Sunday, September 27, 2009

Seven Steps For Giving to Charities

At this time of year snail-mail and email carry an extra heavy burden of pleas to give money to any number of mostly worthy charitable causes. Due to various disclosure documents and/or if your zip code is in one of the higher income tax payment districts, one certainty is that any charitable giving this year will generate many more requests next year. These requests will come from the same group to which you gave, but also many others who learn (or guess) that you are good for a contribution.

My Seven Steps for Giving to Charities:

1. The first step is to have a CHARITABLE GIVING PLAN. There will be more urgent pleas for your money than all of your resources. (As Mark Antony was quoted by Shakespeare in Julius Caesar, “They are all honorable men.”) This plan could encompass this year or future years. Due in part (and only, in part) to high “death taxes,” charitable giving is an important part of many people’s estate plans.

As with any plan, writing the first plan is the most difficult. The writer or if you prefer the professional term, the grantor, is often paralyzed by trying to think of every conceivable element to the plan. This paralysis usually prevents the production of a plan. As one who has drawn up many business and organization plans, I recognize that the first step is a commitment to plan. Experienced planners know that plans are meant to be revised over time. Nevertheless, if shared with one’s attorney, the first plan can become one of the foundations of an estate plan with a good chance of doing what the grantor intended. As one matures in the art of preparing and revising charitable giving plans, there may be comfort in discussing the plan with selected beneficiaries, now and in the future.

2. TRANSFERRING RESOURCES is similar to an equation. On one side are the resources. Most often cash or securities are deducted from one’s total and added to one or more charities. The motivation for the transfer is triggered by a belief there is a benefit from the transfer. This benefit is often difficult to measure or even define. In some cases the benefit is best summed up by the phrase, “A warm feeling.” I suggest one should be a little more precise in identifying the benefits.

The first benefit is that the specific charity can accomplish a favored endeavor that it could not do at all, or as well, without the contribution. The next possible benefit is that the charity’s work relieves others of an additional requirement that would have to be funded. (Perhaps improved educational opportunities that help children lead a productive life rather than increased taxes for incarceration.) There can be a personal benefit, other than a tax deduction, e.g. helping children learn a trade or a business that is needed for a well- functioning society. We need more plumbers, landscapers, and bookkeepers as well as classically-trained musicians, among many other skill sets. One of the benefits for giving money away wisely is to teach other, younger members of the family how to help others.

An important part of your charitable giving plan is to identify and understand the benefits of charitable giving.

3. GET TO KNOW THE ORGANIZATION. Many charities will treat contributions they receive as “manna from heaven,” and spend the money as they see fit. There are a large number of horror stories of various charities spending money that was intended for various forms of “good works” on themselves in the forms of compensation, facilities, and entertainment. Others have used money to influence the political process. Some contributions have been diverted to favored commercial activities. While each of these is improper and possibly illegal, the biggest waste of contributors’ resources is through inefficiencies or outright mismanagement. People who work in the non-profit world, in general, are attracted because they have faith in the good works of their particular charities. Often, but not always, they lack management skills and training. Quite often they are short in financial and investment skills. In dealing with these types of concerns, one should compare the size of one’s intended gift relative to the size of the organization.

I believe, if one is intending to become an important contributor to a charity, it would be wise to get involved as a volunteer. For a few non-profits, my principal contribution is to be a member, or chair, of their investment or finance committee. Over time what I can save for them (or earn for them) is much larger than my initial contribution. (I urge my children to follow a similar pattern for any non-profits that have an interest in helping.)

Your charitable giving plan should take into consideration not only your cash contributions, but other resources, most importantly the time being given. Unfortunately, a number of worthy causes are organizations that are not well managed.

4. UNDERSTAND WHAT YOU ARE SUPPORTING. Once one begins to show any sort of sincere interest in a non-profit, one quickly learns of its projects, programs and policies.

Projects typically spend money today or in the near future to accomplish a mission by a certain given date. Think of a new YMCA facility, a specialized hospital wing, or dormitory. Each of these requires an estimated amount of money to be spent on a specific funding schedule. Some of these projects require cash up-front; some require cash to meet progress payments due to contractors and others may require long-term financing for mortgages or equity for the charity.

Programs are often a continuous activity of involvement, with the people the charity sees as its audience. Most often, this takes the form of providing education or medical services to a community that can not afford to pay for these needed services. Instead of brick and mortar spending, program spending is mostly about paying people to work with those in need. “As the poor will always be with us,” the funding needs will almost always be with us. However, the size of the funding support can change based on the flow of contributions and perception of the immediate need.

Policies often deal with the charity’s desire to change the world. This may entail focusing public opinion on a need or attending to a problem. In working toward this goal, interacting with various levels of government is required. This activity is labeled “educating the government,” not specifically lobbying. While the mission of most charities won’t change, their policies can change slowly or dramatically depending on visibility and the political focus.

Understand what you choose to support; projects, programs, or policies. Each can have different funding needs and opportunities.

5. UNDERSTAND THE DIFFERENCES BETWEEN TRADITIONAL CHARITIES vs. MORE VENTURE DRIVEN CHARITIES. Many of the new-multi millionaires have generated their wealth quickly from being involved early in successful companies funded along the way by various venture capitalists. With their newly-achieved fortunes, they want to use the methods that made money for them when they invest in non-profits. I use the term “invest” intentionally, as this is their attitude. They look for a clear mission statement, which appears do-able. They want to see capable management in place, or at least specifically identified. They expect a timetable with specific milestones. Further, they want to see the same level of intensity in the non-profit that they “invest in” as they employed in building their fortunes. Since many made their money in new companies, often they favor new charities. But do not expect them to work their way through the various seats on a board of directors/trustees in the traditional path before they become the anointed leaders!

Understand the differences the way established charities work versus the more venture driven new charities and determine where your comfort level is.

6. MEASURE THE RESULTS. We live in a results-driven world. One of the elements of a well- thought out plan is the measurement of results. Many charities publish self-congratulatory annual reports which trumpet their perceived successes, and the even larger needs facing them. These are like other corporate annual reports or fund reports, which give one side of the story. An intelligent grantor should come up with his/her expectations and measurement yardsticks. In assessing the relative success of a potential gift, one should include personal benefits. For example, listening to great concerts, meeting interesting people, or gaining a deeper understanding of important factors about the community. If other family members have benefitted from these experiences that is also important.

In very human terms, we should periodically measure our efficiency in giving as well as living.

7. SELF-CORRECT. The final stage in any business plan or charitable-giving plan is the feed-back loop so corrections can be made and errors of judgment corrected. Facts believed will prove to be incorrect. One’s knowledge of what is important, will evolve. All of these elements should lead to the next edition of our charitable giving plan.

*One of the advantages of publishing a blog is that I receive feedback. Often some of the most insightful comments are from my family. The topic of this week’s blog was suggested by my writer son, Don, who believes that some multi-millionaires need help in thinking through their gifts to charities. Thanks, Don.

Sunday, September 20, 2009


The frequency of similar financial headlines today tell us much more about current perceptions than future risks and opportunities. This misaligned focus has been true ever since there has been financial gossip emanating from market places. Instead of deriding these calls for attention, we should array these headlines in a reasonably normal progression from total collapse to a glorious future, as a indication of where we are in a normal progression.

Beginning in the fall of last year and through the first quarter of 2009, great concern was expressed as to the closing down and liquidation of financial and industrial enterprises. While Lehman Brothers is in various forms of liquidation, no other large scale enterprise has been closed putting almost all of its employees out of work. Many employees are still drawing paychecks from corporations that are working their way through bankruptcy and other arrangements to restructure their debts. Analysts are now celebrating companies that are generating cash. (Note the cash is before various non-cash charges such as depreciation to pay for the costs of past capital expenditures including, in some instances, acquisitions.)

The next series of headlines will be when companies like the auto makers actually earn a full net income, albeit probably not accruing income taxes due to past losses. At this point we are likely to see equity offerings from the auto companies as a way to pay back the government (us). Soon we may see reports suggesting that even if there is another leg down in the economy, various companies have developed survival earnings that can keep their doors open in a decline. (Many companies world-wide are probably there today.)

After surviving in a defensive bunker, we will see an increase in the number of analytical reports that will declare various stocks are cheap in that they are selling at relatively low multiples of earnings power. As most analysts and most management are not good at estimating future earnings, they will rely on the past. Earnings power will be determined as the average earnings per share developed over the last five or ten years. The thought is that the future, on average, won’t be a great deal different than the past.

The more venturesome investors will look at the very best earnings, or perhaps margins, achieved in the past and declare that stock prices are real cheap when compared to the past. While they do not come out and say it, they are hinting that most market indexes will accede to their old highs. (This would suggest a doubling or more for NASDAQ, and even more for Japanese securities.)

For corporate managements contemplating meaningful capital expenditures, they need to deal with payback periods of five to twenty-five years. To give a go ahead for such spending, they probably need to see net cash generation growth on the order of 15% or more. We are actually seeing those kinds of commitments being made selectively in mining and pharmaceutical companies.

There are some unreconstructed optimists that believe that there will be other large scale developments that will generate massive earnings power as has the Internet and cell phones in the past twenty-five years. (I am awaiting a list of these opportunities from you, the readers of this blog.)

The popular fears that accompany each step in this progression from a bear market collapse to a bubble bull market are unlikely to materialize because too many are expecting it, and have already made some preparations. The progression from bear to bull won’t be smooth with regular steps up. There will be falls along the way for geopolitical disturbances, fraud, forced liquidations of visible capital positions handled poorly, and disappointments in people, products and services.

Less than a year after the point of feared liquidations of employment and capital, I look at the long term horizon positively. Do you?

Sunday, September 13, 2009

Who are Better Equipped
to Make Decisions?

History often seems to be a tale of decisions made by many versus those made by few. Humans recognize that the results of various decisions can turn out poorly for us individually. In search to improve the odds, we crave some form of central authority. In the distant past, people invested these roles of all-knowing and all-powerful in external forces, supported by strong religious beliefs. In more modern times, we have substituted various forms of governments to play the role of God on Earth. The question is, what level of authority should we invest in the government to make critical decisions for us?

After reading the above paragraph, you are preparing yourself for a long polemic about healthcare and the other issues of the day. What follows is about portfolio management, much lighter, but perhaps more immediately meaningful for many investors.

When we seek advice, traditionally we seek “experts.” While various governmental or trade associations require those who put themselves out as “experts” to have passed various examinations about a generally accepted body of knowledge and codes of ethics in dealing with clients, none of these exams measure the success of picking the correct investments. As a very poor substitute for this measure of success, so called “track records” are proffered. As the early developer of one of the largest and most accurate data banks on investment companies (popularly known as mutual funds), I urge caution in the application of these “track records.” The data shown is point to point, is flat and has a lack depth or narrative. For example, earlier this week I was discussing with an associate the search for a new technology focused fund to add to a specific portfolio. My associate suggested a relatively new fund that is managed by a manager who had a very good record in the distant past when technology stocks were flying. I demurred, for I distinctly remembered that the fund in question benefitted from the buying power of its group to load up on “hot” IPOs, between quarterly statements. There are many other examples of important factors that are not captured within performance records.

Worse than an ordinary expert, is a well-known expert or a minor celebrity. I experienced that treatment in my own home Saturday night. Ruth and I were hosting a cocktail party for friends who had recently returned from their honeymoon. The party included many of their long-time friends, some we did not know.

Allow me to make a composite of several conversations. The composite couple (not the newlyweds) had very impressive positions at learned institutions. They wanted a brief shopping list as to where they should invest their money. There was not much discussion as to any of the factors what would go into a proper prescription to their needs.

I found this ironic. While we did not talk current politics with our guests that evening, I am under the impression that they believe that healthcare decisions should be left almost exclusively in the hands of the medical/scientific community, for they are the only ones equipped with the knowledge of what worked in the past (most of the time) and through appropriate diagnosis of a patient, select what would be medically the best solution. They understood the individualized need of the patient but not the investor.

In such situations, some might provide a “school solution.” This approach calls for 30% in money market or other high quality short term funds, 10% in somewhat longer term funds of intermediate investment grade quality bonds, 20% in international or global funds, 20% in domestic-oriented growth funds spread by market capitalization, and the final 20% in large domestic valued oriented stock funds. The advantage of the school solution is that many will adhere to it. Disclosure point: None of the accounts that we manage would follow the exact school solution, as it would not fit their needs.

The school solution would be authoritative, not because I said it, but it is close to the overall mutual fund industry taxable composite.

In the world of investments, be wary of all experts, particularly celebrities. Central authorities lead eventually to unstable conditions, as other solutions prove to be more beneficial for many.

Sunday, September 6, 2009

Happy Labor Day

Happy Labor Day to our readers, we will be back next week.