Americans--Let's Take Responsibility! December 18, 2008

December 18, 2008

It seems the news is full of losses lately, and it also seems there is a spate of fraud (e.g., Bernie Madoff).  Let's just be careful as honest and responsible citizens to distinguish between losses in which there is appropriately someone else to blame and sue, and those for which no one among our financial service providers has responsibility to reimburse us. It's our opinion that for the vast majority of us, most of our losses are in the second category. Some seem to think that if they ever told their fund manager, "I really don't want to suffer principal losses," that constitutes sufficient obligation on his/her part to have put everything in money market, thus avoiding the catastrophe.

Well, most of us followed any such statements with other statements: "I'd like to get high returns on my money." Most of us are smart enough to know we need to have written direction to our fund managers, and unless we told them to be 100% fixed income in writing, we're not clean in terms of ability to blame them for the stock losses.

Just because the losses are huge, doesn't mean we have to find someone to blame and to make it right for us. Which of us offered to refund to the manager any returns higher than we reasonably expected when things were better than we had hoped?

Come on, Americans, suck it up and realize we're all responsible for all of this. No one to blame, no one to make it right, and that's not the kind of country we want, anyway. Let's get rid of the ambulance chasers in the financial sector--that'll just run up the cost of service to everyone!

Economics and the Fallacy of Composition--December 7, 2008

December 7, 2008

From Wikipedia: In Keynesian macroeconomics, the "paradox of thrift" illustrates this fallacy: increasing saving (or "thrift") is obviously good for an individual, since it provides for retirement or a "rainy day," but if everyone saves more, it may cause a recession by reducing consumer demand.

These days, most of us know that the most significant answer to the world recession is for citizens of the world to spend, spend, spend. Even with our ability to spend severely damaged, we can still spend--at least some of us can. And, the need to spend now is greater than ever, tho the capacity to spend is so much less.

While saving, in the long run, is a good thing--for governments, businesses, and for individuals, it's not a good thing collectively just now.

The way this works is that if all of us spent (to avoid drifting into distraction from the main point, let's assume we all spend on good things, like education, better schools, home improvements that have value, physical fitness, fuel efficient cars, etc.) aggressively, we'd quickly grow our economy out of the recession. If only a few of us spend (the wealthy, for example), it will not grow the economy. If only a few spend and we're among the few, we deplete our personal savings and safety and it doesn't help much. We may end up in poverty.

Provocative questions arise, when one stops to consider the fallacy of composition: Is it immoral for us (having a little money left) to retreat to cutting all our discretionary expenditures now--shouldn't we be trying to spend all that we have, for the common good? And, what about government--it seems our budget (at least in the US) was already frighteningly deficit before the recession arrived. And now, it's good for us to double or triple our deficit to get out of it? Yes, maybe so, if we do, how will we rein in these "temporary" excesses when we have rescued employment and growth?

Search for Safety and Alpha-December 2, 2008

December 2, 2008

We've just completed a study of investment management alternatives, following a rather damaging year for our personal investments and those of our favorite charities. Initially, we had hoped to find that our investment manager erred in not changing allocations, and at least come away with a better model to address the next cycle. We wanted to find a solution that would capture upside, but would adjust to minimize downside when storm clouds begin to form on the horizon, next time around.

It turns out that (so far) we did not find any such hope: While various managers all promised to do a better job for us than what we have experienced, there were several problems in giving credibility to such assurances. One problem is that those with measurable results all had performed similarly to our existing manager--about the same as the market, a little better or a little worse. Some do not manage money and only advise, so they were prevented from showing client specific results. Another problem is that none of them actually claimed to have avoided the fall this time around. Furthermore, they all ultimately admitted that the purpose of their arcane metholody of risk and volatility tolerance (resulting in recommended allocations) never pretended to include frequent or dramatic shifts in allocations, such as to try to take advantage of opportunity or to prevent damage. God forbid--that would be a kind of market timing! To the contrary, the picture was one of setting the allocations and leaving them alone, except for periodic rebalancing to the original allocations. In this way, provided the underlying allocated investment tranches of domestic and foreign stocks, government and private debt instruments, etc, are all managed reasonably well, there would be upsides and downsides, both potentially beyond what you expected, but relative to the market either shallower (less return long term) or more pronounced (more value long term), but in accordance to your relative tolerance for risk and volatility.

We suppose this makes sense. After all, if anyone had the crystal ball, wouldn't she/he have all the money in the world to manage by now, or wouldn't that magic have been copied by thousands of others so that we'd all have access to it? When we see the fall of such as Harvard, Stanford, Legg Mason, Dodge & Cox, and hundreds of others who enjoyed such remuneration and such esteemed wisdom, we suppose there is some small comfort to us little people, that we didn't fail so very totally to grasp something that might have saved us.

Seems to us that the only people who truly avoided this catastrophe were those who went to cash or went very short. The first strategy is mostly made up of ultra conservatives who enjoyed none of the upside because they saw the storm clouds for years or had no risk tolerance. The second is home to a small group of high flyers, some of whom have been squeezed out, even in this market, because the fall has not been steady and continuous.