We Are Overdue For A Stock Market Correction

How bad was the Great Depression?

A timely, eye-opening Wall Street Journal article by Jason Zweig.

“The Dow peaked at 381.17 on Sept. 3, 1929. It finally hit bedrock at 41.22 on July 8, 1932, down 89.2%. In less than 35 months, a dollar invested in stocks shriveled into barely more than a dime.”

How wrong were the experts?

“In a newsreel from Oct. 30, 1929 . . . Irving Fisher, the nation’s leading economist and a Yale professor, proclaimed: ‘It now looks as though the bottom of the market had been found.’

The market found the bottom, all right—84% lower and almost three years later.”

How long did it take for the market to rebound?

“The Dow didn’t surpass its 1929 high until Nov. 23, 1954, a quarter-century later.”

How many people held their stock investments long enough to break even? A clue.

 “A 1954 survey by the Federal Reserve found that only 7% of middle-class households said they preferred to invest in stocks over savings bonds, bank accounts or real estate.”

How are we still getting the lesson of the Great Depression wrong?

“No one who lived through the crash of 1929 would agree with the view, advanced in the late 1990s, that stocks become riskless if you hold them long enough.”

Zweig’s cogent conclusion:

“To be a long-term investor in stocks, you have to be prepared to lose more money for longer than seems possible. Anyone who takes that risk lightly is likely to sell out, in the next crash, near the bottom.”

The investors first task, know your time horizon. If it’s less than 10-25 years, proceed into equity markets with due caution.


The Smartest Guy in the Locker Room

Princeton’s freshman quarterback, the 193rd ranked recruit in the country, Brevin White.

When asked why he passed on scholarship offers to Power 5 schools, including Arizona State, Oregon State, Tennessee and Utah, he said, “I want to have a roommate that’s smarter than me.

The WSJ tells White’s story here. In short, he wants a career in the NFL and on Wall Street. He’s watched an increasing number of Ivy players find their way to the NFL and is confident he can do it too.

What a great quote. The irony is, by saying he wants a roommate that’s smarter than him, he’s instantly the smartest guy in the dorm and locker room.

My dad always told me to get better at tennis, hit with people better than you. The same principle, surround yourself by people more knowledgeable and/or skilled, applies to any context in which a person is striving for self-improvement.

To what degree are you surrounded by smarter, more skilled people?download.jpg



Sentence to Ponder

From an article on Jeb Bush’s taxes in today’s WSJ.

“The average rate for middle-income households was projected to be 12% in 2013, the latest available data.”

The top 1% of earners, who do 99% of the complaining about tax rates, pays an average of 33%.

What percentage of people in developed countries would sign on to pay 12%? Trick question. Somewhat less than all because some (many?) would not want to accept the trade-offs of minimal taxes including worsening infrastructure, expensive health care, and tens of million in poverty.

If Only Schools Were More Like Businesses

Every once in awhile, it’s important to inflict pain on yourself. Builds character. Run a marathon. Fast for a day. Do your taxes. Watch a Wayne LaPierre press conference. Or most painful of all, listen to politicians and business people talk about what we need to do to reform education in the United States.

Their message—breakdown the government monopoly on schools by infusing them with business principles. Most importantly, competition. Between teachers, schools, and districts. Highest standardized test scores win. Their unquestioned premise is that the business community has its shit together. The pro-business propaganda is so steady we start to believe it.

Yeah, if only schools were more like businesses.

Lots of schools would close every year. But I guess we could just tell the affected families that “creative destruction” is just a natural, even healthy part of the business cycle. They’ll understand. Yeah, if only schools were more like businesses.

And teachers would start relating to students the way my local bankers and insurance agents routinely do, from behind websites, and sometimes via the telephone. Last week I received birthday cards from my bank and my insurance agent. I recycled both cards without opening them. No one at my bank or insurance agency would know me if I walked into their offices. We have no personal relationship, only an economic one. The best teachers know their students individually, and something about their families, their interests, their hopes for the future. But maybe all that effort to connect with students is misguided. Maybe teachers should be more like my banker and insurance agent. Just design some websites where students can get assignments and submit their work and mail out computer generated birthday cards once a year. Yeah, if only schools were more like businesses.

And every school would ace every state assessment whatever the form. Because that’s the way my car dealership works. When I take my car in, I’m told they have to get perfect scores on the evaluation they mail to me afterwards. Heaven for bid if they get any “9’s”. It seems like gaming the system to me, but I guess it’s just an advanced form of assessment thinking, everyone getting perfect scores all the time. Yeah, if only schools were more like businesses.

Most importantly, the best thing about business people is they’re always accountable for their performance. Regular performance reviews ensure it. That’s what teachers need most of all, more business-like accountability! Or maybe not. Here’s Nassim Taleb blowing that fallacy apart:

Those who have the upside are not necessarily those who incur the downside. For example, bankers and corporate managers get bonuses for “performance,” but not reverse bonuses for negative performance, and they have an incentive to bury risks in the tails of the distribution – in other words, to delay blowups.

Read the history of Wall Street from 2007-2008 for sordid example after example. Five years later, in the U.S., there’s a sure-fire way for business people to avoid accountability. Climb the corporate ladder as high as possible. Yeah, if only schools were more like businesses.


Women Make Better Money Managers

If you’re of the male persuasion, slowly step back from the check book or computer, and find a woman to take over your financial decision making.

According to Ronald T. Wilcox, a growing body of research reveals distinct differences in how married men and women approach money and investing. Because men tend to be overconfident, they trade stocks and bonds more actively because they think they know what the next market movement will be. As a result, they incur various transaction costs associated with trading but don’t pick assets any better than women. They’re also less likely to listen to financial advice.

Women are less confident than men about their financial abilities, switch investments less often, and are more likely to listen to financial advice. As a result, they generate risk-adjusted returns superior to those of men.

The Wall Street Journal summarizes Wilcox’s findings thusly, “Men may think they know what they are doing when it comes to investing but often do not. Women may think they don’t know what they are doing but often do.”

Truth be told, you can plug in anything you want for “investing” in the last paragraph. Now if you’ll excuse me, the market is about to close and I have some trades to make.

Bonus link—a couple that has figured out how to enjoy a better quality of life despite making considerably less money.

My “not motivated by money” award nomination double bonus link—and favorite 2012 US Olympian and favorite youth sport parents—Missy Franklin, Dick Franklin, and D.A. Franklin.

Chelsea Clinton and the Meritocracy Myth

Yes, I'd be happy to join your board.

After reading a few accounts of Chelsea Clinton’s recent appointment to the Board of InterActiveCorp (IAC), a company that runs sites including Match.com, Ask.com, and Dictionary.com, here’s what I think we’re supposed to conclude.

There’s one winner and one loser.

The obvious winner? C-squared herself. The Wall Street Journal explains. Ms. Clinton will receive an annual retainer of $50,000. In addition, she will receive a $250,000 grant of IAC restricted stock.  

IAC’s stock is up 41% this year. Say she serves for ten years. With stock appreciation that will be well over $1m in income for attending what I suspect are quarterly meetings. Winner, winner, several very nice chicken dinners. She’s currently working on a Ph.D at Oxford. Sure hope they reimburse her for her airfare.

The loser is actually losers. From Alyce Lomax in Daily Finance:

This new appointment is a big — and possibly bad — deal for IAC shareholders.

Boards of directors are charged with protecting shareholder interests, whether many investors realize it or not. These days, plenty of corporate problems — such as out-of-control CEO pay — can be correlated with dysfunctional or flimsy boards that have nothing near an independent spirit that’s willing to challenge management teams.

Now 31, Chelsea Clinton was in her teens during the dot-com bubble and only about 20 years old when it burst, for example. That was a make-or-break time for companies like IAC, but she was probably still pretty preoccupied simply with the process of growing up.

GMI’s Nell Minow commented on Clinton’s appointment on PBS’sNightly Business Report, arguing that the best directors have decades of achievement to speak for them. She also pointed out that IAC’s Diller has a tendency to populate his board with “cronies,” which is just one reason The Corporate Library gives that company a near-failing “D” grade for its corporate governance.

In addition, Diller supported both of Clinton’s parents’ campaigns, which gives shareholders no reason to believe this is the kind of independent director that helps make a robust boardroom. In fact, she sounds a bit dependent on her parents’ careers at this point.

Name-dropping “important” or “known” appointees instead of adding truly experienced directors indicates weak corporate governance and madly waving red flags for shareholders. 

The unreported loser is the notion of meritocracy that the right loves to trumpet. This is the idea that the relative work ethic of U.S. citizens determines their success instead of the color of their skin, their gender, or their parents’ connections. Ironic that a first family of the left disproves one of the right’s foundational ideas.

C-squared’s appointment proves the playing field, that is life in the U.S. in 2011, isn’t level, the starting line of life is staggered, and an individual’s personal capital sometimes trumps others’ smarts and work ethic.

Market Volatility and the Invisible Gorilla

Familiar with the invisible gorilla social science research? Learn about it here. It demonstrates that although we think we see ourselves and the world as they really are, we’re missing a whole lot.

The personal finance invisible gorilla is the precise difference between your average monthly income minus your average monthly expenses. Understandably, right now, with the stock market fluctuating wildly and ultimately losing value, many peeps are obsessing on the declining value of their stocks and bonds.

Meaning they’re not paying nearly enough attention to the two things that will determine their financial well-being medium and long-term. (1) The relative difference between their average monthly income and expenses and (2) their time horizon.

Forget investing altogether until your average monthly income exceeds your average monthly expenses ten to twelve times a year every year.

A friend bought some AAPL shares during last week’s roller coaster ride and I’m probably to blame because I’m a fanboy, I own it too, and occasionally talk it up (everyone talks about their gains, not their losses, my term for this is”gain bias”). His first day of ownership just happened to be a good one so he emailed me, “Nice amount of returns in 24hrs.” To which I replied, “Dear Usain, It could hit 300 before 400. Financial independence is a marathon.”

Should probably trademark that line before I start hearing it on MSNBC. I’m learning not to sweat large paper losses during market corrections because I know that overtime, my modest income/expense differential, which translates into monthly cost-averaged investing, will lead to greater wealth in five, ten, twenty years.

Taking the long view is not a panacea because there are two other vexing challenges: 1) increasing one’s average monthly income and 2) reducing one’s average monthly expenses. People focus too much on 1 (offense) and not enough on 2 (defense). If only we could all find jobs that paid mad money or find more hours in the day to work or get others in our orbit to kick in more on the income side. Defense isn’t that complicated. Resolve to eat out less. Camp out. Buy movie tickets at Costco^. Commute by bike. Buy clothes at Costco^. And most importantly, quit bringing sh*t home you don’t need.

And speaking of gorillas, not a sci fi guy, but still loved really liked (moms says you can’t love something that can’t love you back) The Rise of the Planet of the Apes.

^ Full disclosure, should of held them, but I sold my Costco shares awhile back. For a loss.

My new old lunch box

Ominous Clouds on the Horizon

1) Obama’s statement last week about studying BP’s liability not as a topic in a university seminar, but to figure out “whose ass to kick.” Red flashing lights. Somewhere in the West Wing a small group of 30-something Ph.D’s with expertise in focus group research is handling him. Their sole focus is getting him re-elected. He couldn’t have sounded less authentic or genuine if he tried. Save the faux swagger for the pickup game or 19th hole.

2) Also last week (on Tavis Smiley’s NPR show), Cornel West’s excoriating criticism of Obama’s handling of the B.P. oil crisis, his temerity in the face of Wall Street, and his neglect of the poor.