...and This Little Piggy Got Sick

Unless you have been under a rock this week, you are aware that there has been a global outbreak of swine flu. This is certainly unsettling news.  Fears of global pandemic have been rising since the outbreak of avian flu in Southeast Asia earlier this decade.

Actually the history of global epidemics is much longer, as the so called "Spanish Flu" killed more than 20 million people in 1918, at least double the amount of deaths from World War I.

It is not really news that disease is mutating between pigs, birds, dogs, monkeys, people, etc..  This has been happening continuously over the history of life on earth. (Ever heard of bubonic plague, small pox, Ebola, .....) Obviously, what is most concerning now is how quickly we travel across the globe, which means these mutated germs have a chance to travel right along with us.  Will this ultimately lead to some global pandemic that makes the Spanish Flu look like just a bad cold?  Only time will tell.

However,technology is allowing us to understand and monitor infectious diseases better now than ever. Check out these web sites:

CDC Swine Flu Update 

WHO Epidemic and Pandemic Alert and Response (EPR)

The World's Premier Global Infectious Diseases Database

The Internet is full of this stuff.  Just Google "influenza". This doesn't even include the peer-to-peer communication that is now available.  Doctors in Germany are able to test whether the flu their patients have is the same strain as the swine flu in Mexico. This is happening only days after the virus was discovered.  We humans have gotten pretty smart, which gives us an edge over our infectious enemies.

We live in the age of technology, whether we like it or not.  It is fascinating to see just how technology is affecting one of the great struggles of human history: that of us versus germs.

P.S. Here's some good news:  

Creative Destruction

I just finished reading The Ascent of Money by Niall Ferguson.  The book sets out to be "A financial history of the world" and has also been turned into a PBS documentary.  I have to say that I was a bit disappointed.  There are some interesting stories within the book, but I think they all could heave been tied together much better.  It isn't until the afterword that Mr. Ferguson acknowledges that economics is at its core an evolutionary process characterized by "creative destruction", an idea put forth by Joseph Schumpeter in 1942.

This is an idea that I have spoken about many times before.  Change is inherent to the capitalist system, and over time these changes generally benefit most economic participants.  Mr. Ferguson points out that "of the world's largest 100 companies in 1912, 29 were bankrupt by 1995, 48 had disappeared, and only 19 were still in the top 100"  We have clearly seen much economic destruction over the past year, and now it will be interesting to see what happens as economic creativity helps lead the way to economic recovery.

Having a thorough understanding financial history is critical to properly managing financial plans and investment portfolios.  I think Peter Bernstein did a much better job covering the topic of monetary and financial history in his two books Against the Gods and The Power of Gold.   I would recommend both of these to anyone interested in understanding how the world's economy evolved from hunter/gathers to the complex global marketplace we live in today.

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Better to Be Lucky than Good II

This is a quick post in yesterday's Wall Street Journal.  It basically says that over the past five years active managers have again lost to their respective indexes.  This has been one of the cornerstones of our investment philosophy, that active managers do not justify their expenses.  

We are much better off owning the market and controlling investment costs. Stock picking is expensive and generally not worth the cost. For the managers who did beat their respective index, it is most likely a case of being lucky, because if the market is the aggregate of all active managers, some of them will by definition beat the average.  However, the data very clearly shows that there is no consistency of out performance by any particular active managers.

Better to Be Lucky than Good

This is a recent post by Professors Eugene Fama and Ken French. It responds to an issue that many of us have dealt with. Someone we know says that they got out of the market early last year, or their advisor put all their money in cash just before the market crashed in September. I am generally sceptical of such claims. Just like to people who claimed they made a fortune in Internet stocks in 1999 and then got out just in time.

Clearly, there are some who got the timing right over the past year. However, there are probably a lot more who got it wrong. Markets are very unpredictable and we think trying to predict them will likely cause more harm than good. We don't want to rely on luck to determine the success of our long-term investment plans. We believe it is better to have a well thought out plan that relies on proper asset allocation and diversification and that keeps investment costs to a minimum. The hard part is to stick to the plan when so may other are panicking.

Worst Case Scenario

No wonder they call economics "the dismal science".  

This article talks about the recent increase in gun and ammunition sales.  The contrarian in me sees this as a good sign, since I seriously doubt that people buying guns have any valuable insight into how well the economy will improve.  It's sometimes good to see what the crazy people are doing, so we remember to keep a level head.

Happy Tax Day!

We generally try to keep politics out of this blog, but today is a special day, Tax Day.  There is no question in my mind that we have a broken tax system.  It is far to complicated, convoluted and confiscatory.  I have often joked that we should pass a constitutional amendment that would require all members of Congress to prepare their own taxes long hand.  Only then will we get meaningful tax simplification, which would make our economy stronger and more resilient.

I strongly support these protesters.

I sincerely hope that by the time my kids are taxpayers we have a tax system that is simple and fair. I won't hold my breath.!

A Little Humor

Pat On the Back

Here in Boston we are supposed to have spring like weather  all week.  Nice!

Here's a quick link to an article on how to pick a financial advisor.  I think Bond & Co. stands up pretty well to the criteria outlined by the author.  Good for us.

My New Hero

No, not Hank Paulson, the guy on the right.  His name is James Lambright, and he is the Chief Investment Officer of the TARP.  That means his job is to negotiate,on behalf of Uncle Sam, with companies looking for bailout money.  Apparently, he's quite good at his job, as you can see from this profile. 

Here's a few tidbits:

• After working his way through Stanford delivering beer, he boxed his way through the Harvard Law School:

" He took up boxing as a way to exercise indoors during the Boston winters and quickly found himself competing in the semifinals of the New England Golden Gloves, an amateur boxing event."  

• He eats PBJ's for lunch:

"He packs homemade peanut-butter-and-jelly sandwiches for lunch and takes photographs of doors he finds interesting. He is fond of metaphors." 

• This is what happened during negotiantions with Bank of America:
  

"Mr. Lambright spoke up. He reminded the CFO that his firm was bleeding outside the emergency room and was seeking help from a government with only blunt instruments at its disposal, according to three people familiar with the call.

'You're in pain and you have to decide: Does it hurt more to come in or stay out?'"

• The next month this happened with GM:

"A little later, Mr. Lambright was on the phone with Mr. Young of GM, haggling over some details the Treasury was demanding. Mr. Lambright was in no mood to negotiate.

'You're our third-biggest deal of the day,' Mr. Lambright told GM's chief financial officer, according to three people familiar with the call. 'So if you don't want to do this now, we have plenty else to do. Call us later.'

GM agreed to the government's offer, and received its cash before the New Year.

The good news is that New Treasury Secretary Geithner was smart enough to keep our hero in this job.  Yay for the bald guy!

Cheers for Free Trade

Since yesterday's post referenced the Wall Street Journal, I thought I'd be journalistically balanced by referencing the Boston Globe. (Plus, this may be my last chance to link to a Globe article).

This piece by Edward Glaeser, is an excellent analysis on how the US and global economies will eventually recover from our current economic slump. He rightly asserts that free trade, the rule of law, and personal property rights will be essential in moving us forward from here.

I like this quote:

"America's future prosperity depends on engagement with the world that is now lending us so much. American entrepreneurs have and will make fortunes by finding opportunities in the dynamic, developing economies. Indian software makes American companies more efficient. Chinese clothing makes American lifestyles more affordable. Tariffs are meant to protect workers in America's declining industries, but it would be far better for those workers to move from the industries of the past to the businesses of the future."

I'm fairly confident that cooler heads will prevail and our government won't turn radically, or even moderately, protectionist. We know for a fact that Larry Summers, Christina Rhomer, Austan Goolsbee, Tim Geithner, Ben Bernanke, etc.. are all avowed free traders, and they make up the core of President Obama's economic team.

I do have a bit of an issue with Dr. Glaeser's characterization of "fiscal restraint". I am most certainly not a fan of government waste, profligate spending or general bureaucratic mismanagement. However, I am not convinced that comparing nominal national debt to gross domestic product (Dr. Glaeser calls it "debt-to-income ratio") is really the best way to understand federal government borrowing.

I prefer to look at debt as a percentage of assets, and I am not overly concerned with the amount of debt that the US government has, when compared to its assets (the largest land owner in the US is ... Uncle Sam.) Of course I would prefer less debt, but when debt is financed at rates that could easily be below the actual inflation rate over the next several decades, and that debt is not collateralized, I am generally less concerned than many others. I could very well be wrong, so we'll have to wait and see how things play out.

Earnings Jitters Hit Stocks

This post has nothing to do with the title.  I just love it when anyone uses the word "jitters" to explain why the stock market goes down.  I just picture the floor of the stock exchange, with all the brokers shaking uncontrollably.

This piece was in yesterdays Wall Street Journal. It's basically six veteran investment managers saying that we have seen bad times before, and it is the bad times that require patience and faith in human invention.  My favorite quote comes from Will Browne, a man I have never heard of, "We will in some fashion get through this. One of the lights at the end of the tunnel is no longer going to be another train coming at you, it is going to be daylight." I generally think successful business leaders are optimists.

The piece also features David Booth, who is the the CEO of Dimensional Fund Advisors, a firm that we use extensively in our client investment portfolios.  I wouldn't say the writers captured anything especially interesting from Mr. Booth, but it's nice to see him included on the panel.

We put this video on our web site a few months ago.  Mr. Booth does a great job of providing a calm and reasoned perspective of how to behave during difficult economic environments.

The Good, the Bad and the Interesting - Part III

Here it is!  The table below shows returns for some of the mutual funds owned by some of our clients, arranged by asset class, from November 20 of last year through the end of last month.  

The interesting part is just how strong returns were during this four month period, when there was virtually no good news reported anywhere about anything.  Both high yield bonds and US large growth stocks had returns in excess of 13%, a good four month stretch in any market environment. Emerging market stocks were up over 26%, partying like it was 1999.  (a 26% return over four months results in an annualized return of 100%)

If we were to dig deeper into these returns we would see that most of the positive returns were during the last week of November and the final two weeks of March.  If we could have timed these two bursts of return, we would have made back all of the losses from last October.  Oh if it were only that easy....

The Good, the Bad and the Interesting - Part II

As promised, here's the bad:

Of course I wish there wasn't a "bad", but there is.  I'm not going to say too much about it. Clearly we are going through a significant economic disruption that isn't going to miraculously fix itself overnight.  

Tomorrow, I'll delve in the "interesting" which you might guess is my favorite part.

The Good, the Bad and the Interesting - Part I

Let's start with the Good, because it's more fun than the bad. The table below shows the returns for US Stocks over the past month, represented by four asset classes that we generally place in our client portfolios. We pretty much equal weight these asset classes, so the average return is fairly indicative of the part of our client portfolios allocated to US stocks (please see here for all relevant disclosures, methodology, etc.)






What the table shows is that US Stocks were up 8.9% in March - Yippee! I don't know if this is a new trend, a sign of the bottom, a head fake, a "dead cat bounce", or anything else. What I do know is that it just feels good to see an up month.


It is also pretty remarkable how strong returns were for the 16 trading days since March 9th, at 19.3%. In my opinion this shows the folly of market timing. For a long term investment strategy to work, you need to be invested during the short periods when most of the positive returns take place. I doubt we could find anyone who said on the morning of March 10th "Get in today, you'll make almost 20% over the next three weeks!"