Tag Archives: Risk Management

The Perversion of an Ideal.

Gingrich is out. Santorum is done. Only Mitt remains.

President Obama officially announced the beginning of his campaign for reelection.

Both parties, their supporters and super pacs are set to get medieval on each other. They’re squared off in a scene reminiscent of the fight from the movie, Anchorman. It’s about to get really, really ugly.

While this political bloodbath rages throughout the rest of the year, the Fiscal Cliff, set to expire at year’s end will only draw nearer. Politicians on both sides of our political duopoly will say much and do little.

By October, my four-year old son will be questioning the very validity of the American dream, so fed up with the political stage play transpiring before us will we be.

Yet, this duopoly that exists so that Democrats and Republicans can, even in the worst of times, keep their fiefdoms intact, is a poorly copied print of a beautiful original.

The United States of America was founded on principals set forth on parchment. Principals that, when followed, pointed to liberty and justice for all. These principals allowed everyone to pursue happiness, dreams and interests, without infringing upon the inalienable rights of others.

Alexis de Tocqueville noted in the early 1800s that Americans pursue their economic interests with passion, while also forming associations to take up public affairs and steward the needs of their communities.

The American calling card was optimism, independence and accountability. To fail was to mean you tried. And one was given the right to fail often along the road to success.

We opened our borders to immigrants, many of whom were fleeing authoritarian, omnipresent states that sought to control every aspect of their lives. Here, they could be free to express, act and achieve in any way that suited them, so long as it did not adversely affect others.

Through hard work and diligence, many of these immigrants charted fabulous successes that continue, even today, to offer guidance and inspiration to those who follow.

At that time, the nation could be likened to the woods beside the neighborhood in which you grew up. Full of adventure. Full of opportunity. Sometimes you would fall down. Hurt yourself. Yet, never so badly that you could not get up. And the attraction to return was so strong that yesterday’s failures were oft forgotten before the new day arrived.

In the woods, you were free to roam. Explore. Discover. Dream. Nobody was there to tell you which trees to climb. Which creeks to walk. Which rocks to throw. Even as a child, you just knew.

Our rugged individualism and sense of right and wrong was respected. We approached problems with a can-do, idealistic and optimistic attitude that caused other nations to gravitate towards us.

Our government was by the people and for the people. Politics were local. The federal government simply stood an army, protected our borders, and saw that the states and localities had what they needed to pursue their interests. Service was honorable. And having served, one then went back from whence he came. To tend to his family, business and get on with life.

This great nation. Having once thrown off the yolk of tyranny, set out to change the world. We kept our minds on what mattered. Improved ourselves. Worked hard. And when history, on occasion, came to our doorstep seeking assistance in the fight against oppression and tyranny, we answered the call. With unbridled optimism and fortitude.

Our heads clear. Our vision resolute. Our balance sheet clean. And our eyes on the prize.

This beautiful, strong, resource-laden nation became exceptional.

Eventually, technology and an all-encompassing 24/7 media complex weaponized the political process. Turned politicians into celebrities. The first time the television turned its focus on the Kennedy-Nixon Debate, a star was born. Advertisers bought more. And coverage flourished.

Soon, principals gave way to promises. Many of them empty and unattainable. Yet, they served to lead these new celebrities to the very pinnacle of power. Where connections, opportunities and access can provide wealth, power and prosperity unavailable to firemen, accountants and teachers.

Today, the United States of America remains exceptional, in so many ways. Even thought many of our politicians dispute the idea.

Our nation’s capital is infinitely more powerful than it once was. It is also a far less attractive and effective place.

Our federal government is the largest enterprise in the history of the world. It consumes more people, capital, time and energy than any other organization that civilization has ever known.

Jefferson, Washington, Franklin, Adams – these gentlemen stood for their ideals. Today’s politicians stand for office. Every two to four years.

Once our political class learned, in the European tradition, how to parse the voting populace according to interest groups, they ceased running on ideals and began running on promises. Most of them empty and unattainable.

And so the next six months will be replete with mudslinging, grandstanding, demagoguery and, occasionally, impassioned pleas centered on theoretical possibilities. Entire speeches will focus on who might get what.

Yet, the America ideal remains exceptional. Emphatically shown by the number of people who come here each and every year in search of their dreams. Even while our government, especially at the federal level, has become a perverted, bloated and empty version of the original.

The next six months, and all of its made-for-television chicanery, will prove this in a manner that is exceptional only for its expense and grandiosity.

Regardless of who wins, there are likely to be few winners.

Hypocritic Oath.

John Edwards will stand trial this week. Four years ago, he was a primary or two from competing for the highest office in the land.

Edwards made politics look easy. Nice suit. Great hair. Bright smile. Kind face. Promise the world–or, at least whatever it takes to get elected. Once in office, he chose to live by a wholly different set of standards.

Could Edwards have pursued and performed other professions in the same effective yet decidedly dishonest fashion?

Depends on the profession.

Becoming a doctor is a different matter altogether. Doctors cannot promise to move heaven and earth. Then, after having failed to do so, use sophistry and half-truths to win back patients’ hearts.

Doctors utilize understatement. Then, they are judged on results.

Conversely, success is politics is largely determined by what you say and how you say it. Still, the differences don’t end there.

First, one must gain entrance to medical school. Then, students endure rigorous four to six year programs that test their mettle at every turn.

Upon graduation, students take the Hippocratic Oath. The oath requires doctors to promise that they will do their best to practice medicine ethically, and in the best interest of patients.

Only then does one receive a license to legally practice medicine.

Recently, I read that Dutch bankers may soon have to swear to a similar oath. One requiring them to put their clients’ interests first.

The laws, rules and regulations governing the means by which we are free to conduct our lives are no less important. They rank right up there with health and money as the most important items with which each of us will contend as we navigate our lives.

So, doctors must swear an oath to practice. And bankers may soon have to swear a similar oath. Should not our politicians have to swear an oath before they are given the right to establish laws? Amend the constitution? Govern our nation’s legal, educational, medical, technological, diplomatic, military and energy infrastructures?

Of course, politics was once a temporary pursuit practiced by honorable men notable experience.

Lucius Quinctius Cincinnatus was a Roman aristocrat, political figure and hero of the Republic. He served as consul, soldier and dictator. His service was notable for, among other attributes, his immediate resignation upon the achievement of the formidable tasks he’d be asked to complete.

He was once called from his farm to serve as Rome’s dictator (the second time he’d done so) when the republic had been invaded by enemies. Upon defeating the invaders, he immediately resigned and returned to his farm.

Contrast the story of Cincinnatus with today’s politicians. Men and women who gain office by scandalizing their opponents as best they can. Once in office, they do everything in their power to remain. Building vast networks of wealthy donors who are granted favors in return for their contributions. They lecture the public on how it should conduct its existence. All the while, they hold themselves to a different standard.

Our politicians utilize a separate healthcare system. They receive better pension benefits than do private sector employees. And often, when in legal hot water, their problems are handled in ways that John Q. Public could never rely upon. Problems disappear. Arrests are suppressed. Illicit affairs are forgiven. And that’s just Edward Kennedy.

Today’s politicians have only one standard which truly dictates success: how much access does one have to monetary resources capable of keeping donors satisfied, their fiefdoms in place and their problems at bay.

The contest is not how to accomplish as much as possible, so much as it is how to remain for a long as possible.

Many of today’s politicians consider theirs to be lifetime appointments. And, once given the next job up the ladder, they do everything they can to secure their position for family or associates. American politics has become big time family business.

Why not force our lawmakers, regulators and governors to take an oath? An oath that demands their abject adherence to honest, ethical practices. To transparent activities conducted in the public’s best interest. To doing their jobs without the intentions of seeking wealth, favors and influence.

Outside of term limits, which might be the most effective step in saving our republic, such an oath might have a positive effect in our ability to remove those who do not adhere to their promises.

An oath requiring the repeal of hypocrisy in our nations’ political offices may help to purge the Goat Rodeos currently transpiring in D.C. as well as in state capitals throughout the nation.

Till then, we’ll get what we deserve. Candidates who will say absolutely anything to attain office. And then do absolutely anything to remain.

Anthony Weiner. John Edwards. Eliot Spitzer. Gary Condit. Jim McGreevy. Rod Blagojevich. Tom Delay. Larry Craig. Mark Foley. All ages. Both parties. Ad infinitum.

We are human. We make mistakes. We deserve forgiveness. But, like doctors, attorneys, nurses, financial planners (and Danish bankers), if you cannot live up to the standards of your position, you should step down. Not waste countless tax payer dollars attempting to remain in office. Yet, our politicians are given too much wiggle room and held to too low a standard.

November’s election will pit two very capable, flawed individuals against each other. Everything they have ever said, done or thought will be available for your dissection. Yet, as in all elections, what these two promise in the heat of battle will bear little resemblance to that which is delivered on the post-electoral buffet table.

Perhaps Newt Gingrich, himself a supremely bright, capable and flawed politician, most aptly summed up our November choice–not to mention our political process, when he recently said: “Would voters rather hear a comfortable and familiar set of lies eloquently repeated by a lifelong politician who has proven himself phenomenally ineffective at actually accomplishing anything or a fresh new set of ever-shifting lies delivered by a gaffe prone, part-time politician who has spent most of his career outside of Washington getting rich by methodically achieving his objectives?”

Cynical indeed. But beneath a cynical surface lay a harsh reality. Recognizable for its truth, as well as its unpleasantness.

Public service will always be conducted by less-than-perfect public servants. Yet, it should at least be conducted in the best interests of the public. Perhaps an oath would better align that which is promised with that which is done. Help to purge the system of some of its hypocrisy.

Till then, we freely choose to defer our liberties to a less than adequate system. And this epidemic of cynicism only worsens. More Blagojevich, less Cincinnatus. Until, someday, the cynicism remains the only part of the process our children recognize.

The Folly of Bovine Behavior (or, why cows never retire).

Running along rural roads yesterday somewhere outside of Augusta, Kentucky, I reveled in the beauty of the countryside.

The turkey buzzards were circling overhead (I must have looked pretty bad), the deer were traipsing through the woodlands, and the occasional herd of cattle grazed placidly upon the hills.

Consider the cow.  Bovine lives are tranquil affairs right up to the unfortunate end. Unabated by the stressors facing so many of their human counterparts. They are free to stand, eat grass, chew their cuds and moo about whatever is on their minds.

One immediately notices the unflinching uniformity shared by those of the bovine persuasion. These are not charismatic creatures. God obviously created humans, then sea creatures, reptiles, Michigan and Steelers fans, then spilled what remained in the charisma bottle on the table, and only then pieced together the bovine.

Yet, cows and humans are much alike. Each wants to be part of the herd. Neither desires to stand alone. Both essentially choose to look, sound and act alike as often as possible. To think and behave in a fashion that does not distinguish them from one another.

Gary Larson capitalized on this when he created his legendary cartoon. In The Far Side, cows and other mundane beasts would be personified so as to act in ways typical of humans. They were funny because cattle would be seen engaging in human activities. The human equivalents to grazing. Mooing. Cud chewing.

Only, cows are afforded this lazy, monotonously cozy lifestyle because, eventually, they are slaughtered and eaten. While many Americans choose to emulate the bovine lifestyle, ultimately, they must fend for themselves. Increasingly, however, they have not displayed much capacity for doing so.

A recent report on the state of retirement by TIAA-CREF asserts that baby boomers reaching traditional retirement age will face a new era. One that is less certain and more demanding.

Americans are living longer, healthier lives. Simultaneously, mandatory retirement has been eliminated for the vast majority of American workers. Traditional employer pension plans have been eliminated. Social Security benefits have been pushed back. Concerns abound about the road ahead. Social Security, Medicare and Medicaid.

A study by Allianz Life Insurance recently found that 92% of boomers believe there is a retirement crisis in the U.S. They also believe that they are unprepared to deal with it.

In light of such social and demographic changes, retirement patterns are dramatically evolving. The century-long trend towards earlier retirement has reversed. Many retirees are taking bridge jobs, which continue to provide an income before facing the prospects of a full retirement.

So what’s the problem? It boils down to the disparity between retirement expectations and reality.

For years, Americans have sat with their financial advisors and discussed retirement locations, hobbies, legacies and plans. They were lulled into a false sense of security. Skipped financial planning. Ignored forward looking analysis. Yet, expectations remained for a cozy retirement, complete with a home in Florida, and trips to Disney with grand children.

As such, many soon-to-be retirees continued to lazily graze, spend, chew their cuds and moo. Instead of making the difficult decisions, they opted to be part of the herd. Continued working with Chad from Church. Biff from the Block. Cole from the Club.

Only, it was more like hiring Jennifer Lopez as your judge. Yes, someone is in the chair. But they certainly were not doing the job. Not making the tough calls.

“Yes men” are effective only on the cabinets of third-world dictators and on Donald Trump’s Celebrity Apprentice. Otherwise, they tend to be non-prescient sycophants more interested in maintaining something that works for them than effectively performing the task for which they were hired.

The secret to financial independence is no holy grail. In fact, it is beautiful for its simplicity. It can be summed up in the following triumvirate of financial principals:

1) Save early.

2) Save more.

3) Protect your downside.

There is a simple mathematical logic behind how these three principals work together to create wealth.

Future Wealth = Current Wealth x (1+k)T

K represents the annual rate of return on your current wealth. T, the exponent, represents the number of years that wealth compounds in value.

Realize that wealth accumulation is not a linear exercise, but an exponential one. A 10% return on $100 compounded over a ten-year period equates to $259.  $673 over 20 years.  A 15% annual rate of return on $100 compounds to $405 over 10 years.  $1,673 over 20 years.

This disproves the Buy and Hope mentality long perpetuated by the brokerages. Wall Street is obsessed with mutual funds and money managers whenever it does not involve Wall Street’s money. Most of these managers cannot own cash, charge high fees, and have exposed investors to every correction the market has ever suffered. Few provide the opportunity to preserve capital. So lowering the annual rate of return.

Yet, the three largest brokerage firms have over 50,000 advisors between them. That’s a lot of cows, er, advisors to feed. So, the sales and marketing mentality predominates. Less time is spent on the mousetrap. More time is spent finding the mice.

In the eyes of clients, a round of golf and a steak dinner will make up for a lot of poor returns. And so the brokerage firms will continue to hire anyone they think can sell. Former real estate agents. Software peddlers. Ex-middle managers.

The idea? Simple. Set up a drive through window. Advertise the drive through window. Get as many cars to pass by the drive through window as possible. The meals will be fast, easy to prepare and standardized. Quantity over quality.

Still, Americans refuse to face the dilemma. To think differently. Think for themselves.

“If the advertisement says so, then by God, that’s how it’s gotta be!”

Few defer immediate gratification. Make difficult decisions. Wish to consider something new.  Better. So, many continue with financial advisory relationships that are more convenient than effective. Continue working with salesmen rather than advisors.

And so we save less than we should. And when we manage to put money away, we do so with someone possessing a scratch golf game, but no game whatsoever when it comes to the principals of investment and risk management.

Accordingly, we ride every market cycle.  Up and down. We buy and hope.  Often, at my former employer, I watched salesman who looked like advisors but were as shell shocked as their clients when the market corrections transpired.

I saw the brokerage firm(s) spend more time teaching brokers how to talk clients off the roof than teaching advisors how to prevent clients from wanting to go up there in the first place.

“John, I don’t know where the market will be in three months. Nobody does. But, I do know where it will be in three years. So, we just have to ride this out…”

When that passes as advisor training it’s time to seek greener pastures, bovine pun intended.

Save. Early and often. And have risk management procedures in place in order to preserve capital when markets get volatile.

For years, the mega-brokerage firms put more money into marketing communications and advertising than in advisor training. New brokers were sent to remote locations where they would spend the lion’s share of their time learning about the firm’s products, services, and how to close new business in two appointments or less.

If you were productive upon your return to the office, you were invited back for further product training. Additional tutorials on cold calling and overcoming objections.

Weren’t much of a producer? You were eventually invited to leave the firm. Weren’t much of a producer but displayed a modicum of charisma? You were eventually offered a managerial role.

But don’t worry. There were resources upon which the new advisor could rely. The branch manager who invited every wholesaler with a credit card into the office for lunch. The guy from the firm’s asset management department who had an office right down the hall. He would do whatever it took to help you sell the firm’s mutual funds and money managers. Even though these guys rarely ate their own cooking.

Brokers are like politicians. Appearances are everything. And deceiving. The business card may say Vice President. But brokerage firms hand out the V.P. moniker with all of the scrutiny by which Sandra Bullock chooses husbands.

Your doctor doesn’t play golf three days a week. I would argue that your finances are not too far behind your health when it comes to your long-term well being. So, if your broker plays golf every day, your wealth is probably not his biggest priority.

A financial advisors handicap simply should not be less than the current 10-year Treasury yield.

With the negative convergence of demographic, political and personal preparation trends, the situation will likely worsen before it improves. Or, retirement as we know it will simply cease to exist. Because for all of our inability to think for ourselves, we are also creatures of habit. Once comfortable, we tend to stay put. For a long time. Often to our detriment and that of our families.

Of course, that’s what the brokerage firms count on. Even as many smaller accounts are forced into call centers, less personalized products, and a more difficult road to prosperity.

Once the cattle is in the barn, it rarely tries to leave.

At some point, investors may wake up. Save more. Save earlier. Formalize the education of financial literacy within our schools. How is it that we offer students 600 sports alternatives per season yet few students, if any, leave high school with any idea as to what a balance sheet represents?

Until we open our eyes and seek clarity on these and other matters, Americans will continue to march towards imaginary retirement dates while counting on imaginary pools of money and dreaming of imaginary states of financial independence.

Wake up, America.  The farmer may love his cattle. The cattle may love the farmer. But when the farmer is contending with a herd of 350 head, he has little time for each individual cow.  Regardless of how much you moo.

Cows do not work on retiring.  They are ignominiously retired.  And its ugly.  Yours does not have to be.

Still Sexy at 235.

If you listened to the critics, you might think Lady Liberty a wash up. Past her prime. A nation in need of a facelift. Expanding Economic quagmires. Political intransigence. Declining competitive spirit. The American Century, they would have you believe, is in decline.
Or not. At 235 years of age, America may be the new China.

In a recent piece titled, World Power Swings Back to the U.S., Telegraph columnist Ambrose Evans-Pritchard posits that the American phoenix is set to rise. Again. And to plan for a post-American century may be a perilous choice, indeed.

Evans-Pritchard explains that the shale gas revolution has turned American into the world\\\\\\\\\\\\\\\\’s top producer of natural gas. Hydraulic fracturing, the technology used to break rocks with jets of water and so extract the massive energy outputs of hard-to-reach shale covering much of the nation\\\\\\\\\\\\\\\\’s vast western territory, have established the possibility of severing the U.S. reliance upon foreign energy producers.

The U.S. already meets 72 percent of its oil needs, up from 50 percent a decade ago. The ramifications of the United State becoming energy independent are massive. The U.S. can focus less time, attention and resources on the volatile middle east. Rededicate itself to what it does best. Innovation and progress. Reestablishing itself as the world\\\\\\\\\\\\\\\\’s growth engine.

Further, Evans-Pritchard thinks that the pendulum of power between the U.S. and China is swinging back towards the west. \\\\\\\\\\\\\\\\”Re-inshoring\\\\\\\\\\\\\\\\” is the current trend as continuing Chinese wage inflation has employers considering the \\\\\\\\\\\\\\\\”Made in America\\\\\\\\\\\\\\\\” moniker all over again.

Computers. Electrical equipment. Machinery. Cars and car parts. Metal parts. Plastics. Rubber. Furniture. All are at a tipping point whereby a lot of the work imported to China over the last decade could be brought back stateside.

Boston Consulting forecasts that 800,000 manufacturing jobs will return to the U.S. by mid-decade, with the multiplier effecting adding up to 3.2 million new jobs, total.

While the long appreciating euro currency has \\\\\\\\\\\\\\\\”hollowed out\\\\\\\\\\\\\\\\” Europe\\\\\\\\\\\\\\\\’s industrial base by forcing firms to redirect their foreign investments to less expensive, more productive regions, the U.S. suddenly appears very competitive with its global peers in terms of attracting foreign capital with well-priced infrastructure and a productive, educated work force.

Additionally, the U.S. university system remains the epicenter of global innovation and development, with sixteen of the world\\\\\\\\\\\\\\\\’s top twenty universities.

And, Evans-Pritchard points out, the U.S. fertility rate remains well above that of Europe, Japan, Korea and Russia-all of which will suffer the demographic decay of a smaller workforce taking care of a larger elderly population.

And finally, let\\\\\\\\\\\\\\\\’s not forget that, unlike the saga currently playing out in Europe, the United States sports a common language and cultural heritage. The U.S. has proven, effective systems capable of allocating capital, rewarding risk and effort, and enforcing the law. These systems, when confronted with the technological innovations bubbling to the fore in energy, information tech and biotechnology, to name a few, will only prove to be more effective than ever.

Lady Liberty past her prime? Not so fast, Nostradamus.

She may have traded her white dress for a three piece Armani suit and six-inch heels, but her prospects appear to be as effervescent as ever. Bet against this savvy dame at your own risk.