Evensky & Katz
By Harold Evensky
March 14, 2013
NOT THE ENTERPRISE
I put this first as it’s a MUST SEE for you, your friends, your kids and grandkids. A tour of the interior of the International Space Station, it describes exactly what it's like to live there day to day. It is a personal tour of the station, given by our female astronaut. My mouth is still open in awe.
GO HERE SECOND
I would have placed this first; however, the space station tour is passive and this will take some effort on you part – but IT’S WORTH IT!. Namely the Kahn Academy on YouTube. The tag line is ‘Watch. Practice. Learn almost anything for free,” and the Academy exceeds expectations. I was introduced to the Academy by my friend Arun who was introduced to while attending an executive program at Harvard. This is what he wrote about it.
The Education Revolution and the Khan Academy
The Khan Academy’s mission is simple as it is bold: “To [change] education for the better by providing a free world class education to anyone anywhere”. Founded by Salman Khan, the Academy is a YouTube based not for profit education business. It has over 3,000 video tutorials on topics ranging from math, to physics, history and finance and has attracted over 4 million unique viewers.
Salman Khan graduated from MIT with three degrees and then moved into the hedge funds management business. One of his cousins asked him to help tutor her in math, which led him to post on YouTube various tutorials for her use in her own time. Somehow other students stumbled across these. The enthusiastic and positive feedback that Salman received from these unexpected users, together with his discovery that he had a passion and talent for producing educational videos, led him to abandon his high paying hedge fund job, to launch the Khan Academy as a not-for profit. His growing realization that what he was doing could revolutionize education, gave him a new sense of meaning and purpose.
The beauty of the system is its free availability to anyone at any time. Traditional classroom learning means that a certain amount of time is allocated to each topic, regardless of whether this is sufficient to gain mastery of the topic. Using the Khan Academy, students are able to work at their own pace, giving everyone the chance to achieve mastery, before moving on to the next topic. It is currently designed as a supplement to, rather than an alternative to school based learning. While users span the spectrum of age categories, most are high school or college students looking to supplement their classes with outside help.
Salman had the good fortune to be discovered by Bill Gates, who found his videos useful for teaching his daughters certain concepts [and my son David says he’s used it for my 8 year old grandson]. The Gates Foundation and Google, among others, have provided initial funding of around $10 million to the Academy, allowing it to expand its scope and reach, with a small but dedicated band of people, including some great computer programmers. There is a marvelous TED talk in which Gates MCs a presentation by Salman on the Academy: Khan Ted talk.
But better still, if you just want to experience the site for yourself, or for your child, go to YouTube, type in ‘Khan Academy’ and you will see an array of videos arranged by different topics.And this isn’t just for kids. Want to get a quick lesson on Cantango or Backwardation? Here’s the source. Clients have questions? This may be the answer.
COULDN’T SAY IT BETTER MYSELF
Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it. - Mark Twain (From a posting on our Committee for the Fiduciary Standard web site).
COULDN’T SAY IT BETTER MYSELF #2
I do try but I’m not always successful in persuading investors of the wisdom of long term investing so I thought this excerpt from Bottomline Personal by Warren Buffet might carry more weight and help doubting Thomas’s become better investors.
“Realize that the market always comes back. In the 20th century, the US endured two world wars, a depression, a dozen recessions, oil shocks, terrorist attacks, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. The point is that over the short-term, economic and political events may cause stocks to go down. But over the long term the American economy is strong and resilient, which causes stocks to go up.
Some pundits predict another crash and are telling us to stay out of the market. But pessimists and doomsayers have a lousy track record at predicting the future."
Remember last year when all we heard, ALL YEAR, was about the world coming to an end? Well, as Vince Farrell, Chief Investment Officer at Soleil Securities and one of my favorite bloggers reminds us;
“The year was actually pretty good. Not one day of 2012 did the S&P trade below the closing level of 2011. That hasn't happened since 1979 and it's occurred a mere eight times since 1928 when detailed record keeping started.”
To make money in the market, you have to be in the market.
If Warren’s wrong and the market doesn’t eventually go up, it won’t matter much where your money is.
A POOR RETURN
According to the Journal of Economic Perspectives, spam costs American consumers and businesses an estimated $20 billion/year versus spammers’’ gross worldwide annual revenue of $200 million.
Share of income given to charity by taxpayers with incomes from $50,000 to $99,999 = 6%
Share of income given to charity by taxpayers with income $200,000 and up = 4.2%
DON’T KNOW WHERE THEY GET 20% FOR EMAILS FROM, I’D RATE IT 80%+
BETTER WATCH YOUR DRIVING
According to an article Martina sent me, not knowing the law could result in a ticket. Here are a few examples;
In Alabama it’s against the law to drive barefoot.
In Massachusetts if you drive with a gorilla in the back seat YOU WILL BE TICKETED!
As you will in Sag Harbor if you take your clothes off in the car.
In New Jersey, if you’re convicted of a DUI you’re PERMANENTLY eliminated from getting a vanity plate! Say it isn’t so!!
And, it’s not just restricted to cars:
In Nevada it’s illegal to ride a camel on the highway.
Of course it’s not all bad news. In Sarasota, Florida the fine for hitting a pedestrian is only $78.
A TIP FROM EINSTEIN
Albert Einstein told us that ““The most powerful force in the universe is compound interest” and Bottomline Personal provided an excellent example.
“If your teenage child or grandchild is gainfully employed, they can contribute up to $4,000 a year in a Roth IRA. The contributions are tax-deductible, but at the child’s low tax bracket it doesn’t matter.
Let’s say the child puts at $4,000 a year between the ages of 16 and 21, and then doesn’t contribute another dime. If, over the long-term, the Roth IRA earns 10% per year, the child will have $2,045,042 at age 65 and the money will be 100% tax free!”
NOT LOOKIN’ SO GOOD
Next to IPOs, Hedge Funds are many investors’ favorite “bragging right” investments. Only problem is, it’s not too clear what anyone’s bragging about. Here’s a table from Private Wealth.
More Booms than Busts:
I CAN ALWAYS COUNT ON DR. FIELDS
Introduced by the wise counsel that “Smile, the market will recover,” was a sampling of newspaper headlines. I couldn’t include them all but here are a few of my favorites:
Something Went Wrong in Jet Crash, Experts Say
Police Begin Campaign to Run down Jaywalkers
War Dims Hope for Peace
Cold Wave Linked to Temperatures
Red Tape Holds Up New Bridges
Kids Make Nutritious Snacks
Typhoon Rips Through Cemetery; Hundreds Dead
In an earlier NewsLetter, I wrote how impressed I was with Pat Regnier’s [Money Magazine] mea culpa regarding his panic liquidation of stocks to cash in 2011. He followed up in a recent article, candidly sharing lessons that all investors will be rewarded by following.
For a time, my bet worked out. I sold all the stock funds in my 401(k) during the Washington D.C. drama over the debt ceiling and missed a big drop in the market. But as I wrote last year, all the evidence showed that market timing is a mugs game-that I was just lucky, temporarily – and I vowed to go back to a buy-and-hold strategy...
This would have been a great idea if I had actually done it. I procrastinated and missed a bunch of opportunities to buy at what now looked like low prices. In the end, I finally edged back into the market at prices just a little bit higher than when I sold. And I took home one more lesson about the folly of trying to outwit the market.
Stock investing is like a reverse roach motel. It’s easy to check out of taking risk, but hard to check back in again.
My thanks and compliments to Pat and Money.
WOW! BIG BROTHER (AND SISTER) IS REALLY WATCHING
Bloomberg reports that although store mannequins have been designed to catch your eye; that may be changing. New EyeSee mannequins are equipped with technology typically used to identify criminals in airports. “The dummies allow retailers to glean demographic data and shopping patterns from customers as they move through stores.” It gets the demographic info by feeding data into demographic profiling software to determine age, gender, and race. As an example, the story reports one store found that a third of visitors using one of its doors after 4pm were Asian so it placed Chinese speaking staff by that door.
FOR SHAME – SAME SONG, SECOND VERSE
From recent headlines; it’s depressing and inexcusable but seemingly endless. Still, it’s what keeps me traveling to D.C. with my friends in the hope that one day Congress and regulators will consider the interests of the “little guy.”
WSJ, “Big Banks Settle mortgage Hangover – Major banks agreed to pay $20 billion [that’s BILLION!!] to settle mortgage-related legal disputes…”
Deal Book “UBS Posts $2 Billion Loss Tied to Legal Settlements. LONDON — The Swiss bank UBS on Tuesday reported a large loss for the fourth quarter, driven by the costs of settling legal matters, including its role in a global rate-manipulation scandal.”
NYT – Goldman Sachs “But its hardball tactics and supersized profits draw scrutiny and criticism. It was called “a great vampire squid” by Rolling Stone and denounced in Congress. In recent years, the bank’s reputation has been greatly tarnished by the role it played in the financial crisis as well as a number of multimillion-dollar settlements relating to fraud and insider trading.”
If you’d like a copy of our Fiduciary Oath for your friends to use when checking out prospective advisors just let us know.
Remember Pat’s story? It seems that after every market boom or bust I read articles explain “how it was obvious” that the boom or crash was imminent. In Behavioral Finance it’s known as Hindsight Bias. My technical term for the phenomenon is Balderdash!
Take as an example the “obvious” housing crash. In March of 2007, Chairman Bernanke said “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” In April, in spite of the failure of a major subprime lender, the Fed remained generally copasetic about the markets. Based on the recent release of Fed minutes from that period, The New York Times reported that at the August meeting, William Poole (president of the Federal Reserve Bank of St. Louis) commented “My own bet is the financial market upset is not going to change fundamentally what’s going on in the real economy.” And, Chairman Bernanke mused, “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.” That was on a Tuesday. By Friday the Fed saw a new “obvious” and Chairman Bernanke told his colleagues, “The market is not operating in a normal way.” No kidding!
How about a more recent example? Remember the panic over European government finances; especially Greece? It was “obvious” that investors should run as fast and as far as possible away from Europe. Well, Businessweek published a great table showing the returns from 6/29/2012 to 1/15/2013 for a few of these dogs. Here are the results:
So much for “obvious.”
I’M NOT GETTING OLDER, JUST BETTER
That’s the mantra I adopted after my last (and last) birthday. And, if I forget and need cheering up I just take a look at the web site below (also from Katie). It’s a video clip of a very young 101 year old Ms. Dunning driving her magnificent 1933 Packard.
Pacific Standard is a fascinating new publication I’ve only just become aware of. In addition to a potpourri of thought provoking articles I came across some interesting statistics:
Immigrant families from one Indian state-Gujarat own 35% of all American motels.
One source – fast food trash – makes up 49% of the garbage in the California cities of Richmond, Oakland, San Jose and South San Francisco (I hope they at least wash it down with good California wine).
63% of American lettuce is produced in one county – California’s Monterey.
AND YOU THINK THE U.S. HAS TROUBLES
According to the Wall Street Journal, there’s a rising controversy in the Czech Republic over efforts to make water cheaper than beer! It seems that in the Republic beer really is often cheaper than water. Maybe that explains its citizen’s consumption of an average of 37 gallons of beer per year. Well, the Health Minister is not real happy with this guzzling and proposed that restaurants and bars must offer at least one nonalcoholic drink that is cheaper than beer. For some reason his proposal hasn’t met with universal approval.
THE NEW WORLD ORDER
In my ongoing effort to remind American investors not to be myopic here are a few items to consider:
By 2010 Asia’s share of global M&A surpassed the European Union’s and is now second only to the U.S.
UnionPay [ever hear of them?] has 2.9 billion credit/debit in circulation in 135 countries (45% of the world’s total) and transaction volume for the first half of 2012 accounted for 23.8% of the world’s volume placing it at number 2 just behind Visa international – UnionPay is a Chinese company. [Bloomberg Businessweek]
ZEN FOR THOSE WHO TAKE LIFE TOO SERIOUSLY
This one is from my friend and regular contributor, Ed.
If you think nobody cares, try missing a couple of payments.
Ok, so what's the speed of dark?
How do you tell when you're out of invisible ink?
Hard work pays off in the future. Laziness pays off now.
If Barbie is so popular, why do you have to buy her friends?
How much deeper would the ocean be without sponges?
Inside every older person is a younger person wondering what happened.\
The news for active management continues to be depressing. According to S&P Dow Jones “Persistence Scoreboard:
Of the 707 funds that were in the top quartile [of performance] as of 9/2010, only 10% were in the top quartile at the end of September 2012
For the three years ending September 2012, 23.6% of large-cap funds, 3.2% of mid cap funds and 29.4% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. Random expectations would suggest a rate of 25%
Looking at longer- term performance, only 5.2% of large-cap funds, 3.2% of mid-cap funds and 5.1% of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random expectations would suggest a repeat rate of 6.25%.
IMMIGRATION- MORE THAN JUST FARMWORKERS
Percentage of high-tech businesses started by immigrants in Silicon Valley in 2012 – 43.9%
According to the WSJ it seems investors may be catching on. A front page headline read “Investors sour on Pro Stock Pickers” It read, “Investors are jumping out of mutual funds managed by professional stock pickers and shifting massive amounts of money into lower-cost funds that echo the broad market.”
COOL KID GIFT
If you have a young child, grandchild, niece or nephew, here’s a great gift. The crayon belt; at about $30 it’s a winner.
SIGNS OF THE TIMES
From my friend Gordon:
At an Optometrist's Office: "If you don't see what you're looking for, you've come to the right place."
On a Plumber's truck: "We repair what your husband fixed."
Outside a Muffler Shop: "No appointment necessary. We hear you coming."
In a Veterinarian's waiting room: "Be back in 5 minutes. Sit! Stay!"
In the front yard of a Funeral Home: "Drive carefully. We'll wait."
Sign on the back of another Septic Tank Truck: "Caution - This Truck is full of Political Promises"
THIS WOULD MAKE AGATHA CHRISTIE PROUD
According to a NYSSA SmartBrief release “JPMorgan bet against its ‘London Whale,’ sources say three people familiar with JPMorgan Chase's ‘London Whale’ trading debacle, which cost the bank $6.2 billion, say there's a new twist to the fiasco: Some traders within JPMorgan actually bet against the very derivative positions placed by the company's own chief investment office. The U.S. Senate Permanent Committee on Investigations is examining how different units of the same bank wound up on opposite sides of the same trade. The panel is expected to release a report on its probe within a few weeks.” Stay tuned.
Mena sent me this note “I find this man [Richard Branson, founder of Virgin Group] fascinating (for his ideas) and follow him on LinkedIn and Twitter. Today he had this posting on his blog and I wanted to share with you.” Thanks Mena; I thought it was so good; I too wanted to share it.
I have always lived my life by making lists. These vary from lists of people to call, lists of ideas, lists of companies to set up, lists of people who can make things happen. I also have lists of topics to blog about, lists of tweets to send, and lists of upcoming plans.
Each day I work through these lists, and it is by ticking off each task that my ideas take shape and plans move forward. As the New Year gets started, lots of you will be busy making resolutions. If you want to stick to them, I suggest making them into lists. Here are my top 10 tips for making lists:
1. Write down every single idea you have, no matter how big or small
2. Always carry a notebook
3. Find a list method that works for you. Doodles, bullet-points, charts – what suits you best?
4. Make a list of small, manageable tasks to complete every day
5. Mark off every completed task – you’ll find making each tick very satisfying
6. Make your goals measurable so you know if your plans are working
7. Set far off, outlandish goals. What do you want to have achieved by 2020? How about 2050?
8. Include personal goals in your lists, not just business
9. Share your goals with others. You can help motivate each other further
10. Celebrate your successes – then make new lists of new goal
MORE – WE’VE COME A LONG WAY
From the Journal of Financial Planning:
40.3 million – Number of individuals age 65 or older, someone in America enters Medicare every eight seconds.
1.8 million is the cost of raising a child to independence in the Northeast. And, that only includes half of college costs.
Good news - 8 of the world’s largest companies (by market value) are based in the U.S. (up from 4 in 2007)
TID BITS #2 - Bad News
7th- Rank of the U.S. on the World Economic forum’s Global Competitiveness Index
4 – Number of consecutive years that the U.S. rank has fallen.
I know it’s tempting to jump on a hot IPO but don’t confuse case data with base data (i.e., one good story versus the history of IPOs). As “Before Buying That IPO...” in the Journal of Indexes warns, “Initial Public offerings (IPOs) are supposed to represent the Holy Grail. It’s your chance to own the next Microsoft or the next Google. But is it really your lottery ticket to riches?”
Here’s some statistics to keep in mind:
That means that over the last three years over 50% of IPOs lost money during the first three months of trading.
She was in the bathroom, putting on her makeup, under the watchful eyes of her young granddaughter, as she'd done many times before. After she applied her lipstick and started to leave, the little one said, "But Grandma, you forgot to kiss the toilet paper good-bye!" I will probably never put lipstick on again without thinking about kissing the toilet paper good-bye.
My young grandson called the other day to wish me Happy Birthday. He asked me how old I was, and I told him, 80. My grandson was quiet for a moment, and then he asked, "Did you start at 1?"
After putting her grandchildren to bed, a grandmother changed into old slacks and a droopy blouse and proceeded to wash her hair. As she heard the children getting more and more rambunctious, her patience grew thin. Finally, she threw a towel around her head and stormed into their room, putting them back to bed with stern warnings. As she left the room, she heard the three-year-old say with a trembling voice, "Who was THAT?"
My grandson was visiting one day when he asked, "Grandma, do you know how you and God are alike?" I mentally polished my halo and I said, "No, how are we alike?'' "You're both old," he replied.
A little girl was diligently pounding away on her grandfather's word processor. She told him she was writing a story. "What's it about?" he asked. "I don't know," she replied. "I can't read."
A 6-year-old was asked where his grandma lived. "Oh," he said, "she lives at the airport, and when we want her, we just go get her. Then, when we're done having her visit, we take her back to the airport."
Although I do spend an inordinate amount of time immersed in the world of financial planning as it’s my avocation as well as vocation, I do occasionally branch out as on a recent visit by my niece, Abby. Here we are supporting the Harlem Globetrotters in a boisterous rendition of YMCA.
AND I WASN’T ALONE
Katie exercised her considerable basketball skills.
As always, I hope you’ve enjoyed this issue; I enjoyed putting it together. Also as always, if you’re short of nighttime reading, you can find prior issues on our web site at http://tinyurl.com/EKNewsLetters and if you know someone who would like to be added to our NewsLetter email list have them sign up at http://www.evensky.com/. Until next time…
Harold Evensky, CFP®, AIF®
(c) Evensky & Katz