Sunday, June 16, 2013

Investment Stages Need Second Opinions

There are five stages through which many long term successful investors pass. They are titled past, present, future, retirement, and beyond. Many of us prudently seek qualified second professional opinions to review our options at each stage.

I urge all investors to look for multiple causers for past actions which should help in deciding how much weight to put on the perceived history to their investing for today and much more importantly for tomorrow.

US Marine Corps inputs

Ruth and I have concluded a reunion with my US Marine Corps Basic Officers Class.  My class was an unusually productive group producing five general officers including two four-star generals, one being our Commandant. We found our meetings and visits both worthwhile and thought provoking. A meeting like this recognizes our brethren who are no longer with us, some lost in defending our country. Our class leader and our former Commandant reminded us that we are all in the zone to join our departed brothers. In typical Marine optimism two thoughts were mentioned. The first was in planning future reunions, there was discussed the need to have a reunion when members will be 95 years old. The second item brought up was the Marines’ Hymn, which in its final verse provides the duty assignment, "If the Army and the Navy/ ever look on Heaven’s scenes; /They will find the streets are guarded/ By United States Marines.” 

After an evening such as this I cannot avoid thinking about our progress as investors and the missions ahead.  In the USMC spirit, a "Pass in Review" is the command issued to troops to pass and salute their reviewing officers. Reviews by others can also be very useful for our investment marches.

I will devote the rest of this blog to the different phases we have as investors. 


For most of us the sum total of our experiences are our main guides to our thinking and actions. This is the way we learn in school and from other authority figures. My fellow securities analysts (quoting our various professors or former bosses) rely heavily on perceived history. In an uncertain world, we like the certainty of history because it then becomes an easy task to extrapolate a trend;  such as projecting growth rates into the indefinite future. Economists are also fond of using history as laboratories for their pronouncements. The problem with relying on perceived history is that it may not be either accurate or relevant to the tasks ahead. We need to remember that history is largely written by the survivors and they are good, simple story tellers. There are many examples of deeply believed historical views that were inaccurate; e.g., the flat earth was the center of the universe or that slavery was the only cause of the US Civil War or the assassination of the Austrian Archduke was the cause for the first World War.  I urge all investors to look for multiple causers for past actions which should help in deciding how much weight to put on the perceived history to their investing for today and much more importantly, for tomorrow.

History is often seen through the eyes of good writers of history. Two of the best currently are my friend Jason Zweig of the Wall Street Journal and William Cohan, a Bloomberg contributor and the author of
The Last Tycoons: The Secret History of Lazard Frères andA House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” his story of the last days of Bear Stearns. They will be on the panel that I will chair in New York this Wednesday night on financial bubbles. The discussion should be good fun as I may question nice neat declarative statements about our past bubbles and who contributed to the problems.


As much as some may like to live in the past because of its perceived certainty, we cannot. Others would prefer to live in the future where today's problems are solved satisfactorily, but we cannot dwell there either. We can only live in the present. The present is in truth confusing, particularly as Jason Zweig points out, we now live in a 24 hour, 7 day a week barrage of information and opinion. How will my portfolio react Monday to the election of an apparent moderate Iranian cleric as its president?  Will all global investments change dramatically on the 18th after the news conference by the chair of the Federal Reserve? Because of the increasing reach of the financial press plus the drumbeat of investment peddlers, one would think that your entire investment portfolio will permanently change in value with each news update.  I doubt it. I do not doubt that the activists will see reasons to trade and that volatility will rise in what should have been quieter markets. Based on the past I would not be surprised to see the initial violent action to some news to be reversed. Because of the absence of market structure stability forces, (floor specialists) we are likely to see wider intraday moves. This increase in intraday volatility is not likely to mean a perceived increase in changes of attitudes of risk of permanent loss of capital.

My attitude about the present that it is a minefield to be traversed until we can get to a future that is focused on solving longer-term problems. However, we need to be prepared and have our scouts out looking for opportunities to make money and avoid permanent losses.


There are two nice things about thinking about the future. The first is that it is an indefinite period which can cyclically turn out to be favorable to one's point of view. The second benefit of cogitating about the future is you can't be wrong until you get there. Nevertheless, as equity investors our rewards will come in the future. I cannot claim to know the future, but I can share with you thoughts about the elements that are likely to shape the future.

The first is the way people look at the future. Some expect the future to be largely like the past; these view themselves as pragmatic and rules based.  They tend to be value investors, buying securities at a discount from presently defined value. Another group is more optimistic and expects change to be in a more positive direction (“good things can and will happen”). These tend to be growth investors. For a considerable period of time the value investors have produced larger and more consistent results. Some have said that investors could either eat well (on current income) or sleep well (on perceived security). There is a third alternative, those that dream well. These are the risk assumers, or in many cases the entrepreneurs who follow the force of their driven dream. The mix of the leading personalities pointing towards value or growth will supply the multiple effect on whatever the current valuation metric is popular. Another example of an optimist who comes from a very value orientation is the current President of the New York Stock Exchange, who recently stated that the only surprises he perceived coming were on the upside.

Second is to appreciate how technological progress is changing our world; not only are we finding ways for people to live longer, but more comfortable and productive lives. Technology is a growing tool kit which can be used positively or negatively. A recent Bloomberg BusinessWeek article entitled "Balancing Security and Liberty in theAge of Big Data" described the impact of gathering huge quantities of personal "metadata" indicating there is enormous power in linking things or ideas. Our ability to predict the actions of people will have major predictive power both in the commercial world and the security world. 

Our enhanced, but not perfect understanding of people may well have had a similar impact as the development of the printing press. However, we need to be aware that technological and other progress is built on mistakes or failures. For those who are interested in this aspect’s progress,  the new book “Brilliant Blunders” by Mario Livio is about the greatest scientists since the beginning of the scientific revolution.  One of the largest blunderers described by Livio was Albert Einstein, who contributed to the greatness of Caltech where I serve as a trustee.

China and Japan

The third element that will shape our future is not Europe where much of the US financial news media and numerous political leaders derive their views taking up most coverage of world economic affairs. After the US, China and Japan are the number two and three ranked national economies. Both of these countries have serious demographic challenges and both have been critical suppliers of imports and exports to this country, the rest of Asia-Pacific, Africa, and Latin America. A good bit of the recent nervousness in the US bond, stock, commodity and currency markets is due the accurate transition of the Chinese economy from an export/investment orientation to a consumer oriented society. This is probably a decade-long trend. What is creating greater short-term volatility is the Japanese government and central bank utilizing quantitative easing at a rate four times greater than the US relative to the size of its population. If Japan does not show a great deal of progress quickly there could be a real signal to investors globally as to the appropriateness of "QE". The widening spread between the yield on high yield (junk) paper and US Treasuries is an early sign that the suppressed rates may explode rather than rise in a gradual, gentle pattern. There already appears to be some indigestion in Japan. The bottom line is that much more of the future of the US market will be coming from the East.

Redistribution of retirement capital

I don't know how it happened that the meeting of this band of brothers, the young Second Lieutenants of fifty-six years ago, now includes some old men who are living on their stored retirement capital. While no longer at risk to bullets and other forms of destruction, they and their children are under fiscal attack by much larger forces. First the current low interest rate environment is similar to our former front line troops now discovering that they are running out of effective ammunition to save themselves in their retirement. The next sneak attack on these warriors is the first salvo of limiting the tax deferral privileges on the size of their 401k and IRAs. This redistribution ploy on our troops’ savings will hurt our replacements on the line to protect their heirs/families. With Medicare Means-testing, the ability to fund the most expensive part of our lives will become more limited, which again will penalize our heirs. As the retirees have less votes than those who pay little or none in the way of direct taxes, it will be difficult to defeat the redistribution efforts of some of our politicians.


For the lucky ones who will not outlive our retirement capital, there is the obligation to have our savings be used wisely for the true benefit of our heirs or good charities. To do this effectively four people need to be involved:

An attorney who can provide counsel and an accurate record to the giver/grantor.

A wise and currently up-to-date tax accountant who can recognize the tax application of various strategies and structures.

A flexible investment advisor who can structure investment portfolios that work well for the living grantor, multiple generations of human heirs as well as various different tax-exempt institutions of varying investment capabilities.

The fourth person is the most important, the grantor/student. The reason I used the term student is because the grantor needs to be aware of changing legal, tax and most importantly changes in the thinking and conditions of each of the main heirs.

Second opinion for Supreme Court Justices and others

Recently the press has ferreted out that potentially eight out of nine members of the US Supreme Court have personal assets of over $ 1 million. Further research shows all eight of these justices own mutual funds.  The poor man on the bench happens to have a son who has worked in our industry and I suspect that he has invested for at least himself if not members of his family in some sorts of funds.

Perhaps, it is due to visiting our imperial city this weekend, but I am moved to be helpful to these public servants.

This post has briefly recounted some of the more important aspects of assembling a portfolio. Suspecting that these very busy people did not personally assemble their investment portfolio of funds, I assume that they used good investment advisors to help them. Just as it is wise to seek a second qualified opinion on many of life's challenges, I am offering a free, no obligation review of each of the Justice’s portfolios.  These men and women may have potential conflicts of interest as well as other reasons they use mutual funds.  I am guessing that other readers have similar needs and portfolios, thus I will extend the same offer to them. For the first few readers with over $1 million accounts holding at least five funds,  I will offer a no cost/no obligation portfolio review. Please contact me, within the next two weeks.
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