Silver Anniversary Of A Crash

The stock market was down just under 2% today, Friday October 19th.  Not a good day, but relative to 25 years ago, a GREAT day.

I recall October 19, 1987 quite well.  That was the day the Dow Jones Industrial Average dropped over 500 points in one day, which at the time was over 20%.  Think about that - a similar drop today would mean the Dow would fall over 2500 points!

Can you imagine the near and maybe real panic that would cause today, in the U.S. and around the world?  People would be non-functional.  At least the 40+% drop in the stock market in 2008 was more of a cascading crash, since it happened over the course of many weeks/months.

25 years ago, I was less than two years out of college, working an entry-level job setting up 401k plans for employer-customers at Principal Financial Group in Des Moines.  Oh, and I had just found out we were expecting our first child.  But I never felt like I was in danger of losing my job - if anything, there may have been more job security.  Principal needed more help after that, as the 'yuppies' of that generation suddenly concluded they should be saving more money (inside a 401k plan was one way) instead of spending every dime they made.

Looking back, one of the crazy things about that day was we were not in the 24-hour news cycle that we are today.  We weren't following the crash using TVs or the internet (the what?).  We just got periodic updates throughout the day, near the end of which we learned of the 500+ point drop.

One of my favorite stories from that day actually didn't happen until the next day, when we were ushered into a meeting with some Principal executives, who told us to tell employer-customer not to be alarmed, it was 'business as usual' there - except now we weren't going to do this, or this other thing, or that, or that other thing. In other words, it was the opposite of business as usual.  Clueless morons!

In the end, the market and the economy came back stronger than ever, setting up the 90s for another big bull run.  Is that why people think the current recovery seems non-existent - because it isn't happening fast enough?

(Un)conventional Thinking

One of the simplest and most common questions asked of investment advisors is, "What stock should I buy?"  Another frequent request is, "Where do you think the market is going?"

Although these questions ask different things, they share something in common – they are asking someone to make a forecast.  The conventional thinking is, in order to have a successful investment experience, advisors and investment managers should be able to predict the future.  Just pick the investments that will do well, and avoid all the others, right!?

Unfortunately, man versus market isn't a fair fight.  More often than not, the market is going to win.

Identifying investments that have outperformed in the past is easy, but there is no way of determining what will outperform in the future.  While some fund managers are going to ‘beat the market’ from time-to-time, a mountain of academic research tells us it’s no more than you would expect by chance.  In other words, the market always has investments that will do well, but there’s no logical way for man to determine which ones they will be.

So instead of trying to predict the future, I think about this instead:  In the aggregate, investors earn market returns before fees. Since the market reflects the collective holdings of all investors, the value-weighted average investment experience must be the market return after fees.  This is not just a theory; it is a universal truth based on simple arithmetic.

This arithmetic gives me something reliable – rather than a prediction – from which to base investment decisions.  Specifically, if I broadly diversify investments based on client risk tolerance, and keep investment costs to a minimum, I have significantly increased the likelihood of an above-average investment outcome.

Making investment decisions based on this logic certainly isn’t glamorous.  It would be much more exciting to declare which individual stocks I ‘like’ based on a hunch, and then regularly update that list.  Still, I vastly prefer our more reasoned approach.

Investors may never lose the urge to form an opinion about the future, or to ask their advisor for one.  But if those investors ask me, they should expect to hear some unconventional thinking.

The Liars Club

As we enter the heart of election season in presidential election year, so do we enter a time when the rhetoric is at an all-time high.  If only it was just rhetoric.

These days, we don't have rhetoric, which would be fairly defined as persuasive but insincere speech.  Instead, we have intellectual dishonesty, which I would define as a failure to apply a rational standards that one is fully aware of.

(Yes, I got those definitions with the help of the internet, defined as a place from which you can get information to help prove your point.  Also, don't confuse these terms with another one of my favorites, 'truthiness', coined by Stephen Colbert as something people claim to know intuitively because it feels right, in the gut, without regard to the facts.)

Intellectual dishonesty is what political campaigners (and most people) engage in these days.  It's when a person knows but ignores the facts, and says or does something contrary to those facts in an attempt to convince people otherwise.  Let me use it in a sentence: "Every word that comes out of Michele Bachmann's mouth has the smell of intellectually dishonesty."

While this kind of thing obviously happens in politics, but just think about the day-to-day applications.  What workplace doesn't have one or more employees who aren't as sharp as their co-workers, but tries to cover up their shortcomings by skewing the truth, and parsing the blame onto others?  And don't get me started on the so-called 'financial advisors' who spend their days selling products to people who don't need them, in order to get a big commission.

Intellectual dishonesty is the same as lying, and it is currently pervasive in our society.

Dancing Like A Dad

What follows is the text of a September 27th article written for The Des Moines Register (specifically for its young professional supplement, Juice) by Mike Draper, the fairly well-known owner of the Des Moines t-shirt store, Raygun.  (I would link to it, but their web site only allows so many non-subscription visits.)  This should be required reading for every Iowan, and maybe everybody else:

Governor Terry Branstad would be a lot more likeable if he just never opened his mouth. Whenever he starts to give his opinion, I feel like a high schooler whose dad has decided to show off his dance moves in front of you and all your friends.

Most of his infractions have been pretty minor. There was his declaration this past May that companies “want to get out of California as quick as they can. We welcome them to Iowa.” Unfortunately, the shirts we’ve been saving for Mark Zuckerberg and Larry Page have been gathering dust in our store since spring.

That was just after he called for a congressional investigation into the “pink slime smear campaign” as well as state laws against filming inside food factories. The last thing we want people to know is what they’re eating.

All TB has done, though, pales in comparison to his wall-to-wall B.S. editorial in The Des Moines Register earlier this month: “Obama has worn out his welcome.” It reads like something the Republican National Committee jotted down on a couple cocktail napkins, then attached our governor’s name. But if Branstad actually did write it (and more frightening, believes it), this isn’t your uncoordinated dad just dancing for all your friends, this is your dad stepping onto the “American Idol” stage.

“In Iowa,” Terry writes, “we know a thing or two about building success with our own two hands. ... We don’t look at our farms or our factories or our businesses and say, ‘Look what the government built.’ ”

Good god. He writes this from the center of a state that is up to its hog-nuts in federally subsidized agriculture, federally subsidized ethanol, and federally subsidized wind energy. He writes this within days of giving the largest economic subsidy in Iowa history to a foreign fertilizer production company. He writes this from a state whose governor declared he’d create 200,000 jobs (how a governor would do this without “picking winners or losers” needs to be explained to me). He writes this from a state whose commemorative quarter depicts a public school building painted by our most famous artist, Grant Wood, whose livelihood during the Depression was sustained by the Federal Art Project.

As a business owner who has never used a federally backed loan, who has never had a government contract, who has never really had any direct aid to speak of, I’d be in a good spot to claim that “I built it” if I wanted to sound like more of an a-hole than I already am. But I still can’t. After all, I was born into a stable home, in a stable state, educated K-12 in a public community school, graduated from college debt-free because of my parents, and opened a business in a building that was constructed with the help of Tax Increment Financing.

From direct help like the mortgage interest deduction to peripheral help like roads, everyone in America has taken some form of government assistance. Everyone wants government assistance cut, but not their government assistance. I can forgive 24-hour news commentators for making brash, incorrect declarations, because their news model is built on B.S. But I worry when our elected officials start to sound like our 24-hour news commentators.

At least Barack Obama is in luck: Branstad declares that he’s “not resting until Mitt Romney gets the votes to send him to the White House.” If his promise for Mitt gets as far as his promise to not pick winners and losers, Obama is in great shape.

Facebook For The Over 40 Crowd

I've been on Facebook (or as the original creators and I call it, 'The Facebook') long enough now to have a pretty good idea of what is worthwhile, and what is a waste of time, for anyone older than 40.

[As an aside, it seems to me that Facebook usage begins to noticeably drop for people somewhere in their 30s.  It figures that once people's lives mature, they should get busier working on the relationships with their children and their careers, and have less time for social media.  Maybe this will change some as the Facebook generation matures, and the mobile technology further integrates.  As for the under-30 crowd on Facebook, I have no idea what's worthwhile - other than spending less time on it.]

Here are a few effective uses of Facebook for the over-40 crowd:

• Posting pictures and status of out-of-the-ordinary events, like football games or vacations.  No need to post pictures of your children or grandchildren (see below), with the possible exception of newborns in the form of a birth announcement.  And it's OK to post pictures of significant others, for others to creep on them.

• Re-connecting with old high school and college friends, ones who you liked well enough, but not well enough that you cared to keep in touch.  This comes with the added benefit of finding out what they look like, who they've become, and comparing that with what you thought they'd be.

• Sharing links to other interesting web-based material, especially video links.  Let me repeat - INTERESTING material.  Note that anything related to animals, especially cats, is not interesting.  Also note that contrary to what some say, politically-related info is perfectly acceptable, especially to those over 40.  Cute pictures or videos of pets don't affect your future, but political ideology does.

Here are a few ineffective uses of Facebook for the over-40 crowd:

• Posting pictures and status of children, especially older children.  Unless it's a big event, like prom or graduation, no one actually cares what your teenager is doing, as long as they aren't doing something illegal in my neighborhood.

• Liking statuses.  If you're over 40 years old, unless it's family, or unless you also have a pithy comment to attach to a someone else's status, don't simply 'like' it.  That super-cheesy, and it implicitly means you dislike status which you don't 'like.'  What's the point?

• Invitations to events.  Thanks for not calling, but this isn't going to work either.

One other thing for us oldsters - if you aren't going to check your Facebook page at least once every few days, why have you bothered to start one?  If your answer is to creep on your kids or their friends, that isn't good enough.

Cyclones, Hawkeyes, Elephants, Donkeys

Over the past two weeks, the Republicans and Democrats wrapped up their respective national conventions.  These things have really changed over the years.  Everything is so scripted and made-for-TV now, there is no potential for any surprise.  And the broadcast networks only show the last hour of each nigh - back in the day, it was the only thing on TV the entire evening, and since there was no cable TV then, you were stuck.

Over the past week, another big event soaked up media time in Iowa.  Specifically, the Iowa - Iowa State football game.  These games have also changed a lot over the years.  In the '80s and '90s, Iowa would routinely win big.  Now the game is more competitive, with Iowa State winning the last two, and 9 of the last 15.

Now, why write about these seemingly different things?  What do these events have in common?  Plenty:

• Each party/team has some passionate supporters.  People who will vocally and monetarily back their party/team regardless of how good the actual product is.

• Each party/team has some extremist supporters.  People who will take whatever action necessary they believe will help their party/team to win, including lies and even violence.

• Each event rarely lives up to the hype.  They are small parts of a longer effort to achieve a larger goal, and the event itself is forgotten in a few months or weeks.

Oh, and one more:  There is lots of partying before and during each event.

From Dope To Dopey

A new study released this week concluded that teens who routinely smoke marijuana risk a long-term drop in their IQ.  The study drew on survey data from more than 1,000 people in New Zealand.  (The study did not say why Kiwis were chosen for the study; maybe all of the Amsterdam folks were sleeping it off.)

If one reads the headlines on this study, the quick and easy takeaway is that smoking pot makes you dumber.  Therefore, it's bad for you, and young people should not smoke it.

Fine...but why be so limiting?  The whole truth is, teens would be adversely affected by using ANY mind-altering substances.

In America, and I suspect in New Zealand, wouldn't the outcome be the same if youngsters drank alcohol?  Or how about if they consistently took anti-anxiety or anti-depression medication?  Of course, the answer is yes, a conclusion I reached without using one taxpayer dime to study.

Yet it is completely legal (and prevalent) in this country for kids to take prescription medications that affect brain cells.  And while it is illegal for teens to buy / sell / drink alcohol in the U.S., they don't get thrown into jail if they do it, because it's socially acceptable and tolerated.

This is where the anti-marijuana folks get it all wrong.  Critical thinkers - like me! - aren't pro-pot; we're pro-decriminalizing pot.  We know from a combination of experience and god-given common sense that it isn't any worse, and maybe better for you, than the other legalized mind-altering substances I've mentioned.

Throw in how marijuana decriminalization will save billions in law enforcement, and help the economy in other ways (and I'm not just talking about Doritos consumption), and even a 'dumb' pot smoker can tell you this is a 'no-brainer.'