Thursday, December 31, 2009

Quote of the Day: Thomas Jefferson

"It is error alone that needs the support of government. Truth can stand by itself."

~ Thomas Jefferson

Ponder these words for a few minutes. Think about the past year, the financial markets, the government's actions. Think in broader terms about government in general, the areas where it keeps expanding and the "errors" that in continues to subsidize.

Tuesday, December 29, 2009

Paul Farrell: Who Can You Trust But Yourself

Quote of the Day: J. Scott Armstrong

“No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.”

~ J. Scott Armstrong’s Seer-Sucker Theory on Expert Forecasts

Monday, December 28, 2009

Smart Money Magazine's 10 Stocks for Next Decade (2000 - 2009)

Ever wonder why many investors say ignore the noise of the market and just keep things simple by investing in indexes?  Take a look at the recommendations from Smart Money magazine in December of 1999 to hold for the next decade.  How prescient were these geniuses?  Try to take a look at the results below without laughing:

AOL (merged with Time Warner in one of the dumbest business deals in modern history, stock went down at least 70% in 2000-2002, such a dog that Time-Warner spun it out in 2009 as its own company to be rid of it)

Broadcom ($91 then, $30 now)

CitiGroup ($29 then, $4 now ...would be bankrupt without the generosity of the government)

Inktomi (stock peaked in March 2000, acquired by Yahoo)

MCI WorldCom (bankrupt, bought by Verizon)

Monsanto (best results on this list, $39 then, $82.69 now)

Nokia ($39 then, $12.69 now)

Nortel Networks (bankrupt)

Red Hat ($105 then, $30.98 now)

Scientific Atlanta (acquired by Cisco in 2005)

How would you have fared investing in these gems and holding for the entire decade?  While I don't have an exact figure, the winners on this list are few and outnumbered by the bankruptcies.  Needless to say, the know-nothing investor who plopped 50% of his money in a total stock market index and 50% in a total bond market index would have a better result than the above portfolio of "winners" picked by the experts.  So what is the moral of this story?  Ignore the noise, keep things simple, take no risk where the odds aren't in your favor.

Saturday, December 26, 2009

Nearly 2/3 of the Continental US has a White Christmas

More evidence in that global warming is having a dramatic impact on the weather of the US. NOAA maps indicate that close to 2/3 of the Continental US experienced a white Christmas this year. Ho, ho, ho, here's wishing everyone a Merry Christmas and a Happy New Year.

Thursday, December 24, 2009

The Purpose of a Bond Allocation in Your Portfolio

If the long-term return on stocks is 8-11% and the long-term return on bonds is 4-6%, why should I own any bonds?

This question is often asked by folks condition by the bull markets of the golden decades of the 1980's and 1990's into thinking that the road to wealth lies in being 100% invested in stocks, and that bonds are a loser's game. After the tin decade of the 2000's, where bonds returned around 5% a year and stocks around -1.5% a year, the wise advice that your bond allocation should come close to matching your age might be more apparent. The emotion turmoil of the financial market meltdown of 2008-2009 caused many people to sell low once their pain threshold for losses had been crossed only to see the market rebound months later. My preferred portfolio allocation for almost all investors is the traditional 60/40 split between stocks and bonds to balance growth and stability.  The primary reasons for having bonds are:
  1. Risk Management.  When generational bear markets hit like 2008-2009, your bond allocation will limit your downside, provide more stability, and make it easier emotionally to stay the course with your investment plan.  Bonds have a lower volatility than stocks, and the shorter the bond duration the less the volatility.
  2. Low Correlation between asset classes.  Bonds and stocks often move in opposite directions, and are influenced by different factors in the economy.
  3. Steady, reliable compounding of income. 
  4. No one knows what the future holds. 
People will not get rich off of bond investing, but mixed with stocks in a balanced portfolio they help provide stability and the right overall asset mix can come close to approximating the overall return of the market with less volatility enabling investors to sleep better at night.

Some passive bond funds that I like currently include the usual suspects: Vanguard Total Bond Market Index, Vanguard Intermediate Term Bond Index, and Vanguard Short Term Bond Index.  Active funds that I like are Dodge & Cox Income, Harbor Bond Fund Institutional, and for the more risk tolerant Lomis Sayles Bond Fund and TCW Total Return Bond.

Health Care Reform: Designed to Fail

Today, sadly, the Senate passed its version of "health care reform." No one knows exactly what is in the bill, but one thing is certain-- it is designed to fail. By failure, I mean it will do the opposite of what the politicians are touting as its benefits: the cost will be substantially more than advertised, the savings will not materialize, it will add significantly to the deficit, it will reduce competition and innovation, taxes will have to be increased beyond what is already in the plan, it will result in healthcare rationing, and a black market for healthcare services to compensate for its shortcomings. Its failures will usher in the next set of healthcare reform fixes that will have as its inevitable a single payer system for the US... that is in fact the goal and endgame of healthcare reform... command and control healthcare by government bureaucrats. The US political leadership has chosen to take another step further away from the marketplace with its natural cost control mechanisms in favor of top-down profit and price controls for the healthcare industry when what we really need is a Wal-Mart for healthcare and a resetting of attitudes that rights are not something that can be dispensed by politicians confiscating other people's money.

For other perspectives on alternate care read Scott Jagow at Marketplace on his recent experience getting "Fast, Cheap, and Happy Health Care" at a Minute Clinic.

For an intelligent discussion on the subject, here is Richard Epstein:

Wednesday, December 23, 2009

Tuesday, December 22, 2009

Quote of the Day: Arthur Cecil Pigou

The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant; for (the) boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.

~ Arthur Cecil Pigou (1877-1959)

For investors, this statement can be interpreted as meaning future returns for every new dollar invested will be lower in times of euphoria than in times of pessimism. These episodes of pessimism are times of great opportunity for the long-term investor. March 2009 will be viewed as the investment opportunity of a lifetime for many, and was a time when many investors made exactly the wrong move of fleeing the stock market to invest in "safe" T-bills or treasuries yielding close to 0%.

Detroit on Display

Monday, December 21, 2009

Books that I Recommend (In No Particular Order)

  1. Enough, John Bogle
  2. Common Sense on Mutual Funds, John Bogle
  3. American Sphinx: The Character of Thomas Jefferson, Joseph J. Ellis
  4. The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk, William Bernstein
  5. The Four Pillars of Investing: Lessons for Building a Winning Portfolio, William Bernstein
  6. The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel, Benjamin Graham
  7. Churchill, Paul Johnson
  8. The Snowball: Warren Buffett and the Business of Life, Alice Schroeder
  9. The Road to Serfdom, F. A. Hayek
  10. Capitalism: The Unknown Ideal, Ayn Rand
  11. John Adams, David McCullough
  12. Benjamin Franklin: An American Life, Walter Isaacson
  13. Free to Choose: A Personal Statement, Milton and Rose Friedman
  14. The Federalist Papers, Hamilton, Madison, Jay, et. al.
  15. Colossus: The Rise and Fall of the American Empire, Niall Ferguson
  16. The Ascent of Money: A Financial History of the World, Niall Ferguson
  17. The Investor's Manifesto: preparing for Prosperity, Armageddon, and everything in between, William Bernstein
  18. Value Averaging: The Safe and Easy Strategy for Higher Investment Returns, Michael E. Edleson
  19. The Autobiography of Benjamin Franklin, Benjamin Franklin
  20. Common Sense, Thomas Paine
  21. Investing the Templeton Way: The Market-Beating Strategies of Value Investing's Legendary Bargain Hunter, Lauren Templeton
  22. Contrarian Investment Strategies - The Next Generation, David Dreman

CBO Analysis of the Senate Health Care Bill

This just in from the Congressional Budget Office:
Based on this extrapolation, CBO expects that Medicare spending under the legislation would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the legislation would increase at an average annual rate of roughly 2 percent during the next two decades—well below the roughly 4 percent annual growth rate of the past two decades. It is unclear whether such a reduction in the growth rate could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care.
Translation for the layman:  We have no idea what this bill will really cost.  However to achieve the desired budgetary targets rationing and/or lowering the quality of health care will be required.  Does this sound like a deal too good to pass up?

Where Have all the Defenders of the Constitution Gone?

As an addendum to my post on the Senate Health Care Bill, I'd like to add my editorial opinion that I find it appalling those elected officials who are sworn to uphold the Constitution of the United States are both woefully ignorant of its contents as well as deliberately attempt to undermine and circumvent it to suit their fancy. To be even more plain, I'm referring the current Congress, The President and his Administration, and the Judiciary. and to be even more expansive, this problem covers all the Congresses, Presidents and Judiciaries for at least the past 80 years. The more we talk of the Constitution as a "living document" the closer we come to turning it into a dead document, nothing more than ink on paper, subject to the current whims of the times as government continues to expand well beyond the enumerated powers, and the treasury is raided to dispense political favors and buy votes. We should be talking about the "living law," the set of rules laid down by the founders that specifically spell out the authorized duties of federal government and its various branches and how they should be energetically enforced. Instead, today we have a Congress that continues to encroach with no check or balance into those powers the Constitution vested in the state and the people, an Administration who deliberately seeks to undermine the Constitution and a Judiciary who fails to enforce the laws of the land. Is this an extreme view? Maybe, but one if the founders were to suddenly re-materialize in this time would agree with. The Republic is in deep trouble.

Sunday, December 20, 2009

Richard Epstein on the Senate Health Care Bill

Richard Epstein, constitutional legal scholar, expresses his opinion of the Senate Health Care bill in Medical Progress Today. His conclusions are not unexpected and should be heeded by the American public as a whole:
This ill-conceived legislation has many provisions that regulate different aspects of private health-insurance companies. Taken together, the combined force of these provisions raises serious constitutional questions. I think that these provisions are so intertwined with the rest of the legislation that it is difficult to see how the entire statute could survive if one of its components is defective to its core. How courts will deal with these difficult issues is of course not known, but rate-regulation cases normally attract a higher level of scrutiny than, say, land-use decisions.

There is, moreover, no quick fix that will eliminate the Reid Bill’s major constitutional defects. It would, of course, be a catastrophe if the Congress sought to put this program into place before its constitutionality were tested. Most ratemaking challenges are done on the strength of the record, and I see no reason why a court would let a health-insurance company be driven into bankruptcy before it could present its case that the mixture of regulations and subsidies makes it impossible to earn a reasonable return on its capital. At the very least, therefore, there are massive problems of delayed implementation that will plague any health-care legislation from the date of its passage. I should add that the many broad delegations to key administrative officials will themselves give rise to major delays and additional challenges on statutory or constitutional grounds.

The health of the American people should not be held hostage to such unwise legislation. The Senate should reject the Reid Bill because of the unsustainability of the statutory scheme regulating health-insurance markets. But there is also little doubt that its central arrangements are unconstitutional, and will face serious legal challenge for years to come. Rather than embarking on a fundamentally flawed course of action, sure to spark litigation, the Senate should start over with other reforms that go in the opposite direction: simplify the system so that market forces can increase both quality and access in ways that no system of government mandates can hope to do. Deregulation is a word that has been forgotten in the current debate. It should be returned to center stage.

The Lessons of History with Market Historian Niall Ferguson: The Decline and Fall of the American Empire

How federal deficits threaten the American empire, and rising interest rates could invoke a second economic crisis. Is continued dollar depreciation in our future?

An absolutely fascinating interview.

Quote of the Day: Max Baucus

"This administration ought to know that five years' worth of Medicare and Medicaid cuts totaling $200 billion are dead on arrival with me and with most of the Congress."

~ Senator Max Baucus, during the Bush Administration, before signing on for over $1 Trillion dollars in Medicare cuts and tax increases as mandated by the Senate's version of the healthcare bill.

Snowball fight with Algore

With much of the east cost blanketed by a global warming snow storm, it is a good time to celebrate with a snowball fight with Algore.  This new online game can be found at:  Here's wishing a good aim to all.

Redneck Santa

From the files of the weird and disturbing:

Not sure I'd want my kids accepting a gift from a Santa with taxidermy "raindeer."

The Frugal Person's Attitude Toward Credit Cards

At best they are a necessary evil in today's society as more and more shopping is done through online stores.  At worst they are a temptation to spend and live beyond our means so the credit card companies can dip into our wallets for a continuous stream of fees and interest income.  They run contrary to the goals of the frugal who are trying to live below their means and kept debt off of the family balance sheet.  So in this day and age of electronic commerce what is a frugal person to do:
  1. Use cash and debit cards wherever possible.  There is nothing wrong with being old-fashioned and there were some sound financial principles in the way our grandparents coming out of the Great Depression handled their money.  
  2. Carry no more than 1 to 2 credit cards in your wallet and use them sparingly.  Credit cards do have a purpose when it is impossible to use cash to make a purchase, or when emergencies arise that require large expenditures.
  3. Only get credit cards with reward programs.  Might as well get something in return.
  4. Pay off the entire credit card balance religiously each month.   Avoid all interest charges and fees.  If you can't, stop charging and cancel the credit card immediately.
  5. Resist temptation for frivolous purchases.  Advertisers play on our human weaknesses everyday to convince us to buy things we don't really need.  Tune them out.
  6. Don't use credit cards to build credit scores.  Contrary to what I've read on many money blogs, credit cards are not a tool to be used to build credit scores.  They should be used sparingly, and only for necessary purchases.
  7. Don't set a bad example for your children.   If little eyes see you swiping your credit card for every purchase, they will fail to realize that items cost real money, and you are helping to establish their attitude about money.
Credit cards are a losers game for most consumers who cannot control their impulse to spend.  Frugal people should be wary of this temptation and discipline themselves to continue to live within their means.  If the temptation to spend cannot be resisted, then ditch the credit cards; go back to a cash only world.

Saturday, December 19, 2009

More Irrefutable Global Warming Evidence

Who could imagine this is December with the weather outside? I awoke this morning to this irrefutable evidence that global warming is back with a vengeance.


A good solid foot of evidence that global warming is reeking havoc on my neighborhood, my state, and my country.  I swear to you, dear reader, that these photos have not been manipulated in any way to create a false impression or deceive anyone with junk science.

Sunday Update: Over two feet of global warming evidence fell in my yard over the past 24 hours.  Thank you, Algore, for raising my awareness through your sermons at the Church of Climatology.

CHINA: 'The world does not have Money to buy more US Treasuries'...

The mess that is the Obama administration just keeps producing one laughable moment after another. Just when you thought nothing could top the ridiculousness of the Copenhagen Climate Summit with its record cold temperatures and snow from Copenhagen to the south of France, the President returns to find a blizzard blanketing Washington with record snowfalls. Then today comes a headline from the that China is losing its ability and appetite to finance runaway US Government spending. What is Captain Stimulus to do now?

The Comrades of the Global Warming Movement

In case you haven't figured it out yet, the global warming movement is all about the destruction of capitalism, especially the United States. The useful idiots in the US who support this movement are either clueless or willful participants in this fraudulent revolution.

Thursday, December 17, 2009

Hunting the Elephant in your Underwear: Shatner & Palin

NewsHour -- Keynes vs. Hayek: Late Economists' Hip-Hop Legacy

The CBC's Rex Murphy on Climategate

I'm surprised the left-leaning CBC actually let this guy speak his mind in one of the more well-reasoned commentaries on climategate.

Quote of the Day: Barack Obama

"Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

~ Senator Barack Obama, 2006, in a prophetic moment.

Sunday, December 13, 2009

The Great Global Warming Hoax

One of the biggest con jobs in the last hundred years is the global warming hoax. In scope, ambition and sheer size, this hoax greatly exceeds even the swindle that Bernie Madoff was able to pull off on some of the most sophisticated individuals and institutions in the world. Even with the recent revelation that much of the data used to "prove" that global warming exists had to be massaged to fit the theory, many people still cling to their beliefs as if it were religion instead of science, and even when the science is proven false will not give up those beliefs.

In this video, Lord Monkton, global warming skeptic and gadfly, challenges one of the true believers with the pesky facts behind climate change. The reaction is priceless.