disclosure: long BRK/B for myself and clients