October 2012 Newsletter
Evensky & Katz Wealth Management
By Harold Evensky
October 25, 2012
TAKE ME OUT TO THE BALL GAME!
Oh the joys of driving to a baseball game; sitting in endless traffic four miles from the stadium, inching past full lot after full lot, or not finding your car when it’s time to go home (was it D-4 or 404 Green?). Now you can streamline your parking experience with ParkWhiz, a Chicago-based company that’s recently gone national.
ParkWhiz positions itself as OpenTable for parking. Partnered with hundreds of major American Venues, including sports stadiums, airports, amusement parks, arenas, and the like, ParkWhiz helps users You reserve spots in advance of events. Just search for a day and place and you’ll see all the area Garages that are taking reservations, along with pricing and lot info. Once you make your selection and pay, ParkWhiz sends you an e-ticket or printable pass. Present the pass at the parking lot on the day of your event and voilà: your parking has been made painless.
For example, I checked out parking on the 29th for the Philadelphia Phillies at Marlins Park and found 13 locations ranging from $17.60 0.16 miles away to $6.60 0.21 miles from the stadium. Some of the pricing is counter intuitive (i.e., parking further away costs more) but the site even includes customer parking lot reviews and ratings to help you decide on the ideal location.
ByAllAccounts, the developer of the Rolls Royce of aggregation software, conducted a survey of advisors last year asking about their understanding of their fiduciary duty. Jeff Briskin, writing about the results in Advisor Perspectives, said, “Perhaps the most surprising [I would say shocking] finding of this survey was that roughly half of all respondents don’t believe that their fiduciary responsibilities extend to their investment activities. Only 55% said that they need to act in their clients’ best interests when advising their clients on mutual funds. Only 47% said it’s necessary to practice due care and undivided loyalty when providing advice on stock and bond investments, and less than a third said it’s important when advising on hedge funds and limited partnerships. [my emphasis]
That 90% of respondents claimed to be acting as fiduciaries when only 56% said that these standards apply to all of their clients’ investments may be symptomatic of a lack of fiduciary awareness among many advisors. It may also result from advisors’ belief that they can cherry-pick those responsibilities that most appeal to them.
SO, IN KEEPING WITH THE PRIOR NOTE – A QUIZ
Q: How many stock brokers does it take to change a light bulb?
A: Two. One to take out the bulb and drop it, and the other to try and sell it before it crashes.
IT COSTS HOW MUCH???
Compare costs between cities http://www.bankrate.com/calculators/savings/moving-cost-of-living-calculator.aspx#ixzz214uguRit
I WONDER WHAT THE 46% ARE THINKING
According to the computer publication CRM, 54% of the country’s top 25 retailers respond to customer emails. I think the other 46% need a serious lesson in customer service.
I LIKE IT!
The results of a recent John Hancock survey reported in Financial Advisor Magazine found that individuals, when asked how much they trusted various professionals, responded as follows:
x 84% strongly trusted their financial advisor
x 79% doctors
x 74% accountants
x 52% contractors
x 43% real estate agents
GO AHEAD, I DARE YOU!
Not happy with the way politicians propose to resolve our financial crisis? Well, for those of y’all who missed this in an earlier NewsLetter, AARP provides you with a chance to do it yourself. Go to http://www.aarp.org/politics-society/government-elections/info-01-2011/deficit-calculator.html?cmp=RDRCTDEFCAL_APR04_011 and you can personally determine how to close the deficit shortfall. Let me warn you, it’s depressing. In order to get even close to a balanced budget the cuts will be painful.
STILL NOT SO GREAT
The housing market’s obviously been in the tank for quite awhile now. Unfortunately, in many states the outlook remains bleak. According to Bloomberg Business Week, Florida still has over 35% of mortgaged homes valued at less than 5% above or below the loan amount. Texas looks a bit better with those homes in the 15- 25% range. The good news for residential real estate is that historically low rates and suppressed home prices are making homes very affordable; the bad news is the huge shadow inventory, underwater mortgages and tight lending standards. I’m very familiar with the impact as I recently received what I considered an absurdly low appraisal on my home due to the recent shortage of sales in my neighborhood.
THINGS YOU NEED TO KNOW
• Because metal was scarce, the Oscars given out during World War II were made of wood. Still, no one turned one down.
• The name Wendy was made up for the book Peter Pan; there was never a recorded Wendy before!
• There are no words in the dictionary that rhyme with orange and purple.
• Leonardo Da Vinci invented scissors. Also, it took him 10 years to paint Mona Lisa's lips.
Ever wonder how they keep those stock indexes up to date with changing market conditions? Russell recently “reconstituted” its Russell 3000 (i.e., updated the index to reflect current markets). That involved adding 197 companies (39 were initial public offerings (IPOs) – including Facebook). The Russell 3000 represents about 98% of all U.S. equities and the median market cap is $910 million (that’s down 15% from last year). Financial service firms composed the bulk of the new names (62) and at 17.1% financials remain the largest sector. However, at 17.0% the fast growing tech sector is poised to pass it soon. Apple, having grown by about 2/3rds over the past year moved ahead of ExxonMobile as the largest company in the Russell 3000. All this good stuff from the Journal of Indexes.
PICKING OUR BRAINS
I may not know what the 46% are thinking but then I don’t use “sentiment analysis.” It seems big firms are using powerful new analytical software to scan sites like Facebook and Twitter not just to track likes and dislikes but to delve deeper into our psyche. Hello Big Brother.
You’d think at this price cabs would be Rolls Royces. The Week reported that two aluminum New York taxi medallions sold for $1,000,000 each!! There are currently 13,237 medallions and they originally cost $10 in 1937 or $157.50 in today’s dollars.
MORE DR. FIELDS
It’s hard for me to do a Newsletter without including something Dr. Fields sent me. Here’s a recent example from his missive GREAT BILLBOARDS.
DAVID vs. GOLIATH
One of my ongoing themes is to persuade anyone who wants to trade their own stock that it’s akin to David vs. Goliath, and unfortunately, Goliath will win this one (assuming anyone except the person charging for trades wins). I was reminded of this when reading a story in a recent issue of Advanced Trading magazine that highlighted a number of quant traders. Here are a couple of outtakes.
What types of algorithms do you utilize?
“Most of our algorithms are outsourced from third-party firms. We stay away from VWAP- and TWAP types of algorithms just because those run the most potential to gain in the market. Our strategies are hybrids of many different strategies, such as algorithms that access dark pools and algorithms that access lit markets. Some are based on the of prices. We’re not heavily reliant on one specific strategy.
What is your education?
“BA in economics from the Yonsei University, Seoul, South Korea; an MS in applied statistics from the University of; Pittsburg, Master of Financial Engineering from the University of California, Berkeley and a PhD in statistics from University of Pittsburgh
Only David’s living in a dream world would attempt to compete in this universe. .
TIME TO ASK FOR A RAISE AT HOME
The Journal of Financial Planning reports that $20,248 is the estimated annual value of a father’s contribution to household duties. Want to guess what the number is for moms? I put the answer at the end of this NewsLetter.
ZEN FOR THOSE WHO TAKE LIFE TOO SERIOUSLY
x Depression is merely anger without enthusiasm.
x The early bird may get the worm, but the second mouse gets the cheese.
x I drive way too fast to worry about cholesterol.
x Support bacteria. They're the only culture some people have.
x Monday is an awful way to spend 1/7 of your week.
x A clear conscience is usually the sign of a bad memory.
x Change is inevitable, except from vending machines.
x Plan to be spontaneous tomorrow.
BEAUTIFUL AND AMAZING
My client and friend Shirley is an iPhoneographer. For the uninitiated, that’s taking pictures with an iPhone. You’ll be as amazed as I was when you see some of her results.
If you’re as impressed as I was and want to ratchet up your skills so you too can become an iPhoneographer, I have great news. Shirley is teaching a course on the subject at Fairchild Gardens. Class size is limited so I’d enroll post haste.
From Business Insider: “And Now Facebook's Bankers Are Divvying Up the $100 Million”
Wall Street bankers were paid extremely handsomely to sell the $16 billion of stock they sold on the Facebook IPO. Specifically, they were paid $176 million in fees. (Investors who bought Facebook's stock on the IPO, meanwhile, have since lost $8 billion). But that was only the beginning.
Right now, Lynn Cowan of the Wall Street Journal reports that while Facebook investors digest the fact that the stock has now dropped to $19 from an IPO price of $38, Facebook's bankers are divvying up another $100 million they made on the Facebook stock, this time in a much less visible fashion.
How did the bankers make this second bonanza? By shorting Facebook's stock. By, in other words, selling Facebook stock they didn't own and then cashing in when the price dropped. Seriously!
Wall Street didn't call this shorting the stock, of course. Because shorting is widely understood to be a bet that a stock will drop and bankers obviously don't want to be seen as betting against the clients they just sold IPO stock to. Instead, the big short position that Morgan Stanley, Facebook's lead banker, took in Facebook's stock at the IPO price is described as engaging in price stabilization.
Shorting stocks also generally entails risk, for if you short a stock that goes up, you lose money, and bankers don't like to take risks when they can coin money without doing so. So this particular cashprinting tool enables Wall Street to short stocks without taking the risk that the price will go up and they'll get hosed
A BRILLIANT IDEA
Another missive from my brilliant friend, Dr. Fields.
Ever wonder why Wall Street talks so much about China? Scale! Tencent is a Chinese internet goliath. It has twice as many users as the U.S. has people.
RISK & RETURN
From CNN Money, the highs and lows of junk bonds. Be careful, VERY careful chasing yield!
THE KELLY BLUE BOOK FOR HIP REPLACEMENTS
Well, it’s not really a Kelly publication but the idea is similar. Available as a free app from the Apple store (http://itunes.apple.com/us/app/healthcare-blue-book/id445594701?mt=8) “The Healthcare Blue Book provides consumers with pricing information for healthcare services. The Healthcare Blue Book price represents a fair price to pay for a service or product when the patient is paying cash at the time of treatment. It represents a payment amount that many high-quality providers accept from insurance companies as payment in full, and it is usually less than the stated "billed charges" amount.” There’s a good description in Life Hacker: http://lifehacker.com/5934964/the-healthcare-blue-book-reveals-fair-prices-formedical-and-dental-treatments
WANT A FASCINATING BUT DIFFERENT READ?
Do They Take Credit Cards In Heaven?, recently published by my friend Milica Bookman, is best described by an Amazon commentator as “A unique overview of how everyone from religious leaders to cartoonists has viewed the afterlife, and why it's all about economics at the core. This book is informative, fun to read, and absolutely like no other.” You can find it at http://www.amazon.com/They-Take-Credit-CardsHeaven/dp/1475155700. Treat yourself or a friend; it’s only $13.
BUY LOW - SELL HIGH
I know you’ve heard this before but there’s a catch. It means you need to buy what’s doing poorly and sell what’s doing great. Keep that in mind when you’re thinking of dumping your
I’M SURE I’M MISSING SOMETHING
Investment News reports that the FINRA nominating committee selected Seth Waugh, Chief Executive at Deutsche Bank Americas to represent firms with 500 or more brokers. It seems this was announced one day after the U.S. Attorney’s Office settled for $202.3 million in a civil fraud case alleging reckless mortgage lending practices by Deutsche and three subsidiaries – one of those was Mr. Waugh’s. Finra, when asked about the nomination, wrote, “the [Justice Department] action has no impact on Mr. Waugh’s eligibility to serve on Finra’s board.” Go figure.
GaN IS HERE; THE FUTURE IS NIGH
One of my favorite nerd sites is TechCrunch (http://techcrunch.com/). A recent posting, “How Something You’ve Never Heard Of Is Changing Your World,” by John C. Zolper, Ph.D., Vice President of Research and Development at Raytheon, an American corporation with core manufacturing concentrations in weapons and military and commercial electronics, was so fascinating I thought I’d share an abbreviated version with you.
“I’ve got a riddle for you. What do Blu-ray disks, military radars and LED light bulbs have in common? Chances are, if you work outside of the defense or electronics sectors, you may not easily make the connection. But the common thread is a little-known technology called Gallium Nitride (GaN for short). GaN is evolving rapidly behind the scenes to transform many aspects of modern day life…
GaN is a wide band gap semiconductor material with special properties that are ideal for applications in optoelectronics, and high-power, high-frequency amplifiers. Aerospace and defense innovators have long recognized the critical competitive advantages GaN represents for high frequency electronics –including significant cost, size, weight and power reduction capabilities –, technologists across a number of commercial industries have taken notice of these pioneering innovations for the military, and have started putting GaN to work to power every day technologies in ways that significantly reduce energy costs and environmental impact.
For mobile users, GaN can help ensure an affirmative answer to the old question, “Can you hear me now?” The efficiency and resistance to heat and electronic interference of microwave amplifiers built with GaN enables broader, more reliable cellular coverage, while eliminating the need for power-sucking cooling fans required by older cell phone tower technologies. …Large carriers, including Sprint, have already launched GaN-powered towers in several markets.
While GaN-powered technologies quickly evolve to alter many aspects of modern day life, GaN electronics are expected to play an increasingly more important role within our nation’s military systems. ..Undoubtedly, future innovators will find new ways to apply GaN technology to our iPads and smartphones, bringing the networked world to consumers’ fingertips more quickly and effortlessly. Remember, you heard it here first.
That’s the term Behavioral Finance would apply to the people profiled in a Smart Money story about investors who have given up their day jobs to make a living by market trading. One example is a former compliance officer at a major bank. Deciding that trading options was the way to go he took over 60 courses and webinars, traveled around the country to trader expos and seminars [obviously a learning strategy superior to the more traditional bachelors, masters and possibly a PhD in finance, math and a decade of trading experience]. What’s even scarier, he recently became a registered investment advisor so he can “help” others invest in options.
Before you decide to join these ranks keep in mind:
x Research suggests that only about 1% of traders are consistently profitable over several years (luck vs. skill?)
x The average investor underperforms the market by 1 ½%. The average active investor trails the market by 6 ½%.
x 40% of a broker’s book is active traders but 66% of brokerage commissions and fees are attributable to active traders. As the article caption notes, “With a growing group of investors playing the market more often, the brokerage industry is cashing in.”
Sad to say, this excellent story by Reshma Kapadia and other similar work of equal quality will no longer be available in hard copy as the Wall Street Journal’s Smart Money will no longer be published in print; it will become a web only magazine.
Well, as one of the co-authors along with my graduate assistant Shaun Pfeiffer (now Professor Pfeiffer) I am a bit prejudiced but still very pleased that after nine months of peer review our article “Modern Fools Gold: Alpha in Recessions,” was just published in the Journal of Investing. The results echo my prior observations about overconfidence. Here’s the Abstract.
“Investors continue to chase past returns and active portfolio management despite evidence that suggests a passive investment strategy is generally superior. Prior research claims that active fund managers add alpha in recessions. Findings in this article suggest that alpha from active managers is isolated to a subset of the manager universe. Further, the authors conclude that this outperformance displays weak persistence and that there is no meaningful impact of prior superior performance in recessions on performance in subsequent recessions or expansions.”
If you’re interested in reading the full paper, let me know.
AT LEAST SOME ARE CATCHING ON
The take-up rate is a measure of the percentage of people who begin their social security as soon as they are eligible. We’ve been beating the drum that patience pays (i.e., for many, delaying is the best option) for quite a while but most investors have been slow to catch on – at least until recently. Last year the take-up rate dropped from 30.8% in 2009 to 26.9%, the lowest in 35 years. If you or a friend is facing the decision of when to begin social security, be sure and check with my partner, Brett Horowitz (email@example.com), as he has developed an immensely sophisticated tool to assist in making this decision.
I READ IT; I JUST DON’T WANT TO BELIEVE IT.
It’s a big (and depressing) story that I read in both Registered Rep and Investment Advisor. Namely a survey of 500 American and British financial services professionals on corporate ethics by the New York law firm Labaton Sucharow that found 24% of respondents believed financial services professionals may need to engage in unethical or illegal conduct in order to be successful. I guess the New York Times columnist who commented “perhaps the more surprising aspect of the LIBOR scandal is how familiar it seems,” was on to something.
DO IT BY THE NUMBERS
A few interesting statistics from Rep magazine:
x 120 – The number of companies listed on NASDAQ that had “.com” in their name in 1999.
x 17 – The number today. (so much for the “New Era).
x #1 – The rank Dollar General’s 9,800 locations places it among national retail chains by number of stores.
x 2.64 Billion! – The number of $100 bills the U.S. Treasury printed in 2009. And, believe it or not, that year was a milestone with the number of $100 bills exceeding the number of $1 bills.
x 46% - The number of 18 – 24 year olds who would rather have access to the Internet than have their own car..
x 4% – Number of the 30 occupations with the largest job growth potential that require a college degree (I’ll bet that was a surprise, it was for me)
x Turns out that as an old fogy, I have company. 13.2 million workers 65 and over will still be working in 2022. That’s up from 7.3 million in 2012.
MAYBE GETTING OLD ISN’T SO BAD
The average age of the Justices of the Supreme Court is 66.11. The average of the members of the Rolling Stones is 68.75. The Stones started in the early ‘60’s. They’ve played for an estimated 25 million people (about the population of Texas), have 42 gold albums, 28 platinum, 12 multi-platinum and 1 diamond (that’s 10 million!) for a total of about 200 million albums. And, playing to an average audience of 32,500, their most recent tour hit a record, grossing $558 million.
WHERE’D THEY GO?
Having trouble finding an ATM? If you’re a BOA customer I’m sure you are. According to Investment News BOA shrunk their ATM network from 16,200 to 1,536 as part of an effort to save $8 billion
WORRIED ABOUT MEDICAL COSTS?
Probably not an unreasonable concern. According to the American Journal of Medicine, 62% of bankruptcies are due to medical costs and 75% of those whose illness caused bankruptcy were insured.
GOOD or BAD?
According to USA Today, of the 3,914 bills introduced in Congress this year, only 61 have been signed into law. That’s just a shade over 1 ½%. Combined with the 90 last year that makes the 112th congress the least productive since World War II.
x Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.
x We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
x In the business world, the rearview mirror is always clearer than the windshield.
x Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
x You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in - in 2007, we just didn't know it was uncertain. It was - uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn't know it.
x Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
TAKE THE CAB, LET YOUR HEIRS WALK
That’s one of Deena’s favorite lines. According to Money, most parents of baby boomers agree. It seems only 14% of BB parents feel they owe their kids an inheritance. That’s down from 22% in 2005.
From Adam Pitluk’s, Editor’s Note in American Airline’s Americanway magazine
“The other day, I was at my friend Scott’s house and I say something there that was decidedly un-Scott.
Sitting on the hearth was a pair of combat boots. Now Scott’s a patriot-of that I’m aware-but other than sneakers and flip-flops; I didn’t think he had a thing for shoes. Something else must have been at play.
‘Did you enlist and forget to tell me?’ I asked. ‘No, those are from the Boot campaign,” The Boot Campaign is a grassroots initiative started by five women from Texas known as the Boot Girls.
The campaign provides an easy and tangible way for Americans to show appreciation for troops (both past and present), cultivate awareness of the challenges they face upon return and raise funds that are granted to military programs meeting these physical and emotional needs. What better way to say thank to our troops than wearing a pair of boots just like theirs? Join in the growing chorus of musicians, entertainers, athletes and other celebrities and get YOUR boots on!
WHAT WE DO
We promote patriotism:
What is it that moves you to appreciate your freedom? Perhaps it’s hearing the
National Anthem or watching a parade, maybe it’s the fly-over at your favorite
sporting event. For us it’s boots! They show personal gratitude for our military.
Flags and ribbons decorate houses and cars, but boots go where you go and tell
the story of thankful Americans wearing their gratitude for the guardians of our
You may be wondering how one person can make a difference. It’s quite simple.
The contrast of wearing combat boots with everyday clothes starts a conversation. When you put your boots on, people want to know what you’re up to! More often than not they also decide to join you. Before you know it, your act of wearing boots influences those around you to do the same. Suddenly your collective efforts to wear boots results in practical and necessary financial solutions to help wounded military longterm. Our goal is to see 1.4 million Americans with their boots on thanking 1.4 million active duty military serving in 150 countries globally and stateside creating a flash-mob of conversations about “when they come back….we give back” Mine are on order.
BY THE NUMBERS
Some more interesting statistics from Money. Here’s the low down onmillionaires.
x 60% of millionaires are male.
x 86% have college degrees
x 47% are 60-69; only 8% are 50 or younger.
x 76% are worried about the national debt; 68% about the finances of children and grandchildren; 58% about their health and an amazing 48% about having enough to retire.
x 40% live in the U.S. with Japan at #2 with 13%, China #3 with 11% and the U.K. and Germany well behind at about 3% each.
The U.S. may not be tops at everything but we do shine when it comes to ice cream. According to Smart Money, ice cream is an $8 billion business with 912 million gallons of regular ice cream and 396 million of low fat produced every year. Most popular is vanilla at 27% followed by chocolate at 18%. Quite a bit behind are Nut & Caramel and Neapolitan at 6% each, Strawberry and Cookies & Cream at 4% each, Chocolate Chip and Cherry at 3% each and Rocky Road and Coffee at 2% each. All the others account for 25%.
Turns out it’s not so cheap to start an ice cream franchise store. Construction is $130,000; equipment cost $101,000, franchise fee at $42,000 and signage and advertising at $12,500. The good news – the ice cream costs only $8,000.
A FOOL AND HIS MONEY
That’s the theme of a recent book about hedge funds as described in a recent review in Advisor Perspectives, “Why Hedge Funds Destroy Investor Wealth”:
“If all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good. So claims Simon Lack – a former JPMorgan executive whose job was once to help steer billions into hedge funds – in his recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True. You’d think hedge fund
advocates would immediately pounce on this and refute it; but it’s irrefutable.
Even Andrew Baker, the chief executive of the hedge fund lobbying organization, the Alternative Investment Management Association (AIMA), could come up with only a lame rebuttal – arguing, essentially, without solid evidence, that the same analysis would show that investments in other asset classes do just as badly, because similarly dumb, trend-following investors invest in them just as they invest in hedge funds.”
Thornburg has been one of our favorite managers for well over a decade. In addition to first class money management they also often provide excellent educational and research materials. A recent example is their study of Real Real Returns. As the introduction so accurately notes, “Investors often focus on nominal return — or the return they see quoted in the paper or on a financial news site — on a given investment. Unfortunately, there are several factors that often stand between a nominal-return figure and the building of real wealth.” The graph below provides a powerful visual of the difference between nominal and Real Real Returns.
As always, I hope you’ve enjoyed this issue; I enjoyed putting it together. Also as always, if you’re short of nighttime reading, you can find prior issues on our web site at and if you know someone who would like to be added to our NewsLetter email list please have them sign up at http://www.evensky.com/. Until next time……
Harold Evensky, CFP®, AIF®
(c) Evensky & Katz Wealth Management