Kimmunications

Lessons from the investment bank disaster

I saw last week that Merrill Lynch and Citigroup were in the news again for the exotic mortgage-backed investments that have helped to screw up the credit markets.  Merrill sold off nearly $31 billion of the investments for just 22 cents on the dollar. Citigroup is expected to write down $8 billion because of its involvement in these crazy investments.

Lots of analysts and reporters are talking about how these losses reflect the trickiness of the financial markets and how these collateralized debt obligations were risky ventures from the start. But I don't think that's really the lesson to take from these announcements.

It didn't take a genius to see what was happening. The big investment banks created a bubble, not unlike the tech bubble of a few years back. Everybody knew that eventually the bubble would burst and that things would get ugly. Everybody knew these investments were risky. But the investment banks ran into them head-on. Why? Because of their compensation system. There was the potential to make huge sums of money in commissions, so they were incentivized to take on huge amounts of risk. 

The investment banks also felt bullet-proof. They figured that they were too big to fail, and that the government would bail them out if they got into trouble. In other words, you and I would be on the hook if things went south.

A money manager at one of these investment banks has an incentive to take as much risk as he can with other people's money. He gets paid for gathering assets, and the more assets he brings in, the more he gets paid. The way to bring in more assets is to show outstanding performance over a short period of time and get publicity in the major financial magazines. The way to show outstanding performance in the short term is generally to take on excessive amounts of risk.

By taking that extra risk, the money manager puts his clients in position to lose a lot more down the road -- but the manager doesn't care. Why should he? He doesn't get penalized as a manager for the losses his clients get; he gets paid for the assets he brings in.   

This shows the systemic problem behind Wall Street's compensation structure. Whether you're talking about these exotic investments such as CDO's or the way that fund managers handle your funds, it doesn't matter. Wall Street types are incentivized to put their interest ahead of yours, and they do not suffer the same consequences as you do when you lose money.

These managers are paid handsomely and are widely regarded as the best in the business. They're supposedly geniuses. But if they can screw up their own companies so bad, do you really want them managing You, Inc.? 

The moral is clear. When Wall Street appears in genius mode, raking in huge profits on mysterious products and complex trades, the secret isn't genius at all. It's that hubris is running wild, and so is risk. And whether it's tomorrow or five years hence, risk will jump from the shadows, knife in hand, to cut genius down to size.

-- Shawn Tully, editor-at-large, Fortune Magazine

If you've been reading my blog or newsletter for a while, you probably know that I have six principles underlying my investment philosophy. Number One is "Most investments are designed to make Wall Street rich, not you," and everything else just cascades down from that.

I think the credit and liquidity problems we're seeing now is a fallout from the greed on Wall Street, and it's a prime example of why I advocate managing your own money. You are uniquely qualified to do it, assuming that you are properly educated. The good news is that it's not hard to learn. It's not a big mystery that takes years and years to decipher.

Even if you choose to have someone else manage your money, you still need to be educated. A properly educated investor is subject to the least amount of conflict-of-interest and can better distinguish between a good investment and a clever sales pitch.

Educating investors is what I do, and helping people succeed is what I love. If you're ready to take the reins of your own portfolio, or if you just want to be a more educated investor so you can make better, more informed decisions, let's chat. Give me a call at 214-245-5236, 1-888-6SNIDER, or send me an email.

SOURCES:
1. Story, Louise, "Write-Down Is Planned at Merrill," The New York Times, 29 July 2008. [accessed 30 July 2008]
2. Dowell, Andrew and Ed Welsch, "Merrill Deal May Cause Banks to Revalue Debt," The Wall Street Journal, 30 July 2008. [accessed 04 August 2008]
3. Tully, Shawn, "Wall Street's Money Machine Breaks Down," Fortune, 12 November 2007. [accessed 01 August 2008]

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Kim Snider is the President and Founder of Snider Advisors, an investment adviser registered with the SEC, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Optimism vs. Pessimism

“When asked about the country's economy, schools, health care or community spirit, Americans tell pollsters the situation is dreadful. But when asked about their own jobs, schools, doctors and communities, people tell pollsters the situation is good. Our impressions of ourselves and our neighbors come from personal experience. Our impressions of the nation as a whole come from the media and from political blather, which both exaggerate the negative. The latter has never been thicker.”
-- Gregg Easterbrook

SOURCE:
1. Easterbrook, Gregg. “Life is Good, So Why Do We Feel So Bad?” The Wall Street Journal, 13 June 2008. http://www.wsj.com/public/article_print/SB121331500809069989.html (accessed 08 July 2008).

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Kim Snider is the President and Founder of Snider Advisors, an SEC Registered Investment Advisor, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method and how to stop enriching your investment advisors at your expense, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.

Know Your Greatest Risk

What is your most valuable asset? Your business? Your house? Your investment portfolio? The pile of gold buried in your backyard? What would you guess?

 

If you guessed anything tangible, you guessed wrong. Your most valuable asset is what economists call your human capital. This is the sum total of the skills knowledge and wisdom you possess which you then trade with your employer or your customers for money.

 

When you are young, human capital represents the lion share of your total wealth. As you age and begin to accumulate other assets, human capital becomes a smaller proportion but still is your largest asset.

 

If that is so, and economists tell us it is, then your biggest risk is not being sued if someone slips and falls in your driveway, a protracted bear market or the cost of long-term healthcare. Your biggest risk is disability or obsolescence. Both have the potential to seriously disrupt your income.

 

Think of it. As long as my income stream keeps flowing, I can get through almost everything else. Suppose someone does slip and fall in my driveway. They sue me and the court awards them millions of dollars. I may file for bankruptcy but the court will allow me to keep enough of my income to keep a roof over my head and feed and clothe my family.

 

Imagine we experience a depression which takes thirty years for stock prices to recover from. As long as I don’t lose my job and I can still work, I can still eat. Imagine I work in a family business that continues to pay me long after I have become old and feeble. Long term healthcare is not a problem.

 

I am not saying life would be champagne and caviar. I am just saying it would be better than the alternative. A steady income solves many problems. Loss of one can wreak havoc.

 

Disability

 

We have two choices when it comes to risk. We can either hedge it or insure it. Insuring a risk is almost always more costly than hedging it because the intermediaries, namely insurance companies, have to make a profit over and above the cost of the hedge.

 

We can insure the risk of disability by purchasing disability insurance. Some employers offer disability insurance as an employee benefit. Disability policies can be either short term or long term.

 

Short term disability policies pay you a percentage of your salary if you are temporarily unable to work because of injury or illness. A typical policy will you anywhere from 50% to 65% of your pay for anywhere from two weeks to two years, depending on the policy you purchase. A period of 13 to 26 weeks is more common and then long-term disability kicks in if you have it.

 

Long-term disability replaces income for a much longer period of time. Policies usually limit benefits to five years or age 65, whichever comes first.

 

Of course, being the optimists that we are, no one likes to think about what happens if disaster strikes. But the question asked by a Family CFO most often has to be, “What if?”

 

Data from the American Council of Life Insurers tells us one in seven will experience a disability lasting more than five years. The odds increase to one in five for those of us between the ages of 35 and 65.28 It turns out the leading cause of disabilities is not freak accidents, as many people think, but instead is caused by devastating illnesses such as cancer or heart disease. The long-term loss of income is so disruptive that 46% of home foreclosures are due to medical disability.

 

Obsolescence

 

You cannot insure against obsolescence but you can hedge against the risk. How? By making constant upgrades to the software between your ears. The best hedge against being replaced by a 23 year old whiz kid is lifelong learning.

 

	Those who do not read are no better off than those who cannot.€ ~Proverb

 

Lifelong learning need not be formal to be effective. I had the pleasure of interviewing Dr. Benoit Mandlebrot for my radio show several years ago. Dr. Mandlebrot is a mathematician who is best known as the father of fractal geometry. Fractal geometry is what makes the stunning reality of modern day computer animation possible.

 

Dr. Mandlebrot'€™s accomplishments are unique in that he has been awarded major prizes not just in mathematics but also in physics, medicine, science and technology. His concepts have also been applied to economics, earth sciences and linguistics.

 

Dr. Mandlebrot credits his ability to think outside the traditional confines of a single branch of science to his unconventional education. He said in one interview, "€œTo tell the truth, and not to sound pretentious, but circumstances prevented me from acquiring a real college or university education in the traditional sense, so I am primarily self taught."

 

Passive income

 

Disability and obsolescence can both be hedged by building a portfolio which produces enough passive income to pay all the bills, as described in chapter 14. When passive income equals or exceeds day-to-day living expenses, work is no longer a necessity, it is a choice.

 

For my husband Jim and I, we use a combination of passive income and disability insurance to hedge our risk. Because I am the public face of our company, if I were to become disabled, our business would be seriously impacted. But we still have employees and bills to pay.

 

We have a disability policy on me which specifically covers the overhead of the business in the event I am disabled. We rely on the passive income from our investments to replace our income from the business.

 

Longevity

 

Americans' increasing longevity can be an economic blessing or a curse. Provided we remain healthy, increased longevity increases our human capital. If our mental and physical health declines as we age, our human capital is diminished.

 

Thus, there is one other thing you can do to increase your odds of financial success and it has nothing to do with saving or investing. Take care of your body and your mind. Quit smoking, eat right and exercise. These are as much a part of achieving lasting financial success as a sound investment strategy.

 

The preceding is an excerpt from Kim Snider's yet-to-be published - but getting closer book, "The Family CFO's Guide to Financial Success." This book should be available in bookstores everywhere (don't you agree?), but isn't - until Kim stops procrastinating on the second draft!

 

Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Courageous Investor

Mike was a caller on my radio show Saturday afternoon. Four or five years ago, he had gotten very aggressive in his allocations in his 401(k). Now that the market had been going up for awhile, he was nervous and wanted to know should he change his allocations to something more conservative?

 

What Mike was suggesting is called market timing and it is doomed to failure. Stock picking and market timing are by-products of an obsession with day-to-day performance which is a sure way to get the opposite result.

 

One of the lessons I teach is that most of us are getting the cart before the horse. We pick our investments based on their performance and hope they will meet our objectives.

 

The path to successful investing lies in doing it the other way around. First, you must decide what your objectives are. What is your money's higher purpose? Why are you putting it to work? What do you want it to help you achieve?

 

This is not about numbers. Your objective isn't an 8% return or $1 million dollars in the bank. This is about what you are able to do. This is about being able to do what you want, when you want, without worrying how you are going to pay for it. And most likely, it isn't just one thing. It may be several.

 

I have one client in his mid-50's, his peak earning years, who took two years off to do missionary work in Africa. I have another client who left his job to take care of his two sons full time. Now he is getting his teaching certificate so he can be on the same schedule as his boys as they grow older.

 

Maybe your goals are a little bit more mundane. You just want to have enough money to be able to quit working some time before you die. That's OK. But I would encourage you to allow yourself to get creative and think big. What really lights your fire? What is the one thing you secretly want to do if you had enough money and enough courage? That one thing is your money's higher purpose.

 

	"In the long run, you only hit what you aim at." - Henry David Thoreau   "Aim at heaven and you will get earth thrown in. Aim at earth and you get neither." - C.S. Lewis

 

The cool thing about approaching money this way - even if you don't hit what you aim at - if you aim high enough, even a miss will put you in a pretty good position. So why not aim high?

 

Once you understand your money's higher purpose, then you have two other factors to consider before you can even begin to think about which investments to put your money to work in. You must also consider where you fall on the risk/reward continuum and your temperament.

 

Investments stretch along a risk-reward continuum, from those that produce a guaranteed return to those that offer the chance, but not the promise, of a return. Generally, the higher the return, the higher the risk, although it should be noted that risk can take many different forms. It is not always the loss of capital. That is where your temperament comes in.

 

What sort of investor are you? Are you patient or impatient? Do you stick with an idea that makes sense or do you change philosophy every time what you are doing begins to feel the slightest bit uncomfortable? How hands on are you? How much time do you want to spend managing your investments? These are all questions of temperament.

 

Only when you are crystal clear on these three things can you begin to choose the investment philosophy that is best suited to your specific needs. And yet, when I ask a room full of investors how many can tell me what their money's higher purpose is, only 1 in 10 typically raise their hand.

 

When you get clear about these things before choosing an investment, questions like Mike's go away. Investment strategies and specific investment vehicles are chosen based on their ability to achieve your objectives with the appropriate amount of risk and no more, while be mindful of the fact that your investment strategy must fit your temperament.

 

When you take this top-down approach, your investments - in other words, your money's place of employment - should only change when your money's higher purpose changes. And that, I shouldn't need to tell you, should occur very infrequently.

 

	"Courage is never to let your actions be influenced by your fears." - Arthur Koestler

 

An investor who takes this approach is a courageous investor. A courageous investor never changes course based on fits of fear or greed. The beauty is, the level of commitment to the investment approach matches the level of commitment to the objective. Provided you are committed to your money's highest purpose, the rest becomes a moot point.

 

In the new movie release, Georgia Rule, Lindsay Lohan's character, Rachel, has an exchange with Simon (Dermot Mulroney) about the difference between right and wrong and a lie and the truth. She turns to him and asks sarcastically, "How does it feel to be so sure of yourself?" Without missing a beat, he shrugs his shoulder and replies with complete sincerity, "Yeah, it's pretty good."

 

That is the feeling you get when your investments are based on a higher purpose instead of something facile like growth, income or capital preservation or base like a millions of dollars or 50% return. Wouldn't you like to feel that sure of yourself on a topic that makes some of the smartest people feel so uncertain?

 

Learn more about how to put your money to work consistent with its highest purpose in my upcoming class, "The Family CFO's Guide to Investing." I am offering this class in June only - once in Frisco, once in Fort Worth and once in Dallas. The best part is, like this article, it is free. Check the dates and get registered at kimsnider.com.

 

And as always, feel free to leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Investor or speculator?

Many of Wall Street's most colorful metaphors and fables come, unwittingly for most, from a book originally published in 1940 by Fred Schwed, Jr. (yes, that was his real name) called "Where Are the Customers' Yachts?" Schwed went to work on Wall Street in 1920 and wrote one of the enduring investment classics about his time there.

 

The book is simultaneously eye-opening and hilariously funny. More amazing is that many of its truisms seem prophetic given the passage of almost 70 years. It just goes to show, that for all the changes we have experienced in the investment business, not much has changed at all. Everything old becomes new again.

 

One of the passages in this book which caught my attention was the following description of investing in comparison to speculation:

 

Speculation is an effort, probably unsuccessful, to turn a little money into a lot.

 

Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.

 

If you take a thousand dollars down to Wall Street and attempt to run it up to $25,000 in the course of a year, you are speculating. If you take $25,000 down there and attempt to earn a thousand dollars a year with it (by buying twenty-five four-percent bonds) you are investing. The odds against your being successful in the first venture are roughly 25 - 1. The odds against the success of the second venture are "odds on", or something like 1 -25.

 

Jason Zweig correctly points out in the foreword, "Today, as in Schwed's time, people who try to get rich quick still insist on calling themselves 'investors' - even though they are clearly speculators."

 

I believe in investing, not speculation. I believe this because my goal is to make money, not lose it. But the difference between investing and speculation is, as Schwed himself points out, only a matter of degree. So where do you draw the line? How do you define which is which? What criteria do you use?

 

I would love to know your thoughts on the topic. Do you see a difference? Which are you? Did you set out to consciously do one or the other? Let us know by posting your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Commit

Until one is committed, there is hesitancy,

The chance to draw back,

Always ineffectiveness.

Concerning all acts of initiative and creation,

There is one elementary truth

The ignorance of which kills countless ideas

And endless plans:

That the moment one definitely commits oneself, then

providence moves too.

All sorts of things occur to help one that would never otherwise have occured.

A whole stream of events issues from the decision,

Raising in one's favor all manner of unforseen

incidents and meetings and material assistance.

Which no one could have dreamed would come their way.

Whatever you can do or dream you can,

Begin.

Boldness has genius, power, and magic in it.

Begin now.

 

-Johann Goethe

 

Tip of the hat to EM at No Limits Ladies for this wonderful quotation.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Volatilty vs. Loss

"Once again, this illustrates people’s inability to distinguish between volatility – which I might define as temporary declines in price – and loss, which I would characterize as a permanent reduction in value."

 

Pasted from <http://nickmurrayinteractive.com/secure/articles/jul2006_thank.html>

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

What's Rational?

"We have a high moral responsibility to be rational."

-- Charles T. Munger, Vice- Chairman, Berkshire hathaway, at the 2006 Annual Meeting

Tip of the hat to Nick Murray Interactive for this quote. I, of course, like this quote because one of the six fundamental tenets of my investment philosophy is, "Investors are their own worst enemy."

I believe emotions cause us to do the opposite of what we should be doing and it is my job to try to keep my tribe acting in a rational manner rather than responding to fear and greed.

For more on this topic, see the posts in the Investors Are Not Rational category.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Buy when others are selling and sell when others are buying

In order to really make money in the markets, you have to be both right and different from everyone else. If you buy Google because you believe they are going to be the next Microsoft, you may be right, but you won’t get much return on your investment because everyone else thinks the same thing and it has already been priced into the stock. In order to make money, you have to be right and different.

 

If you look at the very few people who have ever made their fortunes in the financial markets - men like George Soros, Jimmy Rodgers or Sir John Templeton - this is exactly how they did it. They bought when everyone else was selling and sold when everyone else was buying. They did not follow the herd. They followed their own path. But what made them successful was not only being contrarian but also being right.

 

Sir John Templeton, for example, correctly figured out when Hong Kong reverted to Chinese control that it wouldn’t be the economic disaster everyone else was predicting. As all the big multi-nationals sold off their holdings in Hong Kong, at fire sale prices, he bought them up. When everyone else came to the same realization he had much earlier, he sold them back at highly inflated prices.

 

What does this example teach us? Those that succeed - financially and in life - are those that have the confidence to think for themselves and act independently. Success is almost always found in that hidden area where most people do not have the courage to go.

 

Few are those who see with their own eyes and feel with their own hearts. ~Albert Einstein

 

As always, you thoughts and comments are not only welcome but appreciated. You can share them below.

 

SOURCES:

 

1. BrainyQuote. "Albert Einstein Quotes,"

http://www.brainyquote.com/quotes/authors/a/albert_einstein.html

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

On Risk Management

"Loss of opportunity is better than loss of capital."

-- Joe DiNapoli, veteran futures trader

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Financial Advisor Symposium: Investing for Retirement in a Low-Return Era

Investing for Retirement in a Low-Return Era

2nd Annual Financial Advisor Symposium - Las Vegas, NV

Rob Arnott, Research Affiliates - April 27, 2006

 

The Arithmetic of Returns

 

Any investment has three components of return

Yield

Real growth in earnings

Multiple expansion

 

Real rate of return on stocks will be3% (the return over and above inflation) over the next five years

Real rate of return on bonds will be 2% over the next five years

TIPS will have 3% real rate of return

REITS will have 2.5% real rate of return

 

No place to hide! No major markets are priced to deliver the 5% or higher returns we all seek

You can't earn an investment return on money you haven't saved

Hope is not a strategy

 

Is this the end of the storm or the eye of the storm for equities?

 

• Earnings Quality Far Lower Than Investors Believe
  • Non-expensed stock options
  • Unrealistic pension return expectations
• Valuation Still High by Historical Standards
• Equity Risk Premium - still not far from zero
• Demographics - Require Lower future returns

 

Arnott believes these factors point to early stages of a secular bear market. "It is very dangerous for us to invest our clients money in a fashion that this scenario leads to ruin. We must invest their money so that they can weather this sort of scenario."

 

Historically, secular bear markets have lasted fifteen to twenty years. Doesn't mean you prepare your clients to prosper in a twenty year bear market but instead you prepare them so they survive a twenty year bear market. You prepare them so that they are going to be OK either way, meaning you have to give up some of the upside if the bear market doesn't materialize. That is not the case in an equity-centric model like the one we have adhered to historically.

 

Demographics - People Are Living Longer

 

We have gone from a life expectancy of 43 years at the beginning of the century to 78 at the end of the century

 

We have gone from a world in which most people didn't make it to retirement to one in which most do, it is expected to last fifteen to twenty years, and there are more of us than ever.

 

The big pension story of the first quarter century will be the abrogation of the pension promise. America cannot afford for people to retire at 65. People are living longer, they are healthier and therefore will have to work longer. What will make us work longer, as a generation, is that our assets will not last long enough to allow us retire at 65.

 

What Do We Do To Improve Returns

 

Stocks and bonds are not the only choices

Unconventional assets can be priced to offer better returns

Seek alpha - find managers who can beat their markets

Avoiding losses is just as important, if not more, than beating the market

Include alternatives in the asset mix

 

"Markets do not reward you for being comfortable." Move some money to areas which are out of favor or not mainstream. They are usually priced more attractively to reward you for moving away from the herd.

 

Which Risk Do You Want To Control?

 

"It's not assets that define wealth. It is what spending stream or standard of living those assets can support."

 

2001-2005 was only a bear market for those with an equity-centric portfolio

 

High risk strategies are on the tails. Risk is a double edged sword. In order to get return, you have to be willing to take some risk, but contrary to popular belief, risk does not guarantee you a higher return. It often creates a lower one, with potentially big negatives.

 

"The essence of investment management is the management or risk, not the management of returns" ~Benjamin Graham

 

"Investing is a "loser's game" in which the winner is often the investor who makes the fewest errors." ~Charley Ellis

 

Beating Andre Agassi at tennis very is easy. All you have to do is keep the ball in play and not make any mistakes. You have to ask yourself, "Who is on the other side of the trade and why are they willing to lose so that I can win?" Few people approach investing from this perspective. Instead they analyze markets, companies, news, fundamentals, etc. In other words, I don't have to outrun the bear. I only have to outrun you.

 

Rob Arnott and Anne Casscells; "Will we retire later and poorer?" Journal of Investing; Summer, 2004

 

Retirees don't actually consume money. They consume goods and services. As we save for retirement, we are saving assets in hopes they can eventually provide goods and services.

 

The way society will impose a stable support ratio is simple supply and demand. Asset prices will move to a price where the average 65 year old will look at their assets and say, "We don't have enough. We have to work a little longer."

 

When companies retain most of their earnings, 10 year earnings growth is negative. When companies retain a little, earnings growth is positive. The idea that today's low dividend rates are going to help us out with earnings growth in the future is not borne out by the data.

 

What if we took your liquid investable assets and divide it by your life expectancy? That is how much they have to spend. Anything you spend beyond that is speculation that future return will be greater than 0%.

 

If plan spending that way, your customer will never run out of money. It is also not what a customer wants to hear.

 

Going back to the idea of "Who is on the other side of your trade?", those that have the greatest confidence that they can pick stocks and pick stocks well are those that are probably the worst stock pickers. Those that have the least confidence are probably the best.

 

Commodities have a modest place in an investors portfolio as an insurance policy only - with no expectation for profit. If Saudi Arabian oil was wiped out by a dirty bomb for two years - 20% of the world's oil went offline - what would happen to commodities and what would happen to stock prices? Commodities are a hedge because they are non-correlated but should not be bought as speculative.

 

BIOGRAPHY:

 

Robert Arnott is chairman of Research Affiliates, LLC, and editor of Financial Analysts Journal. Recently, he introduced the concept of Fundamental Indexation, built on a theoretical foundation that challenges some of the core assumptions of modern finance. Previously, Mr. Arnott joined forces with PIMCO, serving as a sub-advisor, to offer the first global asset allocation product to make active use of alternative markets, beyond conventional stocks, bonds, and cash. Prior to this, he developed quantitative asset management products and teams as chairman of First Quadrant, LP, global equity strategist at Salomon (now part of Citigroup), president of TSA Capital Management (now part of Analytic), and vice president at The Boston Company (now PanAgora). Mr. Arnott has received five Graham and Dodd Scrolls/Awards, awarded annually by the CFA Institute, and two Bernstein-Fabozzi/Jacobs-Levy awards, awarded by the Journal of Portfolio Management and Institutional Investor, for the best articles of the year. He has authored over 70 refereed articles for journals such as the Financial Analysts Journal, the Journal of Portfolio Management, and the Harvard Business Review. Mr. Arnott has also served as a visiting professor of finance at UCLA, on the editorial board of the Journal of Portfolio Management and two other journals, and on the product advisory board of the Chicago Board Options Exchange and two other exchanges.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

How could you have come up with something Wall Street didn't?

"Creativity in business is often nothing more than making connections that everyone else has almost thought of. You don't have to reinvent the wheel, just attach it to a new wagon." So says Mark McCormack, founder of the premier sports marketing firm in the world, in his book, What They Don't Teach You In Harvard Business School."

 

T George Harris says, "It's the miner's headlamp, not the eureka flash, that drives reliable innovation. The process of innovation is the sweaty work of digging through tons of information to find a few golden nuggets -- mainly unlikely knowledge combinations."

 

The short answer to the question is that I had three things Wall Street didn't - I had a personal need, I was highly motivated to solve that need, and I was oblivious to the limiting beliefs of modern finance - largely, I believe, because I was self-taught.

 

It seems clear there are thousands of people working on Wall Street and in academia who could have come up with the Snider Investment Method, or something close to it, but didn't for the very simple reason they were not working on Kim Snider's problem. The key point here is to understand the Snider Investment Method was developed for my own personal use, to solve a very specific problem for me - never with the intent to share it with others.

 

The problem I was trying to solve for myself was how to make my portfolio produce a low-risk, consistent income, regardless of economic or market conditions, that I could use to supplement and eventually replace my W-2 income. I could not afford to live on 4%. I needed my money to work harder if work was ever going to be a choice instead of a necessity while I was still young enough to enjoy the freedom that represented.

 

While this is now becoming a pressing issue for 76 million baby boomers, and by extension a growing opportunity for Wall Street, it wasn't years ago when I first started working with this idea. No one was all that interested in creating consistent, low risk, high yield, cash flow from paper assets. But I was.

 

To be sure, I did not invent something completely revolutionary. What I did was take pieces that already existed, from many different schools of investing, and combined them together in a new and unique way to produce a very unique result.

 

The building blocks of the Snider Investment Method can be found in any finance text. They include things like dollar cost averaging, laddering, hedging, position management, diversification, probability and behavioral finance. What is so unique is the way these are combined together to get the desired result - high yield, low risk.

 

Is it possible that I could come up with something like the Snider Investment Method without holding a Ph.D from MIT? It must be, because I did. Is that unusual? I don't think so. One need only look back in history to see that innovation often comes from the most unlikely sources. In fact, one need only look back at the commemoration of the 100th anniversary of manned flight.

 

At the ceremony, President Bush re-told the unlikely story of Wilbur and Orville Wright. The Wright Brothers were not engineers or scientists, but simple bicycle mechanics from Dayton Ohio who were fascinated with the idea of flight and pursued their idea in the face of almost universal skepticism.

 

A newspaper editor heard of the Wright’s pursuits and wrote, "Man will never fly -- and if he does, he won't be from Dayton." When the Wright Brothers sent their patent application in for their flying machine, the patent office refused it, having seen applications for many such contraptions that didn’t work. They declined the application saying, the plans were inadequate and the machine could never fly. To build a flying machine, declared one editorial, would require "the combined and continuous efforts of mathematicians and mechanicians from one million to ten million years."

 

But just eight weeks after that editorial was published, the Wright Brothers did fly and the contraption they flew was not at all sophisticated. As many of the greatest inventions are, it was quite simple in design, some would even say a motley looking collection of wood and canvas, put together by two men who looked at all of the information everyone else had, and processed it in a different way. Their persistence forever changed our world.

 

One of the questions I am asked frequently about our proprietary investment methodology is “How can someone possibly believe that you have come up with something all the PhD’s and MBAs on Wall Street haven’t?” I am sure Wilbur and Orville were asked the same thing. In fact, Orville wrote in a letter to a friend, “Isn't it astounding that all these secrets have been preserved for so many years just so we could discover them?”

 

I am not for a minute saying that our investment method compares in significance to the first powered flight. But the idea that only people with prestigious academic backgrounds can conceive of big ideas that change our lives for the better is proven false by countless examples. President Bush said it best:

 

“So many great inventions arose in this country, and so many of the great inventors came from unlikely backgrounds. The Wright brothers had their storefront bicycle shop. Thomas Edison was a newsboy. Eli Whitney and Henry Ford worked as farm hands. George Washington Carver was born a slave. There is something in the American character that always looks for a better way, and is unimpressed when others say it cannot be done.”

 

President Bush also said, “We would not know their names today if these men had been pessimists.” If the only thing that is holding you back from exploring a better path to financial success is skepticism, then let the anniversary of the Wright Brothers serve as a reminder about how unfounded skepticism can be.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Is the Trend Your Friend?

"A trend is a trend is a trend, But the question is, will it bend?
Will it alter its course through some unforeseen force
And come to a premature end…?"

-- Sir Alec Cairncross
Chief economic advisor to the British government in the 1960s

TIP OF THE HAT:

Thanks to Nick Murray Interactive for this quote. I like this quote, of course, because 1) it is clever and 2) it points out a fundamental truth. Everyone can see a trend with 20/20 hindsight but no one knows with any certainty whatsoever whether a trend will continue tomorrow. This concept is called "the hard right edge". It is one of the reasons investing would seem to be so easy when we all know different.

For more interesting quotes, see the posts in the Relevant Quotations category.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Risk Management Defined

"(Risk management means) maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between cause and effect is hidden from us."

-- Peter Bernstein, in his book
   Against the Gods: The Remarkable Story of Risk

Tip of the hat to Nick Murray Interactive for this quote.

I, of course, like this quote because one of the six fundamental tenets of my investment philosophy is the diligent management of risk. I believe risk management is at least as important as the performance number. This is one of the differences between institutional investors and individual investors. Institutions understand that if they manage risk properly, the return will ultimately be there.

For more on risk and risk adjusted returns, see the posts in the Managing Risk category.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

On Innovation

"Don’t worry about people stealing an idea. If it is original, you’ll have to ram it down their throats."

-- Howard Aiken

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Starting Over

The start of a new year is always a good time to rethink things - especially when it comes to money. Things change. Your circumstances may be different. You know more today than you did yesterday - at least I hope you do.

 

Some people resist change. To change means to admit that what you were doing wasn't working for you. You may see that as admitting failure. Not me. I say if what you are doing isn't working, change what you are doing.

 

Others have said the same thing through the years. Henry Ford says "Failure is just the opportunity to begin again more intelligently." George Matthew Adams says, "It's no disgrace to start all over. It's usually an opportunity."

 

I have made starting over an art form. I struggled with my own money until I was thirty years old. I didn't understand that our attitudes, beliefs and even our self esteem will dictate whether or not we are good stewards of money.

 

There was a time when I didn't think I was worthy - not just of money, but of a lot of things - friendships, love, and yes, money. So, my subconscious made sure I never had any. When I had too much I'd find ways to lose it or drive it away. I'll spare you all the gory details. They aren't relevant here. But if you are wondering why I am telling you this, it's because I am proof that no matter how poorly you have handled money in the past, you can make a conscious decision to change it - and succeed.

 

Today I am an author and investment radio talk show host. I speak publicly on the subject of managing your investments. I teach and I have a patent pending on my proprietary Snider Investment Method. But that all came later. Originally, I just had to solve the problem for myself: "How do I make sure I never find myself in this position again?"

 

The position I am referring to is one of having gone from millionaire to flat broke in the space of about two years. Maybe some of you can relate!

 

About twenty years ago, I made a lot of money working for a company here in Dallas that went public. I had been with the company for about eight years, risen up through the ranks, and over the years they had given me options that were suddenly worth a lot of money. I knew nothing about investing or taking care of money. I asked the firm that was the lead underwriter on our public offering what I should do with the money. They told me that they had brokers who would be more than happy to manage that money on my behalf.

 

Cool! Problem solved. Abdicate it - I mean … hire someone else to handle it.

 

I will be the first to admit that I didn’t handle my side very well. I spent a lot of money on some really dumb things. That is what you do when you are young and foolish and feeling bulletproof. But you know what? The broker did his fair share of dumb things too.

 

I didn’t understand what he was doing. Frankly, I didn’t even try to understand what he was doing. After all, he was supposed to be the expert. Whatever he suggested I agreed to. How could I not? I didn’t have any facts to base a decision on one way or the other. I was like a leaf, just floating along in the river, going wherever the current might take me. And where it took me – was over the falls!

 

Two years after making more money than most people had a right to expect they would make in a lifetime I was dead broke. I had to admit to god and the world that I had screwed up the opportunity of a lifetime. That is a pretty bitter pill to swallow when you look yourself in the mirror each morning. I had to sell everything. I sold my beautiful, swanky condo. My cars were re-possessed. I had nothing.

 

The worst was when I had to go to my own Mother and ask for a loan because I couldn’t pay the mortgage. I couldn’t even afford to buy dog food for my dogs. That was pretty much a low point in my life.

 

It was also a catalyst. It was because of that experience that I said, "Never again will I rely on someone else to take care of my money for me. If I lose it, so be it, but I have to be responsible for my own financial well-being."

 

So I started learning, and I started experimenting. Sometimes I was successful. Other times I wasn’t. But what I found was that the more I learned, the more I made. The more I learned, the more control I had and instead of feeling hopeless and helpless when it came to money, I began to feel like I had power over my own financial situation. I was becoming accountable and it was the best feeling in the whole world.

 

So my question to you is how is what you are doing working for you? What is holding you back and keeping you from getting the most bang from your bucks? Look beyond the obvious. Is there some deeper attitude or belief that keeps you from doing what you need to do?

 

Remember two key tenets of the Snider Investment Philosophy - you alone are responsible for whatever financial situation you find yourself in and the only person who has no conflict of interest when it comes to managing your money is you. Are you making the right choices today to ensure a happy tomorrow? Leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Nick Murray on Crises

"It is axiomatic, in the study of economics and markets, that the more warning a 'crisis' gives you, the less chance it has of actually being something you have to worry about.

The converse is also true. The crisis that takes you down is the one you’re not looking for."

~ Nick Murray

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Happy New Year!

"Now is the time to revel in memories and write a new future, to remember where you've been and dream up an entirely new direction. Throw out the map, start fresh, and design the new year you truly want. That's real cause for celebration."

-- January 2006 Fitness

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Event Driven Panic

"One can act one's way to investment success, but one can never react one's way to it. And event-driven panic, head and shoulders above all other kinds of reaction, is still the single most reliable path to long term investment failure.""

-- Nick Murray