Like New, Never Read!

A few years back, Amazon.com sent me a 50% discount coupon for one of John C. Bogle’s books, “John Bogle on Investing: The First 50 Years.”  The market was roaring back then and nobody wanted to read what old man Bogle had to say about value, at least not for $29. One eager Amazon.com seller was willing to let this book go for $4.99, Like new, never read! he boasted.  The Dow was 11,380. My barber had just told me that his college-aged son’s roommate’s parents had just quit their day jobs, making $2k a week, apiece, day trading.  That was March 2000, peak of the dot.com boom.  Apparently, many copies went unsold.

Posted in Uncategorized | Tagged | Leave a comment

Jeremy Grantham’s “Notes to Myself”

Quarterly letters are usually cuter than they need to be (ours included). GMO’s Jeremy Grantham writes a great letter usually filled with analogies and backstories. But December’s turns out to just be his “Notes to Myself” and is insightful and refreshing. Here: http://bit.ly/tzQfi6

Spoiler Alert: he thinks the S&P could overcorrect as is the case with most bubbles and be down 30% by this time next year. #gulp

Posted in GMO, Jeremy Grantham | Leave a comment

Yesterday’s News…

Two great explanations…

from Heidi Moore’s tumblr (Marketplace/NPR): http://moorehn.tumblr.com/post/13587522872/why-now-why-did-we-bail-out-european-banks-this-week (and when she says in the first paragraph “you should go read that first…” obey her).

from Charles Rotblut, CFA (from AAII): http://www.aaii.com/investor-update

 

 

Posted in Uncategorized | Leave a comment

“If not for Veteran I have no place to come”

Two years ago, Jonathan went on the Triad Flight of Honor. I’m pretty sure it still ranks in the top 10 days of his life. He wrote his thoughts here and how being a guardian on that day reminded him of our job as financial guardians for our clients. The excerpt is below, for the full version (with financial commentary, go here: http://bit.ly/uZEBx2)

Some events are so enormous that history’s judgment erects a permanent monument; something that remains long after all the eye witnesses are gone. Last Saturday, I boarded US Airways Flight 9092 to Washington, DCas part of the Triad’s Flight of Honor to take 101 World War II Veterans to see such a monument, their monument: the World War II Memorial.

I was chosen to be one of thirty-six guardians, each of us assigned to accompany three of the Veterans (pictured, myself in red). Before the flight, knowing that seniors prize familiarity, I made an effort to both call and meet my 83, 86, and 91 year-old companions at the ‘pre-flight’ meeting. When the eldest couldn’t make the meeting because he was under the weather, I drove out to his home. I learned how much the last ten years have demanded of him, but I got to hear a lot of happy memories too, and I could see that the more we talked, the better he felt. The only problem, I learned, was that the t-shirt he’d been given for the trip was an XXL but he needed an L at most.  Before I could reel back in my words, I told him I’d take care of it.

After finding out there were no more shirts available, I called the seamstress who has repaired my dress shirts over the years. “Could you take a size XXL and make it into a size large?” I asked. “Sure,” she said, in broken English, “You bring large t-shirt too when you come, ok?  When you come?

Ten minutes later, the owner of Alternation Studio, a petite Vietnamese woman and I were comparing a size L to the size XXL. The shirt had the Flight of Honor logo, which she asked about. “Honor Flight,” she said, “what this?” I offered the short answer. “This you wear?” she asked. “No, no, my 91 year-old Veteran friend will wear it when we go to see the World War II Memorial in Washington,” I answered. “Veteran,” she said, her mind working, “I do for him, yes,” and with a bigger smile, said this powerful truth, “If not for Veteran I have no place to come to.”

Two days later, as promised, she produced the transformed size L t-shirt. Knowing how no one likes to wait for something, I delivered the shirt on my way home. At first I had a little trouble explaining how a t-shirt labeled XXL was really a size L, but when he understood that it had been remade just for him, you would have thought he just made a hole-in-one.

Other than t-shirt alterations, the job description of guardian was to accompany the Veterans through airport security, help them board and disembark, sit, walk and talk with them, point out access ramps and restrooms, tote cameras and pill bottles, provide an arm to lean on, circle up chairs under a big tent, and secure our box lunches.  But more importantly, we were there to listen, offer strength, and stand by them as they, the heroes, gazed into the Memorial, reflected on their own thoughts, and opened up the history books of their lives to us on that magnificent day not one of us will ever forget.

I haven’t been able to get that day out of my mind. It was such a privilege and honor to be with those men on such a gift of a day. But I’ve also been thinking about how much my job that day mirrors our job here, as Financial Guardians. We listen and plan, we direct and monitor, we share highs and lows, and offer our support and strength through all the stages of life’s journey.

Posted in Uncategorized | Leave a comment

Why a Checklist Won’t be Saving Your Life

“I’m Too Busy” and Other Things You Don’t Want to Hear Your Doctor Say

Peter J. Pronovost, M.D. is an intensive care specialist physician at Johns Hopkins Hospital. In 2001, the nurses under Pronovost noticed that at least one of the steps to reduce infection was omitted in more than one-third of the patients. So Dr. Pronovost developed a simple checklist, saw dramatic results, and got other hospitals on board. A later evaluation found that over an 18 month period, this checklist saved more than 1,500 lives and saved the state of Michigan over $100 million…all through a little checklist.

In spite of dramatic results achieved in the test hospitals, Dr. Pronovost soon learned that only a small fraction of hospitals were using these procedures consistently. The lapses fell into three categories: Egotism, Busyness, and Distraction. Some nurses and physicians were insulted that professionals with their wisdom and experience should have to stoop to the level of being governed by a checklist; they let their egos get in the way. Some also felt they were already too busy and had an aversion to more “tasks” in a world consumed with bureaucracy. Lastly, many were distracted by more “exciting” issues such as disease biology and finding therapies for treatment, while often ignoring more “mundane” research that measures whether therapies are effectively delivered to patients. 
 
Flight 38

Inspired in part by Dr. Pronovost’s checklist’s success, but more so by its concurrent failure to gain traction in the wider medical community, Dr. Atul Gawande, a general and endocrine surgeon at Brigham and Women’s Hospital in Boston, wrote The Checklist Manifesto: the Power of Getting Things Right. While recounting the story of Flight 38, Gawande points to one more reason we don’t follow checklists: Emotions. Following the near-fatal crash of British Airways Flight 38 from Beijing to London on January 17, 2008 (pictured), an inquiry led investigators to conclude that during the cross-polar flight, when atmospheric temperatures typically reach negative 105 degrees, moisture as sparse as two drops per gallon of jet fuel can crystallize. There was little risk to Flight 38 while on cruise control, but on approach, the pilot accelerated only to experience severe rollback: both engines lost power. Continue reading

Posted in market commentary, Uncategorized | Tagged , , , , , , , , , , , , | 1 Comment

She Toddles!

This past week, my fifteen month-old, Finley, started taking her first steps. She’s been a solid climber for months (we frequently find her on top of the dining room table or in the dishwasher) but she’s been a bit more hesitant to walk. So, in an effort to be pushy parents, our new favorite after-dinner activity is for all four of us (Millie, three year-old Grayson, Finley and me) to sit on our kitchen floor and unashamedly make Finley walk from person to person.

And she really loves it…at first. We stand her up and she’ll stumble her way to the next person six feet away, ultimately landing in their lap with a squeal and a giggle. Of course, walking in our house isn’t easy. For starters, Finley has a big sister with the wingspan of a basketball player and the excitement of a cheerleader. Grayson frequently gets technical fouls for “excessive celebration” involving neck hugs that are a little too tight. Then there’s the 8 year-old lab mutt with a licking tongue and wagging tail who is all too excited that we’re all on her level. Worst of all, Millie and I are those parents that scoot back as the toddler nears us; hoping to get a couple extra steps out of her.

I’m astounded at how much of a pounding little Finley can take. She keeps toddling and falling, toddling and falling. Invariably though, all our “training sessions” seem to end with Finley crying, pouting and/or just flat-out refusing to put her feet on the floor when one of us tries, one last time, to stand her up. She’s a resilient kid, but she can only take so much before she is “open tears” as Grayson says.

The Obstacles We’re Toddling Through

Over the last quarter, we’ve seen the same sort of “resiliency” in the economy and in the investment markets. The economic and political environments look a lot like our toddling baby: taking a step, falling, taking a step, falling. Some of our data points suggest that investors are predicting the toddler actually won’t fall again, but rather she’ll break into a full sprint any minute now. We have been more skeptical (see our last few market commentaries) and while we believe that she will indeed learn to walk, she’s likely to have more falls, more bruises, and “Ms. Market” is likely to “pitch a fit” or two before running at full speed again.

  • Middle East/ Northern Africa: It’s hard to recall a quarter that has seen so much widespread, diverse geopolitical turmoil. Starting in January, riots and uprising in Tunisia migrated to Egypt and ultimately Libya culminating in a UN sanctioned attack on the reigning regime. Even Syria, which looked to be “civil unrest-proof” is in its third week of protests and uprising.
  • Japan Earthquake: In March, Japan experienced a massive earthquake. Though we’re still assessing the damage of the earthquake, the longer lasting variable is the lingering radiation from the Fukushima Daiichi Powerplant. Japan is an integral link in the supply chain for so many goods; this will only drive prices upward. I think it’s easy to say that a nuclear accident wasn’t high on many investors lists of potential risks.
  • Employment: We’ve seen some surprisingly good employment data recently, although as we like to say, the news is rarely as good or as bad as it seems. The unemployment rate has dropped below 9% – the effect chiefly of two factors: 1) large numbers of people giving up on finding a job (thus not being counted) and 2) rising government hiring (which some argue shouldn’t even be counted since we have to borrow to pay these wages). Fed Chairman Ben Bernanke observed that “this gain was barely sufficient to accommodate…recent graduates and other new entrants…and therefore, not enough to significantly erode the wide margin of slack that remains in our labor market.”
  • Federal Debt: The Federal Debt held by the public is around $9 trillion today. This is the amount our government is paying interest payments on (and in a historically rock-bottom rate environment, those payments are artificially low). Note that this doesn’t include the present value (money needed in the bank today) to pay for projected future demographic needs. That staggering sum is over $65 trillion and consists of $7.9 trillion for Social Security, $22.8 trillion for Medicare, and $35.3 trillion for Medicaid. Unfunded liabilities are not in themselves a problem, rather the problem lies in how likely someone will be able to fund them in the future.  For example, I have an unfunded retirement liability; meaning I still need to make contributions to my IRA to be able to retire decades down the road. If I continually ran a deficit, I would never be able to close in on my unfunded retirement liability. I need to live within my means today while setting aside money for tomorrow. If the US is running a yearly deficit on top of a large debt load, how will they contribute to their “IRA”?[1]
  • Inflation: The Core Consumer Price Index (Core CPI) measures inflation without Energy and Food taken into account. This is the inflation rate that the Fed keeps an eye on and it hasn’t been wildly out of control. The problem is that most of us need to drive….to the grocery store…often. This trip costs about 15-30% more than it did a year ago. Additionally, the Producer Price Index (PPI), a measure of the cost to make things, was up 1.6% just for the month of February! This would translate into nearly a 21% increase annually in the cost to make goods, after an increase of nearly 6% in 2010! We’re kidding ourselves if we think that won’t show up on our Target receipts in the near future.
  • Interest Rates: With Quantitative Easing 2 (QE2) the Fed agreed six months ago to buy $600 billion in treasuries through June of 2011. This provided the economy will loads of liquidity; but what happens when it runs out in two months? The Fed has a job to provide both stable employment and stable prices – but given a choice, they’ll likely choose employment. This could very well mean the Fed implements QE3. And with the inflation effects of QE2 not even showing up yet in the inflation numbers (it usually take 9-15 months), the implications of QE3 along with a possibly slowing economy will be even harder to stomach.

At any point in history we’ve always had some or all of these “obstacles” in the world economy and have “toddled” through one way or another. The point to realize is that some of the old tools we had at our disposal are no longer available. Most of the young parents that Millie and I know have an ample supply of foam pads to cover the corners of coffee tables, hearths, and anything else pointy and at toddler head level. Those foam pads are, in a sense, “tools” that lessen the risk of injury in the toddler stage. With our deficit sky high, home equity severely reduced, interest rates historically minimal, and more liquidity already in the system than ever in history, we are running dangerously low on fiscal and monetary versions of those foam pads to cushion the fall.

Pumpkins and Mice

Yet in all this, the S&P 500 was up more than 5% this quarter (all of it coming in the final two weeks). The largest contributors to this quarterly gain were areas we thought were the most overvalued at the beginning of the quarter (Small/Mid Caps, Low Quality Large Caps, and Real Estate). Their record performances were the results of one part speculation and one part unsustainably high profit margins – both part being fueled by this soon-to-dry-up excess liquidity. To us, these don’t look (and didn’t look) like areas with great prospects for future returns. Rather, they look like Cinderellas still dancing too close to midnight. While it’s never fun to stand on the outskirts, watching someone else dance the night away (and, for the interim, earn a higher return) it’s better than looking down and suddenly realizing you’re waltzing in dirty rags. As investors, we’d prefer to sit nearer the door rather than try to catch that last dance with the “handsome prince” (forgive my references; my 3 year-old is apparently sponsored by Disney®).

Interestingly enough, we still see some bright spots and we’ve tilted our portfolios to reflect where we see appealing risk/reward opportunities. These are mostly in the unloved or lesser-loved areas like: High Quality Equities (across all market caps but mostly in the Large Cap space), Emerging Markets, and Higher Risk Bonds (such as Corporate and Municipals). We’ve also been seeing good returns and further potential values in certain Commodities, driven by the demands both for their use (oil and food) and demand as a storehouse for wealth (silver and gold). Lastly, we’ve seen value in holding Cash. The latter idea sure won’t sell ads on CNBC, but it will certainly buy another dance or two when other investments turn to pumpkins and mice.

Justin W. Smith CFA®, CFP®

Financial Advisor

April 15, 2011


[1] For more, see Bloomberg Businessweek’s article “USA, Inc.” here: buswk.co/ghgSxo and the more in-depth analyst report here: www.kpcb.com/usainc

Posted in Uncategorized | Leave a comment

Dog takes the pill but Cat takes the cake

I’m not immune from behavioral biases. Really, no one is. There’s no cure, either; the best you can hope for is to #1 understand how behavioral quirks effect us, #2 recognize them when they show up and #3 don’t let our biases interfere with our decision making. Number three is a lot harder to pull off than we think. What works for me is having a few trusted colleagues and friends to whom I’ve given authority to speak truth into my life when, as Dan Ariely puts it, I’m Predictably Irrational, or as Meir Statman says ever-so effortlessly, I’m Normal Stupid.

Long before the recent financial crisis, Ariely wrote about how we humans prize keeping all our options open, how forfeiting an option is painful and the high price we’ll pay to “prevent” incurring the emotional cost when we’re in danger of losing one of our options.

If your travels need an overnight in Asheville, you can surely spend more money but you won’t find nicer accommodations, better breakfasts and more delightful proprietors than at Sweet Biscuit Inn. While behavioral quirks in Asheville abound (everywhere, bumper stickers fulfill the prophecy: Asheville – Where Weird is Normal), you won’t find behavioral finance illustrated half so clearly than in Robert and Angela’s kitchen, headquarters to one fine chow-poodle mix named Otto and one cat named Daisy.  The cat is trouble.

Otto recently had surgery to repair one torn Ruptured Anterior Cruciate Ligament, or

Otto in cone

ACL. Otto was still feeling a little punky when we were there, partly due to his Elizabethan collar, to keep him from pulling out his staples.  Otto had learned to navigate the 1915 home and, much to his (and his owners’ delights) discovered he had a reverse gear, which is helpful if you walk around on all fours and wear a lampshade about your neck. So when Robert and Angela told me how they finally got him to swallow his pain pills, I perked up.   You never know when you, like Angela and Robert, will need to know the finer points on how to give an uncooperative dog 5 pills a day, without taking down your whole day or running your customers off.

So Angela and Robert popped a pill in Otto’s mouth. The pill went splat on the kitchen floor.  They tried wrapping the pill in a blanket of sliced ham, with the ends tucked in like an egg roll. Yum. Otto took the bait, swallowed. So far so good. Next dose, wrapped another ham slice around another pill.  Otto must have thought, “Fool me once, shame on you, fool me twice, shame on me.”  ”Nah,” gestured Otto, “no pill going down my throat.”   Angela and Robert tried again. Ham roll went in, out flew the pill. “Let’s roll it up and put it at his feet and see if he takes it, one of them said, and so they did. Otto looked down, and then, as only a dog can do, looked utterly and completely disinterested.  Disinterested, that is, until Daisy the cat sashayed over to see what was shaking.  Figuring if Otto the dog was dumb enough to pass up a perfectly good slice of ham, they both didn’t have to be stupid and so Daisy tiptoed up to the trick ham slice like it was found money. “Not in my house,” grunted Otto to himself and upon seeing his treat about to disappear, lunged wide-eyed, open-jawed, past Daisy, Elizabethan collar and all, straight at the ham-roll, and gulped down his dose of deception in one bite.  Mission accomplished. Angela updated me  -

“We just had Otto’s staples removed today, so he is finally healing well. Pills are still no fun, although we are down to only 3 a day from 5 a day! Progress! Our cat Daisy was the great pill motivator for that one session. Butter is the lure device presently, but now Robert is worried about Otto’s cholesterol! You just can’t win!

In 2008, Ariely wrote about how winning looks and feels to contestants when they start seeing their precious options disappear.  Not too different from what Otto experienced. They pounce, even when it’s in their best interests to stand still.

“Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss,” Dr. Ariely says. In the experiment, the price was easy to measure in lost cash. In life, the costs are less obvious — wasted time, missed opportunities. If you are afraid to drop any project at the office, you pay for it at home.”

You can read the full article here, and you can even try your hand at how a guinea pig feels to be in one of Ariely’s experiments.  If you see or hear iterations of Dog takes the pill but Cat takes the cake, drop us a line.

Posted in behavioral finance, Uncategorized | Tagged , , , , , | Leave a comment