blog.jonathansmith.com

How’s My Performance?

Justin here. This is a mock-up of something a retired investment advisor and friend of mine said he would put in front of clients. It is only halfway “tongue in cheek” and it brings up a good point about what is important and why. 

Client Reporting Process Selection

 

Our intent is to provide you with the most efficient report on your investment account possible. To that end, we ask you to look over the format you would be most comfortable with and check the appropriate section and return it to us.  We will do our best to keep you informed.

 

1.  Please let me know how my account is doing as compared with CDs and ten year Treasury Notes. (CDs are now returning about 2% to 3% per year and ten year Treasury Notes are at 2%)

 

2.  Please let me know how my account is doing according to the popularly used averages, Dow Jones Average, Standard and Poor Average, etc. (This program shows if your account performed as average or if it was better or worse than average.)

 

3.   Please let me know how my account was doing according to the Hedge Funds strategy. (A recent report in The Economist  stated “At the end of 2011, 67% of hedge funds were below their high water marks, according to Credit Suisse, and 13% had not earned a performance fee since 2007…..the average hedge fund slid by 5.2%, much worse than the S & P 500which returned 2%.)

 

4.  Please let me know how my account performed percentage wise during the period. (Percentages are useful to reveal how much your account moved up or down during the period.

 

5.   Please let me know how much my account performed in real dollar value during the period. (For instance, we can report your account grew $ 36,000 during the period or $3,000 per month.  This might effectively assist you in your spending plans.)

 

6.  Please let me know how well my account performed versus inflation. (Inflation varies but is commonly accepted as approximately 3% per year.

 

7.  Please let me know how my account performed compared with the goal we mutually set as a guide line to work toward.  I understand the account may not move up in an equal amount each year but strives to reach our goal within in a six year period.  

 

Thank you for being a part of this investment program.  We want you to be comfortable with our services.  Call us at any time you have a question.

I’d only add another: “#8. Please let me know how my performance was compared to a) my brother in law b) that guy I saw on CNBC this morning c) my tennis partner.

As Heidi Moore (@moorehn) explained on twitter today; she wrote a piece on the JP Morgan trading loss. How to understand it and even talk about it at a dinner party!

A truly great piece of simple yet insightful financial journalism.

JP Morgan’s Loss: The Explainer | Marketplace from American Public Media.

Justin here. Here’s a fascinating chart on starting P/E’s and ensuing 20 yr returns. Take your pick, want to start with a PE of 23 or 8?

Sunday Spectacle CLXXII | Can Turtles Fly?.

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

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.

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.