Mike Rivers' Blog

Mike Rivers' Blog moving to WordPress: https://athenacapitalblog.wordpress.com/

noreply@blogger.com (Anonymous) — Sat, 12 Sep 2015 18:02:00 +0000

After 8 1/2 years on blogger, it's time to move on.

My new posts will be on WordPress at athenacapitalblog.

Please follow me there to keep up with markets, economics, financial planning and all things investing-related.

I look forward to hearing from you there!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Falling prices are good, unless you are an imminent seller

noreply@blogger.com (Anonymous) — Fri, 04 Sep 2015 19:06:00 +0000

When the stock market is tanking, like it has been recently, I find many people are scared to talk to me about it. They seem to think that declining stock prices are like a death in the family--a reason to offer condolences.

But, why is that? I don't fret if I go to the grocery store and find prices have fallen 20%. When I go to buy gas, I'm quite happy to find prices have fallen. Why is this so different with stock prices?

After all, I'm a net buyer of investments. Only if I had some imminent plan to sell my stocks because I needed the money very soon would falling prices be a bad thing.

I think most people think I'm putting on a brave face or bucking myself up when I say I'm happy to see stock prices falling. They can't seem to conceive that falling prices are good for buyers of stocks just as it is good for buyers of groceries, gas, cars or even houses.

I think that is because people too closely associate themselves with their current net worth. Instead of conceiving of their net worth as something in flux, that goes up and down like everything in the economy, they feel their current net worth indicates how much they can pull over time.

But, current net worth is a snapshot, not life itself. Just as a picture cannot capture a life, neither can current net worth define your lifetime cash flow.

Even for those close to or in retirement, stock market fluctuations need not be of major concern. If you have money you need to spend next month or next year in the stock market, you are indeed at risk. But you need not bear that risk unless you choose to. Your cash needs for the next three or so years should be in a stable value position, like a bank or money market account, not in the stock market.

Most people who fret over stock market returns don't need that money soon, either. They know they will need it in time, but they don't need it today.

Market volatility and declines are a benefit to the calm investor who knows that current net worth is just a snapshot. Thought of in this way, stock market drops can lead to higher net worth over time and increased cash flows. That is why I'm happy to see the stock market decline, and I think others should be, too.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

What is diversification worth?

noreply@blogger.com (Anonymous) — Fri, 28 Aug 2015 15:52:00 +0000

In the investing world, diversification has the feel of holy writ. No one conventional will ever question it.

The reality, however, is that diversification is frequently taken out of context and misunderstood.

For example, many investors are sold on the idea that diversification will prevent their portfolios from tanking when markets go haywire. But, this is seldom the case. Perhaps one's portfolio goes down 40% instead of 50%, but that's the best-case scenario at the absolute worst part of a market downturn. How many people are really happy about being momentarily down a little less than the overall market?

I've seen presentations that show much less "reduced volatility"--down 10% instead of 11%--pitched as the holy grail, but I've never heard a client say, "Boy, am I glad I was diversified," with such small differentiation.

As with all things in life, there is a cost to diversification: usually lower returns. The sales pitch is that you give up some return in exchange for lower volatility. That's great, but it must be thoroughly understood that giving up return means less money in retirement. I think many investors would prefer higher volatility and a better retirement, and they should make that choice with a clear idea of what they are choosing. I would happily take 10% more volatility and 10% more income in retirement, and my guess is that I'm not alone.

Diversification is a benefit, but that benefit has limits. A portfolio of 100 stocks should probably be replaced with a low cost index fund. A portfolio that is 80% in your employer's stock is not very smart. Somewhere in between those two extremes is diversification that works for most people.

Diversification works because it removes the consequences of not being omniscient. No one, not even Warren Buffett, knows the future with precision, so that type of diversification is prudent.

That does not mean buy a little of everything and the more the merrier. Over-diversification has huge penalties, too, and that comes in the form of lousy returns.

The benefits and drawbacks of diversification seem clearer after the market has tanked and rebounded like it has over the last week and a half. There was little benefit to being investing in one stock versus another, because they almost all went down and back up together.

The things that did do well, perhaps gold and U.S. Treasuries, either have been or will be terrible investments over 5 to 10 year periods. To gain their benefit in somewhat reduced volatility is to lose future returns that may be worth much more. Perhaps that's not what everyone wants or needs.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The stock market wakes up to global risk

noreply@blogger.com (Anonymous) — Fri, 21 Aug 2015 16:55:00 +0000

Surprisingly--to me, at least--the market has finally woken up to global economic risks.

The signs were there before: commodity prices tanking, emerging markets in heavy decline, state interventions in Greece and China, accusations of broad corruption in places like Brazil.

The question investors will be asking themselves over the weekend is: is this the beginning of a bear market or just a brief pullback to be bought into?

I'll spoil the suspense: no one knows. Only in hindsight is it clear when bear markets begin versus temporary pullbacks.

What I do know is that a significant pullback or a bigger bear market are both opportunities for investors. During such times, psychology takes over as some people panic, and that means something is being sold too cheaply.

To benefit from such situations, the goal is not to pick the absolute bottom in the stock market or a particular stock, but to know what specific securities are worth--after arduous research--and then to buy accordingly.

When people ask me if such pullbacks scare me, I always say "No!" Such times are great opportunities to benefit from the panic of others.

In other words, I'm excited to go shopping.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China's transition

noreply@blogger.com (Anonymous) — Tue, 18 Aug 2015 12:13:00 +0000

Outstanding article on China from Stratfor. The image that many have of China's economic growth and political freedom are at odds with the facts. This article does a great job of showing where things have been, where they are now, and where they may be going.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China is looking increasingly desperate

noreply@blogger.com (Anonymous) — Fri, 14 Aug 2015 19:34:00 +0000

Paper was first invented in China. So was paper money, and thus runaway inflation. It is interesting to see China return to its historical roots this week with the significant devaluation of its currency, the renminbi.

China's actions make it look desperate. The Chinese economy is slowing down, perhaps more rapidly than the communist party in China would like. They have tried spurring stock market growth, and then propping up the stock market to prevent it from falling. Now, they are devaluing the currency to try to get the economy jump-started.

Real economic growth comes from productivity, not from printing currency, redistributing wealth, spurring stock market speculation, or punishing those profiting from stocks falling. All of China's, or Europe's, or America's, or Japan's attempts to get growth from someplace other than productivity (which isn't in the government's wheelhouse) are doomed to failure.

Devaluing the renminbi is an attempt to make Chinese goods cheaper for foreigners to buy. That "works" as long as no other country decides to devalue their currency, too. And, it assumes that market participants are too stupid to adjust prices based on currency manipulation, which history and academic research has been shown not to be the case.

It should come as little surprise that communist dictators misunderstand how a free market works. China is running the risk of not only disrupting the world economy with its actions, but also definitely proving to Chinese people that they don't know what they are doing. The risks and the results are real, and will be felt worldwide.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China and Greece: sound and fury signifying nothing?

noreply@blogger.com (Anonymous) — Fri, 31 Jul 2015 16:40:00 +0000

Just a couple of weeks ago, you couldn't look at the news without seeing dire predictions about Greece leaving the European Union or China's stock market tanking. Now, it seems like these perils have passed and there's nothing to worry about. That's unlikely the case.

I'm an optimist by nature, and I tend to think things will work out in the long run. That does not, however, make me a Pollyanna. I don't think that problems in Greece or China are the end of the world. But, I also think it's naive to think that such issues were insubstantial and likely to fade with so little hardship.

Greece still can't pay back its loans, and they are still demonstrating little desire to reform. European lenders still want their loans repaid, and seem unlikely to grant Greece forgiveness for large amounts of debt. In other words, the situation hasn't really changed, and therefore still requires careful observation.

China's stock market did not tank because of some bizarre conspiracy. Like all markets that have been artificially pumped up, it must necessarily deflate. Any attempts to defy that natural process are doomed to fail one way or the other. The underlying issue of China's economy slowing down has not changed. The political and economic consequences are non-trivial and demand watching.

Markets have a natural ebb and flow, just like nature. And, just like nature, those ebbs and flows are largely unpredictable over the short term. That doesn't mean you can't see broader themes evolving. It was easy to see that the tech bubble of the late 1990's would pop, but impossible to predict when. It was easy to see that the housing market of the mid 2000's would burst, but impossible to predict precisely when.

Greece and China have real problems that will eventually reverberate throughout the global economy. I don't know precisely when these issues will loom large, but I do know they haven't been resolved. This is not a good time to ignore those risks.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Athena Capital Client Letter

noreply@blogger.com (Anonymous) — Fri, 17 Jul 2015 19:03:00 +0000

Athena Capital's latest client letter is available. In it, I cover client investment performance, what I think is happening with the economy and markets, and an after action report on one of our successful investments: Ryanair.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China: more important than Greece

noreply@blogger.com (Anonymous) — Fri, 10 Jul 2015 19:50:00 +0000

While most of the world was overly focused on Greece, bigger things were afoot in China.

First, the Chinese economy is the 2nd largest in the world. What happens in China matters for the world economy. In contrast, Greece's economy is but 2% of the European economy. Although Greece's problems are likely to become broader problems in Portugal, Spain, Italy and France, by itself Greece doesn't have a big impact on the world economy.

Second, China's economy is still essentially run by a communist central planning authority. They are giving some free market principles a try, but they have maintained a firm grip on the most important things. How they react to the inevitable ups and downs any economy faces is important for understanding how the world economy will do in coming years and decades.

Over the last year, the Chinese government has been showing they aren't ready for prime time. First, they have reacted to economic slowing--inevitable in any economic system, whether capitalistic, communistic, socialistic, etc.--with attempts to prop things up. As usual, such attempts look good in the short term but fail over time. Governments just aren't any good at allocating capital.

Second, they are misreading market reactions and have basically lost their cool. After trying to use free markets to boost their economy, they are now trying to prevent markets from clearing by forcing large stockholders to hold instead of selling. There is nothing that spooks markets more than a government's attempts to force the outcome they want instead of the natural equilibrium that would otherwise exist.

This a classic reversal of cause and effect. Stock markets, like all markets, react to news by adjusting prices to make supply and demand match at market clearing prices. Any attempt to prevent that mechanism from operating in the short term leads to disastrous effects in the long run. Markets are effects, not causes, contrary to how many politicians and historians like to interpret the facts.

The more the Chinese government continues to overreact and try controlling outcomes, the more world markets will overreact as a result. Such impacts will be much worse than letting markets find equilibrium. Just witness commodity price swings in reaction to Chinese intervention and you can get a flavor for how nasty things can get.

I think what is going on in China should be watched much more closely than what is happening in Greece. The stakes and consequences are much greater.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

It's all Greek to me

noreply@blogger.com (Anonymous) — Fri, 03 Jul 2015 16:59:00 +0000

It's been five years since I've written about Greece. Given the market's current infatuation with that subject, it's not a bad time to revisit the topic.

To recap: Greece borrowed a lot of money that it can't currently repay (some would say: can never repay). The Greek government, I've read, pays out three euros for every one they take in as tax, so the basic math is unsustainable.

Five years ago, many thought that Greece defaulting would cause a cataclysmic market failure that would lead to a domino effect in multiple markets. At the time, the recency of the 2008-2009 economic collapse made this possibility seem very real and scary. So, Greece was bailed out and given more time to work out its issues.

Greece has not made much headway. When people get used to not paying taxes, they don't eagerly jump into paying them again. When people get used to receiving government checks, they don't willingly stop cashing them just because they've heard the government doesn't really have the money. That's just how most people function.

When a lender lends money, both the lender and the borrower end up with some responsibility. Greece is clearly responsible for paying off its debts. At the same time, the lenders are responsible for lending money to a country that--without massive structural changes--can't repay those loans. Both Greece and its lender may be indignant, but they've both played a part in creating the current crisis.

The basic math says that Greece can't repay its debts, and that it shouldn't get additional loans until it reasonably commits to specific measures that will enable it to sustainably pay back its loans. The negotiations between Greece and its lenders that keep failing are about which side has to give up the most.

Greece's leader was recently elected to make European lenders carry more of the responsibility. He has carried through on his campaign promises by defaulting on loans in order to force a better deal. He has also put Europe's terms to the test by putting them up for a popular vote on Sunday. I don't think anyone knows the outcome of that vote.

What is different now from five years ago? There's been five years for people to alter contracts, make contingency plans, and just get mentally prepared for Greece to default and to potentially leave the euro currency, European Union or the European Community. The damage now wouldn't be as great as it was five years ago.

The scarier prospect is that Portugal, Spain, Italy, and perhaps even France may end up in the same situation several years from now (they all have structural problems that haven't been fixed, though none as bad as Greece), and that the European currency/Union/Community could completely come apart. This would not be the end of the world, but it would create a lot of inefficiencies that would slow global growth permanently.

There is always some possibility of a greater market contagion. For example, suppose some bank or government or hedge fund owns a LOT of securities that head south if Greece defaults or dumps Europe. Suppose also that they bought those securities with short term debt and they have to sell other securities to repay their loans, thus forcing down the prices of other, non-Greece related securities. Then, those price declines lead other indebted securities holders to have to sell their securities, etc. You get the picture. I don't think that is likely, but market contagions have occurred in the past on just such similar lines.

The more important point of Greece's situation is that governments and people aren't above the laws of economics. They may not like economic laws, but they can no more be avoided than the laws of physics, chemistry, etc.

Governments, just like people, can't spend more money than they take in. 1) Printing money 2) shifting budgets, 3) giving away other people's money doesn't create economic growth. Only production creates growth, and governments aren't productive. The laws of economics will hold up whether anyone likes it or not. The sooner people face that reality, the sooner we can all go back to being productive and growing again.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Tempered expectations

noreply@blogger.com (Anonymous) — Fri, 22 May 2015 02:27:00 +0000

With the stock market hitting new highs, it's a good time to assess what can be expected for market returns going forward.

I think a reasonable range of annualized returns on the S&P 500 over the next 5 years is -7% to 12%, with a mid-point around 3%.

That isn't the high returns that most expect, but that's much more likely what they will get.

That assumes 4% to 8% underlying growth in earnings, 2% dividend yields growing at that same 4-8% growth rate, and price to earnings ratios of 12x to 25x.

If you think double-digit returns are to be expected, then it may be time to temper your expectations.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Over-confidence, social security, bonds--oh my!

noreply@blogger.com (Anonymous) — Fri, 15 May 2015 17:29:00 +0000

Some this and that of interest this week:

Investors are once again over-confident about future returns. 10% returns are expected from those in North America and Europe, and 17% returns from those in South America and South Africa. Such returns are above historic averages, and present high valuations make those outcomes extremely doubtful. Not a good sign to a contrarian.

Academics believe the Social Security Administration has had a systematic bias over the last 15 years, over-stating the financial health of the social security program. In particular, the Social Security Administration has been under-estimating life expediencies. This probably means our benefits will be cut sooner and deeper than many suppose. The problem is unlikely to surface soon, but in 15-25 years will likely become a BIG problem. This will have a significant impact for those with a longer time horizon (younger) and for with plenty of their own savings (yes, we will get punished for being prudent).

Most casual observers of markets focus on the stock market. Not so for professionals, who know that bond markets are bigger and more important than stock markets. So, it may come as a surprise to many that bond markets have experienced a major rout over the last month. The downdraft did not hit junk or municipal bonds worst, but super-safe German and U.S. government bonds. Such big moves in super-secure bonds could potentially be the beginning of investors losing faith in government control of interest rates. There's no reason to buy dried food and run to the fallout shelter, yet, but it bears watching.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Be careful Mr. Hastings

noreply@blogger.com (Anonymous) — Fri, 08 May 2015 16:44:00 +0000

Reed Hastings and Netflix might want to be careful what they wish for.

Reed Hastings is the fabulously successful founder and CEO of Netflix. Netflix has become a dominant force in streaming video sometimes consuming as much as 60% of all Internet traffic in the U.S. at peak times. They have built up a viewership of around 60 million paid subscribers.

I am a big fan and user of Netflix, and have nothing but good things to say about the company as a customer.

I do, however, have major problems with Mr. Hastings' use of the government to force his competitors.

Mr. Hastings has used his bully pulpit as CEO of Netflix to oppose the mergers of Comcast (I and my clients own shares of Comcast) with Time Warner Cable, and now AT&T's proposed merger with DirecTV.

He says that such mergers will harm customers when he is really just feathering his and Netflix's bed.

He doesn't want his competitors charging him higher rates, so he is using the government to do what he can't do in fair competition. This is kind of like asking a referee to change the rules of the game to benefit your team.

Although he has already succeeded in stopping the Comcast and Time Warner Cable merger, and may succeed with the AT&T and DirecTV merger, he may want to consider what will happen when his competitors enlist the government's help to deal with his dominant position.

After all, his complaint against Comcast was that--if the merger went through--they'd have 60% market share in broadband to the home. Perhaps he should consider his own market share and how that may play out over time.

The problem with getting the government to intervene for you is that as your success grows, you too become a target. The same is true in paying protection money to the mafia--it doesn't work in the long run.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Hurray! We're all living longer!

noreply@blogger.com (Anonymous) — Fri, 01 May 2015 17:36:00 +0000

The good news: life expectancy in the U.S. increased by 50% during the 20th century. The bad news: we'll all need a good deal more money during retirement.

The average 65 year old man can expect to live to age 84. The average 65 year old woman: 87. When you think of couple living off their retirement income, there is a 50% chance that one spouse will make it to 95. That means that most people should have 30 years of retirement planned (assuming they retire at age 65--not necessarily a valid assumption).

This makes a focus on long term returns more important than ever. Specifically, the conventional view of retiring with a conservative portfolio of bonds is probably not the way to go. We'll all need the growth and inflation protection of stocks to keep from running out of money.

It also means the most conservative period of investing is probably right before and after retirement. A large setback in your portfolio right before or after retirement may be very difficult to recover from.

That is why many advisers are recommending high stock portfolios in your early years, low stock allocations close to and right after retirement, and than increasing that stock allocation as you get older.

We simply need the growth and inflation protection that only stocks can offer to build wealth early and then sustain us into old age. But it also means you may want to reduce that stock allocation right before and after retirement.

Longer lives are great. But, to make it great, we're going to have to plan for longer lives.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Planning to work in retirement?

noreply@blogger.com (Anonymous) — Fri, 24 Apr 2015 16:50:00 +0000

Two-thirds of workers plan to work in retirement, mostly because they know they haven't saved enough to support their current standard of living. In reality, less than one-quarter of those in retirement work for pay (WSJ, no subscription required).

There is a big disconnect between those who think they can work in retirement and those who actually succeed in doing so.

Why? The three big reasons are health crises, layoffs and ageism. If you are unhealthy, you can't work. If you get fired and can't get a new job, then there's no paycheck. If you are too old to do the job or employers simply won't hire someone your age, then employment won't fill your spending gap.

Working in retirement seems like a great idea. It keeps you mentally and physically active. The evidence shows that those who keep working show less cognitive decline. Most who work in retirement do it because they enjoy it, not because they need it to cover their spending.

The bad news is that retirees find it hard to find employment or remain employed.

The good news is that most retirees learn to get by on a lower standard of living. Studies show that such retirees are happier and less stressed than they expected to be.

If you'd prefer to avoid the "getting by" solution, then the best thing to do is save more for retirement rather than planning to work.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Latest client letter

noreply@blogger.com (Anonymous) — Fri, 17 Apr 2015 18:59:00 +0000

Athena Capital's 1st quarter 2015 client letter is available.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Income inequality...tax inequality

noreply@blogger.com (Anonymous) — Fri, 10 Apr 2015 17:29:00 +0000

Income inequality has become a big political topic recently. Unfortunately, the debate is filled with more emotions than facts.

What shouldn't be surprising is that those who make more also pay more in taxes--a lot more (especially with our progressive tax system).

Anyone who wants to understand the income inequality debate should probably become acquainted with some of the facts about how much tax inequality comes with income inequality.

A recent article in the Wall Street Journal (subscription required), with data from the Tax Policy Center, highlights this issue.

The bottom 20% in the U.S. makes $0 to $24,200 a year, earns 4.5% of total U.S. income, and gets paid 2.2% from income tax.

The next 20% makes $24,200 to $47,300, earning 9.3% of U.S. income, and gets paid 1% from income tax.

The middle 20% makes $47,300 to $79,500 a year, earns 14.8% of total U.S. income and pays 5.9% of total income tax.

The next 20% makes $79,500 to $134,300, earning 20% of total U.S. income and paying 13.4% of total income tax.

The top 20% makes more than $134,300 a year, earns 51.3% of total U.S. income and pays 83.9% of the total income tax.

Breaking down the top 20%, the first 10% (those making the top 80% to 90% of income) makes $134,300 to $180,500, earns 13.1% of U.S. income and pays 10.8% of the income tax.

The next 5% (top 90% to 95%) makes $180,500 to $261,500 a year, earning 9% of all income, and pays 9.1% of the income tax.

The next 4% (top 95% to 99%) makes $261,500 to $615,000, earns 12.1% of all U.S. income, and pays 18.3% of income tax.

The top 1% makes over $615,000, earning 17.1% of all income and paying 45.7% of all income tax.

Yes, income in the U.S. is unequal, and that is because native ability, work ethic, and knowledge are unequal.

It should be acknowledged, too, that those who make so much also pay MUCH more than those who earn less.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How should you pull your money in retirement?

noreply@blogger.com (Anonymous) — Fri, 03 Apr 2015 15:34:00 +0000

How you withdraw your money in retirement can have a big impact on how long your money lasts (or how much you can withdraw each year).

The conventional wisdom espoused by Vanguard, Fidelity, etc. is to pull the money from your taxable account first, then from tax deferred accounts (Roth IRA, traditional IRA).

Unfortunately, things aren't that simple. By withdrawing your money in a more tax-efficient manner, the money can last 4, 5, even 6 years longer (or last the same amount of time with higher withdrawals).

This issue has been highlighted by many, but in particular in a recent article in the Financial Analysts Journal (subscription required).

Instead of pulling all your money from your taxable account first and then moving on to tax-deferred accounts after the taxable account is depleted, the money will last longer if you withdraw money from a traditional IRA up to the 15% tax bracket limit, then pull the rest from you taxable account each year.

Even more time can be gained by transferring dollars from your tax deferred account (traditional IRA) to your Roth IRA each year to generate not too much taxes while also maximizing tax exempt benefits of the Roth IRA.

More time still can be gained by transferring dollars from your tax deferred account to two Roth accounts and then recharacterizing the one that has lower gains (or greater loses) each year back to the tax deferred account.

These strategies are too complex to explain here in detail (I'd be happy to send the article to anyone who requests it, but I must warn you it is a technical and dry academic paper). Also, some of these strategies may seem too complex or troublesome to implement, but that does not diminish their benefits.

It is vitally important to save enough for retirement, but it is also important to consider how you will withdraw your money in retirement to make sure the money serves you best.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Frugality for Fortune

noreply@blogger.com (Anonymous) — Fri, 20 Mar 2015 15:30:00 +0000

When most think of building a fortune, they think of starting a business, taking a big gamble, or getting wildly lucky.

The reality is that building a fortune is easily accessible to anyone willing to live within their means, save diligently, and invest wisely.

The Millionaire Next Door illustrates this point well. So did a recent article in the Wall Street Journal (subscription required).

Ronald Read recently passes away at the age of 92 with $8 million in investments and saving. Did he start a business, take a big gamble or get wildly lucky? Nope.

He "displayed remarkable frugality and patience--which gave him many years of compounded growth." "He lived modestly, working as a maintenance worker and janitor at a J.C. Penney store after a long stint at a service station...."

"Those who knew him talk of how he at times used safety pins to hold his coat together and sometimes parked his 2007 Toyota Yaris far from where he was going to avoid having to feed the parking meter."

This isn't quite the 1% popularly portrayed in the media. This was a normal guy who worked, saved and invested.

"Mr. Read owned at least 95 stocks at the time of his death, many of which he had held for years, if not decades." Not really day trading.

His holdings were "spread across a variety of sectors, including railroads, utility companies, banks, health care, telecom and consumer products. He avoided technology stocks." He invested in things he understood after doing his own research.

"Friends say he typically bought shares of companies he was familiar with and those that paid hefty dividends. When dividend checks came in the mail, he plowed the money back into more shares...."

No six-figure income. No internet start-up. Just living within his means, saving consistently, investing after doing his homework. Being patient, being frugal, thinking long term.

Financial success doesn't require lots of luck or risk taking. Just simple strategies implemented consistently.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Net neutrality and Title II regulation of broadband

noreply@blogger.com (Anonymous) — Fri, 27 Feb 2015 18:49:00 +0000

The Federal Communications Commission (FCC) voted 3-2 to regulate broadband internet yesterday (under Title II of the Communications Act of 1934). This move is being heralded as a big victory for the little guy. In reality, it is the victory of those with more political influence over those with less. In contrast to the way it is being portrayed, I see this as a loss for the little guy.

(Full disclosure: I and my clients own shares in companies that provide broadband internet).

Title II regulation gives the government sweeping powers to regulate broadband internet, which is the way people access the internet through their cable, copper or wireless connection. This is being portrayed as a benefit to consumers: so that there is no interference between the providers of online content and the users who want to see that content (a concept frequently referred to as net neutrality).

The fear has been that cable, DSL and cellphone companies would throttle and restrict access to the web in order to extract "a pound of flesh" from users and content providers. In this view, access to the internet is a public good granted by the government through franchise rights and wireless spectrum. As such, the government must intervene to protect users and content providers from mean-spirited content distributors.

Content distributors have a right to their work and investment just as much as content producers and users. Buying cable franchises (that aren't exclusive) and spectrum doesn't bring broadband to our doors. It takes massive investment in cables, people, equipment, digging, stringing poles, writing software, etc.). The stock and bond holders of those companies (which are mostly little guys) deserve a return on their investment just like everyone else. They should be able to determine how their assets are utilized as long as they aren't violating anyone else's rights. So far, they haven't.

It is not content users that are crying foul and asking for government interference (except, perhaps, those selling pirated movies that don't want to have to pay for their massive bandwidth usage). Instead it is content providers who don't want to have to pay to access broadband distribution. It is Netflix and other broadband hogs which sometimes occupy 60% of broadband at a time that are crying foul and want government intervention, not users on the whole.

This is a fight between big guys and big guys, not little guys, and the ones who can get the government on their side wins (the profits margins of content providers asking for Title II regulation are much higher than the content distributors, perhaps this is why they can gain more influence).

And, here, we can go back to a historical analog. The Federal Trade Commission (FTC) was created 101 years ago, partly to regulate railroads who were being accused of charging unfair rates. The complaints came mostly from businesses that didn't want to have to pay so much for railroad service, not from consumers (sound familiar).

The result was a labyrinthine regulatory structure that strangled the railroad industry in the United States for over 60 years. When railroads found it almost impossible to charge rates to justify investment in their railroad systems, the systems went into chronic disrepair. The railroad industry limped along for years under-investing in their tracks, engines and freight cars, thus killing passenger travel (which survives today only with government subsidies and regulation that forces railroad freight companies to let passenger trains use their track). Only recently, since the Staggers Act of 1980, has the railroad industry recovered, and one of the biggest reasons is that they can charge fees that justify investment.

Turning back to broadband, I believe the same thing will happen. At first, the regulation will be used as a light touch to nudge broadband providers to be "more fair" to users who complain loudest, or at least who have the most political influence. Over time, though, it will throttle investment in the industry, hurting the very content providers and users it is supposed to help (every phone and cable company I follow has said they will reduce their investment in broadband distribution if they can't generate sufficient return).

To raise capital and build an industry, businesses need to be able to make money. As long as no one's rights are being violated, the market best decides where assets should go and at what prices. In the absence of that productive situation, investment and progress will stagnate. In the long run, the little guy will be hurt most (but he won't realize this, because he'll never know what he could have had).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The big benefits of boosting your savings--even by small amounts!

noreply@blogger.com (Anonymous) — Fri, 20 Feb 2015 17:33:00 +0000

Everyone knows they need to save more for retirement. But most don't because they think they can't afford it.

The reality is that even small boosts in savings can have large impacts over the fullness of time.

A Wall Street Journal article and a report by Fidelity Investments makes this point clear: even boosting your savings by 1% will have a meaningful impact on your retirement income.

It's more fun to focus on getting higher returns, but the most potent force in anyone's retirement plan is their own willingness to save.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Stock market up 60% since 2007 peak

noreply@blogger.com (Anonymous) — Fri, 13 Feb 2015 17:22:00 +0000

Building wealth over time requires the fortitude to stick to your plan.

Colorado Spring's own Allan Roth made this point nicely in a recent Wall Street Journal article. His basic point is that even if you had been unlucky enough to buy at the stock market peak of 2007, your wealth would still be 60% higher now if you had stuck with it.

The problem is that so few stick with it.

Yes, the market went down over 50% from that 2007 peak. But, those losses were temporary. The U.S. businesses underlying the market rebounded and are doing well.

Nothing in life is free. The price of generating good long term investment returns is having the courage to stick to a good plan.

That means you have to be able to ride the market up and down without getting so that scared you sell at the bottom or so euphoric that you don't adjust your portfolio at the top.

Becoming wealthy is not rocket science. Spend 80% of you income, invest the other 20% in the highest performing asset class over time--stocks--and have the intestinal fortitude to stick to that plan over time.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Adapting as an investor

noreply@blogger.com (Anonymous) — Fri, 30 Jan 2015 18:12:00 +0000

I remember well how much I loved to program computers. As a cadet at the Air Force Academy taking lots of astronautical engineering courses, I had to do a lot of computer programming. These projects were very complex, requiring precise calculations (to 8 significant digits) of the velocity and position of satellites, antenna pointing angles, terrestrial positions, etc. They were done on 286 Zenith computers without hard-drives, so some programs could rake as long as 24 hours to run.

I love the process, though. No matter how difficult the problem, I could always solve it. It was like a big puzzle: figure out what part of the program went askew, make changes to that one part and test it repeatedly, and keep doing that until you got it right. Then move on to the next part and repeat until you got it all solved. My classmates were frequently amazed that I would have the projects done weeks in advance. I just loved the process.

Investing doesn't work so easily. The difference is the noisy feedback loop. Orbital mechanics is like clockwork. You know the starting situation, you know the physics, so when something goes off track it is easy to see that it's wrong, and it is easy to figure out where to jump in and fix it.

With investing, the data is much more noisy. By noisy, I mean there are lots of false signals that things are going well when they won't in the long run, and that they are going poorly when they will go well in the long run.

In other words, when you make a change to your investing process, it can take years, perhaps even decades to see if you really have it right. That's not the happy feedback loop of computer programming with instant and clear feedback.

But, that is the nature of the beast. When you see your results aren't doing what you expect, you need to make changes to adapt, and then wait another couple of years to see how that worked.

The process is the same as it is with computer programming, but the signal is very noisy, meaning you don't know if things have actually gone wrong or not, and the feedback loop takes years instead of minutes to complete.

I have to admit, I still love to solve the puzzle. Just like with computer programming, I'm as committed and convinced that I can get it right.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The Lessons Of Oil

noreply@blogger.com (Anonymous) — Fri, 23 Jan 2015 18:07:00 +0000

Not many outside the investing business have heard of Howard Marks. He is a very successful money manager at Oaktree Capital with a reputation built mostly around distressed debt investing.

He also writes very well and publishes Memos that I eagerly read.

His latest is on the fall in the price of oil and what lessons we can learn from it.

I highly recommend it to anyone who wants clear thinking on the subject.

If you don't want to read it, here are some quick highlights:

"...what 'everyone knows' is usually unhelpful at best and wrong at worst."

"Not only did the investing herd have the outlook for rates all wrong, but was uniformly inquiring about the wrong thing."

"Asset prices are often set to allow for the risks people are aware of. It's the ones they haven't thought of that can knock the market for a loop."

"Forecasters usually stick too close to the current level, and on those rare occasions when they call for change, they often underestimate the potential magnitude."

"This is an example of how hard it can be to appropriately factor all of the relevant considerations into complex real-world analysis."

"Most people easily grasp the immediate impact of developments, but few understand the 'second-order' consequences...as well as the third and fourth."

"...it's hard for most people to understand the self-correcting aspects of economic events."

"If you think markets are logical and investors are objective and unemotional, you're in for a lot of surprises."

"A well-known quote from economist Rudiger Dornbusch goes as follows: 'In economics things take longer to happen than you think they will, and then they happen faster than you thought they could.'"

"The key lesson here may be that cartels and other anti-market mechanisms can't hold forever."

"...it's hard to analytically put a price on an asset that doesn't produce income."

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

There's no substitute for hard work

noreply@blogger.com (Anonymous) — Fri, 16 Jan 2015 22:07:00 +0000

When it comes to improving at anything, there is just no substitute for good, old fashioned hard work.

I've been reminded of this lately as I build out my circles of competence through intensive research.

When I started out investing in 1996, I was still working full-time as a pilot in the Air Force and getting my MBA in night school. My research then was heavily focused on quantitative analysis, and my understanding of the qualitative side of investing was slim to none.

As I gained more experience, I also did a lot more research into the qualitative side of research starting in 1998. At that point, my investing results were about as good as the market's, which isn't outstanding, but is quite an accomplishment as a value investor at the end of one of the biggest bull markets in history.

As the dot-com bubble peaked and then exploded from 1999 to 2000, I found myself holding several very under-valued, small brick and mortar companies. Those companies' out-performance was just incredible over the following years.

That was around the time I got out of the Air Force in late 2001 and started as an investing professional. At that point, I had a lot more time to do qualitative research, but my quantitative method was still working so well that I wasn't quite doing the best research I could. Because the quantitative method looked so easy at the time, I didn't see any good reason to dramatically change. If it ain't broke, don't fix it.

I found myself beating the market by over 8% annualized from 1995-2002 (71% more, cumulatively, than market returns) and 1995-2003 (85% more, cumulatively, than market returns). It was like shooting fish in a barrel. Because I was having a harder time finding my quantitative darlings in 2004, I was sitting in a lot of cash, but my returns were still beating the market by over 6.5% annualized over 9 years (76% more, cumulatively, than market returns).

What I didn't realize at the time was that value investing was having it's best run ever from 2000-2005. The quantitative method that had served me so well was about to sunset.

That was when I started my own value investing shop. Bad timing.

I knew the quantitative side wasn't working like it had, but I didn't fully grasp why. As time went by, I worked harder and harder to master the qualitative side of investing, but I wasn't quite getting there because I was trying to do it without really working with as much focus as I needed to.

After beating the market by a small margin from 2005 to 2008, I started to realize I needed a more fundamental make-over of my investment research. Instead of quantitative screens, I needed to figure out which companies I wanted to own, qualitatively, and then figure out what they were worth.

I have been on that path ever since, and I've been working longer and longer hours at it. Getting to know one company, and all its competitors, all the other companies in the industry, and the company's suppliers and buyers, the substitute products that may kill the business, and so on takes many hours of reading, re-reading, learning, researching, analyzing, etc.

When it comes time to improve, nothing really beats hard work. Hard work isn't fun, per se, but it does produce great value. I'm ashamed to say that it took me so long to find and pursue this path, but now that I'm on it, I'm not sure why I thought any other method would work.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.