Did $100Billion of Stimulus Checks Help?

Somebody at worked asked me if I thought the stimulus checks sent out in May and June of this year have helped prop up the economy. The short answer is that it's too early to tell. But, doing some preliminary math will add at least some transparency. The federal reserve shows that the household savings rate spiked in May and June to 4.9% and 2.5% respectively (compared to .61% over the last three years). In order for those numbers to hold true, then Americans recieving rebate checks would have had to save 80% of May rebates and 60% of June rebates. This isn't exactly what the Fed was hoping for. The goal was to either boost spending or extinguish debt, and, so far, none of that seems to be happening. Although the rebates do seem to be supporting consumer durables (necessities) the general impact on spending does not seem to be proportionate to the size of the rebates. But, most experts agree that we need to see data from the third and fourth quarters to be more definite. And then you have to ask yourself, "was this even the best way to spend $100 Billion dollars?"

The Current Economic Conundrum

My wife informed me that I must be more brief in my posts. So while I make no promises, I will try my best.

The market has been all over the place the last couple of months and pundits are on both sides of the fence as to when and how this slump will end. What I want to do is briefly share four things that explain the current environment and offer an ominous prediction. I'm not saying these are the only four drivers, but they make a lot of sense to me. These are simply four "conclusions" I've reached through informal conversations with economists, and really old bankers.

1. Too much debt, or, in finance speak, "Leverage." Finding the right amount of debt a society should use is difficult. People need access to mortgages and banks need access to collateral. However, it turns out that too much debt is bad for society. That may be obvious in today's environment, but some economists actually saw this downturn coming years ago. The reason too much debt is bad is because it increases the riskiness of societal wealth without creating a proportionate economic gain. In other words, too much debt, or leverage, creates a cycle of boom and busts that cause people to lose their home and job more often than would be the case. Since 1990, the volatility of personal income (measured by standard deviation) has remained the same. While at the same time, household debt/income ratios went from 80% to 130% over the last ten years. So, as a society, we've increased debt without increasing the stability of personal income. And societal wealth growth (measured by GDP) averages 3.4% and is unaffected (directly anyway) by the use of leverage. (FYI, sources are the Federal Reserve, BEA, and SED).

2. Uncertainty. Due to some very complex financial engineering, there is a high degree of uncertainty on Wall St. these days. Nobody has any idea how bad the current mortgage defaults will effect the economy. Note, everyone is in agreement with regards to the fact that the news is "bad," but nobody can quantify it. And being able to quantify the impact of certain events is a main premise of risk management. In an environment of high uncertainty, markets tend to overshoot (overly optimistic or pessimistic depending on the news). Everybody is on a train and no one knows when to get off. The only thing you know is that nobody else knows when to get off. This is precisely why banks have been writing off loans for the last three quarters, rather than coming out at one time with the appropriate number. They are clueless

3. Oil (and other commodities). What is so interesting about oil is that demand has increased over the last five years even with rising prices. Why is this? Because of the growing middle class worldwide that want to drive cars. Although demand for oil in the U.S. may decline, it will not in India and China. The other problem elevated prices create is delayed exploration in new fields. Why increase the supply if that will drive down my price? This is the thinking of most producers. Obviously high food and energy prices effect consumers to a greater extent when they don't have any money and are unemployed.

4. American Short-termism. There is no incentive for publicly traded companies to manage for the long-term. Wall Steet CEO's are rewarded and evaluated against quarterly earnings. This creates an incentive to do what may be profitable today, at the expense of long-term economic viability. Citi Group's CEO said, last June, "As long as the music is playing, you have to dance." Well, now it's not and he got fired. However, he would also have been fired for not taking advantage of easy money (i.e. debt). So this model has to change.

Conclusion. With the global middle class tripling over the next 15 years I predict the U.S. will not be the global economic leader it has been for the last 20 years. It's not only the demographics that are not in our favor, but the huge amount of debt we carry. At some point, you have to pay the piper and I think the time has come for the U.S. No other country (accept the U.K.) is more leveraged that we are. If our major lenders (China and other developing countries) wanted to redeem their loans (because the U.S. economy is no longer the safest) that will mark the end of our high consumption economy as we know it. It's ironic isn't it? That these developing economies have aided our growth over the last 10 years.

Gas at 3.99 a gallon? What fortune!

A few months ago I wrote in my post that the current economic condition would worsen over the next year. At the time, although the Dow Jones had dropped 1,000 points to around 13,000, it was holding against rising oil prices and a weakening dollar. Many experts proclaimed that we had reached the proverbial bottom and were on our way out. Today the Dow is holding just barely above 11,000 and is coming off the worst June in 20 years. There is also talk that Freddie Mac and Fannie Mae are insolvent (which I'll write about next). I'm not one to gloat, but I will say I told you so.


Maybe you noticed last week that oil leveled off a little bit. Did you wonder why? I'll explain in a moment. The other day I was forced to listen to a comment by a presidential candidate (who shall not be named since this is a bi-partisan blog, but, I'll just say he's the older of the two) regarding how nefarious "speculators" are to blame for the high oil prices. What?! It's painful for me to listen to someone who pretends to understand the drivers behind billions of dollars moving among billions of homo-sapiens the world over. Of course, it's my job to explain this (rather, why he is wrong) to the four readers of this blog. How can a system be right when people are making money and wrong when people are losing money? This smacks of public pandering! And how does this relate to oil prices taking a brief respite from their break-neck ascent last week? Read on.

What are "speculators?" It sounds like a dirty word that connotes greed and irresponsibility, but that could not be further from the truth. I'll explain in more detail shortly. This presidential candidate was blaming the derivatives markets, which is sometimes synonymous with "speculation." I'm not going to explain what a derivative is except that it is only an asset class, like a mutual fund, but could be defined further. Options, Swaps, and Futures are all "derivatives." In this case, the blame seems to be directed at the futures market.

I love the futures market! Here's how it works. Futures allow organizations/people to lock in future exchanges (backed by a contract) at future prices. If I'm an oil refinery, I can buy a futures contract committing to buy a certain amount of oil from a seller who agrees (in contract) to sell the oil at a specified price at a specified future date. By the way, this is exactly why Southwest airlines is whoppin' up on their competitors. They bought futures contracts years ago that allowed them to buy oil at $60/barrel today! They can lower fare prices without losing profit and they are killing their competition. Futures markets allow organizations to control some of the volatility behind prices. For example, say Southwest airlines wants to add a new route but it would only be profitable if oil stayed below $90/ barrel. At the same time, say an oil company wants to drill in a new oil field but this endeavor would only be profitable if oil stayed above $80/barrel. A futures contract can be negotiated at $85/barrel between the two parties. It's a win-win. The value of the contract itself is adjusted periodically depending on the price of oil relative to the negotiated price. But the contract now allows both the oil company and airline to move forward regardless of market outcomes. So, why the blame?

Here is where large institutional investors like Pension funds are involved. There are two types of speculators; traditional and index. Traditional speculators engage in active buying and selling. Index speculators usually have an investment policy that stipulates how much exposure the pension plan can have to derivatives instruments. If the policy designates an allocation of 2% of assets, then the plan purchases futures contracts to gain their 2% exposure. What this one presidential candidate claims is that these index speculators never sell their contracts and thus "remove" liquidity from the system, which increases demand and, subsequently, prices. But this conclusion is simply unacceptable.

If a large pension fund decides to allocate 2% to oil futures at, say, $120/barrel, then any rise above $120/barrel would increase the value of the overall contract, right? Therefore, instead of having a 2% exposure, a fund might find themselves with an exposure of 2.5% (of the overall portfolio) reflecting the increased value of the futures contract, especially if the rest of the economy is in the crapper (which it is) and other holdings are decreasing in value. At this point the pension fund must "rebalance" the portfolio, or bring the allocation back in compliance with the 2% mandate. This forces the fund to sell .5% of their futures contract. This could easily equal millions of dollars which would push the price of futures back down. So institutional investors actually help the market. What is the corollary to the recent fall in oil prices last week?

Many institutional investors have fiscal year-ends of June 30th. Many of them also have direct exposure to oil and oil futures. Every quarter or year-end these funds must "rebalance" their portfolios to bring them back into compliance, which means selling off oil futures as well as direct exposure in equities. Increasing the supply back into the market decreases the overall price of oil. Over the last two weeks, plans across the nation have been rebalancing portfolios thus bringing down he price of oil futures and energy stocks in the short-term. Futures contracts allow companies to continue focusing on core business strategies instead of worrying about commodity prices. And institutional investors bring much needed liquidity to the derivatives market and help to keep prices in check.

Banning institutional investors, like this candidate proposed, doesn't help anyone and only displays obvious ignorance.

Section V- Why you will probably make bad decisions; a brief note on behavioral finance

What would you estimate the average weight, in tons, of an adult male sperm whale to be? Go ahead, try and answer.

How about giving a high and low estimate, in miles, of the distance between here and the moon?

If your answers to both of those questions were narrow ranges, like 5 to 10 tons for question one or 100,000 to 150,000 miles for question two you probably are susceptible to overconfidence bias. Psychological biases will play the single most important role in the success of your personal investment program. Fortunately, most biases are the result of simple ignorance and can be solved through education (there are also intense emotional biases that I won't cover here). In case you're wondering, the answer is 20 tons and 240,000 miles. Those of you that answered with wide ranges probably are less likely to develop overconfidence bias.

Individuals demonstrating overconfidence bias will usually have concentrated portfolios as they believe they possess superior analytical abilities and selection skills. They will also tend to ignore the potential downsides as they believe it is unlikely an investment they select will lose value. Luckily, the overconfidence bias is cognitive, meaning it is treatable with a little education.

Advice: Be upfront and honest about your capabilities and get an outside opinion. If you have been managing your own money for awhile, be honest about your performance. This is why Financial Advisors are so helpful, they act as a filter for your dumb ideas and biases.

Here's another question:

What is the probability that George (a shy, introverted man) belongs to Group A (stamp collectors) rather than Group B (BMW Drivers)?

You might conclude that George's shyness is more typical of stamp collectors than BMW drivers when statistics show there are more BMW drivers than Stamp collectors.

This is called Representative Bias. People have a tendency to group situations into familiar buckets, even when statistics disagree. Here's how it might play out in your mind as you are investing. Say you're looking for a great long-term investment and your friend informs you of a hot pharmaceutical stock that will have an IPO and explains the kind of drug the company manufactures. This sounds good to you so you go ahead and invest. The problem? You incorrectly assume that owning a company that might potentially have an IPO is a good long-term investment. Statistically speaking, it is more likely you will lose money over the next few years. You have to actually ask yourself if you've made an incorrect assessment of the situation. Again, your best friend is information. Always study the behavior of a potential investment and approach the decision logically. Understand where the opportunity falls.

One more, try this question:

Say you're outside washing your new car when your neighbor comes by. He notices your new car and immediately says, "Wow, did you know they are giving away free DVD players in model XYZ?" You were not aware of this when you made your purchase. What do you do?

If you run inside and begin to do research but then stop, for fear of what you might learn, you may suffer from cognitive dissonance (buyers remorse). This bias causes all sorts of problems for investors. CD happens anytime someone has to make a selection. While the offering we select has obvious downsides, the one we didn't select has redeeming qualities. Investors dealing with CD often won't sell a poor performing holding only because they do not want to confirm they made a bad decision. Or they might continue to contribute money to a poor performing holding to simply confirm their earlier decision that it was a great investment. It also leads to herd behavior and following the press.

Cognitive dissonance is such a tricky bias to deal with. The best thing to do here is to set ground rules ahead of time, have a plan and maintain objectivity. In the case of selling a losing investment, your policy might be that it's O.K. to hold on to a losing investment for 18 months (or whatever timeframe) and then re-evaluate. Adhering to a policy helps to mitigate the potential dissonance one might feel as the result of a previous decision.


Now, I just shared three basic, albeit pervasive, investment biases. The questions above come from a great book by Michael Pompian entitled "Behavioral Finance and Wealth Management." The point here is that as an investor, you are aware that you most likely are making a biased decision. If you find yourself making decisions without consulting disinterested third parties or gathering independent information, you may want to take a step back and attempt to identify your logic. At the same time, try and understand when an exception to the prevailing data may be warranted and if you are then justified. But for heaven's sake, don't listen to somebody's hot tip at the family reunion!

Next week I'll be back to blogging about current economic events. Stay tuned.

Investing IV

I ran into a person recently who was relentless with their "index investing" mantra. And let me repeat, index investing makes a lot of sense for those who do not consider themselves very sophisticated or those who do not want to bother with management. Your essential claim is "the general market's expectations are more accurate than my own would be." And that makes sense for some people.

Now I want to turn to portfolio strategy for a moment, then I'll turn to vehicles and useful tools. The strategy I laid out in the last post (mixing actively managed funds and passively managed funds) is called the Core/Satellite strategy. In this strategy you gain broad exposure by investing in index mutual funds for the majority, or core, of your portfolio. The core is usually made up of a Large-Cap U.S. index fund, a Mid-Cap U.S. index fund, an International Index fund, a Real Estate index fund, and a Bond Index fund. This should comprise about 70-85% of your portfolio. The rest is meant to be deployed a little more strategically in opportunistic or alternative investments. So what are some of those?

Emerging Economies: Tons of variety here. If you want Indian nano-tech, you can find a fund in that space. This could be a country or industry specific investment. Other up-and-coming countries to evaluate would be Vietnam, Ukraine, Scandinavia, Poland, Brazil, Mexico, and South Africa. You are looking for political stability, strong GDP growth (above 4%), currency stability (if the currency is pegged to the dollar, that is generally not a good sign. The country should have a market determined exchange rate), and a favorable business environment that enforces rules.

Infrastructure: Infrastructure is another interesting space. Infrastructure includes roads, bridges, utilities, airports, etc. The asset class will not give you as much up-side potential as investing in equity mutual funds because they are more conservative. But, they could dependably offer a return in the high single or low double-digits. Also, most infrastructure is tied to inflation (i.e. tolls, utilities, etc) so you can protect against potential rampant inflation. Inflation may not be your concern in the U.S. but it might be in Latin America. Infrastructure could give you meaningful exposure without the risk of losing big in the event of a massive peso devaluation.

Commodities: These include precious metals, timber, crops, and oil. Obviously these have been attractive areas over the last few years. And they are the only asset class that is negatively correlated with the S & P 500, meaning they do well with the stock market performs poorly (the opposite is also true). Commodity prices are tied to inflation, when inflation increases, so do commodity prices. There is also a strong demand component. Global demand is what really fuels commodity prices. As you might guess, developing countries like Brazil, India, Russia, and China are consuming more and pushing the global demand for commodities through the roof.

Clean Tech: Here's an area that has received substantial attention over the last couple years. You can reasonably assume that major dollars will continue to flow to cleantech. This is a very broad area that covers solar power, wind power, alternative fuels, green infrastructure, etc. However, the asset class is very dependent on political mandates.

You can make investments into any of these arenas through mutual funds. You could also use ETF's. ETF stands for Electronically Traded Fund. Their composition is similar to a mutual fund (pool of money spread across various holdings), but they trade like a stock. To this point, I haven't mentioned trading. Whenever you trade a Mutual Fund you have to wait until the close of business to get your price. So, if I decide at 9:00am to sell my mutual fund, I can enter (assuming you use an online account) the trade but will not know what the underlying price of my fund will be until the close of business. Many people don't like that. With an ETF, you can trade immediately and know exactly what the price is. They are also cheaper than Mutual Funds, with lower expense ratios. The downside? Everytime you buy or sell, you pay a commission (which is minimal). If you are one to actively trade, they probably don't make sense. But if you are the type to buy and hold, then they are a great option.

Some websites are very helpful in building a portfolio. I've mentioned Morningstar, but there are others that are equally as helpful. Here's a list.

Yahoo Finance (www.yahoo.com) Portfolio tracking and market news
Motley Fool (www.fool.com) Advice
Bogle Heads (www.diehards.org) People will critique your portfolio (beware, not are all qualified)
AAII (www.aaii.org) American Association of Individual Investors. Great site, excellent resource. You can become a member for a very small fee (I think around 20 dollars) and they will introduce you to various portfolio strategies with performance. They also put out a nice publication and list top finance websites.

There are thousands of others, but the ones above are a little off the beaten path. In my next post, I'll tie up personal portfolio construction.

Investing III, Picking apart a Mutual Fund

Finally I'll get to some of the finer points of personal portfolio optimization. One quick word about Stock picking first. I used the example of purchasing one share of stock in my previous post; well, you can't really do that. Stocks usually sell in lots of 100. If Citigroup is trading at $60/share, you need to fork out at least $6k. Again, that's why MF's make more sense (for most people).

What the Heck do all these numbers mean?!

Let's pick apart a mutual fund. Here's one from Morningstar's website; Fidelity Large Cap Stock. The name tells me that this is a mutual that invests in Large Cap (see previous post) companies. The "ticker" (used for referencing, is FLCSX). You can look it up yourself at www.morningstar.com by typing in the "ticker" in the upper left hand corner. Now, let me explain some of the salient terms you should definately know!

Front Load: None. What is a "load"? It's a commission. There are front, back, and no-load mutual funds. A so-called front loaded mutual fund is one that has a commission right off the top, usually 4-6%. So approximately 95% of your money starts working for you. A back-load is where you don't pay anything up front, but you do when you sell it (usually the same commission). No load means no commission, and no help. Meaning, most mutual funds that brokers offer will carry a commission, or, you are paying them for their advice. No load mutual funds mean you don't have an individual to talk to. Fidelity, T. Rowe Price, and others are all no load mutual funds. There is no dedicated advisor that you speak with.

Expense Ratio: .81%. This is your annual cost for the fund. This money pays the guy managing the money and his staff. Again, large cap mutual funds are generally cheaper. Expense Ratios range from .05% to 2.5% a year.

Minimum Investment: $2,500.

Standard Deviation: 10.9. This is a statistical term that measures volatility. Nevermind how you calculate it, it's the interpretation that matters. One "standard deviation" means that if you looked at the historical performance over a certain time period (in this case five years per the website), the returns of the fund would have fallen within plus or minus 10.9% of the five year average (which is 11.35%) 70% of the time. There's a good possibility (70%) that the value of your fund will be somewhere inbetween 22.25% and .45%. Obviously, for two funds with the same standard deviation, you want the one with the higher average, and given the same average, you want the one with the lower standard deviation.

Alpha: 1.71. Alpha measures out-performance, the higher the better. In other words, given the amount of risk the manager is taking, they are adding 1.71% of value through their skill.

Beta: 1.17. Beta measures the amount of risk they are taking. A Beta of 1, means they are taking the same risk as their index. The higher the Beta, the more returns will swing. So, if the market goes up 1%, this will go up 1.17%. If it goes down 1%, it will go down 1.17%. Again, these are all historical numbers that may not explain the future.

R-squared. 92. Another statistical term that essentially tells you whether or not you can use Alpha and Beta in analysis. If the R-squared is below 80, you should throw out Alpha and Beta as a means for explaining how your mutual fund will behave.

Number of Stock Positions. 185. You would own an interest in 185 publicly traded companies. Not bad for $2,500.

All this will help you understand a mutual fund, but how can you tell if your mutual fund is beating it's "benchmark?" A "benchmark" is an index.


Why You Need to Look at Indexes

Indexes are really important. What is an index? It's essentially a basket of stocks tracked by wall street that are supposed to represent a particular constituency. Here is a list of indexes that are most widely followed.

Dow Jones Industrial- Measures the stock performance of 30 U.S. Blue Chip companies.
S&P 500- Measures the stock performance of the 500 largest U.S. Corporations
Russell 1000- Measures the 1000 largest companies on the U.S. stock exchange (92% of all traded securities).
Wilshire 5000- Broadest index measures all U.S. equity securities.

The above are all U.S. indexes only. Chances are, your portfolio will track the indexes pretty closely. Which one should you follow? That depends. Obviously the Dow Jones, on its own, is not sufficient since it only follows 30 companies. If you're holding a portfolio of Mutual Funds, spread across various asset classes, you are holding thousands of securities. The answer is that your large cap mutual funds will follow the Dow Jones and S & P 500 fairly closely. Your medium and small caps will more closely track the Russell and Wilshire indexes. What about international?

MSCI EAFE- This stands for Morgan Stanley Capital International. The "EAFE," stands for Europe, Australia, and Far East. Your international mutual funds will track this one more closely, assuming you're in developed economies.

The key with looking at indexes is knowing what their constituents are. If you are properly diversified, no single index will explain your portfolio.

My Original Questions Was..

Why should you follow them? If I owned the mutual fund above, then my index would probably be the S & P 500. I want to know if the Fidelity Large Cap Stock mutual fund outperformed the S & P 500. Why? Because I'm paying for it (.81% a year). If the manager can't outperform, then I would rather just invest passively in the index and not pay anyone for it. Wait, you can do that? Oh yes....

Index Mutual Funds

One way to cut down on costs in your portfolio is to "index" your portfolio using "index" mutual funds. The premise for indexing comes from the aforementioned post on "efficient market theory." Which states that the market correctly prices every security, at any point in time, due to the transparency and availability of information. Adding to this is substantial research showing that most mutual fund managers will underperform their index, net of fees. There are mutual funds that are "passively" managed. This means they look at a certain index, i.e. the S & P 500 and do absolutely nothing but hold the exact same 500 companies in their fund. And for this, you pay a measly .05%. Much better.

There are many huge proponents of index investing. These people will quote tons of studies that illustrate what a rip-off advisors and money managers are since they can't beat the index and charge unnecessary fees. But I'm not entirely on board with index investing. In financial services, everything has a place and time. And there is definitely a time for active money managers. Indexing only makes sense for those asset classes that are very efficient, like Large, publicly traded, companies. But other asset classes have major inefficiencies (By inefficiencies I mean that it is possible for you or a money manager to know something that the general public does not). Inefficiencies increase as you move down in size (from medium to small and even micro-caps) and down in economic development (developing or emerging economies). Few analysts cover these areas and you can find some money managers doing very well in these spaces. With this in mind, a more efficient portfolio might look like this:

Large Cap: Index Fund
Mid Cap: Index Fund
Small Cap: Actively managed fund
Micro Cap: Actively managed fund
International, Large Cap: Index
Emerging Markets: Actively managed fund

Next up, "Beyond the Core (interesting opportunities and vehicles and the problem with Mutual Funds)."

What to do with your money, Part II

Once you've taken care of the short term, how do you go about building a portfolio, and what instruments should you use?

First things first. You should take a survey that allows you to asses the amount of risk you are willing to bear. There are numerous surveys available for free to help you do this. Here's one from T. Rowe Price, http://www.troweprice.com/common/indexHtml3/0,0,htmlid=904,00.html?rfpgid=8283

They mostly ask about your time horizon and your appetite for volatility. In other words, if you come home from work and find out that the Dow was down 5%, are you going to freak out?

Let's walk through the basics to portfolio construction. In the next post, I'll talk about how to understand and interpret the market.

I'm going to assume the long term here. In other words, I'm assuming you have adequate savings, and have paid off high-interest bearing debt.

Let's say after taking a survey, you (via the survey) determine that your asset allocation should look something like this: 50%Large-Cap U.S. equity, 15% Mid-Cap U.S. equity, 10% Small-Cap U.S. equity, 20% International Equity, 5% bonds. Now, let's stop there. What does all of this mean? 'Cap' stands for capitalization. This is calculated by taking the price of the stock and multiplying by the shares outstanding.

Large-Cap Companies: These are the largest companies in the world, i.e. Wal-Mart, Exxon, etc.
Mid-Cap Companies: Smaller than the large-cap and generally lesser known. But they are still huge. Examples include Starbucks and Abercrombie and Fitch.
Small-Cap Companies: Smaller than the mid-caps and fairly obscure. Still, they are very large with several hundred million in annual revenues. One semi well-known company is Ann Taylor (if you're not married, you probably haven't heard of it)
International Companies: Don't let these scare you. Most of these are very well-known in the U.S. Some large international companies include Toyota, Nikon, Rolls-royce, Bayer, Daimler, and Nestle.

Wait a minute, can't international companies be broken down further into large, medium, and small? Yes, but for simplicity, I will not do that here.

How do these categories react? Well, what you should be more concerned with is how they react to one another. In other words, if large-caps get slaughtered, will small caps as well? And if it's a bad year in the U.S., will my international portfolio also get slammed? That's the whole point to diversification, it isn't necessarily adding a ton of different holdings, but adding ones that do not correlate with eachother. How many times has the U.S. been the number one performing economy? Never! That's the argument for having exposure to international companies.

Tools to use

Mutual funds (I'll suggest some hybrids in my next post so don't run out and buy anything yet) make the most sense in trying to build out your portfolio. Why? Going back to my previous post, you can purchase one mutual fund that will hold 100 large-cap companies (or mid-cap, or small-cap, or whatever). If you want nano-tech in India, there is a mutual fund for that. If resources are tight, you could buy one mutual fund for each type of asset class and be done. Now, for this, the average mutual fund will charge anywhere from .5% to 2% a year, with small-caps and international stocks on the higher end (reason being more research goes into those asset classes). I'm being very general here, I will explain more in the next post, but this will do for know. I like morningstar's website the best (www.morningstar.com), you can register for free and get great information and search available funds.

Why I'm not a stock picker

Again, greater detail will be forth coming, but, in general, I'm not a stock picker and I don't think others should be. To be able to properly assess whether or not you are buying a company that is fundamentally worth more than the market is pricing it at (for this is the premise to picking stock of an individual company) you would have to know how to properly conduct a company valuation (which most people can't do) and have a very good grasp on intermediate to advanced accounting issues to locate potential trouble spots. And even if you could do that, the chances of you knowing something that hords of Wall Street analysts don't already know (when they travel in their Jet to meet with the CEO), are slim. Most likely, they've already priced the stock accordingly. This is called the "efficient market theory." Which says, the greater the transparency (the U.S. market is highly transparent, almost to a fault), the higher the efficiency which means the less likely it is that you will uncover something the "market" did not six months ahead of you. Does that mean the opposite is true (i.e. emerging markets)? Yes, now you are beginning to understand. I'll save advanced portfolio construction for the next post.

So what do we know now? We know that, taking a longer time horizon, we should have our money spread across multiple asset styles in order to hold assets that do not correlate with eachother or have a very low correlation. And, the quickest way to obtain excellent diversification is through mutual funds. And that I've deferred the 'meat' of the discussion until next time. Take a look around at some of the websites, it might make the next post more meaningful.

Now we have a basic introduction to portfolio construction.

Basic Investing

So I'm thinking I should actually write a post on investment strategy, since that's what I set out to do in the first place. But, I'm not sure where to start. If you're an "experienced" (defined as your mastery of knowledge and practice, not time) investor, then you could probably skip this post. I'm a little anxious because there are actually some very attractive opportunities out there that people should be taking advantage of (and it doesn't involve recruiting others and making $8million dollars a month without getting out of bed). I'll start with some vocab, and then, in a few days (I promise), I will follow up with some of those interesting opportunities. Then I'll conclude the 3-part series with some basic behavioral finance.

Basic terms.

1. Stock- Stock represents ownership in a company. If the company does well, you do well. Likewise, if it performs poorly, the value of your stock decreases.
   
2. Bond- A Bond represents a loan that YOU make to the company. In other words, a company may need $10million dollars for a new venture and they want to raise money for that venture. They issue bonds which means they will pay you for lending them money every year, and, at the end of whatever time frame (1,3,5,10 years), you get all your money back. So you get your money back and you get all the interest payments in the meantime. Whereas a stock is OWNERSHIP in a company, a bond represents LONERSHIP. What's the downside? Bonds are backed by the full faith and credit of the issuing institution. The more risky the institution, the more interest they pay you in the meantime (thus government bonds are considered to be the safest and pay the least amount of interest).
3. Mutual Funds- Sometimes the cost of one share of stock or the purchase of one bond is prohibitive. For example, a share of Google may cost you a few hundred dollars. Or one bond might have a minimum face value of $1,000 dollars. Additionally, you may not like the fact that all your wealth is tied up in a few companies be it as a stock or bond. Mutual Funds are the answer. Nevermind the name, here is what they are. They basically pool everyone's money and buy in bulk. So, you may only have $1,000 dollars to invest. Well, you could own a few shares of Google, or, maybe, one share of Google, and maybe a few shares of something else. You could also buy one bond (maybe). Or, you could buy a Mutual Fund. Here, they combine your $1,000 dollars with everyone else and come up millions of dollars. Then they go out and buy shares, or bonds (usually one or the other, but not both), in several different companies (typically 100 or so) and you participate proportionately. Now, instead of only being diversified over a few companies, your spread across one hundred. Much more diversification. Which is an important term.

Where do you put money? How do you start? Here are my basic rules.

1. Take the free money
2. Short term savings. First things first, if you don't have 3 months worth of living expenses in a savings account you should do that first.
3. Employee Retirment Plans. Some of you may have a 401(k) where you contribute 6% and your employer will match it (remember, you should do this. See rule number one). If you can't contribute the max, then start with whatever you can, because your employer matches.
4. Roth IRA. This is a personal retirement plan. The IRS allows you to put a certain amount of money away each year that grows (without taxes) until you take it out (can't touch it until you're 60 without penalty). When you get to distributions, you don't have to pay taxes on them. This is a nice compliment to your 401(k), which you do have to pay taxes on when you take distributions.
   
5. Brokerage account. This is where you open up that Fidelity, E-Trade, Scottrade, Schwab, T Rowe Price, account. You can buy and sell stocks or bonds whenever you like (but beware of extra costs).

As a note, 401(k)'s, IRA, and brokerage accounts are only shells--you still have to choose what to invest in (stocks, bonds, U.S., International, etc.)

Anyway, I'll get more detailed but I wanted someone with no experience to be able to read this and get a general idea.

Private Equity, friend or foe?

Hectic week, easy post.

In order to understand the old, heavy-set, gentlemen (except on Fox, where, they've determined through scientific study, that when talking about money, people prefer to see women) that debate financial and market news, one should understand the world of private equity. And it's not too difficult to grasp but is so vital to our economy that I thought I would give everyone some insight into this very private world. You've probably heard buzz words in the news, or on the radio, maybe some terms like, "leveraged buyout," "Blackstone," "IPO," etc. First I'll explain the vocabulary, then move to economic factors that influence success of private equity firms, and conclude with advantages and disadvantages.

Private Equity is an investment in a privately held business. I know, no surprise, but many don't really understand what the alternatives are. Let me take a step back. Anyone can buy a share of stock. For example, if I fancy Microsoft, I can purchase one share of their company at any time and there is plenty of information available to help me analyze Microsoft. That's because Microsoft is "publicly" traded. What does that mean? It means the general public can buy shares and participate in the growth, or demise, of a company. In order to do this, Microsoft must follow very strict reporting and accounting guidelines so that the general public can make an educated decision since most people are not financial experts. O.K., good. How is private equity different again?

Who are they and what do they do?

Private Equity is an investment into privately held companies, so they don't have to comply with the excessive reporting standards of the SEC, and because of that, the general public can't participate. So who can? The SEC has determined that, because of the lack of transparency, only financially sophisticated and wealthy individuals/organizations can participate (in other words, you better know what you're doing). And they have a checklist to establish who may or may not be potential investors. Some privately held companies include AMC Theatres, Countrywide, Chrysler, IKEA, and Earnst and Young, to name a few. Rather than ownership being split up among millions of shareholders, private companies may only have four or five larger shareholders.

Some of the largest private equity firms are Blackstone, KKR, Caryle, Apollo, and Bain and Company. You'll hear about all of them in the news on a weekly basis. Now, here is where it gets a little tricky. These firms don't use their own money to invest in these private companies, rather, they mostly use debt and other people's money. And they will invest in multiple companies, here's how. Take Blackstone for example. Blackstone will say, "We think there are some pretty good deals out there, let's go raise some money to invest in these attractive deals." Blackstone decides they need approximately $10 billion to invest. Then they say, "We'll put in $1 billion and let's see if we can go find the other $9 billion from pension plans, college endowments, and large foundations." Once they come up with $10 billion in commitments they're ready to find deals.

Here's an example of how a transaction might work: Blackstone finds company A and offers $300 million (for example, $150 million could come from Blackstone's investors, and the other $150 million they might borrow from the bank) to purchase 51% of the company. This is called a Leveraged Buyout ("leverage," because that's what it's called when you use debt, and "buyout" because they are taking a majority). Once they take control, Blackstone works to improve the operations of the business with the intent to either sell it to someone else (for more than they paid), or take the company public (IPO, for Initial Public Offering) where they list on an exchange and offer shares to the public and comply with all the reporting guidelines.

What determines if they are successful?

• Buying cheap. Isn't that how it works for everyone. Essentially, you want to make sure you bought the company at a very attractive price.

• Access to Debt. Since they use debt to purchase these companies, the restriction of debt causes serious problems. That's why the credit crisis is affecting the large Private Equity firms. They can't get lending to purchase these companies.

• An exit market. They have to be able to get rid of the company. A down market can really affect their two most promising exits; an IPO (again, offering shares to the public), or the sale to another firm. IPO's are hard because public investors do not want to invest in the new kid on the block when everyone is worried about the economy. A sale to another firm is hard because the prospective buyer may not be able to get lending from the bank to make the purchase in a tight market like our current one.

Are Private Equity firms good or bad?

There are two sides to the story. When private equity firms take over, they usually discontinue unprofitable or non-core business lines. This means job loss, which is never good. Conversely, some posit that private equity firms create better businesses in the long term. The argument here is that private companies don't have to be worried about quarterly earnings (as publicly traded companies do) so they can focus on building strong organizations rather than gaming accounting rules.

Anyway, hopefully this allows you to understand just a little more on the nightly news, or NPR.

Why I'm hoping for $6.00/gallon gasoline

Gas prices are high. And while we don't typically see drivers rending their shirts and screaming up at heaven, cursing prices at the pump, most of us recognize it costs us almost twice as much to fill up our automobile now than three years earlier. So what's the deal? Is this outrageous price gouging? Are we running out of oil? Do we need government intervention? Again, answers are (in no particular order), no, no, and no. Let me attempt a meager explanation to the crude oil conundrum.

As you probably guessed, there are a few factors at play. But the underlying theme is that we are experiencing very basic economic theories here. What follows is an amalgamation of personal research along with some salient points as explained to me by an energy executive I met with upon contemplation of an investment.

What's behind the price?

Demand has a little something to do with it, I'll explain that in a minute. But approximately 30% of gas prices are determined by taxes and inflation. So, in an environment where both taxes and inflation are increasing, we would expect the price of oil to increase as well. According to the representatives I met, adjusted for inflation and taxes only, the price of a gallon of gas should be approximately $3.13/gallon. But prices are higher than that (based on national averages) and there is clearly more to the picture than inflation and taxes. It's the cost of crude oil, refining capabilities, and demand. Refineries are having a hard time keeping up since the energy infrastructure we are dealing with is thirty years old and was built to accommodate a somewhat lower demand. Producers also deal with increasing environmental compliance. Some crude is also more difficult to reach. Obviously, the easier it is to get from the ground, the cheaper it is. For example, because of the location (in the ground/ocean) of the crude oil in the middle east, it only costs about 15$ to extract a barrel, while in the gulf coast it could cost up to 65$ a barrel. Factors such as the depth and quality of the crude will determine the cost to pump and refine. But a common mistake is to think that the costs of production are solely responsible for the rising prices at the pump. The first step is to realize that inflation and taxes play a critical role. Now, is there price gouging on top of that? Nope.

Bottom-line, we don't have a choice. Or do we?

Price in-elasticity. That's what is at work here. In simple terms, if something is said to be price inelastic, it means that the change in demand will be minimal relative to price changes. If something in price elastic, then demand will change more drastically relative to price. What determines whether something is elastic or inelastic? Substitutes. For example, if you're going to the store to buy Ketchup you will notice there are roughly a dozen brands to choose from. And, for most of us, the Ketchup tastes the same. If Heinze decides to increase the price of their ketchup, most rational shoppers will simply choose another brand, maybe the generic label, because it is cheaper. In this example, Ketchup is price elastic, rather, the demand for their ketchup is very sensitive to price fluctuations due to the prevalence of substitutes. In contrast, let's take, um, gas as an example. If gas prices increase, where can we go for alternative fuel in the short term? Nowhere. There are no substitutes in the short term. If gas prices increase 20 cents between today and tomorrow, I can't go out and buy an alternative fuel. Then why don't gas stations simply jack the price way up? Because they also have to worry about the long run. Although I can't do anything about a gas substitute right now, I can over the course of a year or two. I can figure out how to take the bus, ride my bike, or buy an alternatively powered automobile. But for now, I'm stuck.

What about our shrinking oil supply?

Now that we understand a little about demand, let's briefly talk about supply. Is there a problem? Yes, but probably not the one you are thinking. Most pundits report we are "running out of oil!" or "We only have 30 years of oil supply left!" Well, this is technically, but not actually, true. Going back to the costs of production, it makes sense to drill where you know oil already is. Looking for more oil costs money. And you can rightfully assume that oil has been discovered long before drilling takes place. So even though the supply we are working with now is certainly finite, that does not mean we are talking about all the crude oil on the face of the earth. If I carried the pundits mentality of a shrinking oil supply to my own life it would be like me walking into my kitchen, examining all the food I have available, and then exclaiming "Holy crap! I only have 14 days of food left!" See the problem? I am going to buy more food and oil companies will drill in new reserves once the current lot is substantially depleted.

Now the truth to the supply argument comes from the uncertainty of demand. Oil companies try and forecast the demand years out in order to determine what they need to pump today (it takes roughly eight years to get oil from ground up). What they totally missed fifteen years ago was the demand for oil in China and India today. Whereas five years ago the industry could say "based on our current supply, we have 45 years of oil in reserves," today they are saying "if this current consumption keeps up, we only have 30 years of oil." But remember, we are only using developed oil fields. There's plenty more untapped elsewhere. So the majority of the huge spike has to do with anticipation of future demand (i.e. China and India in ten years).

The final problem comes from the control of the supply. Yes, it would make things a lot easier if we stopped threatening to nuke Iran. And you can be sure a major reason we are still in Iraq is oil. And Hugo Chavez (in Venezuela) hates our guts. By the way, what do I think of Hugo Chaves? Most experts agree he is a very astute populist politician. Here, I differ from the experts, I just think he's exceedingly stupid. In fact, he's an idiot! I don't know how you run a national deficit with the kind of oil money he's bringing in. Wait, yes I do. That leads me to my next point.

Government Intervention

Hugo Chavez, because he runs a socialist regime, has implemented price ceilings on many goods and services in order to make goods more cost effective for his constituents. What's wrong with that? Again, incentives. If I'm a corn producer why would I sell my goods to Venezuela, or any other state/country, if there is a ceiling on the price? I'm simply going to sell to whomever can give me the higher price (which may be another country). There goes your supply and you've increased demand by keeping prices artificially low. Consequently, you see long lines, shortages, and riots. While Hugo is waiving the Venezuelan flag, farmers are giving him the finger.

This is why price ceilings are not the answer to gas prices in the U.S. The free market needs to be able to do its job. What about in emergencies, like hurricanes? Again, the market should be allowed to do its job. In the Gulf states, during hurricane Katrina, many gas stations, for fear of impending lawsuits from price gouging, refused to raise prices even though there was huge demand. The result? Thousands of motorists stranded on the highway in the path of the hurricane. Recognize the ripple effect if the opposite happened. What if the gas station owner increased prices to $50/gallon or even $1,000/ gallon? "That's just price gouging," you say? How can an owner be accused of gouging if he can justify that his price meets the demand? That's rational economics. But, hear me out. Say the price, overnight moves to $200/gallon at news that a hurrican will hit land in two days. Then many would simply not be able to afford to fill up and leave town. Then they are incentivized to take extra precautions at home, or go to a fascility (like a stadium, school, etc.) or find any other alternative solution, which would decrease interstate traffic. But more important would be the long term impact if every consumer expected prices at the pump to climb due to emergencies. In short, consumers would come up with alternative plans, or any plan, and that would be a step in the right direction.

Look on the brighter side

The recent ascent of oil prices is finally making an economic case for alternatives. Before, it wasn't cost effective to produce alternative fuels, without governement subsidies. Now, we have an economic incentive to produce cars and other equipment that run on alternative fuels because they are becoming a more viable substitue for oil. For those "green" fans out there, the worst thing that can happen is for oil to fall back down to $50 a barrel. I say keep going up. I'm already reviewing how I'm going to adjust. Does this mean Ethanol will take off? No. Why? Because we eat corn. Anytime you try and create energy from part of the food chain someone is going to complain, probably, those that don't have food (as an aside, it's hard to make a compelling case for turning corn into fuel when there are massive food shortages in parts of the world. Maybe this shortage is the last straw we need to convince government that corn subsidies are a bad idea). No, corn-ethanol is not the answer.

Instead of imposing price controls, the government should make it easier for companies to refine oil (i.e. by lessening regulatory requirements, excise taxes on crude, and drilling requirements). That is, unless their constituents are asking for alternative solutions. In my estimation, this is the real issue. Cheaper gas prices create an economic argument against alternative fuels.

An incentive for innovation, that's what $5 or $6/gallon gas prices will do.

How a couple with no money and a home can sink Bear Stearns

Raise your hand if you don't quite understand the whole financial crisis/recession/subprime writedowns/housing bubble/Bear Stearns bail out/insert any other financial term from the Wall Street Journal over the last quarter.

Since this is my first official post I thought I would cover a topic most are at least hearing about. The question some might ask is how subprime loans can bring down Bear Stearns. So I'll share my understanding of recent events (when I say "my understanding" it is because I've become acutely aware that even those in the closest circles on Wall Street don't really have any idea). Who's to blame? Where did it start? How bad is it? Are we in a recession? Well, if you only have thirty seconds, the answers are; us, late '90's, really bad, and "yes." If you have 15 minutes, read on.

Background

Some of us don't remember, but the housing market was a mess in the early '90's. By the late 90's many investors, both domestic and foreign, thought Real Estate was still a bargain. In the U.S. there was plenty of liquidity from the beginning of the internet boom and foreign investors were enjoying higher commodity prices and, yes, even rising oil prices. All this extra money needed a place to be and U.S. Real Estate was relatively cheap. During the dot.com bust the Fed, recognizing that the fragile Real Estate market could not endure another recession drastically cut interest rates.

Problem #1 Incentives

Since Real Estate was fairly cheap and debt was easy to acquire, it became more competitive. It went from using regional banks as lenders to introducing national and international competition. Loans became more "creative." The Fed also enacted several regulations to make it easier for Banks to make loans to low and middle-income families. By 2003 the "subprime" market was in full swing. "Subprime" refers to loans where lenders require little to no documentation, or where the credit score is below 660. This was also the birth of the infamous 3/1 or 5/1 arm, where the borrower pays interest only for either 3 or 5 years, then the rate increases after that. At the same time, the mortgage business essentially "split," meaning, the company that originated the loan was not the end owner of the loan. It is a basic principle of economics that people or businesses do what they are incentivized to do. If the loan originator was not on the hook for the actual performance of the loan, then what incentive did they have to make quality loans? But this is exactly what happened. For example, you approach a mortgage broker for a loan, they complete the underwriting and grant you the loan. If you read the language in the loan docs you will see that they have the right to sell your loan to a third party. So they do and did, they sold them to banks. It is no surprise, when loan officers work on commission, and their company isn't on the hook for the performance of the loan, that many loans were just plain fraudulent. What does this have to do with Bear Stearns? I'm getting there.

Problem #2 Magic

Let's use Citigroup as an example. Citigroup purchases thousands of these subprime mortgages from various originators across the country. These subprime loans pay more because they have higher interest rates (because there is greater risk) . Citigroup realizes that if they keep all these loans on their books, they have to keep money in reserves. Rather, the Federal Government mandates they keep a certain percentage of cash on hand in the event of default, so the bank remains solvent. Well, Citigroup's finest gather in a room to figure out how to efficiently manage this obligation. Their conclusion is that they can package these loans together, say 1,000 at a time, and sell them in bulk. Whenever you sell "debt," like residential mortgages, you must have them rated by a rating agency (Standard and Poors, Moody's, etc.) as to the safety of the packages. Since Citigroup is smart, they recognize if they simply package all the subprime loans together they will receive a lower "rating" (AAA is the highest, then AA, and so one to CCC, which is junk). So Citigroup bundles subprime and conforming (high quality) loans together. This is called "magic," I mean, a CDO (collateralized debt obligation). These CDO's are also able to achieve a AAA rating. What?! If they are subprime how do they get AAA rated?! Remember, this is a new type of "borrower," they don't have a track record since it didn't emerge in earnest until 2003 (and there are also high quality loans bundled in the CDO).

Problem #3 Greed at Home and Abroad

Back to the international markets for a minute. Interest rates determine the extent of foreign investment that flows to a certain country. For example, if I'm the U.K. I can invest my money locally, or in an international institution. I'm going to invest wherever the interest rate is highest. So, if interest rates in the U.S. are 3% but they are 3.5% in Japan, then I might invest in Japan (assuming the same relative risk). And governments usually invest in the safest instruments. In the U.S., those are government treasury bills...and now, CDO's. Yes, CDO's were AAA rated and paying 6% (on average). Somebody (and by "somebody" I mean, Bernake, Greenspan, and thousands of PhD's on Wall Street) should have called "Bull Sh#@%" There is no free lunch! How can two securities, rated AAA have different returns (3% vs. 6%)?

Problem #4 Tremors

Enter Bear Stearns, stage right. Bear Stearns, and several other investment banks, purchase billions of dollars in CDO's because of their attractive risk/reward tradeoff from banks like Citigroup. Since, in our example, Citigroup sold the loans they are off the hook, right? Wrong! In order to attract buyers Citigroup also sold insurance policies against potential defaults within the CDO. They are essentially guaranteeing liquidity. So they are very much still on the hook. Housing prices in the U.S. have never declined. Banks figured the appreciation in the underlying homes would offset any negligible defaults in the CDO's. Especially with housing values increasing at a 50% clip in some markets. Now we have the end owner, Bear Stearns, and the seller/insurance provider Citigroup, on the line for the mortgages. Back to the homeowner.

Housing values increased beyond what would be considered a financially healthy rate. Interest rates were low, debt was cheap, interest-only payments were easy, and originators weren't asking any questions. Demand exceeded supply for a couple of years. As housing values increased, home owners took out second mortgages to capitalize on the value of their home. With the second mortgages borrowers bought cars, purchased other homes, remodeled, and basically pumped a lot of money into the economy. Supply eventually exceeded demand as the Fed started raising interest rates. Housing prices started to "revert" back to the mean. Here's an example:

I buy a home in 2003 for $150k, no money down, with an interest only loan for three years, my payment is $800/mo. The value of my home over the next three years goes from $150k to $250k (Arizona, Nevada, California, Florida, New Mexico, Texas, etc.). During that time, I take out a second loan to purchase a T.V., two cars, a family trip, and to remodel a room, life is good. Since my three years interest only term is up, my payment turns in to principle and interest, $1200/mo. So I try to refinance. But instead of owing $150K, because of my second I owe $230k. And, because easy loans are no longer available, and my housing prices has fallen from 250 to 230K in six months, I can't get a loan for 100% of the value of the home. I can't make the monthly payment so I default.

This played out at the start of 2007 in certain markets and slowly, as these interest only loans came due, made it's way across the country.

Bloody Hell!

Mortgages started to default, Bear Stearns, and others, got the "willies." The rating agencies came back to the investment banks and essentially said, "That bundle of loans we rated AAA is really rated CCC, you have to write the value of the loans down." That's why you see all the banks writing down billions of dollars worth of loans. And they have no idea how bad it really is. The insurance providers are also getting kicked in the teeth because the defaults are much higher than forecasted. Making matters worse, banks like Bear Stearns purchased these CDO's with borrowed money. Now lenders aren't lending and they want their money back. No buyers, no lenders, out of luck.

JPMorgan Bailout

Bear Stearns was going to declare bankruptcy. That would have been devastating to our economy. Experts are pretty unanimous in their opinion that something of that magnitude could have started a Depression. Shareholders moaned when JPMorgan offered $2/share, which, in my opinion, was $2 more that what it was worth. Then JPMorgan offered to increase the share price to $10, just to help the shareholders. The additional $8/share came, in part, from the Federal Government! The Fed hasn't intervened to this extent since the Great Depression! This was huge! Here's the caveat; JPMorgan stands ahead of the Fed in Seniority. Meaning, if Bear Stearns doesn't get its act together and declares bankruptcy, JPMorgan will collect first and then the Fed (i.e. taxpayers). But, that is the lesser of two evils. If Bear Stearns would have declared Bankruptcy there would have been massive global panic. Everyone should send a personal thank you to Jamie Dimon at JPMorgan for his generous offer.

Not Over Yet

This is a long post. Banks did the same thing with credit card debt, auto loans and home equity lines of credit that they did with mortgages. These haven't hit the market yet. Logic is, if someone defaults on their mortgage, they will probably soon default on their auto loans and credit cards. If someone loses a job, which happens in a recession, then they will probably default on their auto loan or credit card. When, not if, this hits our economy it could plunge it into a deep recession. The answer must come from a correction in the housing market. The fed is on the right track with some of the adjustments they've made in addition to the interest rate cuts. However, this is really the fault of every American. We turn anything into an ATM that we can. We don't save and we demand cheap credit. Lowering interest rates is only a band-aid.

...More thoughts later

Why did I choose a Toad?

First things first. Many of you might be asking, "Why does he call himself a Toad?" Jessica gave me that name when we were first married because of how I sounded when I sang. I know, kind of emasculating. But, I thought that was preferred to being compared to Josh Groban. Now THAT is emasculating!

Welcome to my Blog!

With my wife's help, I've begun my own blog.

Working for a $7 billion pension fund has plenty of benefits. I get access to the top money managers and portfolio strategies used on Wall Street (which is exiting for me). I have regular communications with money managers at Goldman Sachs, Morgan Stanley, and JPMorgan, to name a few. I've learned a great deal and I think this has been very helpful for our family. But then I was thinking (rather, my wife was making fun of me for not knowing how to blog) that I could share my views and ideas with friends and family in a more efficient way--that I could spread the wealth (disclaimer: by "wealth" I am referring to ideas, not actual money). So, on this blog I plan to explain financial events, strategies, and ideas with the intent to bring everyone up-to-speed on the financial world around us and what Wall Street is really saying. I figure at least this way you won't have to read what we in the business call "Financial Pornography." Feel free to ask questions or ask advice.

These are my three sons.
Pretty cute.