Sunday, August 28, 2011

Avoiding Moral Hazards in the Stock Market

A few weeks ago (before the debt ceiling debate and stock market dip) I wrote a post that explained that you should invest your money with the purpose to “make more money” and not to promote personal convictions or causes. In other words, do not consider outside “positive” factors when deciding where to invest your money.

However, I do believe that “negative” factors, based on moral or ethical standards, should be considered when making investment decisions. This may sound contradictory, but it is my personal standard. You are not going to agree with everything in this post. We are entering an area that mixes economics and morals and that is a smoky, gray, world. Keep in mind I am not telling you what to do or what to believe. This is how I approach this issue and my purpose here is to make you think about how you invest and hopefully improve the process and results.

Many moral/ethical factors can impact investment decisions. Most can be divided into three categories:

Vices: Alcohol, tobacco, gambling, etc.

Environmental Conduct: Pollution, off-shore drilling, oil spills, destroying the Rain Forest and now, fracking, etc.

Corporate Conduct: Child labor, corporate scandals, corporate policies, CEO conduct, etc.

There are other factors in addition to these, but you get the idea.

So how do I navigate these issues when investing? Because the situations are different, I will look at mutual funds and stocks separately.

Mutual Funds

Because most mutual funds invest in hundreds of companies and because many consumer and entertainment companies have diversified into many products and services, it is difficult to find a mutual fund that does not have something in it that is objectionable to someone. My solution to this is what I call “Don’t Look, Don’t Know”.

That’s right; treat it like a blind trust. Do take the time to research the fund. Know what the strategy is. Know what the performance has been. Look at the summary categories provided in the prospectus (Manufacturing – 23%, Consumer goods -16% etc.), but don’t look at the individual investments. It is too time consuming and you will drive yourself crazy. Is a fund that has 0.2% of its money in a company that derives 4% of its profit from something objectionable, toxic? I don’t know and I don’t want to know. If this is unacceptable to you, then there are those “clean”, socially responsible (I call them “gadget”) mutual funds. But as I stated a few weeks ago, the primary objective of these funds is to be “clean” of something first and make money second. And that makes me nervous as an investor.

It is important to track the performance of your mutual funds and how they are managed. One time I held a substantial investment in a “value” fund that was supposed to provide moderate returns with limited risk. In the late ‘90’s this fund started to rack up yearly returns of over 20%. This delighted me. Great returns with no risk! (This reminds me of the Seinfeld episode where the frozen yogurt is delicious, and Jerry, it’s non- fat). When the internet bubble burst in the early aughts (00’s), my value fund lost much of its value. It lost more than most other funds that were supposed to be riskier. It turns out that the fund manager had totally abandoned the stated strategy of the fund and had put lots of junk (bonds) in the fund’s trunk.

You should also review your mutual fund when you get those notices telling you that the fund manager has changed. If the fund was doing well (compared to similar funds) and the manger left the firm, that is a red flag. This probably means that the manager wasn’t paid enough and that the firm did not value his or her ability. Now the new manager will probably be paid less and be told, “Just manage the fund like Bill did and things will be fine. (How difficult can that be?). If this is the case, it may be time to move your money to another fund. Conversely if the fund is underperforming, the fund manager was not doing a great job and you may as well see if the new person can turn it around. But please keep watching it. Too many people put their money in mutual funds and then never look at it until a big correction occurs.

Individual Stocks

These are much easier to make decisions about. When I was considering dividend stocks to add to the “George Fund”, several consumer product companies that have strong profits and high dividends looked attractive. However, these companies make significant profits selling cigarettes to third-world countries. Because I enjoy sleeping at night, I decided not to buy stock in these companies. But remember, these decisions are based on personal convictions. So I am not saying you should not invest here or are wrong if you already do, however it is not a good investment for me.

So invest wisely and carefully, my friends.

George Fund Update

I finally made changes to the George Fund a few weeks ago. Even though I only ended up changing 20% of the fund, it was actually very difficult to pull the trigger on the sale of the old stocks and the buying of the new ones. When it was finished, I realized why. By taking these actions I had taken total ownership of the fund and this caused some anxiety. I thought about renaming it the “Don Fund”, but that didn’t seem right since 80% of the fund remained the same. From now on I will refer to it as the “GeoDon” Fund. Sounds very 21st century, now doesn’t it?

Seinfeld Frozen Yogurt Clip

Wednesday, August 17, 2011

Mrs. America Has Some Serious Junk in the Trunk

The completion of the ‘Why You Invest Series" will be delayed again due to all the commotion in the stock market. (You probably are not investing much right now anyway).

Did I really end the last blog with “No need to panic just yet.”?

Well I could argue that there is still no need to panic, but I won’t (until later in this post). Panic and volatility are the driving factors right now.

Back in April I did say we would be fortunate to make it through the year without a correction. But in the past, corrections usually happened over weeks. With computer programmed trading, corrections happen in hours. Computers do happen to trade like Vulcans, unfortunately it’s like Vulcans on meth.

This panic of course resulted from the U.S. credit rating being downgraded by Standard & Poors. (We have no standards and now we’re poor). The administration claimed the downgrade was a mistake because S&P used bad math (not bad meth). That’s sounds like an excuse a fifth-grader uses when he brings home a “D” in History (The teacher used bad math when adding up my grade!).

Of course this administration knows all about bad math. It put together the Obamacare budget so it appears to save us money when it really costs us money. Talk about the lemon calling the banana yellow! (Can’t use the pot-kettle thing without being accused of racism).

But there is really no need to panic. The stock market was getting way ahead of the economy. It was like a deep sea diver going too fast away from his oxygen source. He looked very skilled until he ran out of air and then had to retreat quickly coughing and wheezing until he could breath normally again.

A few months ago I compared the economy to a woman. We’ll what would happen if a man said to his lady: “Your ass is fatter than it used to be. It is not as tight and attractive as your friend Cindy’s.”

There would be some serious panic. There would be some massive volatility. There would be screaming. There would be crying. Objects would be thrown. Things would get broken. If she is an NRA member, shots may be fired. There would be an extreme, emotional, outburst.

However, the intensity and fierceness of the reaction would have absolutely no bearing on the fact that:

1. Her ass is bigger than it used to be.

2. Cindy’s ass is in better shape.

She may call her European cousin for support but her cousin is dealing with her own big, fat, Greek ass and will be of no solace. Yes, her ass has been downgraded. It is no longer considered AAA prime. But once she calms down and looks in the mirror, she will realize that she needs to go on a diet and exercise the glutes.

So Mrs. America has some serious junk in the trunk. America’s ass has been downgraded. It is now fat and flabby and not as prime as say, Canada’s ass. Nice cheeks on me, eh?

We have appointed a 12-member committee to save America’s ass. In my opinion, the committee is too large. In my business career, I have never been on a committee that had more than six members that accomplished anything significant. I think if they put Senators Rob Portman and Max Baucus in a room with Beavis and Butthead they would accomplish more than they will with a big committee. Of course you would have to give Beavis and Butthead some nachos and music videos to keep them occupied while a solution is formulated or you could get the following:

“Hey Beavis, stick some more taxes in the bill. We’re almost out of nachos and we need to buy another bag.”

“I am the great Taxholio. I need nachos for my piehole.”

Let's hope the big, fat, committee does better than this!  But it could be just as entertaining to watch.

We will need to make some serious lifestyle changes to get our ass firm, hard, and back into shape. We need the world to once again leer at our booty and proclaim “baby got (green) back”. This needs to be resolved by the end of the year because we don’t want our buns hanging out of our running shoes when things start moving faster in 2012.

Monday, August 1, 2011

Lead, Follow Or Do What!!!!!

We will take a break from the “investing” series for some random Economic/Political thoughts....

Lee Iacocca used to say “Lead, Follow, or Get Out of the Way”. Who would have thought that during this important debt ceiling crisis the President of the United States would choose number three? Okay maybe Jimmy Carter, but who else? A new phrase should be: “Lead, Follow, or Make Another Eloquent Speech”.

Say What?

The speech was delivered brilliantly as always, but there were a few missteps. After the President explained that the government was spending too much money during good economic times, he then said the recession came and we had less money coming in so we had to spend more. Of the millions of Americans who lost their jobs during the recession, I don’t think anybody increased their personal spending. So the government spends too much when times are good and it spends too much when times are bad. And now politicians are surprised and alarmed that people believe government spending is out of control. Spend less. Spend less. Spend less.

He also said that our budget surplus was depleted because of tax cuts. The budget surplus was depleted because of out-of-control spending. But you can’t cut taxes and increase spending at the same time. Is anybody in either party a math major?

No Sugar in the Tea

The Tea Party movement started as a reaction to big government getting bigger. Bigger government means bigger spending, which means bigger taxes. You don’t need to be a math major to figure that one out. Under this principle people from any political party (including independents) could be a supporter. And any politician embracing that principle would be viewed positively. The Tea Party went off course when it added other issues to the agenda and became too partisan. Still, are Tea Party members “crazy” (maybe terrorists?) or just the people who are the most informed?

One Out of Three is Bad

We are fighting three wars and only having significant success in one. In Afghanistan you either declare victory because you achieved your main objectives or you declare a tie. I know in this case a tie is like kissing a camel, but either way it’s time to go home. We have seriously done all we can in Iraq, now it up to the Iraqis. And we are fighting a war in Libya. Were you fooled when we announced that we were turning the war over to NATO? Hey, guess what? We are still paying 75% of the costs. And it is a “war”. If you are dropping bombs from the sky to kill people, that’s a war. Recently Libya was described as a huge stalemate. You know what they say: If you have a stalemate, it’s time to get a new spouse. It’s time for us to get a new strategy. Oh but we never had a strategy, that’s right.

You can’t count the savings from ending these wars in any budget plans because that would assume that you will not be involved in any other wars for the next ten years. By the way, North Korea and Iran both like that budget gimmick.

Please Don’t Scare Granny

It was disgusting, unethical, and cruel to frighten older people during the debt ceiling debate. If you have to resort to this tactic, how strong is your argument? If you are the primary caregiver to an elderly person, you know how damaging this can be. Senior citizens are easily frightened and can worry constantly about things that impact their simpler life. I will have no respect for any politician or group that uses this tactic.

The Free Market Wins Again

Home foreclosures are down 29% from last year. While some experts are claiming this is due to paperwork delays, a new trend is emerging. Banks are realizing it is best to help troubled homeowners work through their problems rather than to foreclose. There are already too many distressed homes on the market and the banks will not benefit from adding more. Underwater homeowners are realizing that they still need a place to live and that defaulting will have future credit and legal implications, so they are more willing to work with the banks.

This is a significant trend. All the dire housing projections were based on larger foreclosure percentages and more foreclosed homes flooding the market. If this continues, the housing market, including housing prices, could recover stronger and faster than expected. This is another example of the free market being able to accomplish what the costly government mortgage relief program failed miserably to do. The free market is superior to government programs almost every time.

Move That Freight!

The freight market is back baby! The American Trucking Association Freight Index is up in June. The Diesel Fuel Freight Index is up in June. FTR (Freight Transportation Research) is expecting continued moderate truck freight growth the rest of the year. Rail Freight and port freight are improving. That’s why my panel of economic experts is forecasting Q3 and Q4 GDP of 3.0%. However, the preliminary July indicators are coming in weak due to the uncertainty caused by the debt ceiling debacle. Thank you Washington D.C.! The Model T is still predicting good things in 2012. No need for all this panic just yet!