Ask Uncle Bill

UFOs? NO, ETFs

Well, leave tomorrow for six days in a U-Haul so I have lots to do to get ready.  Not a lot of time for this stuff but if you want to learn up on ETFs go for it.  Me, I would just read category 12 and do that.  Easy for me to say, I wrote it.  Category 12 I mean, not the following which came from MarketMinder.com.

 

THE ADVISOR'S CORNER

Exchange Traded Funds

8/30/2007 |

The Advisor’s Corner tackles a common situation or issue facing financial advisors and their clients.

Over the past decade, exchange traded funds (ETFs) have exploded in popularity. Originally designed to track a broad market index at a relatively low cost, ETFs now come in all shapes, sizes, and levels of specificity. Most every segment of the market now has an ETF to track it. In this column, we’ll take a closer look at exchange traded funds and discuss ways these tools can be useful in building a diversified portfolio.

Client: What’s an exchange traded fund? Who were they created for?

Advisor: Exchange traded funds, or ETFs, are securities tracking a specified index or basket of assets in a fashion similar to an index fund. However, unlike an index fund, an ETF trades like a stock on a major exchange and the price fluctuates throughout the day. ETFs were originally designed to provide investors with a relatively low-cost method of investing in a particular index or segment of the market. ETFs provide instant diversification and allow investors to sell the index short, buy on margin, and purchase a smaller number of shares. (Most index funds have a minimum buy-in.)

Over the past several years, ETFs have gained in popularity with investors who believe there is no value to trying to outperform a market index or benchmark. ETFs allow investors to essentially perform like the market at a lower cost relative to most other actively managed mutual funds.

Client: That approach sounds pretty appealing. What are the drawbacks?

Advisor: On the surface, it seems an appealing alternative to other investing techniques. If you can spend minimal time achieving market-like returns, what’s not to like?  But, like almost everything market-related, it’s not that easy.

Many “indexers” purchase ETFs planning to just let them “do what they do” over the next twenty years. Unfortunately, though this is a noble goal, you see very few able to stick to it. Why? Part of the reason most investors underperform the market is their (very natural and understandable) propensity to allow emotions to overwhelm objectivity. Many investors become spooked by even small short-term losses in their portfolio. It can be difficult to recognize short-term losses are likely temporary in the bigger picture. When market indices and the funds tracking them have double-digit declines, many investors panic and fail to stay the course. That panic can lead investors to sell out at the wrong time—making it likely they miss the opportunity for the positive returns they seek.

Really, buying a fund for the long-term and actually sticking with it are two totally separate things.

Client:  Is there a better way to use ETFs?

Advisor:  In my opinion, yes. There are certain instances when utilizing ETFs to gain exposure to narrow sectors of the market makes sense, from a transaction cost and diversification standpoint. For example, if I want an approximately 3% portfolio weight in Japanese stocks, I can more cost-effectively gain exposure and diversification with an ETF.

But if I purchased individual positions instead, I would have a few challenges. First, I would have to purchase multiple individual stocks, maybe 10 or more, to properly diversify in that narrow category. However, allocating only 3% of my portfolio to 10 or more positions can lead to big transaction costs. Since most brokerages charge minimum commissions for trades, buying 5 or 10 shares of a stock becomes much more expensive relatively than buying 100 or more shares. Second, even with 10 or so positions, I still wouldn’t have achieved the diversification available with a single ETF that might track several hundred positions.

Client:  So, why create a portfolio using anything but ETFs?

Advisor:  First, even though it is not nearly as important as proper asset and sub-asset allocation, stock picking can still add value to your portfolio’s return. Studies have shown nearly 10% of a portfolio’s return is attributable to stock selection. If you have the time and ability to pick good stocks, you can likely add return.

Second, if you build an ETF-only portfolio, you still have many decisions to make. Do you use only broad index ETFs? Or do you use sector, country or size-specific ETFs? How much do you put in each one? When do you rebalance? How do you ensure the underlying positions in each fund don’t overlap? Essentially, using ETFs this way requires active management—something an ETF user may be trying to avoid. Part of the ETF allure is their passive attributes and there’s nothing passive about this type of approach.

How To Make A Million--The Easy Way

Stealing articles again because I have a lot to do--1,500 miles to go in a UHaul takes your mind off money.  And you should take your mind off money too by making investing a habit, not a gamble.  See below--pretty dry but makes a lot of sense.  An article called Taking A Gamble On Ignorance by Kebin Bailey, an Aussie.

A FRIEND of mine recently told me with great confidence that investing in shares was gambling.

I took offence and assured him that if you use a scientific approach you can wash out most of the speculative risk and be left with ownership of good quality businesses that produce good earnings year after year.

His opinion about the market is not unique -- and is borne out of an ignorance of the evidence that backs up sound portfolio theory.

He has only experienced the hype of stock tips and timing calls of when to get in and when to get out of the market. In a word, his only experience of shares was speculating.

Empirical research has shown that stock selection and market timing techniques contribute virtually nothing to the total return of a broadly based investment portfolio over time and in many cases detract from the overall portfolio performance.

Research conducted by Brinson, Hood and Beebower in several well documented studies showed that over 94 per cent of the long-term return of broadly based investment portfolios were attributable to the asset allocation decision.

Only the remaining 6 per cent was attributable to stock picking and market timing.

However, stock picking and market timing (sometimes called tactical asset allocation) are the very areas that generate the bulk of the revenue for the investment industry.

Many shareholders have failed to match the market return, despite taking far greater concentration risk by picking a relatively small number of shares that they think will be winners.

They tend to blame their broker for poor stock selection without realising the futility of the exercise in the first place.

Most of us rarely compare the total performance of our portfolio relative to the market as a whole and we are often unaware of our poor relative performance.

Some of us are like the gambler who only remembers the wins at the track but conveniently forgets the losers. During a rising or "bull" market when a "rising tide lifts all ships", share clubs spring up and there is a sense that investment is easy and fun.

Interest begins to flag when losses start to accumulate during a prolonged downturn. Nothing substantial is learned about the nature of investment markets and a belief is usually formed that share investment is speculative and dangerous.

The famous author Benjamin Graham used a precise formula to differentiate between investment and speculation. His description has stood the test of time.

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Often, the unsuspecting public is led into purchases that they think are investments when they are in effect, speculations.

The evidence of how to achieve better results is available but ignored by the majority of participants in the advice industry for commercial reasons.

Prior to the advent of the computer, work was already being done on the efficiency of markets.

Some of this research dates back to the work of French mathematician Louis Bachelier, who presented his dissertation in 1900 on "The Theory of Speculation" for his degree of Doctor of Mathematical Sciences at the Sorbonne in Paris.

In this paper he stated that "the mathematical expectation of the speculator is zero." He described this condition as a "fair game".

Bachelier arrived at his conclusion because "it seems that the market, the aggregate of speculators, at a given instant can believe in neither a market rise nor a market fall, since, for each quoted price, there are as many buyers as sellers."

The logic is irrefutable: "Clearly, the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower."

Over time, of course, prices will move in either direction, when the market as a group changes its mind about "what the price considered most likely" is going to be.

My friend who thought investing was about second guessing the market should read Bachelier. He should ignore short term fluctuations, diversify as broadly as possible and focus on the long-term dividend producing potential of every purchase.

And you should read Category 12--All You Need To Know

Death Of A Salesman

Why go to the work of thinking up stuff when you can steal it?  Did I say steal it?  Sorry, borrow it. 

The job of salesman (salesperson?) has always fascinated me because I'm not very good at it.  Wish I was because it is a job you can take anywhere.  I was in international finance and the smart money said you had to live in New York, London, or at worst, Chicago to make a living.  I proved that wrong but the career category is not very portable. 

Sales is.  If you're good you can live anywhere.  The guy building the million dollar house next to ours is a salesman for IBM working out of his house.  And he builds houses in his spare time.  What a life. 

So think about it but read this by Ben Stein first.

Ten Ways to Blow a Sale

by Ben Stein

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Posted on Friday, October 12, 2007, 12:00AM

In 1900, the most common job in the United States was farm laborer. That was backbreaking, dangerous work. Now the most commonly occurring job is salesperson.

That's not as difficult. Usually, such jobs are performed in air conditioned settings. The most painful parts of it are dealing with rude customers and having to stand for long hours.

It's Yours to Lose

There are all kinds of sales jobs, of course, from selling gum and cigarettes at convenience stores to selling giant office buildings, airplanes, or immense blocks of stocks or bonds. Or even selling entire companies.

But whether you're a salesperson at 7-Eleven or Goldman Sachs, you've probably heard and read advice on how to make a sale. I'd like to change gears and come at it from another angle. As a companion piece to my column from last year, "The Art of (Killing) the Deal," how about some further advice on how to lose a sale?

The Terrible Ten

If you find yourself doing the following acts or omissions on a regular basis, you might want to reconsider your steps:

1. Don't listen to your customer. Instead, only tell him or her what you feel like saying.

Don't hear what's important to the customer about a house or a car or a pair of shoes or an investment. Only talk about what's interesting and important to you.

2. Show disrespect to your customers. After all, you never know if the guy is serious or not. So make fun of him and belittle him until -- and maybe even after -- you actually see the color of his money.

Don't hesitate to be sarcastic and mock or criticize his choices and opinions. After all, it's your store, your dealership, your brokerage. You're the expert, not him or her. Besides, customers like being taken down a few pegs. They don't want to just be sucked up to -- they want to be treated badly. It makes them much more likely to buy.

3. Don't be accommodating on big purchases. If you're selling something as expensive as a home or large boat or resort condo, and if the buyers have any hesitation because of unsettled market conditions, don't cut them any slack. Just show them the standard contract, and make it as one-sided as you can.

Make sure you tell them it's your way or the highway. Yes, it might be a million-dollar sale, and maybe you haven't had any other customers in a few weeks (or months). But still be totally unbending about your terms even if what the buyer wants doesn't really cost you much money.

You have to show that ratty little buyer who's boss. Flexibility is for losers, and you're not a loser.

4. Put your personal life ahead of your customers. Get right off the phone with your clients if your girlfriend calls. If you have a manicure and pedicure appointment, do that before you even consider staying a minute late to get the sale closed.

After all, there are always more clients coming through the door -- your nails are sacred. You have to respect yourself and not become a slave to your job.

5. Don't know your product. If your customer asks about your product, the best answer is "whatever," preferably said in the most dismissive tone possible.

If you don't know something your client asks about, tell him it's not important and that if he really wants to find out about it, he should look it up online. You have other things to do, like that manicure and pedicure.

6. Don't bother closing the deal. Or rather, make it really hard for the customer to close the sale.

Don't have the paperwork ready. Gossip with the finance manager instead of getting your papers ready. Forget to fill out parts of the contracts. Then tell the buyer he'll have to cool his heels while you get it done -- and then just leave and make him wait until tomorrow! It'll teach the customer a much-needed lesson in humility.

7. Lie to your customers about the product. Tell them it's safer, or more reliable, or guaranteed for longer than it is.

After all, they'll never catch on. And if they do, there'll be plenty more customers coming. Besides, you'll be gone and in another state by the time they catch on. If they sue, that's your boss' problem, not yours. Little lies help you, and they don't really hurt anyone.

8. Look like a total slob. Have bad breath. Don't wear clean clothes. You're a poet, an artist -- you don't have to look like you're someone's butler or maid.

You can look any old way you want and smell any way you want. Your charming personality will come through anyway. If it doesn't, tough. There are 300 million people in this country, and any one of them is a customer. So worry about the next one, not this one.

9. Don't bother to close the deal. Just explain a little bit, then walk away and let the customer stew. Don't come back to him -- let him come crawling to you.

Don't explain things, then ask how he wants to pay for it and any other question that will lead to closing.

10. If you're selling big-ticket items, don't bother to qualify your customers.

Don't find out if they can actually afford that plane or that car or that home. Just do your standard pitch and assume the guy or gal in front of you has the money to do the deal. That really works beautifully. Then, if they don't qualify, yell at them for being deadbeats.

Salesman, Heal Thyself

Oh, there are a lot more. But if you find yourself doing any of these little things, pause, take a few steps back, and ask yourself, "Do I really want to sell this thing?" If the answer is yes, then take a step back and start again with selling in mind.

(I'm greatly indebted to my master-salesman pal and fellow author Barron Thomas for many of these tips.)

Quick Political Fixes That Don't Work

Going to post another article that is pretty good but pretty boring but has a lot of meaning so read it.  I'm too busy right now to do it all myself since I just added a possible lawsuit in Florida over my late uncle's estate.  Just gets better and better.

But I realized when I saw this article at MarketMinder.com (full disclosure--I do business with these guys) that none of you have ever seen or been under price controls.  Hope you never do because they don't work, ever.  Read on.

The high cost of cheap food

Published: October 24 2007 20:37 | Last updated: October 24 2007 20:37

In 1973 Richard Nixon, US president, under political pressure be­cause of rising domestic food prices, banned the export of soyabeans. The policy had predictably dire results, but today, with the world in the grip of another bout of food price inf­lation, governments worldwide are rushing to distort the market with subsidies and quotas, price controls and export taxes. They should stop.

In the run-up to its presidential election, Russia has imposed price controls on basic foodstuffs, and plans an export tariff on wheat. China already controls prices; other importers, including Egypt, Jordan, Bangladesh and Morocco, are increasing subsidies or fiddling with their tariff regimes.

The simple problem with all these actions is that they distort the market. Price controls and export tariffs make production less profitable, which discourages increased supply and can make shortages worse. Subsidies stimulate demand so it does not fall into line with higher prices. All distort the terms of trade within a country. Farmers suffer at the expense of city dwellers – especially perverse in countries with high rural poverty, such as China.

None of this is too bad in the short term. If food prices fall back, price controls become meaningless, subsidies can be withdrawn and export tariffs no longer make sense. The more pernicious problems will appear if food prices stay high. With more demand for protein from fast-growing Asian middle classes, lunatic policies to subsidise corn-based ethanol and the legacy of under­investment during long years of low prices, that prospect seems likely.

For exporters, distorting the market in favour of domestic consumers harms the balance of payments, lowers investment and helps rivals. Nixon’s ban is often credited with creating Brazil’s soyabean industry.

For net food importers, who can keep prices down without shortages only by offering subsides, the risks are much more serious. Cheap food is an open-ended fiscal commitment – once in place it is politically impossible to withdraw – that can play havoc with a budget. Developing countries have improved their fiscal position in recent years. They should not throw that away.

Rich countries, where food is a small part of total consumption, have less to worry about, although they should beware the ratchet effect as food importers increase subsidies and food producers tax exports, driving up world market prices still further. But leaders in the developing world, no matter the political pressure to bring down the cost of grain, should resist. Cheap food comes at a high price.

Copyright The Financial Times Limited 2007

Deliver Us From Human Resources

Somebody over at Tower Perrin doesn't have enough to do as evidenced by this 'study.'  I struggled through it but not sure I can draw any conclusions except that Mexican companies have the greatest percentage of 'engaged' employees.  From what I saw in Mexico they are engaged because they just feel damn lucky just to have a job.

Interesting remarks about Japan as well.  Well, interesting if you are in Human Resources.

On the 'road to engagement?'  What is that?

Read on and figure out your own conclusion.  Please share any insight because I'm not sure I get this.  Or even want to.

Few workers are 'engaged' at work and most want more from execs
Sunday October 21, 10:28 am ET
By Andrea Coombes

Just 1 in 5 workers are 'engaged' -- and most want more from executives

SAN FRANCISCO (MarketWatch) -- Only 21% of workers worldwide are "engaged" -- that's human-resource-speak for ready to expend some extra effort at work -- while 38% are either disenchanted or disengaged, according to a new survey.

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Engagement is not satisfaction or happiness, but the degree to which workers connect to the company emotionally, are aware of what they need to do to add value and are willing to take that action, said Julie Gebauer, a managing director with consulting firm Towers Perrin, which surveyed almost 90,000 workers in 19 countries.

"Happy employees don't necessarily create better financial results, but there is a definite link between engagement and a company's financial performance," Gebauer said.

The survey found 21% of workers worldwide are engaged, and another 41% are "enrolled," which means they're on the road to engagement, Gebauer said.

More than 80% of the engaged employees say they contribute to the quality of company products, services and customer satisfaction, while only 40% of disengaged workers agree.

Engagement helps retention too: About 50% of engaged employees say they have no plans to leave their company versus 15% of the disengaged.

'Dollars-and-cents issue'

The fact that almost 80% of workers are less-than-engaged is likely costing companies money, Gebauer said.

"The notion of engagement is really a dollars-and-cents issue. Organizations that have employees that are highly engaged deliver better financial results than those that don't," Gebauer said.

In a separate study, Towers Perrin assessed data on 40 global companies over a three-year period, measuring employee engagement at a certain point and then looking at the companies' financial results over the ensuing three years.

Companies with highly motivated workers enjoyed a 3.7% increase in operating margins and a 2% rise in net profits, while companies with a lower level of worker commitment saw both measures decrease slightly.

Countries vary widely

The portion of engaged workers varies widely by country, according to the survey.

In the U.S., 29% of workers are engaged and 28% are disenchanted or disengaged, while in Mexico, 54% of workers are engaged -- the highest among the 19 countries surveyed -- while 16% are disenchanted or disengaged.

The lowest portion of engaged workers on the list is Japan, where 3% of workers are engaged and 72% are disenchanted or disengaged.

Still, other reports find higher levels of worker commitment among U.S. workers, at least. A separate survey finds that 72% of workers would recommend their company as a good place to work, up from 62% two years ago, and 64% say their company values them as employees, according to a survey of 2,000 U.S. workers in September by Rasmussen Reports LLC, a research firm, for Hudson, a staffing and recruitment firm.

From the Towers Perrin report, here's the full list of engagement levels by country:

Region	Engaged	Enrolled	Disenchanted	Disengaged
Global	21%	41%	30%	8%
Mexico	54%	30%	13%	3%
Brazil	37%	38%	22%	3%
India	36%	46%	15%	3%
U.S.	29%	43%	22%	6%
Switzerland	23%	50%	23%	4%
Canada	23%	44%	25%	7%
Spain	19%	35%	31%	15%
Russia	18%	46%	30%	7%
Germany	17%	47%	28%	8%
China	16%	51%	27%	6%
U.K.	14%	42%	33%	11%
Belgium	13%	47%	31%	9%
Netherlands	13%	47%	32%	7%
France	12%	41%	35%	12%
Italy	11%	40%	36%	13%
Poland	9%	37%	39%	15%
Korea	8%	45%	40%	7%
Hong Kong	5%	36%	46%	13%
Japan	3%	25%	56%	16%

Engage me

So, what makes for an engaged employee? It's not necessarily pay. While the level of pay is important, it's not among the top 10 drivers of engagement, Gebauer said.

Rather than using "the blunt instrument of pay," Gebauer said, companies should survey their work force, much as they might study their customers, to assess what employees are seeking.

The top 10 drivers of employee engagement across all 19 countries are a mixed bag that includes both the behavior and actions of senior management and individuals' own actions and abilities:

1. Senior management sincerely interested in employee well-being
2. Improved my skills and capabilities over the last year
3. Organization's reputation for social responsibility
4. Input into decision-making in my department
5. Organization quickly resolves customer concerns
6. Set high personal standards
7. Have excellent career advancement opportunities
8. Enjoy challenging work assignments that broaden skills
9. Good relationship with supervisor
10. Organization encourages innovative thinking

Many employees "are looking for a greater demonstration of senior management's interest in their day-to-day work," Gebauer said.

"What employees are looking for is open communication, communication that reflects the fact that senior management really understands how the work gets done, and recognizes and appreciates that," she said.

Senior management's interest in employees can be expressed in a number of ways, Gebauer said, "including organizations' willingness to help employees balance work and activities outside of work, to sponsor competitive benefit programs, to focus on career development and training," she said.

"Those are things that will translate to employees as senior management being interested in my well-being," she said.

Communication helps, too, even the electronic kind. "CEOs who will provide a monthly Web cast or a voicemail just letting people know about key developments in the industry and in the company -- those are some of the things that help employees put at least a voice and a face to senior management," she said.

The study's findings refute other studies that find workers' immediate supervisors are most important to employees' sense of well-being.

"It's not to say the manager isn't important, but imagine the best manager in the world working in an organization that doesn't have a good performance-management system, doesn't have good advancement opportunities," Gebauer said.

"How is that manger going to help the employee navigate through an organization that is actually not working so well?"

Beats the hell out of me.

Getting To A Million Bucks

Most people don't get rich because they refuse to start small.  Why bother?  Just win the lottery.  I can't believe people buy lottery tickets but they do.  And the ones I see doing so don't look very smart.  And they aren't.

The way to get there is simple, well, kind of.  Save two times your annual salary and let the power of compound interest take over.  Einstein said that compound interest was the eighth wonder of the world and most people think Einstein was, well, an Einstein.

Jonathan Clements gives the details in the following---

How to Save $1 Million for Retirement

The Wall Street Journal Online
By Jonathan Clements


If you're a newly minted college graduate, the $1 million-plus needed for retirement might seem impossibly large.

Feeling discouraged? Try lowering your sights, aiming instead to accumulate savings equal to two times your annual income.

Once you hit that milestone, the financial wind will be at your back -- and reaching your retirement-savings goal should be a breeze.

Breaking through. Suppose you expect eventually to earn $80,000 a year. Looking ahead to retirement, you reckon that -- in addition to Social Security -- you will want maybe $45,000 a year from your portfolio, adjusted for inflation.

To generate that $45,000, you will need a $1 million nest egg, calculated in today's dollars. This assumes that, in retirement, you use a 4.5% annual portfolio-withdrawal rate.

Investment Growth

"People wonder how they will ever accumulate enough money," says Charles Farrell, a financial adviser with Denver's Northstar Investment Advisors. "But what many investors fail to understand is that, once they reach a certain level of assets, most of the savings should come from investment growth."

Mr. Farrell figures the breakthrough occurs at around two times income. Let's say your salary has hit that $80,000, you have amassed $160,000 in savings, you are socking away 12% of your pretax income each month and your investments earn 6% a year.

Over the next 12 months, your $160,000 portfolio would balloon to $179,518, or $19,518 more. Your monthly savings would account for $9,600 of that growth. But the other $9,918 would come from investment gains. In other words, you've got to the crossover point, where the biggest driver of your portfolio's growth is now investment earnings, not the actual dollars you're socking away.

You should, however, keep salting away money. That sacrifice will be handsomely rewarded, as things really start to snowball. Using the assumptions above, your portfolio would soar from $160,000 to more than $418,000 a decade later. True, part of this gain would be lost to inflation. But inflation should also drive up your salary, allowing you to squirrel away more money.

Get Started Now

Getting started. That still leaves the initial task of accumulating two times income.

"It can take people 12 to 15 years," Mr. Farrell says. "The earlier you can start, the better. But if you're close to two times pay by your early 40s, you're probably in pretty good shape."

As you strive to amass that sum, your top priority should be funding your employer's 401(k) plan. In addition to the initial tax deduction and continuing tax deferral, you will likely receive a matching employer contribution, which will help speed your portfolio's progress.

If you can, save outside your employer's plan, by funding a Roth individual retirement account. That won't get you an initial tax deduction, but you will enjoy tax-free growth. A Roth also offers a heap of flexibility. At any time, you can withdraw your contributions -- but not the account's investment earnings -- without any sort of tax hit. That means your Roth could double as an emergency reserve or as your house down-payment fund.

Investment Ideas

Which investments should you buy? Check out broadly diversified no-load funds like AARP Aggressive and Schwab Target 2040, both of which require a $100 initial investment. Until you reach Schwab's $1,000 brokerage-account minimum, you will need to add $100 every month through an automatic investment plan, where money is pulled out of your bank account and invested directly in the fund.

Also consider Fidelity Freedom 2050 and T. Rowe Price Retirement 2050. The regular minimum at both funds is $2,500. T. Rowe Price will trim that minimum to $1,000 if you open an IRA and waive the minimum entirely if you sign up for a $50-a-month automatic-investment plan. Similarly, at Fidelity Freedom 2050, you can sidestep the minimum if you agree to invest $200 a month through Fidelity's SimpleStart IRA program.

Yahoo! Finance Weekend

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Minimum Wages Worldwide at Yahoo! News

Who's Earning What? America's minimum wage, though unchanged in a decade, is still more than 250 times that of Mongolia.

Just Be Glad You Are Not In The Newspaper Business

Very early in my career, like at the beginning, I had a boss who was not the happiest guy on the planet.  He had about an hour and half commute by train each way which for me explained everything but so did a lot of other people but they seemed kind of normal.  Not Dick, he was miserable. 

Then one day he wasn't.  Everyone noticed but put it down to exception.  Until it happened again the next day and the next and the next.  What was going on?  As the junior guy with the most to lose, I was selected to ask about the reformation. 

I did.  Dick's answer--"I quit reading the newspapers."

Here is an article with a lot of references to newspaper articles which you may want to read but you should probably ignore if you want to be a successful investor. 

   

Flaming Kamikaze Squirrels! (And Other Anomalies)

10/19/2007

Story Highlights:

• A true, prolonged bear market can’t be forewarned or foreordained by the mass media.
• This week’s market volatility is perfectly normal, not a specter of ghosts past—stocks remain a great value for investors

Discounting an anomaly is impossible. What are the odds a squirrel catches fire and ignites a car? Like zero, right? Whoops…it happened!

Flaming Squirrel Ignites Car in Bayonne
By N. Clark Judd, Hudson County Now
http://www.nj.com/hudsoncountynow/index.ssf/2007/10/flaming_squirrel_ignites_car_i.html

Flaming squirrels are uncommon…but fiery car-igniting squirrels are downright anomalies! As a car owner, there really is no way to protect against such an event, is there? (Do most car insurance policies cover flaming squirrels, or is that just geckos? If so, does that fall under “acts of god,” “collision,” “arson/vandalism,” or what?) We’ve written on the nature of market anomalies before:

Obsessing Over Black Swans (5/1/2007)
http://www.marketminder.com/commentary/commentarypage.aspx?articleID={798DE358-09EF-4BE6-B75C-AA673CB282E3}&sectionID=\commentary\daily

On the 20th anniversary of Black October, today’s market drop (S&P 500 shed 2.6%) has some folks wondering if it’s déjà vu all over again. But this is no new bear market and no downside market anomaly. This is barely a bump in the road.

Why? Many reasons. An important one is Black Monday took just about everyone by surprise. It’s extremely difficult to have a true market crash everyone expects because that expectation will be baked in to stock prices a priori.

A true crash today would not come as a surprise—too many folks are worrying about it:

Crash and Quivers a Lesson, Not Guide
By Annette Sampson, Sydney Morning Herald
http://www.smh.com.au/news/business/crash-and-quivers-a-lesson-not-guide/2007/10/19/1192301043459.html

Watching for the Next Black Monday
Bryant Park Project, NPR.org
http://www.npr.org/templates/story/story.php?storyId=15436281

20 Years Later, Could Markets Crash Again?
By John Waggoner and Adam Shell, USA Today
http://www.abcnews.go.com/Business/PersonalFinance/story?id=3750809&page=1

Paint it Black
Economist.com
http://www.economist.com/finance/displaystory.cfm?story_id=9993586

As a matter of fact, the so-called ills frightening today’s markets are the oldest of this bull market!

Wall Street Walloped
By Alexandra Twin, CNNMoney.com
http://money.cnn.com/2007/10/19/markets/markets_0405/index.htm?postversion=2007101916

We quote: “Stocks slump, with Dow down 300 points on credit and housing sector woes, earnings fears, record-high oil prices, slide in dollar, questions about the Federal Reserve.” Not a new worry among them! That’s great evidence this is mere short-term investor psychology.

On Monday we gave our thoughts on why twenty years later a new Black Monday is highly unlikely:

Ghost of October Past (10/15/2007)
http://www.marketminder.com/commentary/CommentaryPage.aspx?articleID={3D4C6163-2B00-498C-8B3A-2481840C0DF0}

Keep in mind, the week’s market drop is not even the largest one week drop of the year. This is still well within the confines of normal market volatility.

Don’t fret stocks too much—their prospects for the immediate future are still stellar. This was just a rough week. But if you require further solace, here’s some sense about 1987 and today:

The Truth About the Crash of 1987
Donald Luskin, Poorandstupid.com
http://www.poorandstupid.com/2007_10_14_chronArchive.asp

Have a great weekend…and watch out for those kamikaze squirrels.

Cheating Today

Actually I've been cheating for the last couple of weeks since our son went to blow up things in the Las Vegas desert, we're building a house, I may have to sue some people in Florida, and I'm having trouble getting the electrician to show up.  Not a lot of time for other things like concentrating so I'm cheating.  Actually the subject is about paying attention to only certain things so take a look at this article from Marketminder.com (again) and learn to ignore thinking that only gets in the way of getting rich.  Here goes---

The Myth of One

9/12/2007 |

Right now, you’re reading this column and your mind is focused on each sentence. That’s a marvelous and miraculous thing your brain is doing! The ability to focus on one thing is an incredible feat of focus allowing us to accomplish much in life. But there’s a big drawback: While you’re focusing on this column, there’s a whole world of activity your brain is ignoring!

That pain in your back, the chatty co-worker across the room, the phone that won’t stop ringing, the fly buzzing around your head…where did all those pesky thoughts go? None of them ceased to exist, you just stopped paying attention for a few seconds.

Blocking extraneous issues from our minds and directing our focus towards what’s most relevant is a nifty feature of the human brain: We’re actually designed to ignore most of what’s going on around us. Human brains—and those of many animals—are made to focus and reduce situations to actionable, understandable steps. We can’t keep a whole lot of information at the forefront of our consciousness for very long. At best, we can hold on to a few items at a time, but mostly we just focus on one thing or we’ll forget it.

That’s because evolution designed the brain as a hierarchical thing—receiving stimulus from the outside world and running the data through various neural unconscious systems (which account for the vast majority of brain activity) and deciding what, if any, information is worth bringing to your actual frontal lobes (where most of your consciousness is believed to reside). You’ll never even know about most of what your brain does or perceives!

That’s a great thing because nobody wants to be thinking about regulating their heartbeat, digesting this morning’s cinnamon raisin bagel, or focusing the lenses in their eyeballs to read the newspaper every second of the day. Our unconscious brains do all that heavy lifting so we can put our attention on other issues.

Only problem is, the brain’s tendency to block out extraneous information can be a very hazardous thing for investors.

I like to call most of today’s financial media pundits disciples of the “Myth of One.” That is, most stories we read today tend to focus on one issue alone as if that was the only thing moving stocks. “Oh, stocks were down today because housing starts fell last month!” or “Stocks went up because mortgage loan demand was higher than expected in August!” (Really? Since when are we suddenly all so focused on mortgage demand as the seminal market moving issue?)

The reality is millions upon millions of factors are acting on the market at any given time. But our brains can’t live with that idea so we write and read stories about single factors as if they were the only relevant thing. How absurd! But that’s how our brains work—we’re just not made to see the big picture. (In fact, our brains are so blind no one seems to notice corporate earnings are easily surpassing expectations this year!) Today the singular mythic issue is credit and housing, yesterday it was energy prices and carry trades, and tomorrow it will be something else. That’s your brain tricking you into the Myth of One.

It seems impossible to truly understand what’s going on in markets if we can only focus on a few measly issues at a time. What can we do?

One useful strategy is to put things into perspective. Often when investors get too focused on a single issue it gets blown far out of proportion.  A great example is last week’s US employment report. Investors headed for the hills as the S&P 500 relinquished more than 1.5%–supposedly all for a job contraction of 4,000. When we consider a workforce of over 153 million, 4,000 jobs account for less than one thousandth of a percent of the employee base. How silly! There’s virtually no way such a small thing could account for such a big move. That tells you investors irrationally fell prey to the Myth of One. If you can see that, you’ve put the issue into perspective and gotten ahead of the game. Read more about the employment issue here:

Belaboring Labor, 9/7/07
http://marketminder/commentary/CommentaryPage.aspx?articleID={FCC988F3-72BA-4D67-97CE-10681D05A89C}

Ultimately, you’re just going to have to live with the brain you’ve got. But that doesn’t mean you have to buy in to the myth that just one story alone moves global markets at any given time.

Sometimes You Have To Put Up With The Bad To Learn Something--Annuities

What I mean is that this article, which I stole off MarketMinder.com which they got from Money magazine, is pretty boring but useful so try and read it.  Read it so when you get a call from an insurance salesmen pitching these things two red lights will go off in your brain--high fees and taxes.  Then say no.

Pay attention to the last couple of paragraphs where the guy has some alternatives, alternatives which Uncle Bill tells you all the time.  Have a good weekend.

Early nest egg: Say no to annuities

If you're still building up your retirement, steer clear of annuities. They have a function, but not quite yet, says Walter Updegrave.

By Walter Updegrave, Money Magazine senior editor

October 11 2007: 9:23 AM EDT

Sign up for the Ask the Expert e-mail newsletter

NEW YORK (Money) -- Question: I'm 44, and after maxing out my 401(k) and Roth IRA, I still have about $400 a month I'd like to invest outside these accounts for early retirement. Would you suggest I invest this money in an annuity? - Angie Tyrie, Hinton, West Virginia

Answer: The short answer is no, I wouldn't recommend you invest your extra savings in an annuity. Although I do believe a type of annuity known as an immediate, or payout, annuity can in certain circumstances play a valid role in a retiree's portfolio (for details, click here), for reasons I'll get into shortly, I don't think annuities are a particularly good way to build a retirement nest egg, particularly if you plan on tapping that money for early retirement.

More from Money Magazine

Harvest a rich 401(k) Retire Rich: 13 myths Do it now: Get on track for retirement

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	When do you need the money? 3 - 5 years5 - 10 years10+ years
	How much risk can you handle? Not much at allA reasonable amountAs much as possible

	How flexible are you? If I miss my goal by a year or two, I'll still be okay. I can't afford to miss my target.
	During market sell-offs, do you See an opportunity to buy more stocks Sell stocks thinking things will only get worse Do nothing

Video

More video

Money Magazine's Walter Updegrave gives advice on things you can do right now to ensure you are saving enough for retirement. Play video

I should add, though, that you'll get a very different answer from people who sell annuities. They typically portray annuities - and especially variable annuities, which allow you to invest in mutual fund-like portfolios - as an excellent place to stash money once you've maxed out your 401(k), IRA and similar plans.

Indeed, based on the emails I get from individual investors, it's clear that some "advisers" also apparently steer people who haven't contributed all they can to 401(k)s and the like into annuities, a practice that, in my mind at least, can border on financial malpractice.

One selling point is the old standby that the money you invest in a variable annuity (which is the type most often pitched to someone in your position) grows without the drag of taxes until you withdraw the funds. But there's a new sales mantra from the annuity industry these days.

Today, the "killer app," so to speak, goes by the name "living benefits." Essentially, this refers to various riders and options you can tack onto the annuity. The one often pitched to someone your age is the "guaranteed minimum income benefit," a feature that promises you'll receive a certain amount of income in the future even if the investments within the annuity perform abysmally.

Harvest a rich 401(k)

Another type of living benefit, geared more toward people in or closer to retirement, is the "guaranteed withdrawal benefit for life," which assures that you'll be able to withdraw a given amount of money as long as you live. But as tantalizing as all these features may seem, I don't think an annuity makes sense for someone like yourself who is still accumulating money for a retirement nest egg.

One reason is that most annuities come with onerous fees. In the case of variable annuities, there are several layers: an annual insurance charge that can run 1.25 percent or more; the annual investment management fees, which range anywhere from 0.5 percent to more than 2 percent; and, the fees for the various riders, which can add another 0.6 percent or more. Add them up, and you can be paying between 2 percent and 3 percent a year, if not more.

The fee extravaganza doesn't stop there. Most annuities also have "surrender fees" that can dock you 6 percent to 10 percent (and in some cases much more) if you decide to withdraw your money soon after investing it.

Unfortunately, many people who end up in annuities - or at the receiving end of a sales spiel about them - don't realize just how expensive they can be, which is why in a recent Long View column I recommended a simple form for disclosing the various charges. These fees alone are enough to make most annuities a lousy bet.

And, as I've written before, I don't think the highly marketed living benefits (which, by the way, are also used as a rationale to induce people to invest in a tax-deferred variable annuity within an already tax-deferred IRA) are worthwhile when you understand what you're actually getting and what you're paying for them. (For more on that issue, click here and here.)

But even if you manage to get around the fee hurdle - and, in fairness, I should note that there are some annuity providers who charge much less than the industry averages - I still don't think annuities are a good choice for someone like you.

Why? Well, one reason is the way your gains are taxed when you withdraw them. You pay ordinary income tax on investment earnings regardless of whether those earnings are interest income, dividends, short- or long-term capital gains. If you're investing for growth - as someone your age should be - you'll likely have the bulk of your money in investment options within the annuity that generate long-term capital gains.

Money for life: The hidden costs

But instead of paying tax on those gains at the long-term capital gains rate, which maxes out at 15 percent - as you would in a mutual fund held in a taxable account - with an annuity you pay tax at ordinary income rates that can go as high as 35 percent.

And if you withdraw your money before age 59 1/2, you'll not only have to pay ordinary income taxes on your gains, but you may also face a 10 percent IRS early withdrawal penalty. (This is separate from any surrender fee the annuity provider might charge.)

So given the fees and the way your gains are taxed, I don't find annuities a very appealing investment for someone looking to build a retirement nest egg. Throw in the possibility of a 10 percent early-withdrawal hit, and I think the case for them is even more underwhelming if you think you'll retire early.

So where should you put your extra savings? My suggestion would be a tax-efficient investment like a tax-managed mutual fund or a broadly diversified index fund that generates most of its gains in the form of share-price appreciation.

Until you sell, you'll pay no tax on the rising share value. And as long as you hold this investment longer than a year, any gain you realize from the appreciation in the value of your shares will be taxed at the long-term capital gains rate, as opposed to ordinary income rates with the annuity. (For more on how tax-managed and index funds help keep your tax bill down, click here.)

To sum up, I think you can do a lot better than an annuity with your $400 a month. At some point after you're actually retired, you may want to consider investing some of your money in an immediate annuity to assure yourself an income you won't outlive.

But in the meantime, if someone wants to sell you an annuity, just say no. 

About to retire? It's all about the 'safe money'

Gotta Quit Singing The Blues

The market hits an all time high but most people think the world is coming to an end.  In addition, lots of people say 'so what?' because the market is getting a bit ahead of where it was seven years ago.  Number wise, yes but economically no.  Seven years ago we had the dot.com nonsense with PEs so out of whack that the bottom had to fall out and it did. 

Check out this MarketMinder.com article on the new high.  It has one line that should be imprinted on your investing eyeballs so you see it every day which is---Pessimism and undue worry are the stuff of bull markets; euphoria is the bane. 

Remember that and read on.

 

Happy Anniversary!

10/10/2007

Story Notes:

• Yesterday the bull market celebrated its fifth anniversary, but you’d never know it by reading financial headlines over the same period
• Fears about stocks gaining “too much too fast” and “too many years of an up market” aren’t based in reality or logic
• Strong economic and market fundamentals supporting stocks’ climb are still in place—making the immediate future look bright

MarketMinder doesn’t like to dwell on the past because it can’t tell you much of anything about the future. But we feel it’s incumbent upon us to highlight a scarcely recognized fact: The bull market for global stocks is five years old. Here’s one of the few acknowledgements we found:

Happy Birthday, Bull
By David Landis, Kiplinger
http://www.kiplinger.com/features/archives/2007/10/bullmarket.html

Five years ago yesterday, the S&P 500 closed at 776.76. Today, it sits around 1560…over a 100% recovery in five years. Good times!

According to Standard & Poor’s, in those five years Energy stocks were the winner, gaining over 236%. Other economically sensitive sectors also flourished, including Materials with 157%, Industrials with 124%, and Technology’s 144% gain. Traditionally defensive sectors like Consumer Staples and Health Care lagged, each with about 40% gains. An outlier was Utilities, which racked up a whopping 168% rise in the period. On balance, that’s very close to what you might expect from an economy experiencing sustained expansion and high demand. And these are merely US returns—foreign stocks fared even better.

Perversely, such a big recovery scares many—they proclaim it’s been “too much too fast.” But history tells us this recovery wasn’t all that big. The current bull is actually the second weakest of seven post-World War II bull markets that lasted five years or more, according to Standard & Poor's.

The “aging bull” argument doesn’t fly either. It’s a strange thing to believe stocks should go down just because they’ve been going up. This is a perversion of the mean reversion theory, which simply doesn’t pertain to stocks. There’s no mathematical, economic or financial law that says earnings, economic growth, or stock prices must revert back to any kind of average. Trends can last as long as underlying fundamentals support them. (See our past commentary “Vector Investing” 9/27/07 for more.)

To wit, the fundamental drivers propelling this bull remain intact: Better than expected corporate earnings and global GDP, high M&A and share buyback activity, and relatively dour sentiment (among many other positives out there) are all very much a reality today.

Yep, it’s been a good five years. We hope you enjoyed the ride, but we suspect most didn’t. Thinking back, folks fretted over everything from dollar doldrums, energy prices, terrorism, trade and budget deficits, carry trades, credit crunches, inflation, and consumer spending (to name a few). At one time or another each was hailed as the Apocalypse, yet NONE had the potency to slay the bull. We think that’s a great thing: Pessimism and undue worry are the stuff of bull markets; euphoria is the bane.

Today’s real risks (yes, there are always risks) are minimal and well contained. Deleterious government regulation, protectionism against free trade, and monetary or fiscal policy errors are remote. (For more, see yesterday’s commentary, “The Real Risks.”)

Looking back, it’s apparent stocks reflected reality—not media hype—over the past five years. And while it’s crucial to remain vigilant, don’t forget to step back once in awhile and appreciate the positives of this dynamic and wealth-creating global economy. More gains are just ahead.