Chris G. Allen

Tatters and Fringe

noreply@blogger.com (Chris G. Allen) — Tue, 17 Apr 2012 11:58:00 +0000

When you cannot tell the difference between the carpet and the carpet fringe, the carpet is in tatters. I used to describe the process of asset allocation as "managing the edges", the fringe, if you will. Adding value through small adjustments to the portfolio kept costs low, minimized tax erosion, and gave the largest allocations time to perform. While the board debated between strategies, it was not realistic to choose only growth, or only value; only equity or debt; only public or only private, only alternative or traditional managers. Ranges for each source of return were set and then we "managed the edges" to achieve the best relative return possible.

The great assumption was that the strategies were uncorrelated, and would not all move in the same direction at once. If they did it was called an anomaly and discarded as an unreliable data point. Its remarkable how many investment advisors still subscribe to this. In fact, investment advisors who don't are regarded as "the Fringe".

Today managing the edges is not enough. There are no edges to manage, and its time to reweave the carpet.

A Must Read

noreply@blogger.com (Chris G. Allen) — Wed, 11 Apr 2012 05:22:00 +0000

http://ineteconomics.org/conference/berlin/scenarios-recovery-how-write-down-debts-and-restructure-financial-system

Michael Hudson gives us a terrific history lesson and view into our future in this analysis. I urge you to read this and think beyond relative returns and spreads, beyond probability theory, and consider the writing on the wall.

Here's a notable excerpt:

In the Great Depression, high finance and other investors lost fortunes (paper fortunes, to be sure) as stock market and real estate prices plunged and debtors defaulted. But there was a silver lining. The liquidations of wealth wiped out debts. This freed the economy from interest and principal obligations, enabling recovery to take place. But unlike the case in the 1930s, today’s 1% are unwilling to absorb a loss. They have used government agencies originally created to regulate high finance to enforce harsh creditor terms and make the economy’s nonfinancial sectors absorb the losses, partly by foreclosure and partly by taking bad debts onto the government’s balance sheet (“taxpayers”). As a bonus, banks (most notoriously Bank of America) and A.I.G. received long-term tax credits that render them largely tax-free institutions.

Traffick, inc - An awesome awareness project

noreply@blogger.com (Chris G. Allen) — Fri, 20 Jan 2012 05:47:00 +0000

Awareness Works

noreply@blogger.com (Chris G. Allen) — Fri, 20 Jan 2012 03:58:00 +0000

Over 300 children are sold for sex in metro-Atlanta for an estimated revenue of $100,000 per day, $3 million per month, $36 million per year. If we can bring ourselves to talk about it, it will go away. Talking about it is like turning lights on. If you turn on the lights, the cockroaches run, and so do criminals. Help me turn on the lights -

Traffick, Inc. Trailer from Brian Davis on Vimeo.

For more information please visit www.meetjustice.org www.traffickinc.com www.innocenceatlanta.com

I am listening to unspoken words I do not want to hear

noreply@blogger.com (Chris G. Allen) — Sat, 07 Jan 2012 18:34:00 +0000

Its never easy to be honest with ourselves when confronting the truth. We rationalize, we deny, we look for our happy place, that fantasy based environment called Mayberry or Lake Wobegone. After all, its not really our problem, is it? We escape to our drug of choice, some form of consumption; be it drugs, food or alcohol, or worse, credit. That escape has now become our norm, where it no longer is an escape, but a prison, where our future seems forever limited.

Many of us have recognized this trap for what it is, and are looking for a way out. Some will blame those who have, others will blame those who have not. Some will continue to focus on their personal Mayberry and like ostriches, choose to avoid the truth. The Matrix, if you will.

Like Morpheus, I am choosing to pull my head out of the sand, and unfortunately, I am listening to unspoken words I do not want to hear.

What I mean may be best understood by asking the right questions.

1) Is it merely coincidence that the head of Wikileaks and the head of the IMF were accused of essentially the same crime?

2) Why is it that the media can find every dirty secret about Presidential wannabee's but they seem to know nothing about the dirty secrets of Wall Street?

3) Since 99% of the US equity markets are owned by pension funds, and the 1% makes 100% of the decisions for those funds, how is it that the 1% is so offended by the rising of #occupy?

4) Why is there a shortage of storage vaults for physical gold?

5) Why is it that gold leasing has gone from a positive to a negative carry?

6) Why isn't the Defensive Authorization Bill of 2012 troubling every American? In the name of anti-terrorism, American citizens can now be held indefinitely without trial. Yes, this is the law of our land.

7) The European banking system has 40 Trillion of assets, 25% dollar based. They can't create dollars so how will they pay a return in dollars? Best guess is to borrow them from the US Fed. How do they do that? They borrow our gold, sell it forward 3 years out, and hope they can settle with paper money. If the buyers want physical gold, too bad. In the meantime, dollars have been generated to pay current obligations.

In the words of the greatest technology investor (Roger McNamee) in our nation's history:

“The country has been stolen,” says McNamee bluntly. “I expect to be involved in getting it back for the rest of my life.” http://tinyurl.com/7x986ce

Roger is right. The country has been stolen. Lets get it back. Start listening to the unspoken words and prepare yourself.

Real Power, Real Change, $2 a month

noreply@blogger.com (Chris G. Allen) — Fri, 24 Jun 2011 16:16:00 +0000

We have the power to solve our problems, we have the power to change our world. The power comes from each of us, individually, making the slightest effort to support needed change. This is real power. Individuals collectively making tiny efforts. If enough people will make a tiny effort together, real change is almost guaranteed. Here’s a change we need:

We need to abolish sex trafficking in children now.

How is this a tiny effort? We know that as communities become aware of crimes like this, the criminals leave. Awareness works. Awareness is a tiny effort. The internet makes it easy. Promoting awareness is something everyone can afford. It doesn’t take much if everyone chips in, and its really powerful when everyone does.

Please join me in sending $2 a month to MeetJustice.org. MeetJustice is a leading awareness agency fighting human trafficking. Established in 2005 to promote social justice, it launched MeetJustice Medical and INnocence Atlanta to build awareness of the problem and support the rescue and restoration needs of victims.

$2 a month. Spare change for Real Change. Check out www.meetjustice.org.

noreply@blogger.com (Chris G. Allen) — Fri, 24 Jun 2011 16:16:00 +0000

213 Years Ago Wordsworth Was Right

noreply@blogger.com (Chris G. Allen) — Wed, 20 Apr 2011 04:07:00 +0000

Turn the tables in your life, go outside.

THE TABLES TURNED

AN EVENING SCENE ON THE SAME SUBJECT

UP! up! my Friend, and quit your books;

Or surely you'll grow double:

Up! up! my Friend, and clear your looks;

Why all this toil and trouble?

The sun, above the mountain's head,

A freshening lustre mellow

Through all the long green fields has spread,

His first sweet evening yellow.

Books! 'tis a dull and endless strife:

Come, hear the woodland linnet,

How sweet his music! on my life,

There's more of wisdom in it.

And hark! how blithe the throstle sings!

He, too, is no mean preacher:

Come forth into the light of things,

Let Nature be your teacher.

She has a world of ready wealth,

Our minds and hearts to bless--

Spontaneous wisdom breathed by health,

Truth breathed by cheerfulness.

One impulse from a vernal wood

May teach you more of man,

Of moral evil and of good,

Than all the sages can.

Sweet is the lore which Nature brings;

Our meddling intellect

Mis-shapes the beauteous forms of things:--

We murder to dissect.

Enough of Science and of Art;

Close up those barren leaves;

Come forth, and bring with you a heart

That watches and receives.

1798.

Wordsworth, Dan Pink and Wealth Management

noreply@blogger.com (Chris G. Allen) — Sat, 05 Feb 2011 03:07:00 +0000

the child is the father of the man.

William Wordsworth

Wealthy people often wonder if they give their kids money, do they take away their incentive to be productive? If they don't have to work to make a living, what will prevent them from living a life of leisure, without ambition, without gratefulness, without a sense of value, or worse? Is there a middle ground, where they can share the benefits of wealth without these risks? How can I assure their happiness?

Personally, I don't think money has anything to do with it. Wordsworth is right - the child is the father of the man. The environment within which a child is raised forever affects their perceptions and their sense of self. If Mom or Dad is so busy making money they have no time to connect with their children, then those children will always have difficulty connecting with others. If money is used to incentivize behavior, then the withholding of money will always generate misbehavior. As these behavior modified children age, they sense their disconnection with the less fortunate world and act out in exaggerated ways. Excessive consumption of everything - from possessions to drugs and alcohol, or worse, the consumption of people. Not happy? Change your spouse. Still not happy, buy another house. Still not happy, take drugs, get plastic surgery, remodel, get new friends and travel. They were raised addicted to wealth, and while they may somehow learn to deny themselves, they often don't have an internal gyroscope to keep them balanced and connected to others. Happiness is a symptom, not a result.

We all see the divorces, the lawsuits, the misbehavior within wealthy families, and we all ask how can they behave that way? They have so much, how can this be happening? I'm here to say its not the money. Dan Pink has shown the world in his exceptional book, A Whole New Mind, that in thought based businesses more money does not incentivize better results. If families aren't thought based organizations, what are they?

More or less money is not the issue. What really matters is are you really, honestly, connected to your kids? Do they know that happiness and personal peace are symptoms, not results? Their source is not from within us, but from outside of us. Happiness and peace are not something to own or control. They are un-own-able and uncontrollable. They come to us from doing what is right for others without concern for ourselves. When we attend to life as a matter of the soul, happiness is near. When recognized as symptoms of life properly cared for, we will almost supernaturally provide for our family and others because it feeds us where we need it most. Its a reflection of God in our lives when we deny ourselves and live for others; true happiness finds us in the process.

In my life I have had the benefit of observing from a close and personal position the lives of the most fortunate and the most unfortunate. From billionaires to adolescent victims of human trafficking; from the most powerful to the most insignificant in a variety of cultures; and I have come to this one important conclusion: life is a matter of the soul, when we submerge that fact in being busy, when we allow our conscience to be distracted or mollified, when we disconnect from God’s best advice for how we should live, misfortune is upon us.

Money has nothing to do with it. The child is the father of the man.

A Time for Hating

noreply@blogger.com (Chris G. Allen) — Fri, 12 Nov 2010 13:06:00 +0000

A Poem by Prudence Lloyd Allen , 1959

Forgive and forgive and forgive...............

COWARDS!

Its going to take a lot of concentrated hating

To make this world any good.

You've got to know who your enemies are,

and you've got to HATE them.

You've got to HATE them right out of existence.

You've got to HATE them so hard

You don't even care if you get killed doing it.

These are your enemies:

Stupidity, blindness, and boredom,

Hopelessness, resourcelessness,

Crying and pity;

Idleness, greed, fear,

Laziness, and intimidation;

Possessiveness, jealousy, gossip,

Arrogance, and doubt.

The Art in Smart

noreply@blogger.com (Chris G. Allen) — Mon, 08 Feb 2010 05:35:00 +0000

Today is different. A look at the numbers is not nearly as important as a deep look at the qualitative aspects related to your economic future. The declines faced in American finance and vital American manufacturing as well as small business is a direct result of an over-dependence on “the numbers” and why its time to look at what really makes businesses grow and profit. Qualitative factors that are not readily quantified make all the difference. The art in smart makes sense of the future.

If you are a scientist, people will assume you are smart. If you are an artist, people will assume you know nothing about science and probably are not very smart. This is not true but because science has delivered so much value over the last 50 years it has come to be a common belief. While there are plenty of “starving artists” you don’t hear the term “starving scientist” very often.

For over 50 years quantitative methods have been integral to economic success. Only an idiot would say “Don’t look at the numbers” when making a business decision. Not only look at them; model them, do sensitivity analysis with them, create algorithms and multi-factor models to predict what will happen if things change. Stress test the limits of the models so we can be sure we can achieve our objectives. Our global growth is now facing the “paralysis of analysis” and instinctively we are returning to a more qualitative perspective. And thats a good thing.

Want to destroy American Ideals of Life, Liberty, and the Pursuit of Happiness? Then support the Healthcare bill. Here are ten reasons to scrap it

noreply@blogger.com (Chris G. Allen) — Sun, 10 Jan 2010 18:59:00 +0000

ACCESS will be limited. If the legislation is passed most likely half of cardiologists over 50 will retire. At the same time we add millions to the insurance role we drive doctors out as we turn them into quasi-government employees.
RATIONING who gets care and who doesn’t. Telling Americans they are too old, or too sick to justify the expense to potentially cure them will be a function of 132 different boards depending on the illness. By the way it is already being rationed by the way Medicare dictates what it will pay for. Research carotid artery stents - they are FDA approved, reduce costs and stroke risk dramatically but CMS won't pay for them.
QUALITY will go down. You can’t add insureds, cut budgets, drive out Doctors and expect quality to go up.
COST will go up - 132 new perpetual bureaucracies will have to be paid for.
MORTALITY rates go up - when uninterested parties are responsible for who gets care and who doesn’t mortality rates have to go up.
INNOVATION DECLINES - when there are no incentives to develop new procedures, or those procedures are going to have additional taxes (2.5% is proposed) innovation declines.
NO TORT REFORM - should we be surprised that issues related to malpractice and other legal costs of medicine are not even addressed? Of course not given that approximately 350 members of the house are lawyers and only 14 are doctors.
NO COST IMPACT - the legislation does not bend the cost curve, it should include ways that all agree will reduce costs, not just reallocate them.
INCREASED DEFICITS - Higher costs, reduced innovation, higher mortality all add up to increasing deficits.
LOSS OF INDIVIDUAL RIGHTS - this legislation represents the largest power grab in the history of the nation and it will change the fabric of the country because it touches every single citizen. Its 2,000 page start will turn into 20,000 pages of regulations.

I had lunch with Chris Cates www.catesforcongress.com this past week and suggest you consider supporting his campaign. He is a cardiologist and community leader who has decided the only way to stop the train is to jump on it and try to get to the driver (Congress). I applaud his ambition and hope we can work together to solve our healthcare and economic issues across party lines.

Thanks Anuzis Family for this hilarious PC wish!

noreply@blogger.com (Chris G. Allen) — Thu, 24 Dec 2009 15:40:00 +0000

To All My Democrat Friends:

Please accept with no obligation, implied or explicit, my best wishes for an environmentally conscious, socially responsible, low-stress, non-addictive, gender-neutral celebration of the winter solstice holiday, practiced within the most enjoyable traditions of the religious persuasion of your choice, or secular practices of your choice, with respect for the religious/secular persuasion and/or traditions of others, or their choice not to practice religious or secular traditions at all. I also wish you a fiscally successful, personally fulfilling and medically uncomplicated recognition of the onset of the generally accepted calendar year 2010 , but not without due respect for the calendars of choice of other cultures whose contributions to society have helped make America great. Not to imply that America is necessarily greater than any other country nor the only America in the Western Hemisphere. Also, this wish is made without regard to the race, creed, color, age, physical ability, religious faith or sexual preference of the wishee.

To My Republican Friends:

Merry Christmas and a Happy New Year!

Tarzan, the Digital Jungle, Connecting to Your Future

noreply@blogger.com (Chris G. Allen) — Fri, 16 Oct 2009 13:30:00 +0000

This post will help novices understand why twitter, blogging, and related social media are more than a fad, and you don’t have to be Tarzan to control your jungle.

If you were born before 1974, you may be thinking that the facebook, blogging and twitter phenomena is a passing fad. Think again. Think today. The amazing publication power from blogs, twitter and social media is changing the way we do business. And it should.

How does it work? Its like the jungle. There is more than one Tarzan calling all the elephants to come save his rear however. Flocks of birds may have more to tell us about how this will all work ultimately, but in the interim it is as simple as that. If you are a bird you call and listen all day long about basically the same stuff humans worry about. Where is the best place to eat? Is that place safe or dangerous? Can I meet someone special there? When are we taking off for winter? etc. etc.

The business ramifications for this advent in human behavior are enormous. Think about it. You have a brilliant idea but you have no connections to the people who can use it and would likely pay you handsomely for it. In the past you would search and perhaps never find a connection that could help you. Today you google Blog sites for people that have those interests. You try to add value to them so say they might pay attention to you.

You reach out to that blogger and he agrees with your good idea. And he makes a post about it. He also sends out a message on Twitter (a “Tweet”). Now he is your Tarzan! He has 1,000,000 followers because he is an expert in his field (or he is really popular for other reasons). In any event, your idea just got posted and within a few days 1,000,000 people heard about it. For Free! That kind of marketing would be unaffordable in the past. Better yet, 1% of his followers agreed with him and “re-tweeted” the post, and those 10,000 folks are connected to another million people who also like your idea. This is a whole new level of leapfrog - Its like lightspeed leapfrog(TM)!

How do you reach out to bloggers? Having a blog is a good start. Birds of a feather flock together - Bloggers have a pecking order, they have protocols, quid pro quo’s, and much of it is driven off the value add of what they read. If its drivel its going nowhere fast. So think hard about what you think is valuable and does it add value to others. A core component in any business relationship.

Exponential compounding of relationships is what this is all about. It still is who you know more than what you know, and blogging and twittering is the new connecting force of the human flock. I’m told by MyNetWatchman.com Hackers can hit every single computer in the world in a matter of minutes. Your ability to connect to your future is just a Tarzan tweet away. Who knows, maybe you can be your own Tarzan?

40 Gigabytes and a Stool

noreply@blogger.com (Chris G. Allen) — Thu, 15 Oct 2009 07:20:00 +0000

OMG, the Titanic sank. (See Link to 2004 article Its About Time) Roughly a year ago, thousands of people killed for simple pilot error – no wonder Captains go down with the ship. Some Hedge fund managers would say that is an easier fate than what they face now in terms of high water marks, new regulations, and horrible investor relations. Few people cared five years ago when the alarms were set off, and now that the boat has sank, even fewer care to go back and see who was at fault. In fact, our federal government has chosen to put the very people responsible for the system break-down in charge of the repairs. The stampede for the market’s exit nearly killed the herd. The quantifiable logic that market forces are outside quantifiable boundaries is now plain to see, and no one seems to know what to do. Many lead steers are dead, others penned for slaughter by the Cowboys at the gate. Still others in limbo, watching the herd to determine where their best relative position will be.

The system that created unimaginable wealth is somehow unimaginably gone. Or is it? The basics of life are still produced and available at the supermarket. The electronic means of moving value p.k.a. Cash, is still in tact. As long as you don’t have to use a wheel barrow to carry your bank notes, no one can tell the currency is debased. The issue at hand is connecting the American dream with American reality. The bridge between dream and reality is and always has been the indefatigable American spirit; the ingenuity, the innovation, the entrepreneurial DNA that we inherited from our fore-fathers, who had the gumption to leave the status-quo and opt for self-reliance in the world of the unknown. The equivalent of enormous natural resources available to our fore-fathers is today’s networks and distribution systems of products and information. 40 acres and a mule is now 40 gigabytes and a stool. America will plow forward despite the lack of automatic liquidity from financial markets.

The current reality requires we deal with many significant market imbalances.

Consider the trillion dollar plus imbalances:

1) Supply and Demand for residential real estate (inning 6?)

2) Supply and Demand for commercial real estate (inning 1)

3) Supply and demand for corporate credit facilities (inning 7)

4) Government expenditure and revenue (inning 3)

Consider the $100 billion dollar plus imbalances:

American Automotive manufacturing capacity and demand
City and State government expenditure and revenue
AIG Portfolio assets and liabilities
Major Banks and Insurance company assets and liabilities – Goldman, Morgan, BOA, Merrill,
Foreign governments expenditure and revenue

These imbalances will take years to level out. If real estate pricing follows the example of the 20^th century, land prices paid in the 20’s were not seen again until the 1950’s. For reasons beyond explanation, today’s lenders believe they are better off to foreclose than make loan modifications that will enable productive use of the assets involved. It is tantamount to the debtor’s prison of centuries past when if a man could not pay his debts he would be locked in jail where he could never pay his debts and his family was left completely dependent on society for their support. Lenders will likely sell these properties for far less than the current debtors-in-possession would be willing to pay, expanding the imbalance of supply and demand. My sources indicate that current foreclosure recoveries are roughly 25% of mortgage balances. The truth hurts doesn’t it?

The financial market Tsunami of 2008 resulted from the issues we pointed out in January of 2004 in our pre-blogosphere article “Its about time”. The implosion of the markets resulted from significant irrational pricing of risk. The resulting wave has hit us, and now we are dealing with the ebb tide that is ripping every industry off its moorings. Successfully navigating the ebb tide will require a combination of innovation and careful risk management – not risk avoidance, but management.

What then is an investor to do? Faced with insurmountable declines in all leveraged asset prices, extremely low yields on risk free assets, and doubtful veracity in many financial instruments, is it any wonder so many are holding on to their cash? Is there any asset class that can generate positive returns with any probability?

The short term “wave action” will require steady hands at the helm and active investment management is clearly the favorable style. Serious due diligence combined with sensitive analysis of cash flows and growth opportunities will result in solid investment returns for the informed investor over the next several years. Embracing the notion of 40 gigabytes and a stool will be hard for many, but the future of capital growth is in identifying the beneficiaries of the network age and plying them with capital. The future is about information and its abundance not about legacy businesses of construction, manufacturing, and print media.

5 years ago there was literally no access to the leaders of the venture capital industry, titans who spawned Amazon, Google, and a host of other household names. Today these investment managers are readily available through secondary purchases of their funds from many of the largest portfolios in the world. New capital is generally unavailable for any team desiring to fund innovations and work with entrepreneurs. The hottest investment market is healthcare, where revenues are peaking and profitability is suspect. High returns have always resulted from where investment dollars are least likely to go. Our recommendations in 2004 provided significant returns through the Tsunami of 2008 - proxy graphs are included at the end of the article.

The havoc wreaked in the last year stems from misguided loyalty to pure capitalism, NOT capitalism with moral restraint. It is interesting to note that leading corporations are finding that by aligning their brands with socially important (and popular) causes actually improves employee productivity. The moral values of brands are actually a differentiating factor hence the popularity of being green and sustainable. The rise of Social Capitalism as an industry is remarkable and I think here to stay. As the world discovers Google Chairman Eric Schmidt is correct that “the right way to run human systems is transparency,” invalid and conflicted value propositions will diminish, and our global citizens will be better off. Just a little late, but isn't that human nature?

In the meantime investors need to “pay attention to the tension” and carefully consider the incredible spread of potential outcomes we face. Owning secure knowable cash flows needs to be a priority for every portfolio and balance it with thoughtful research and investment in innovation based businesses. I expect in 2014 you will be very glad you did.

TED Conferences Go Local

noreply@blogger.com (Chris G. Allen) — Tue, 13 Oct 2009 15:07:00 +0000

The TED Conferences that started in 1984 in California have gone global and digital in a major way. For those of you unaware of TED, I encourage you to check out www.ted.com. These “annual conferences in Long Beach and Oxford bring together the world's most fascinating thinkers and doers, who are challenged to give the talk of their lives (in 18 minutes).”

The TED organization is big, but what’s bigger is their following. TED stands for Technology, Entertainment, and Design. Its mission of showcasing “Ideas Worth Spreading” resonates across the globe. In the last year or so they have started to promote shorter local conferences and the response is amazing. These conferences called TEDx “local name” are springing up all over the world and most notably are non-profit, non-commercial events.

I am participating with a group to host a conference in Atlanta called TEDx Peachtree. You can learn all about it at www.tedxpeachtree.com. It takes place December 4 and will be held at SCAD, who has generously offered their event space for the day. The attendance is limited and tickets are available through an application process on the TEDx Peachtree website.

Investing is Personal, Part 2

noreply@blogger.com (Chris G. Allen) — Mon, 28 Sep 2009 17:57:00 +0000

I have had the pleasure of advising a few investors of great significance financially in my life and I told them we would stand on top of our desk and yell if we thought they were making the wrong move. To be honest, I didn’t actually stand on top of my desk and yell, but I did say “I am standing on top of my desk and it’s time to sell” when the market peaked in 2000. The investors were unmoved, comfortable with the status quo in volatility and likely uncomfortable with the taxation they would bear when selling. The rest is history, advice spurned turned into money burned.

But investing is personal and what right do I have to deny them the comfort of their own persuasions? Thus, great investing and their results are a function of debate and a wrestling with facts and myths, perspective and context, history and human behavior. This is why it is important to start with philosophy and policy, our personal, unique astrological-type chart for navigating the investment ocean.

I am struck how little attention is paid to the contrarian view. It is hard to define a top or a bottom price in any asset class, but it is fairly simple to define where money is not available. This provides a starting point for research and the development of investment targets. The next step is to define sustainability of the target. Is it too early to invest? Is it too late? Does the investment provide a reasonable reward for the risk?

One area that is devoid of capital at this time is the Venture industry. The resistance by investors to consider even the most conservative opportunities is striking and will definitely result in well rewarded returns for the shrewd investor. Five years ago the toughest investment to source was exceptional venture investment funds - today you can have your pick.

The most popular investment today is liquidity, leveraged within a leading financial institution. Five years from today, I suggest the most popular investment will be private or semi-private growth companies.

Make sure you spend more time looking out your windshield instead of the rear view mirror - it’s much bigger, and it makes the drive a lot easier!

Investing is personal; investments are scientific: 5 mistakes and how to avoid them

noreply@blogger.com (Chris G. Allen) — Sun, 20 Sep 2009 18:27:00 +0000

Investing is personal—and don’t ever forget it. However scientific your approach to evaluating risk and return, the ultimate decision is a personal one and the results of your investment will have a great deal to do with how well you know yourself. Here are five common personal mistakes to avoid in investing:

Popularity: If an investment idea is popular, it is only natural to want to be a part of it. If it is truly popular, you can be pretty sure it’s overpriced. Market tops are always defined by what is the most popular investment. Think Real Estate in 2007, think internet stocks in 1999. One of my favorite indicators for measuring the most popular industry (and thus a place not to invest) is the most popular job for newly minted MBAs. In 2006 it was Private Equity, in 1999 it was Venture Capital, and so on. It is part of human nature to align with what is popular, and so many of our investment mistakes stem from that

Horizon and Liability Mismatch: John Maynard Keynes said it best: “In the long run, we are all dead.” So many people will say they are in for the long run but they really are not. They are in for the long run as long as the values don’t go down too much, or until they have something else they would rather spend their money on. It is essential to match your horizon to the predictability of the environment you face. Fund your liabilities within that horizon. You may outlive your assets if you expect too much from them. It works both ways—it is easy to be too liquid or too illiquid, and managing the balance is a PERSONAL choice.

Momentum (Greater Fool Theory): People always expect that someone else will always be there to buy what they are holding, thus the crash of 2008 could never happen. Or worse, they expect there will always be debt capacity to carry the investment. 2008 happened, and it happened for all of the reasons mentioned in this post.

Rich means Smart: The New Yorker had a great editorial years ago: “If you’re so smart, why aren’t you rich?” Rich does not mean smart nor does smart mean rich. Some of the greatest success stories of all time die broke—and how many wealthy college professors do you know? Many people like to invest in deals where Mr. Big is leading the charge: ”If he has his money in the deal, it must be good.” Nothing could be further from the truth. Often Mr. Big does have good investments, but his risk profile and appetite may be entirely different than yours and if so, it may cost you dearly.

Strategy Stew:
Averaging Down - how to take a failed fundamental strategy and turn it into a technical “bounce” strategy.
Missing the Boat - diving into a deal without enough due diligence to justify the investment because you are afraid you will miss out on “the deal of a lifetime.” Also calls out a potential horizon/liability mismatch.
High Risk = High Reward - not really, if an investment is very well thought out, the reward comes from recognizing there is much lower risk than the popular uninformed view, which should mean ultra smart low risk = high reward.

I hope you find this helpful!

Seven principles on which to build your investment philosophy

noreply@blogger.com (Chris G. Allen) — Tue, 15 Sep 2009 16:30:00 +0000

These quotes come from the (out of print) book, The Merchant Bankers by Joseph Wechsberg. Fortunately for me I had just read this book when I received the most important interview question of my entire life: “Chris, what would you do with a hundred million dollars?” My response was: “...that is a phenomenal question and speaks directly to my investment philosophy. Why don’t I write that down for you and we can discuss it?” The answer was apparently acceptable because I got the job and my philosophy was soon part of the organization’s policy book. Here are the quotes - they speak for themselves - keep in mind most of these rules have been around for hundreds of years!

“One can’t avoid being wrong once in a while, the important thing is not to be wrong too often.” Jocelyn Hambro (1700s).
“The desire for instant gratification leads to consistent disappointment.” Robert Farrell (late 1900s).
“The banker’s three cardinal qualities: First to be able to put oneself in the situation of the customer, second, courage as one approaches a task, and third, caution to know the extent of the risk.” Hermann Abs (1700s).
“Between success and failure there is a margin no wider than a razor’s edge.” Mattioli (1700s).
“Without complete integrity, there can never be complete confidence.” Rothchild (1700s).
“You can do all the business in the world, if you do it for nothing.” Barings (1800s).
“If I cannot understand something by reading my notes on the subject, I won’t buy it.” Lehman (early 1900s).

Good judgment comes from experience…

noreply@blogger.com (Chris G. Allen) — Tue, 08 Sep 2009 16:49:00 +0000

…and experience comes from bad judgment.

If you are so lucky to not have made some bad judgments along your path, look twice as you move forward. My best senior mentors always told me to look behind the good news—meaning there may be more luck in that success than a solid basis of good judgment and execution. I would add though that people change. They grow and get better at what they do. So many people make a negative judgment about a person or an investment opportunity or an industry and that perspective stays with them. They miss the fact that change is continuous and most people improve with age. I have to admit I passed on David Einhorn when he was 27 and forming green light capital. It wasn’t that he wasn’t smart; it just seemed he was too young and too inexperienced to invest in at the time. Oops. He now has a six billion dollar fund and likely doesn’t remember our conversation.

First Thursday Club

noreply@blogger.com (Chris G. Allen) — Thu, 03 Sep 2009 16:44:00 +0000

Going back to the mid ‘90s when I was responsible for a significant 9-digit private fund, I gathered up many of my favorite investment managers and had them to lunch at Bones, my favorite restaurant here in Atlanta. It occurred on the first Thursday of the month and so it became the “First Thursday” group. The lunches served multiple purposes, but primarily gave me the benefit of a few hundred more years of investment experience and insight every month. It also helped the managers attending get feedback on their ideas as well as to better define key inflection points in the markets. For years we only had buy side attendees, but after a while we invited one institutional sales guy from Merrill Lynch. He is probably the best-read person I have ever known, and I have become quite dependent on his “Cliff’s Notes” over the years.

We don’t have minutes, but in the last few years I have been making notes about what we like and don’t like and it is uncanny how savvy this group has been. I guess that is why we still meet. Many of the managers have retired, but still have their own accounts and like to have a regular forum to check in and talk about the markets and hear the occasional investment pitch.

Now that I am formalizing my investment thinking in this open forum I will be mentioning each month the highlights of First Thursday meetings. I hope you will find it as helpful as I have.

Think Today

noreply@blogger.com (Chris G. Allen) — Mon, 31 Aug 2009 18:15:00 +0000

One of the most common mistakes investors make is living in the past. It is essential to think today, not yesterday and not tomorrow. This is not to say we don’t utilize information from yesterday and make forecasts about tomorrow, but more to point to the internal biases we develop and maintain that interfere with rational evaluation of the current situation, e.g. I can’t sell that stock, it’s has too large a gain, it belonged to my father, it was the company that made our fortune, it’s a part of the family, it’s gone down so much surely it will bounce back, it’s blue chip it must be safe, and so on.

In the meltdown of 2008, a host of wealthy investors lost fortunes in bank stocks. Many of them were holding shares that had resulted from mergers which completely changed the operating metrics of the original holding company. The industry had changed, the management had changed, the risk of the business had changed but the names were not changed, just everything relevant to the value of the business. So why did so many people hold onto these time bombs? I suspect it was not because they were “thinking today”.

Issues of leverage and asset concentration were a major contributor to bank stocks demise. The departure from traditional banking practices and entry into derivatives and other extremely complex securities compounded those issues. What people remembered or thought they owned was in fact not at all what they owned—they weren’t thinking today, but thinking yesterday.

Thinking today does not mean adopting a trading mentality but rather recognizing the moment, the situation you are in, and its context. The people who hold concentrated positions are making a decision of great importance whether or not they choose to think about it today. Holders of concentrated positions are making a probability assessment of market value. They also usually underestimate the consequences of their assessment. In Atlanta I know the failure or near failure of two different companies cost our community well over a billion dollars in market value. The true consequences of the losses are still vastly misunderstood—both by the losers and their observers. Those that do understand are mad as hornets about the recent admissions by Hank Paulsen—but that’s a blog for another day.

The Low-basis Stock Dilemma

noreply@blogger.com (Chris G. Allen) — Tue, 25 Aug 2009 14:05:00 +0000

The dilemma we face as taxable investors has big horns: if we hold on to our appreciated assets long enough we can die with them and create a new cost basis for our heirs, bypassing capital gains taxes. This horn leads investors to hold on to companies earning subpar returns holding out for the hope “good times” will return and justify the hold by avoiding tax erosion. Should we sell, pay taxes and then redeploy in an asset that does not meet our objectives we are stuck again and with 20 to 30 percent less? This issue drove many investors to invest in absolute return strategies aiming for minimal volatility and 1% monthly returns (which rapidly became 0.50% monthly returns). Taxes are maximized but downside seemed minimal which is more important - sort of like the devil you know is better than the one you don’t.

That didn’t work well either, as of last year investors that capitulated with this strategy in the last 24 months lost 50 to 80 percent of their capital and likely are hung with non-performing investments in long term lock-ups.

So what does a shrewd investor do? Structuring your holdings in partnerships can provide a great solution. Following estate planners’ main theme “live well and die poor,” developing investment partnerships between different family generations can allow for holdings to be managed for maximum tax efficiency and ultimately better returns.

Don’t allow tax consequences to drive your investment decision process, but it's OK for them to sit in the front seat with the business merits driving the deal.