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.

Friday, November 6, 2009

Interview with Jim Grant

Must see interview with the insightful and erudite Jim Grant.

Jim Rogers on Bloomberg

Tuesday, October 27, 2009

New Ideas in Graphical User Interface Design

10/GUI from C. Miller on Vimeo.

Could this be the future look of your desktop?

Monday, October 26, 2009

Forstmann on Future of Wall Street

Buyout king and Wall Street legend Teddy Forstmann discusses the future of Wall Street with CNBC's Charlie Gasparino.

Friday, October 23, 2009

Steve Wynn on the Economy, Jobs & Hotels

Steve Wynn talks common sense on deficits and job creation.

How do Harvard Economists Invest?

This article is summarized from the University newspaper The Harvard Crimson.

Greg Mankiw

Mankiw, professor of the largest economics course at Harvard and author of the textbook "Principles of Economics," is a long-term buy-and-hold investor, but does not think he is smart enough to time the markets. His portfolio consists of 2/3 stocks and 1/3 bonds, balancing the higher risk of equities with the steadiness of fixed income. When his portfolio took a hit in the financial crisis, he rebalanced by adding more cash to his equity position. His investments are widely diversified, including international holdings and mainly consist of low-cost index funds. He is invested not only in the US, but in Europe, Asia and the emerging markets.

John Campbell

Campbell, chair of the Economics Department, is an asset pricing specialist and no stranger to active investing, lending his expertise to the hedge fund Arrow Street Capital, and helping to oversee the Harvard endowment fund. With his own money, Campbell avoids stocks and focuses on less risky assets. The article doesn't detail what those assets are, but implies that Campbell may be active in the real estate market. Campbell believes stocks are looking more attractive with the recent rebound in the economy and believes this is a great time for young people to invest.

Claudia Goldin

Goldin, an economic historian specializing in labor economics, comes "from a family of people who are not risk takers," and is well-schooled in the history of hard times. Her approach to investing is very conservative and consists mainly of conservative retirement funds.

All in all, this brief look at three investment styles of Harvard economists left me mildly surprised with their conservativeness when it comes to their own money. My style is most similar to Mankiw, but they all seemed to place an emphasis on balancing capital preservation with growth. No one was a go-go investor, riding the wild swings of the market, hoping to hit a home run. They all seemed to be patient, methodical, almost boring in their investment approaches, which is how investing should be.

Thursday, October 22, 2009

Frontline: The Warning

Must see TV on the financial crisis..... the failure to regulate and create a market for derivatives, or WMDs as Warren Buffett calls them.

Wednesday, October 21, 2009

Budget Deficits for Dummies

Warren Buffett on the Economy

The "Oracle from Omaha" weighs in on what's next in the payment industry and the economy at large. Business Wire CEO Cathy Baron Tamraz sits down with Mr. Buffett in an exclusive interview.

Tuesday, October 20, 2009

Jonathan Zittrain: The Web as random acts of kindness

Feeling like the world is becoming less friendly? Social theorist Jonathan Zittrain begs to differ. The Internet, he suggests, is made up of millions of disinterested acts of kindness, curiosity and trust.

Lord Monckton on Climate Change

Feeling like climate change is a scam and the world's leaders are selling out their citizens? Lord Monckton agrees with you and minces no words in making his point.

Sunday, October 18, 2009

The State of the Union

These charts taken from Calafia Beach Pundit show the current Federal Budget situation.  By many measures this is the worst situation in the post WWII period, with tax collections as a % of GDP as low as they have ever been, and spending spiraling out of control.  The current year's deficit now exceed 11 % of GDP.

If these figures weren't bad enough, just examine the budget projections.

Chilling projections, absolutely chilling that anyone with a conscience would saddle their their constituents with this level of debt or the taxes to fund this debt.

The country needs some smart politicians to put these charts in front of the TV cameras, much like Ross Perot did as candidate for President with his infomercials, and help we the people see the country is on an unsustainable course, and a major reevaluation of the role of government in managing the economy is required. Entitlement programs are already the biggest budget problems, and it is irresponsible for the politicians to push forward with a major new entitlement program that would fundamentally expand the role of government in healthcare and put the taxpayers on the hook for trillions more in expenditures when spending is so far out of control.   In addition, embarking on a new set of energy taxes in the form of cap & trade, based on the dubious science of global warming, would only continue to weaken an already weak economy.  What's left of the Pokulus Bill should be shifted away from make-work projects, boondoggles, growing state and federal governments, and large scale income redistribution schemes to increased incentives for businesses to hire and invest.

The #1 message all citizens should send to Washington is that it is time to get our fiscal house in order and stop these insane levels of spending.  The country simply can't afford it.  We need the private sector to help us grow our way out of this mess; continued growth in government will only act like a boat anchor on the economy.

Saturday, October 17, 2009

Portfolio Allocation

One of the most neglected topics on the personal finance blogsphere is asset allocation, and if you believe modern portfolio theory asset allocation this could be one of the most important determinates in portfolio performance. So today I'd thought I'd share with you my personal portfolio allocation. My goals are simply to own most major asset class, be diversified internationally as well as across market caps, and have the traditional 60/40 balanced portfolio split between stocks and bonds. It is designed to help weather downturns in the market, currency risk, country risk and individual security risk, and emphasizes value, small cap, and emerging markets, areas that have historically over long periods of time outperformed the total market.

Fund Name
Asset Class
Vanguard Total Stock Market
Vanguard Value VIPERs
Vanguard Small-Cap
Vanguard Small Cap Value VIPERs
Vanguard REIT Index ETF
Vanguard FTSE All-World ex-US
iShares MSCI EAFE Value Index
Vanguard FTSE All-World ex-US Small-Cap Index
WisdomTree Int'l Small Cap Div Fund
Vanguard Emerging Markets Fund
iShares S&P World ex-US Property Index
Vanguard Intermediate Bond Market ETF
Vanguard Short-Term Bond Market ETF
Nuveen Select Tax Free Fund
iShares S&P/Citi Intl Treasury Bond
SPDR Barclays Cap S/T Intl Treasury Bond

Is it perfect? I don't think anything is perfect when it comes to investing. But it is something I where can sleep at night and provides returns that are competitive. The shortcomings are that I wish I could find a more broadly diversified international small cap value ETF, and I wish there were more broadly diversified international bond offerings available. As the financial marketplace changes, I'll keep searching for new offerings that better fit my needs and will adjust the portfolio accordingly. Do I have any investments outside of this portfolio? A few... primarily a small position in a commodities ETN that I don't consider a core holding, and some physical gold as a hedge against worse case scenarios.

Friday, October 16, 2009

Occam's Razor

Developed by William of Occam in 14th century England, Occam's razor reads entia non sunt multiplicanda praeter necessitatem, or in near literal translation entities must not be multiplied beyond necessity.  The principle can be more popularly stated as "when you have two competing theories that make exactly the same predictions, the simpler one is the better."  How does this apply to investing?  Let's attempt to formulate an investment portfolio that provides maximum diversity and covers the major classes of investments in the simplest way.  Asset classes I'm interested in include large, mid and small cap domestic stocks, large, mid and small cap foreign stocks, emerging markets, domestic bonds, and foreign bonds.  It includes a classic 60/40 split between stocks and bonds, and a 60/40 split between domestic and international.

My sample portfolio looks like:

Fund Name
Asset Class
Vanguard Total Stock Market
Vanguard FTSE All-World ex-US
Vanguard Intermediate Bond Market
iShares S&P International Treasury Bond Fund

This simple portfolio is merely an example, not a recommendation, but illustrates how easy it is to achieve diversity by investing in worldwide economic growth, hedging currency risk, individual security risk and individual country risk.  Each individual will have to determine the optimum mix of assets for their portfolio.  But the simpler the portfolio, the more likely to investor is to stick with the investment program through both good and bad times.

Quote of the Day: Marcus Tullius Cicero

Do not blame Caesar, blame the people of Rome who have so enthusiastically acclaimed and adored him and rejoiced in their loss of freedom and danced in his path and gave him triumphal processions.... Blame the people who hail him when he speaks in the Forum of the "new, wonderful good society" which shall now be Rome’s, interpreted to mean "more money, more ease, more security, more living fatly at the expense of the industrious."

~ Marcus Tullius Cicero (106-43 B.C.)
HT (Maggie's Farm

Thursday, October 15, 2009

Investing Using the Principle of Maximum Pessimism/Optimism

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
~ Sir John Templeton
This famous quote from John Templeton outlines an investment strategy in broad terms that is counter intuitive to the way most people invest, but if applied properly can reward the patient investor with handsome returns over the years. The difficulty in applying the strategy is controlling investor emotions to not get caught up in the euphoria of a rising stock market and having the discipline to wait for those moments of maximum pessimism or optimism. But one important thing to keep in mind in looking for these opportunities in maximum pessimism is that we are not talking about individual companies, but entire industries or countries where a broad basket of stocks can be purchased to control individual security risk and we are looking for a catalyst to drive these stocks higher.

Let's examine some of the moves that Templeton made during his lifetime applying this principle:
  1. WWII. In 1939 as the Great Depression was ending, WWII beginning, and much of the US was fearful the Depression would deepen, Templeton foresaw the wartime economy would drive up the demand for commodities and industrial materials.  As a result he invested $10,000 in104 stocks on the US exchanges trading under $1, 37 of which were already in bankruptcy.  As these positions were gradually sold off over the years, Templeton earned a 4 fold return.
  2. The Rising Sun. In the late 1950's Japan was viewed as a low-wage manufacturer of cheap, shoddy goods.  Templeton believed that Japan was committed to growth and quality improvements, and as a result of their improved position in the world economy would have to open up their capital markets to foreigners.  In the early 1960's, when Templeton bought in, the Japanese markets traded at a PE of 4 compared to 19.5 for the US with twice the growth rate, 10% verses 4%.  From 1960 to 1990 the Japanese index increased 36 times its original value.  Templeton sold most of his positions before the market peak when he thought they were fully priced and found better values elsewhere.
  3. The Regan Revolution and the Return of Optimism. In the early 1980's following the malaise and stagflation of the Carter years, the US was in recession with interest rates raised artificially high to break the back of inflation.  At this time many stocks in the US had fallen to single digit PEs, many people thought the US was in decline, and magazines were running headlines like The Death of Equities (a great contrarian indicator).  In 1979, the PE on the Dow stood at 6.8, book values around one or less, and almost everyone had given up on the market.  With inflation running at double digits, he reasoned the replacement value of assets was much higher than what was carried on the books, and that if corporate profits returned to their historic growth rate of 7% and inflation was reduced to around 5 - 7% that compounded corporate profits could double in 5 years.  
  4. The Internet Bubble.  In the go-go 1990's anything associated with the .com revolution commanded astonishing PEs, whether the companies had any sale as assets to back up those stock prices. This was a bubble of historic proportions, similar to the tulip bulb bubble in Holland or the South Sea bubble in England.  Maximum optimism is an understatement in describing the valuations of many of these companies.  The PE of the NASDAQ had climbed to 151 by 1999.  The IPO market for Internet companies was going crazy.  Templeton sold these technology companies short, concentrating on the stocks that had risen at least 3x above their offer price and timing his short position days prior to the lockups expiring, giving insiders the right to sell their shares.  His reasoning was simple: with little behind these companies other than hype, when the last buyer has bought and no more buyers are left there is only one way prices can go-- down.
  5. 9/11. Following the horrific attacks on the World Trade Center and the Pentagon, the stock markets were closed for close to a week.  Looking to capitalize on the initial panic and subsequent recovery, Templeton did something few would have expected.  Believing the government would not let the airlines fail, he placed limit orders on the 8 major airlines at 50% below their pre 9/11 closing price, not as long term trades but short term speculations.  Three of these orders triggered and when he sold these stocks in February of 2002, he pocketed gains of 61%, 72% and 24%.
  6. The Asian Currency Crisis. Triggered by the devaluation of the Thai currency, a chain reaction of selling ran through countries like Thailand, Malaysia, Indonesia, the Philippines, Singapore, and finally South Korea.  South Korea caught Templeton's attention, having one of the world fasted GDP growth rates, a high domestic savings rate, and a trade surplus.  At the end of 1997, when the country could no longer afford to defend the won, the currency collapsed along with asset values and its stock market.  South Korea was forced to go to the lender of last resort, the IMF, who imposed reforms on the country to open up its markets and change many of its traditional labor practices.  South Korea also raised interest rates to protect its currency.  Templeton began to buy into the Mathews Korea Fund in late 1997, whose 64% decline made it one of the worst perform mutual funds of 1997, viewing that stock market as seriously depressed.  The PE of the South Korean market had fallen from 20 to less than 10 because of its poor outlook.  In two years, as the country and its markets recovered, and the Mathews fund became one of the best performing mutual funds of 1999, Templeton earned a 267% return on his original investment.
Recent opportunities to participate in moments of maximum pessimism occurred in the March of 2009.  At that time almost every market in the world was a bargain and it would have been hard to go wrong buying anything.  But three opportunities especially stood out at this time: financials, REITs, and homebuilders.  Opportunities abounded in the common, preferred and debt securities of each sector.  The common could have been purchased using ETFs to obtain diversity and would have paid off more handsomely than the market as a whole during the recent recovery, while the debt and preferred, with their handsome yields in the teens and twenties, would have to be purchased individually.

But the question each investor should continuously ask themselves is: do any opportunities exist in the market where maximum pessimism or optimism exist.  Today's opportunity may be in shorting bonds.  With the Fed discount rate near zero, the weak dollar and steep federal deficits interest rates will at some point in time have to be raising to protect the dollar, combat inflation and keep foreign investors interested in purchasing government debt.

Wednesday, October 14, 2009

WSJ: The Baucus Bill Is a Tax Bill

From yesterday's Wall Street Journal:
To avoid the fate of the House bill and achieve a veneer of fiscal sensibility, the Senate did three things: It omitted inconvenient truths, it promised that future Congresses will make tough choices to slow entitlement spending, and it dropped the hammer on the middle class.

One inconvenient truth is the fact that Congress will not allow doctors to suffer a 24% cut in their Medicare reimbursements. Senate Democrats chose to ignore this reality and rely on the promise of a cut to make their bill add up. Taking note of this fact pushes the total cost of the bill well over $1 trillion and destroys any pretense of budget balance.

It is beyond fantastic to promise that future Congresses, for 10 straight years, will allow planned cuts in reimbursements to hospitals, other providers, and Medicare Advantage (thereby reducing the benefits of 25% of seniors in Medicare). The 1997 Balanced Budget Act pursued this strategy and successive Congresses steadily unwound its provisions. The very fact that this Congress is pursuing an expensive new entitlement belies the notion that members would be willing to cut existing ones.

Most astounding of all is what this Congress is willing to do to struggling middle-class families. The bill would impose nearly $400 billion in new taxes and fees. Nearly 90% of that burden will be shouldered by those making $200,000 or less.

It might not appear that way at first, because the dollars are collected via a 40% tax on sales by insurers of "Cadillac" policies, fees on health insurers, drug companies and device manufacturers, and an assortment of odds and ends.

But the economics are clear. These costs will be passed on to consumers by either directly raising insurance premiums, or by fueling higher health-care costs that inevitably lead to higher premiums. Consumers will pay the excise tax on high-cost plans. The Joint Committee on Taxation indicates that 87% of the burden would fall on Americans making less than $200,000, and more than half on those earning under $100,000.

Industry fees are even worse because Democrats chose to make these fees nondeductible. This means that insurance companies will have to raise premiums significantly just to break even. American families will bear a burden even greater than the $130 billion in fees that the bill intends to collect. According to my analysis, premiums will rise by as much as $200 billion over the next 10 years—and 90% will again fall on the middle class.

Senate Democrats are also erecting new barriers to middle-class ascent. A family of four making $54,000 would pay $4,800 for health insurance, with the remainder coming from subsidies. If they work harder and raise their income to $66,000, their cost of insurance rises by $2,800. In other words, earning another $12,000 raises their bill by $2,800—a marginal tax rate of 23%. Double-digit increases in effective tax rates will have detrimental effects on the incentives of millions of Americans.

~ Douglas Holtz-Eakin
My take: Why should anyone be surprised by this? Health care "reform" is not free and will not pay for itself. The savings from eliminating fraud and waste in Medicare will not be achieved. The price tag of $890B will be underestimated by a factor between 2 and 4, and substantial taxes, penalties, fees will be imposed on the middle class to pay for this plan. Those who were counting on getting something for nothing will be in for a rude awakening-- their costs for health care will be greater after the reform than before the reform.

Dr. Ben Carson on Health Care Reform

I encourage everyone to watch this video where world renowned pediatric neurosurgeon Dr. Ben Carson discusses his ideas on healthcare reform. While I don't personally agree with everything he says, he makes a number of good points and is a quiet voice of reason that is well worth listening to in a sometimes raucous public debate. Click on the link below to start the video.

WBFF FOX 45 :: Health Care Reform

The Value Added Tax (VAT): A Hidden New Tax to Finance Much Bigger Government

This Center for Freedom and Prosperity Foundation video explains why a value-added tax would be a dangerous money machine for big government. The evidence from Europe also shows that VATs actually lead to higher income taxes.

My take: IF IF IF IF the VAT were a PERMANENT REPLACEMENT for the personal income tax on all citizens, I would support it. However, the VAT is merely another way to grow government, and find new and creative ways to confiscate more money from the country's producers.

Medical Tourism

The above chart (click to enlarge) shows surgery costs in the US compared to other countries around the world that promote medical tourism.  The data is compiled from the Medical Tourism Association site.  I assume this may not be an apples to apples comparison, in that additional discounts are usually obtained on the US surgeries by providers and insurance companies.  I would treat these as ballpark figures to show relative comparisons.

From the Health Tourism site:
  • In 2006, about 150,000 American citizens traveled to Latin America  and Asia for medical treatment.
  • In 2007, the figure increased to approximately 300,000.
  • By 2010, experts say the number can increase to over 1 million.

American patients are opting to undergo medical treatment abroad for procedures such as: face lifts, heart bypasses and fertility treatments. For many people who require medical treatment, the last thing they want to do is travel. However, due to the high cost of medical treatment in the USA, many American patients are going abroad for medical treatments. Their purpose is to save 50% to 80% on medical treatment conducted by doctors who are often trained in the United States, at hospitals that maintain the precise standards of patient care and safety.

Canadians Speak Out on Socialized Medicine

Part 1

Part 2

Part 3

Part 4

Michigan's Mackinac Center for Public Policy speaks to Canadians about the quality of their health care system. As America moves closer to a government-controlled health care system, many Canadians want to set the record straight about life under their country's “universal” system. With many Canadians enduring pain for months and years while they wait for surgery, traveling to the U.S. for treatment, entering "lotteries" to get a doctor, and getting "wait list insurance," is Canada really a model for U.S. health reform? You be the judge.

HT (Carpe Diem)

Sir James Dyson Reinvents the Fan

This guy continues to amaze me with his inventions, and his spirit to revolutionize the mundane. I hope he turns his skills in the future to home heating and cooling, and revolutionizes the energy footprint of the average house.

Now for an alternative take on Dyson from 4-Block World:

Hulu Desktop for Linux

The Hulu Desktop for Linux is now available and can be found at  I downloaded the 64-bit .deb for Ubuntu and installed it with no problems.  However, when I went to Applications->Sound & Video->Hulu Desktop, I received an error that the could not be found.  To fix this problem I downloaded the 64-bit flashplayer off of the adobe site and copied it to /usr/lib/mozilla/plugins.  I then edited the ~/.huludesktop configuration file to change the options under [flash] as follows: flash_location = /usr/lib/mozilla/plugins/  Hulu Desktop then came up with no issues.  Sweet.

Tuesday, October 13, 2009

Quotes of the Day: Thomas Jefferson

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his candle at mine, receives light without darkening me.

~ Thomas Jefferson

Monday, October 12, 2009

El Rushbo on The Today Show

Part 1

Part 2


Love him or hate him, Limbaugh knows how to draw an audience.

SNL on the Obama Nobel Prize

How to Install Google Chrome on Ubuntu Linux

Google Chrome is my favorite browser when I use Windows.  But until recently it has been unavailable on Linux.  Here are step by step instructions for installing chrome on Ubuntu:

First update your software repositories to include google chrome:

sudo gedit /etc/apt/sources.list

Add the following two lines for Ubuntu 9.04 (Jaunty) Users

deb jaunty main
deb-src jaunty main

For ubuntu 9.10 (Karmic) Users add the following two lines

deb karmic main
deb-src karmic main

save and exit the file

Now add the GPG key using the following command

sudo apt-key adv --recv-keys --keyserver 0xfbef0d696de1c72ba5a835fe5a9bf3bb4e5e17b5

Update source list

sudo apt-get update

Install chromium browser using the following command

sudo apt-get install chromium-browser

If you want to open chromium go to Applications->Internet->Chromium Web Browser

From the CBO Assessment of the Baucas Health Care Bill

From the CBO assessment of the Baucas Health Care bill:
marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.
Is this considered a middle class tax hike?

Saturday, October 10, 2009

What Happened to Global Warming?

With the postponement of the Rockies-Phillies playoff game in Denver due to snow, the early opening of the Rocky Mountain sky resorts, and snow forecast for Chicago on Sunday.... a reasonable person might ask what happened to global warming?

To quote a BBC article:
This headline may come as a bit of a surprise, so too might that fact that the warmest year recorded globally was not in 2008 or 2007, but in 1998.

But it is true. For the last 11 years we have not observed any increase in global temperatures.

And our climate models did not forecast it, even though man-made carbon dioxide, the gas thought to be responsible for warming our planet, has continued to rise.

So what on Earth is going on?

Climate change skeptics, who passionately and consistently argue that man's influence on our climate is overstated, say they saw it coming.

They argue that there are natural cycles, over which we have no control, that dictate how warm the planet is. But what is the evidence for this?

During the last few decades of the 20th Century, our planet did warm quickly.

Skeptics argue that the warming we observed was down to the energy from the Sun increasing. After all 98% of the Earth's warmth comes from the Sun.

But research conducted two years ago, and published by the Royal Society, seemed to rule out solar influences.

The scientists' main approach was simple: to look at solar output and cosmic ray intensity over the last 30-40 years, and compare those trends with the graph for global average surface temperature.

And the results were clear. "Warming in the last 20 to 40 years can't have been caused by solar activity," said Dr Piers Forster from Leeds University, a leading contributor to this year's Intergovernmental Panel on Climate Change (IPCC).

But one solar scientist Piers Corbyn from Weatheraction, a company specializing in long range weather forecasting, disagrees.

He claims that solar charged particles impact us far more than is currently accepted, so much so he says that they are almost entirely responsible for what happens to global temperatures.

He is so excited by what he has discovered that he plans to tell the international scientific community at a conference in London at the end of the month.

If proved correct, this could revolutionize the whole subject.
To read the entire article go here.