Evensky & Katz
By Harold Evensky
January 4, 2013
Most importantly, I wish one and all a very happy, prosperous, and healthy new year!!
A HAIR-RAISING STORY
Welcome to 2013! For the New Year I thought I’d begin this newsletter with a brief personal story. For most of my life my dad wore a hairpiece, but after many years he decided that he’d forego the piece on weekends. Well, I too have been wearing a rug since I was in the Army in my 20s. Having recently reached a somewhat milestone birthday (my last – I’ve decided I’m no longer going to get older, just better) I decided that what was good for my dad is good for me. Consequently in the future there will be two Harold’s. So you’ll be able to find
me, I’ve posted a guide to the two Harold’s at the end of the newsletter.
My friend Al, Chief Consumer Investigator at CBS, introduced me to the book Trade the Congressional Effect: How to Profit from Congress’s Impact on the Stock Market by Eric Singer. I’m not suggesting it as an investment guide, but Mr. Singer does provide some interesting statistics. Here are some examples of what he calls the “Congressional Effect.”
From 1965 through 2011, on the 7,900 days Congress was in session, the stock market went up in price less than 1% annually.
During the same period, on the 4,100 days they were on vacation, the stock market went up over 16% annually.
Statistically, the data is identical going back to 1897 day by day. $1 invested only on in-session days from 1897 through 2011 would have compounded by price action into just $2. $1 invested just on vacation days would have compounded into over $300 in 115 years. The moral seems to be – let’s give Congress a LONG vacation.
REALL, REALLY BIG
One of my ongoing themes is to remind individual investors that even the wealthy investor with $100 million doesn’t even have pocket change in the world of institutional investing. An article in Institutional Investor about state-owned Sovereign Wealth Funds reminded me how true this is. For example:
Kuwait $290 billion
Chile $44 billion
Malaysia $34 billion
Azerbaijan $32 billion
Botswana $7 billion
Vietnam $3 billion
Norway $612 billion (It owns 1% of the world’s liquid assets!)
MORE BIG NUMBERS
LEGOs (a combination of the Danish words LEg GOdt which mean “play well”) are now 600 billion strong with the firm producing approximately 2.5 million elements every hour and 42,000 every minute. Thanks to Americanway for the info.
FROM FUNNY TIMES
I LOVE GURUS
One of my “hobbies” is tracking the success of market pundit predictions. For example:
In the 10/17/2011 issue of Investment News the story headlined “MSSB plans for the worst with new asset allocation” went on to say, “Shift to cash, quality reflects recession fear. In what the firm calls its ‘most significant change’ to its tactical asset allocation in two years, Morgan Stanley Smith Barney LLC’s global investment committee is adopting an overweight position and safe havens and an underweight position in risky assets.”
Whoops – the S&P return from 10/17/2011 to 12/13/2012 (the date I added this tid-bit) was about
A few weeks later in the 10/31/2011 issue was a story headlined “The tea leaves say ‘sell,’ portfolio manager says.” This story told us “Frank Barbera Jr., co-portfolio manager of the Sierra Core Retirement Fund, tracks a staggering number of jobs reports and other economic indicators. They all say the same thing, he said. ‘We have been seeing ‘sell’ signal since August …”
I guess the indicators lie – the S&P return from 10/31/2011 to 12/13/2012 was up a shade over 15% and almost 19% from August 2011.
Finally, how about a longer term? The headlines in the 11/13/2008 Money section of USA Today headlined in large bold type – “Stocks tumble near 2008 lows on more grim news.” “Hurt by a fresh barrage of bad news on the economy, jobs and corporate profits, the broad US stock market continued its free fall Wednesday, edging ever closer to last month’s bear market lows. Confidence was jilted again, as Wall Street dealt with news job cuts in securities firm Morgan Stanley, sales drops at department store giant Macy’s, and a grim 2009 forecast from consumer electronics retailer Best Buy. The latest signs of eroding business reinforced fears that consumers, who account for two -thirds of economic activity, will slash spending further. Consumers’ reluctance to open their wallets will further hurt profits of already weakened US companies.”
Wrong again. S&P return from 11/13/2011 to 12/13/2012 was over 70%
These musings on tactical allocation market timing reminded me to include a bit from one of Jason
Zweig’s always excellent Wall Street Journal columns “The Intelligent Investor.” In “How Practical is
Tactical,” Jason began with “‘Buy-and-hold’ is beating ‘dodge and weave.’ After years of being
mocked as ‘buying hope,’ the patient strategy of holding stocks and bonds is paying off again. By
contrast, many ‘tactical’ funds, which seek to smooth out short term market swings through more
frequent trading, are coming up short.”
Jason goes on to comment that “two thirds of these funds didn’t even exist before the financial crisis
erupted 2008…. Morningstar, the research firm, tracks 42 mutual funds and exchange traded funds
with ‘tactical’ in their name, up from eight in 2007…. Mutual funds with ‘tactical’ in their names are up 6.9% this year – an average of five percentage points less than the various indexes they follow,
according to Morningstar. Over the past three years, these funds have gained an annual average of
4.9%, or more than six points a year behind their benchmarks.”
These are all good reasons why we do not employ a global tactical allocation or market timing overlay for our investment portfolios.
I CAN ALWAYS COUNT ON DR. FIELDS FOR GOOD CONTENT
Wonderful English from Around the World
Cocktail lounge, Norway:
LADIES ARE REQUESTED NOT TO HAVE CHILDREN IN THE BAR.
In a Nairobi restaurant:
CUSTOMERS WHO FIND OUR WAITRESSES RUDE OUGHT TO SEE THE MANAGER.
On the main road to Mombasa, leaving Nairobi:
TAKE NOTICE: WHEN THIS SIGN IS UNDER WATER, THIS ROAD IS IMPASSABLE.
In a cemetery:
PERSONS ARE PROHIBITED FROM PICKING FLOWERS FROM ANY BUT THEIR OWN GRAVES.
BECAUSE OF THE IMPROPRIETY OF ENTERTAINING GUESTS OF THE OPPOSITE SEX IN THE BEDROOM, IT IS SUGGESTED THAT THE LOBBY BE USED FOR THIS PURPOSE.
Advertisement for donkey rides, Thailand:
WOULD YOU LIKE TO RIDE ON YOUR OWN ASS?
Airline ticket office, Copenhagen:
WE TAKE YOUR BAGS AND SEND THEM IN ALL DIRECTIONS.
A laundry in Rome:
LADIES, LEAVE YOUR CLOTHES HERE AND SPEND THE AFTERNOON HAVING A GOOD TIME.
I’M SO PROUD
Bloomberg Businessweek reports that Cornell, my alma mater, has completed a project to precisely
frost cupcakes using a 3D printer. The only downside is the $3,300 cost of the printer.
Do you wonder why the public views Wall Street and Banking with such disdain? Unfortunately, there’s good reason. Here are a few recent examples.
The federal government filed a civil lawsuit against Bank of America alleging the secondbiggest U.S. bank by assets saddled taxpayers with losses by misrepresenting the quality of home loans it sold to mortgage-finance firms Fannie Mae and Freddie Mac.
Barclays admitted in July that its staffers tried to rig the London interbank offered rate (LIBOR) as far back as 2005.
Barclays faced a double-barreled assault from U.S. authorities, as the federal energy-market regulator sought $435 million in penalties for the bank’s alleged manipulation of U.S. electricity markets. The lender also disclosed that it was facing a U.S. anticorruption investigation.
JPMorgan Chase has agreed to pay $600,000 to settle charges it violated cotton futures position limits, the CFTC.
MassMutual settled for $1.6M for insufficient VA disclosures.
Rajat Gupta, the former Goldman Sachs director convicted in June of insider trading for passing along corporate secrets, received a sentence of two years in prison and one year of supervised release. Gupta, 63, the former head of consulting firm McKinsey & Co., also was ordered to pay a $5 million fine.
UBS has agreed with regulators in Switzerland, the U.K., and the U.S. to pay a $1.5 billion fine to settle charges that it manipulated benchmark interest rates, I think you get the idea. I could keep on going but it would be too depressing. As I’ve written before, it’s time for investors to start looking out for themselves because they can’t count on politicians or regulators doing it for them. If you haven’t yet obtained a copy of the Fiduciary Oath let me know and I’ll send you one.
Both sides of the aisle rant and rave but seem to do little to solve our problems. Unfortunately there are real people out there who are facing real issues. From AARP:
Half of seniors have income under $20,000. They spend 17% of that on health care.
There will be 80 million Medicare beneficiaries in 2030, up from 40 million in 2010.
In 12 years, Medicare will not be able to cover full hospital costs.
Almost 25% of seniors rely on Social Security for 90% or more of family income.
THE FUTURE IS HERE
“The Next New Thing” was a fascinating story in Institutional Investor. It seems that in spite of modest missteps such as Long Term Capital and the implosion of CDOs (arguably the primary trigger of the grand recession), financial engineering creations (in the words of Warren Buffet, “financial weapons of mass destruction”) are alive and well. IBM estimates that 90 percent of data on a global scale is less than two years old. With an estimated 2.5 quintillion new bytes of data generated daily, who’s surprised? Obviously there’s no shortage of information to crunch and crunching they are. As an example, IBM recently signed an agreement with Citigroup to explore the use of Watson (the artificial intelligence software that beat two human Jeopardy champions) for “identifying opportunities, evaluating risk and exploring alternative actions ...” Rebellion Research is using a super computer capable of 5 million calculations per second to generate daily investment ideas for the hedge fund’s 20 or so quants and math wizards. “Over the past five years, high frequency trading, where transaction spreads are measured in microseconds, has come to drive more than 50 percent of U.S. equity volumes.” The result is an increasingly volatile market. “Before 2007 the Standard and Poor’s 500 index rarely shifted up or down more than 2 percent in a single day; it happened only twice in 2006. There were 72 such breaks in 2008 – a banner year for HFT and the height of the credit crisis – and 35 last year.” Next time you want to do your own stock picking you might want to think twice. Stay tuned.
ATTACK OF THE KILLER TOMATOES
If you’re not familiar with this magnificent 1978 classic, for shame! But it’s not too late to catch up. Just head over to YouTube at http://www.youtube.com/watch?v=PPZUWTTCBRA. The reason for this post is that I’ve just learned from Spirit magazine why they were so successful. Tomatoes have 6,760 more genes than humans. For you who like details, that’s 31,760 for tomatoes vs. 25,000 for us. Who knew?
BIGGER IS BETTER
If you’re charitably inclined, according to CNN Money you might want to consider fewer, bigger contributions as divvying your funds among too many charities is pretty inefficient. Here’s their analysis:
ALWAYS WISE COUNCIL
I’ve frequently quoted Walter Updegrave, Senior Editor at Money, but that’s only because he so often
brings both professional knowledge and common sense to his readers regarding investment issues. A
great example is his recent column on dividend investing, “Living off dividend income.” Here are a few excerpts:
“So far this year investors have poured $22 billion into mutual funds and ETFs that specialize in dividend stocks, even as they’ve yanked $25 billion out of all other stock funds and ETFs, according to EPFR Global. Think twice before you join that hot pursuit. While it's true that MONEY has long recommended dividends for income investors, I find that many people have an unrealistic view of what these stocks can do for them – and underestimate the potential risks, especially at today’s prices.”
“THE DIVIDEND ILLUSION … You might think that by living off dividend payments you’re avoiding the “sin” of dipping into capital. But that’s just an illusion. Because cash the company once had in its coffers is being paid out to shareholders, the stock of a company that declares a dividend subsequently drops by the amount of that payment. Yet with so many things going on at once in the market, this is easy to miss.”
“THE MYTH OF SAFETY … Another appeal of dividend payers is their perceived security. And it’s true that the stocks typically hold up better when the market falls. But the more you tilt your portfolio toward dividend-paying stocks, the less diverse it will be…”
You can find the full article at: http://money.cnn.com/2012/10/01/pf/expert/dividend-income.moneymag/index.html
Watch them build the Eiffel tower. Time-travelling 3D tour shows the birth of the Eiffel Tower
FOOD FOR THOUGHT
If you have any children or grandchildren considering law school, they might want to do some research in advance. Here’s a sobering piece from the APA Journal:
The U.S. Bureau of Labor Statistics forecasts 73,600 new lawyer jobs from 2010 to 2020. But in the first three years of the decade, 132,757 new lawyers have already been produced. “So, in theory, all of the BLS-forecasted job openings through 2020 have already been filled, and 59,157 new lawyers are still looking for ‘real’ law jobs,” the story says. “By 2020, about 300,000 additional grads will join those 59,157 in a hunt for jobs that, statistically, are not to be found.”
In a recent Kiplinger’s, Professor Jeremy Siegel contributed a piece titled “The Case for DOW 17,000.” http://www.kiplinger.com/columns/goinglong/archives/the-case-for-dow-17000.html
I know I just wrote about a glut of law school graduates, but actually, there are some terrific opportunities for attorneys. According to the ABA Journal, Judge Judy’s annual salary is estimated at $45 million. Of course for the losers there’s always less lucrative positions such as that of Chief Justice Roberts who makes $217,400. That’s 1/207th of Judge Judy’s salary.
Another interesting area of topsy-turvy comp is on college campuses. According to Bloomberg Businessweek growth in administrators at U.S. universities has been 60% from 1993 through 2009. The example provided in the article is Purdue where there is an acting provost and six vice and associate provosts along with 16 deans and 11 vice presidents including a $253,000 marketing officer and a $198,000 chief diversity officer. The average salary for a full professor is $125,000.
HEADED TO THE HOSPITAL?
AARP provides two sources that you might want to use to check up on facilities:
o Hospital Safety Score (http://www.hospitalsafetyscore.org) ranks 2,600 hospitals on 26
o For your tax dollars at work, check out http://www.healthcare.gov/compare/
MOVE OVER SLOWPOKE
Need to test out your new Lamborghini? Head to the Texas State Highway between Austin and San Antonio where the new speed limit is 85 MPH!
Remember all of those headlines about Greece? It was “obviously” a place for investors to avoid. Well, a recent headline in InvestmentNews read “No tragedy: Greek bonds up 80% since January.” The story went on: “Investors bold enough to buy junk-rated Greek bonds in January have earned twenty times more than owners of top-rated German debt this year even after the biggest ever sovereign restructuring.” Be wary of the obvious!
NOT THERE YET
The good news is that women have closed the earnings gap, shrinking from well over 30% in 1982 to right at 20% today. Unfortunately, the details for many professional jobs are not quite as encouraging. For example, according to a Bloomberg story:
I WANT ONE
Bloomberg Business Week writes that “IBM Wants to Put a Watson in Your Pocket.” IBM researchers spent four years developing Watson, the same one in the IBM/Citi story. Now they’re trying to figure out how to get that brainpower into your pocket. For those of you not in the know, Watson is IBM’s super computer. It currently has a nerve center based on 10 racks of IBM Power750 series with the processing power of 6,000 desktops. No piker in the power category, it can scour documents, Web sites, and books and analyze 66,000,000 pages a second! Count me in.
It’s common for the popular press to tout dividend-paying stocks and funds as the "safe" alternative. Unfortunately, as Professor Michael Finke, a friend and professor at Texas Tech, wrote in his article “Dividend Limits” on Advisorone.com:
“I asked David Blanchard, head of retirement research for Morningstar Investment Management and doctoral student in Personal Financial Planning at Texas Tech, to estimate the total return on the fund category traditionally associated with dividend payouts (large cap value) sorted by magnitude of dividends and excluding index funds… If higher dividend funds outperform then we might feel more comfortable defending a high yield equity fund strategy. They don’t.”
“I happen to have a soft spot for dividends… [However] [s]uggesting that dividend stocks are a good alternative to a non-dividend paying equity portfolio, particularly for retirees, might be setting investors up with more portfolio and income risk than they bargained for.”
You can read the full article at http://www.advisorone.com/2012/10/24/dividend-limits.
Michael’s conclusion is echoed in Walter Updegrave’s column, “I’d like to live off dividend income when I retire. How should I invest my portfolio?” Walter’s answer? “You might think that by living off dividend payments you’re avoiding the ‘sin’ of dipping into capital. But that’s just an illusion.”
His advice? “When you rely on dividends, you’re tying your cash flow to a corporate policy decision that has nothing to do with your needs. Selling shares, by contrast, lets you control how much money you’ll get from your nest egg and when.” In fancy investment terminology that’s a “total return” portfolio.
A NEW REASON TO WORRY
Your suitcase has been tagged and whisked away for a TSA security check before being loaded onto a plane en route to your final destination. How safe are the belongings inside? At the head of the “Oh my!” list is Miami International Airport, which ranks twelfth in passenger volumn but first in TSA theft firings, with 29 employees terminated for theft from 2002 through December 2011. I was tipped to this story by my associate Josh and info from ABC News.
Good news, at least for those of us who believe in international diversification (and if the world doesn’t come to an end). One of the most prestigious awards in the investment world is the Financial Analyst Journal Graham and Dodd award for the year’s best article. The most recent winner was Cliff Asness, Roni Israelov, and John Liew’s “International Diversification Works (Eventually).” The authors’ research, covering the period 1950-2008, supports their conclusion that “…the risk portion of the portfolio-equities-when diversified globally across many countries, offers dramatic improvement over an undiversified portfolio invested in any single country.”
IN THE SPIRIT
In the spirit of our recent election, I thought I’d share a few thoughtful observations sent to me by
my friend Peter.
“We hang the petty thieves and appoint the great ones to public office.” Aesop, Greek slave & fable author
“Politicians are the same all over. They promise to build a bridge even where there is no river.” Nikita Khrushchev, Russian Soviet politician
“When I was a boy I was told that anybody could become President; I’m beginning to
believe it.” Quoted in “Clarence Darrow for the Defense” by Irving Stone
“Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnels.” John Quinton, American actor/writer
“Politics is the gentle art of getting votes from the poor and campaign funds from the rich.” Oscar Ameringer, “The Mark Twain of American Socialism”
“I offered my opponents a deal: if they stop telling lies about me, I will stop telling the truth about them.” Adlai Stevenson, campaign speech, 1952
“The problem with political jokes is they get elected.” Variously attributed to Will Rogers and George Bernard Shaw
SO THE WORLD DID NOT END
Turns out we’re still here, but I thought I’d share some reasons to worry for the next time we face
USA Today: We’re Dead
The Wall Street Journal:
Dow Jones Plummets As World Ends
National Enquirer: O.J. And Nicole, Together Again
Microsoft Systems Journal:Apple Loses Market Share
Sports Illustrated: Game Over
Rolling Stone:The Grateful Dead Reunion Tour
Readers Digest: 'Bye
Mad Magazine (now 60 years old!): Yes, Me Worry
Heat-Resistant Long Johns – We Test 10 Brands
The New York Post:The End
America Online: System Temporarily Down; Try Calling Back in 15 Minutes
Inc. Magazine:Ten Ways You Can Profit From the Apocalypse
THE TWO HAROLD’S
As always, hope you enjoyed. Until next time……. Harold #1 and Harold #2
Harold Evensky, CFP®, AIF®
(c) Evensky & Katz