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Antifragile. The Book.

Posted: September 21st, 2013, by

There are maybe two people who have figured out the direction of our global economy.  One is George Gilder, who wrote the groundbreaking “Wealth and Poverty” some thirty years ago, and has recently published his opus “Knowledge and Power”.  His newest book will be the subject of a future post, once I’ve finished it.  But I’ll tantalize you with his thesis that wealth is not measured in physical assets or even in currency, but solely in knowledge.

The other guru I follow is Nassim Nicholas Taleb, a truly iconoclastic thinker.  You’ll want to read his trilogy on the nature of our dysfunctional economic order.  The first book was “Fooled by Randomness”, which was followed by “The Black Swan” and most recently “Antifragile:  Things that gain from Disorder”

Where to start?  His targets are all over the place, ranging from the Federal Reserve Governors who are perpetually tinkering with the market in order to bail out our too big to fail governments and banks, all the way down to the soccer moms and their control over their children’s “play dates” who insulate their children from having any agency over their own lives.

And it’s not as if this should come as a complete shock to any of us.  We got a preview of this philosophy early on when the forest service finally acknowledged the role of forest fires as being an essential element in forest ecology.  When we worked to extinguish all forest fires as a matter of policy, we overlooked the important role that these fires played in clearing out vegetation that threatened the overall health of the forest.

Then, when massive fires such as the fire that devastated Yellowstone in the eighties raged uncontrolled, they were fueled in part by the lush vegetation that had not been allowed to be burned out over the course of naturally occurring fires.

I can’t think of a better metaphor for the national and global economies.  Both the Euro zone countries and the U.S. are essentially following the Japanese Model adopted after the twin crash of the equity and real estate markets in Japan in 1989.  The adaptive philosophy was to protect companies rather than protect competition.  This was the birth of the Zombie Banks that were kept on life support despite their portfolio of non performing loans, and the walking dead of the corporations that would not be allowed the simple dignity of dying a natural death.

And what is there to show for it now that we are deep into the third decade of this “fragilista” policy?   The Nikei average is just under 15,000, despite its flirting with a high of 40,000 at the peak of the bubble.  It was once called the lost decade…but it’s been going on for 24 years…and still counting.

You’d think that this dismal performance would have scared the other market economies straight.  To the contrary, this template of free money, financial repression on savers, and life support for moribund governments, companies and banks is now a global prescription for economic idiocy.

There’s so much more to Taleb’s book.  Like how having your own personal physician is a threat to your personal health.

How do I know this guy is smart?  Easy…his beliefs and prejudices so closely align with my own.

The Other Three Legged Stool

Posted: September 7th, 2013, by

In our last post we revisited the time honored tradition of sourcing your retirement income from three solid streams of funding.

Today we look at the non financial aspect of your lifetime goals…your physical well being, and how it too can be strengthened by three distinct disciplines.

The goal, simply put, is to tightly compress your morbidity.  Which means that you want to be high functioning for as long as you can, rather than endure the steady decay of your physical functions and living a life constricted by lack of mobility and clear thinking.

And it all comes back to obesity, the wellspring of most of the illnesses that plague our later years…including cardio-vascular disease and dementia.

You’ve heard this before, of course.  The secret to taking the excess weight off…and keeping it off..is a function of both diet and exercise.  Which is only two thirds correct.  The missing leg of the triad is nutritional supplementation.

It’s been twenty years since I launched one of my independent businesses, dealing with a unique nutritional supplement that greatly facilitates weight loss, while also promoting a greatly improved lipid panel (lowering cholesterol, triglycerides and glucose).

This was the missing piece of the puzzle for me, and millions of others.  Think of your many friends as well as your own personal struggle with weight management.  Think of the hours you committed to being a gym rat, trying to sweat it off through strength training and cardio workouts.

And then think about all the fad diets you’ve endured, when exercise alone was not enough to bring about the needed results.  There is a catch all term for these diets–which work very well right up to the point when they not only do not work–but work in reverse.  The Yo-Yo diet phenomenon.

What is needed is the full three pronged approach.  A sensible diet, sourced primarily from home based food preparation (more on that later), reinforced by the unique BiosLife Slim supplement, which helps to create a sense of satiety and fullness to help curb your appetite, and with the final reinforcement of a daily regime of physical activity.

Notice I do not use the word exercise, which is such a turnoff, and which implies some kind of ascetic devotion to painful exertion.  In my case, it involves a brisk 45 minute walk each morning before breakfast, and two afternoons per week at the fitness center for cardio, strength training and my Yoga class, and topped off by six sets of singles tennis and three sets of doubles tennis each week.

It’s part of my routine now, and I make sure to pencil it in to my work schedule so that it is as important as any other business appointment.

Speaking of which…it’s the business environment that creates the greatest hazard to weight maintenance.  Business means business lunches and evening entertainment of clients, which is also a food based activity.

And the dirty secret that nobody wants to face…is that restaurant food is much too rich in calories, fat, sugar and salt.

Show me anyone who eats out on an expense account…and I’ll show you someone who is desperately struggling with a weight problem.

The Three Legged Stool: Version 2.0

Posted: August 31st, 2013, by

Here’s an ancient rhubarb that we once learned about our ultimate retirement funding.

The three legged stool.

For those of you too young to remember, the three legs of the stool were:

a.  Social Security

b.  Your defined benefit pension payment, from your thirty plus years of employment with the same benevolent employer.

c  Your personal Savings.

The idea was simplicity itself.  You never had to worry about Social Security or your pension.  The money was taken out upstream, as a payroll deduction…or perhaps as a hidden benefit.   There was absolutely no effort on your part.

All you had to do was to take care of the third leg…the savings component.  Maybe by a payroll deduction into a passbook savings account that paid 5%…or perhaps a one to five year maturity certificate of deposit that paid 8%.

All of these tools were once at our disposal…back in the day.

Fast forward to the present.

1.  There is still something called Social Security.  But look closely, and you can see how it is being hollowed out from within, due to a very sneaky clawback known as means testing.  It started when legislation was passed that cast a wide net of taxation over social security income, despite the oft repeated promise that this income would never be taxable, since it was all taken in the form of non-deductible, after tax confiscations….uh, I mean contributions.

Not only is there a two tiered tax that brings in anywhere from 50% to 85% of your social security income as regular taxed income, but the real genius behind this tax is that it is not indexed for inflation, with the effect that it will one day encompass the vast majority of working class and middle class retirees.

The only sure fire way to avoid the tax is to have absolutely no other source of income…and that is shaky ground indeed.

As to the second leg–the defined benefit pension plan, well yes..maybe…if you are a member of congress perhaps, as they have one of the juiciest such plans every devised.

But for the rest of us poor working stiffs, every corporation has now perfected the shuffle, whereby they have sloughed off the responsibility for employee guaranteed retirement income (and medical care, for that matter, as well).  In it’s place is the pathetic 401-K, which was designed primarily to enrich the toll gate collectors of the retirement investment complex.  This inferior vehicle is larded with poor account selections, excessive fees, and complacent account holders who don’t have even a clue.

Be sure to catch Scott Burn’s syndicated column on this very topic, that was published this past week.  As always , he is right on the money.  These plans are so corrupted that you would often be better off without an employer match and saving by yourself in a plan that offered ultra low fee index exchange traded funds.

The third leg has always been there, the idea of personal savings.  But our culture is enraptured with consumption, and not savings. Even with both parents working, the idea of savings is defeated by the necessity just to tread water to keep from drowning in debt.

Try sitting on such a stool with one shaky leg…and you can begin to understand the magnitude of the problem we face.

This is ugly as it stands now…and it stands to get a good deal worse.

 

 

 

 

 

Poor Charlie’s Almanack

Posted: August 10th, 2013, by

It seems that my reading queue tends to run in cycles.

For fiction, I’m now deep into the works of Larry McMurtry (Lonesome Dove…and many, many others).  No one else seems to have such a deft touch in describing Texas, in both historic and contemporary terms.

And for non fiction, I’ve taken on the task of mining all that has ever been written by or about Warren Buffett.  After all, if you’ve decided to model behavior, who else to learn from than the most successful investor of all times?

The crucial lessons learned are to limit your core investments to areas that you understand, and then to double down once you’ve committed yourself.  Having fewer eggs in the basket makes sense if you’ve taken the time to do your selection right in the first place.

The other major lesson has to do with investor psychology.  It’s so important not to get caught up in the herd like stampedes that typify wildly fluctuating market valuations.  The point is made time after time.  It’s not so much intellect as temperment that separates winners from losers in the marketplace.

And of course, it’s not possible to read about Buffett’s accomplishments without being directed time and again to his sidekick of nearly forty years, Charlie Munger.

Buffett and Munger were introduced by mutual friends, and they each found someone who could be considered a valued confidant and partner.  They differ widely in their political affiliations, but they have remarkable synergy in how they evaluate investment opportunities.

It’s easy to be overshadowed by a towering figure like Buffett, but it’s worth your time to plow through the coffee table sized mega book that is captioned in the title of this piece.  It’s a vast compendium of Munger’s writing and speaking on a wide variety of topics, surprisingly centered mostly on psychology.

Charlie Munger is a true polymath, and his interest are nothing if not wide ranging.  He is equally at home in scolding the accounting profession (for their laxity in caving in to their corporate clients who did not wish to expense their stock option compensation), and then in the next breath he is savaging academia for erecting Chinese walls between their many disciplines.

If one had to choose the glue that binds Munger to Buffett it would be their absolute faith in logic and their resolute determination to never be led by majority opinion.  They point is made several times.  You are never right because others agree with you…you are right only because that’s what the facts and the evidence confirm in weighing your beliefs and actions.

Munger turns 90 on January 1st, 2014.  There is not the least hint of his slowing down.  He maintains his base in southern California, and has never felt he had to be domiciled in Omaha in order to have his views represented to his partner.

Of all his contributions to the partnership, this one sums it up best:  It’s better to pay a fair price for a very good company, than to pay a good price for a fair company.

 

Detroit’s Bankruptcy: The Harvest from the Excess of the New Deal

Posted: July 27th, 2013, by

I’ve long touted the benefits of the streaming Netflix service…all those online movies and documentaries.  One you will want to add to your list is “Detroipia” a clear eyed look at the decline and fall of one of America’s formerly great cities.

I’ve been sifting through all the editorials written about the recent bankrupcty filing, and so far the only one who has come close to pinpointing the blame is Charles Krauthammer’s July 26th syndicated column (Detroit was doomed by basics of economics).

I’m not anywhere near the pundit that Krauthammer is, but I would like to expand on his diagnosis.  Which would take us back to 1935 and the passage of the Wagner Act, which tilted the balance of power away from corporate ownership and management to unionized labor.

This unleashed a massive social experiment…and the laboratory was the city of Detroit.  You might say that the experiment was a success…right up to the point that the patient died.

The underlying premise of this adventure in economics was to suspend the supply and demand curve for labor, and put in its place a command and control model that allocated a price for labor that was several multiples of what the clearing price of labor was worth.

Put more simply, the army of unskilled labor that enrolled in the Auto unions was being compensated well into six figure incomes, when all benefits and post retirement payouts where included.  The idea was to find out if all the increased costs of labor could be tacked on to the cost of American autos and passed on to the consumer.

But there was no compulsion for the consumer to pay the bloated prices for inferior cars.  The only compulsion was to pay a grossly oversized benefit to the members of the union.

When the Japanese, German, and Korean automakers decided to carve out a portion of our domestic market, they did so by building plants in the south where right to work legislation ensured that labor would be priced at market rates.

In our family, our two cars were assembled in Kentucky and Alabama…from Foreign badged cars.  It never occurred to us that we were under any obligation to be a party to the ludicrous economics of Detroit.

Worse…once the municipal workers in Detroit had the example of the power and gains from the autoworkers union, they extracted similar benefits from the city…and we know that governments have no spine when it comes to dealing with Unions.  They simply pass on the increased cost to the besieged taxpayers.

Once it was clear that taxes would continue to rise, while basic protections such as police and fire services would diminish, the owners voted with their feet.  First by abandoning Detroit, and eventually the entire upper Midwest rust belt area suffering under the same constraints.

The good news is that this should be a wake-up call for all government entities that cannot simply print money to meet their obligations.

The cramdown that emerges will shrink benefits to current and retired workers, and force haircuts on the bond holders.

This will hurt…then again…the best way to get a mule’s attention is to smack it upside its head with a 2 by 4.  Works every time.

 

Learning from your Mentor’s Mentors

Posted: July 13th, 2013, by

I make it a point to read everything I can find that is written by and about Warren Buffett.

The purpose is not to amass a $50 billion net worth as he did.  His talent is rare and unique.  But there is no harm in emulating what he accomplished on a more modest scale.

What I admire most is the distance he has placed between himself and the mainstream of thinking found in the investment/retirement complex headquartered in Wall Street.  That…and his focus on investing in what you know, and in putting together a more concentrated portfolio as opposed to being unfocused and scattered.

It was encouraging to see that Buffett had his own mentors…four in particular.  Most notable is his long term partner, Charlie Munger, still active in investing at the age of 89 as opposed to Buffet himself at just 83.

He also has drawn on the market wisdom passed on by Philip Fisher, the godfather of growth stock investing, as well as Benjamin Graham, the apostle of deep value investing.  And then there is a name you might not be as familiar with.  John Burr Williams, who authored the classic “The Theory of Investment Value” back in 1937.

This was not an easy book to track down, being long out of print, but through the inter-library loan service I found a dog eared copy in the SMU library in Dallas.

It was worth the exhaustive search.  This was the first textbook that explained the core theory of investment…which is that we value an investment as the net present value of its future income stream, whether it is interest on a bond or dividends from a stock.

Admittedly, the algebraic equations were tough sledding, but the text was priceless and ageless.

Remember, this was written during the high water mark of Roosevelt’s new deal agenda, which was a correspondingly low water mark for capitalism and what Keynes referred to as “animal spirits”.  It was especially poignant to read the section on Social Security, back when the ink was still wet on this historic and groundbreaking social legislation.

Williams wondered out loud if the administration were to be so bold and reckless as to raid the social security trust fund, in total violation of  how it was presented to the American people, as a means of shoring up and expanding government spending.  Even 77 years ago the threat was a clear and present danger, only made much worse by the long passage of time and continuous plundering of the trust fund that has taken place since its inception.

I think the lesson that Buffett learned from Williams is that there are two kinds of gains to be obtained from the market.  Real gains, in the form of free cash flow on your wholly owned businesses, and consistently growing dividends from your minority portfolio holdings.

And then there are the gains to be harvested in the future…the if, when, and maybe gains to be harvested when you sell a position for a greater price than you originally paid.  These are ephemeral and ethereal…and they may or may not materialize.

Better to pull your winnings out of the pot as you go along…then to let it all ride on the next roll of the dice.

 

 

These Guys Just Don’t Have A Clue

Posted: July 6th, 2013, by

By now you’ve heard the news…the latest retreat from full enforcement of the laughably named “Affordable Health Care Act”.

For those of you who have learned to tune out the national discourse on this dismal piece of legislation, there was an especially onerous provision that mandated employer paid health care on every company that had fifty or more full time employees.  The definition of full time employees was someone who put in a thirty hour workweek.

Since small businesses are the engine that generate the bulk of new jobs in our economy, this was a bullet directly to the heart.  An entire cottage industry of consultants has sprung to life, to advise growing small business how to avoid the cap, by re-classifying employees into part timers (sliding under the thirty hour limit) and how to outsource projects to avoid hitting the 50 employee cap.

If someone had set out to diabolically derail our fragile recovery, this was the ideal course of action.

So what will be accomplished by pushing the phase in of the new limits back one year?  The best the administration could hope for is to lessen the damage from the November 2014 midterm elections,  hoping that the unemployment numbers would not drastically increase.

All of this makes perfect sense to an administration that is staffed to the gills with academics who have no significant real world work experience.  In their worldview, such inputs as labor are abstract symbols representing something they have never endured…i.e. working for wages in the competitive, free market economy.

There is another path in our brave new world of employment.  Teaching in protected, tenured faculties…drawing lucrative salaries from grant funded think tanks and charities…and serving as spear carriers in our vast legislative, executive and judicial branches of government.  This is a pool of talent that runs well into the tens of millions, and what they all have in common is that they are never tested in the crucible of the profit and loss economy.  Their jobs and salaries are essentially immune from turbulent market forces.

They cannot envision a world where the decision to hire is based on mid and long term projections of market share and ultimate profitability.  Their world is a bloodless landscape, where any shortfall can be funded by taxes, grants, and all other forms of legalized larceny that characterize the command and control portion of our economy, derived from aggressive rent seeking as opposed to commercial leadership.

They would have difficulty understanding that no business would base its long term survival on the sunsetting of a nasty piece of legislation, whether it takes place on January of 2014 or 2015.

This is not the first time they have been flummoxed by such short term patches.  The recovery from the devastating 2008 recession was needlessly placed in hazard by the timid, year by year extensions of the Bush tax cuts on income, dividends, capital gains, and estate taxation.

The underlying flaw is not difficult to discover.  Politicians live in a world where budgets are passed year to year.  There is no long term plan whatsoever.

They just don’t have a clue.

The Wealth Secret That Hides In Plain Sight

Posted: June 22nd, 2013, by

As investors, we must have a built in bias to take anything that is simple at its core and mold it into something complex and expensive.

What brings this to mind is a recent appointment with my newest wealth management clients, a professional couple who have done an admirable job of living within and below their means so as to systematically build up their investment and retirement portfolios.

Unfortunately, they had fallen into the hands of the investment/retirement complex, and into the most expensive thicket available.  They had the bulk of their funds invested with one of the so-called “independent” firms built on a platform of extravagantly commission compensated sales of investment “products”.

It was a mess.  A jumble and hodgepodge of cat and dog funds, which systematically underperformed in hitting the bogey of the major market indexes.  Even if the management of the funds had been exemplary…and that was hardly the case…the overlay of management fees, high volume trading, and the obscene 12b-1 marketing fees placed a deadweight of nearly 200 basis points (2% in plain english) on the entire portfolio.

The good news is that we are moving the funds over to Schwab, where the current promotional bonus offers 150 free trades per account over the next six months, plus a cash bonus for transferring new funds into Schwab.  All told, these bonuses should tally in at a little over a thousand bucks…not bad, considering that the Schwab platform is so user friendly to cost conscious investors that we would have made the switch even if there had been no extra incentives to do so.

But the lesson learned is that virtue triumphed over the greed of the previous firm’s policies.  And that virtue was the simple result of systematically funding retirement accounts and not living above one’s means.  I see this in action almost every day.  It’s the act of conscious savings…of paying oneself first…and of doing so month in and month out that produces the seven and eight figure net worth statements.

The investment industry is littered with ridiculously overpriced products.  The worst offenders are the limited menu, trash offerings of small business 401-k plans, that are stacked with high priced and low performing funds.  It’s an ongoing scandal, at a time when the federal government has carved out ultra-ultra low cost broad base index funds for its federal employees, while foisting this legally sanctioned thievery onto the private sector.

But even for those who are trapped into such dysfunctional plans, they gain the benefit of the employer match, and the habit of systematic funding taken off the top from their gross paycheck.  That’s the deal maker.  Not the low returns or the outrageous fees…just the habit of saving upstream before the client ever gets their hands on the money.

Worst of all are the plans forced on public teachers, the notorious 403-b plans, which achieve the dubious distinction of being even less viable than the sluggish 401-k plans.  Somehow, the insurance industry hijacked the 403-b at its creation, and loaded it up with high fee annuities as the exclusive option.

The next time teacher’s unions want to go militant, this should be the focus of their rage.