Sunday, October 21, 2012

Labels Can Be Dangerous to Your Wealth


In our modern lives we are inundated with information. To avoid chaos we organize information in silos and give each of the silos a label. Unfortunately we (the universities, the governments, media)  rarely ever examine whether we have misfiled the information or whether those informational relationships have changed. If so, the current label on the current fact is often misleading.

One of the few benefits of long plane rides is that I get to read the news of the day more thoroughly and from many different sources. As I read these pieces, different relationships between the elements of information and some important investment implications occasionally come into focus.

How and where do we shop?

On October 18 in the London edition of the Financial Times there was a front page article headlined “Retailers Shut 20 Stores Each Day.” The article was based on research conducted by the accounting firm PricewaterhouseCoopers. In a study of 500 UK cities/towns, PwC found that in the first half of the current year some 953 stores were closed, compared to 174 in a similar period in 2011. (While I don’t have data on the US and other countries, I suspect that the trends are roughly parallel.)  Computer game stores, toy shops, clothes shops, gift shops, jewelers, card/poster shops and furniture stores were hit the hardest. Places offering check-cashing, pawnbrokers, discount and convenience stores, coffee shops, currency changers (and wire sites) and charity shops were far less effected. After reading the article, the analyst in me had three different thoughts that bumped heads with the traditionally-labeled silos.

First, did the UK statistical offices note the change in the mix of retail activity? Second, the realization that we are seeing marked changes in behavior. Trading down from higher-priced merchandise and conversion of assets to various forms of money, replacing merchandise spending for service spending are all important changes. Third, the data is incomplete, I am guessing a good bit of the store traffic has been lost to the Internet.

In my recent discussions with UK portfolio managers, no one directly discussed these changes, however many held Internet-oriented stocks as long as they were moving higher in price. National governments do not seem to be aware of these changes. Local governments around the world are very conscious of disappearing storefronts and therefore employment, but seem powerless to stimulate sales on their High (Main) Streets.

Does the US have the same labeling problem?

The labeling of various stocks as consumer staples or consumer discretionary is misleading.  These are terms from outmoded economists based on the goods and services once sold, not how they are bought today. Amazon and similar online merchants have changed the world and both investors and policy makers need to catch up.

Another example of mislabeling

In a recent conversation with a very intelligent mother of children who are now in the workplace, I was told that she educated her children as they were growing up at various ages by the stocks she bought for their accounts. At an early age she bought McDonald’s for them, as it was the place they went to get rewards for good behavior and good marks. I am delighted that it worked out well for the family. She followed that thinking and at some point bought shares in Apple for them. (I suggested that now as they are in the workplace she might look to buying some of the recruiting firms. In the past they have not been big winners as stocks but are very much leveraged to mid to high-income employment growth.)

All of the stocks mentioned appealed to her and her lucky children because they knew of the companies and their products. But in each case these are globally-oriented companies. It would probably surprise her and many Americans to learn that McDonald’s has more sales in Europe than it does in the US. (Interestingly there are more Burger Kings in Barcelona than McDonald’s even though McDonald’s has the Airport location beyond security.) In a similar fashion, Apple’s future is very dependent upon both production in China and whether the iPhone 5 will increase the potential market from 17 million users to 200 million users.

The fastest growth for many recruiters is their foreign placements. Not only are local offices around the world filling local needs with local talent, they are searching for qualified US talent to work overseas. These are examples of stocks that are labeled as US domestic because they are legally domiciled here. Most portfolios owned by US institutions and individuals need to recognize the global nature of their holdings and adjust to the world not as it is, but how it is likely to be.

Fidelity has come up with some very important numbers

Following the trail of the now grown up children mentioned above, they and their cohorts need to start to think about their retirement capital needs NOW!  In an article  in the October Financial Advisor magazine, Fidelity Investments has laid out the math for meeting a working person’s retirement needs which I have outlined below. (Bear in mind that Fidelity is the largest factor in the 401(k) market.)    

1.     To reach 85% of final salary level at age 67 retirement, including social security, one needs retirement capital of eight times the ending salary. They assume the age at death is 92.
2.     To reach this goal one needs to enroll in a 401(k) at age 25 and make continuous contributions beginning at 6% and raise it 1% each year until it reaches 12%. (This plan presumes an employer contribution of 3% p.a.)
3.     The intermediate benchmarks would be an account equal to one year’s income by age 35, three times by age 45, and five times by age 55.
4.     The underlying investment assumptions are a 5.5% rate of return, the employee’s income grows by 1.5% p.a. more than inflation and no breaks in employment or savings.

There are very few people that I know that are on this track (excluding those who have access to outside capital) and most workers won’t get to these numbers. Thus, we need to come up with a new label for the period of our lives beyond our primary employment.

Can we discuss your retirement planning?
Did you miss Mike Lipper’s Blog last week?  Click here to read.

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of

No comments: