BULLS, BEARS, AND BRAINS: THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS

8/29/14

The geopolitical situation has rarely been worse, short of all out war: 

• Russia is apparently conducting a not all that surreptitious invasion of Ukraine.
• ISIS is sweeping across Syria and Iraq, seizing territory and oil and conducting acts of brutality that are appalling even by Middle Eastern standards.
• A de facto military coup has taken place in Pakistan.
• Ebola continues to spread through western Africa and threatens to burst out of its present geographic constraints to threaten Congo, other African regions, and perhaps the entire world.
• The UK just put on a terror alert that borders on hysteria.
• The western Pacific continues to be a hotbed of sparring between regional and global powers, with the latest developments being an ongoing game of chicken between Chinese fighter planes and American surveillance planes spying on Chinese nuclear submarines.
• Cyber-attacks, on major financial institutions, power providers, retailers, and agencies of government seem to be a weekly, or daily, occurrence.
• The French government was reshuffled for the second time in months.
• It looks like David Cameron’s center-right coalition in the UK is encountering turbulence as euroskeptics start to jump ship.
• The usual nonsense and gimcrackery prevails in Washington, D.C.

Smart market observers are warning of complacency, not only about geopolitical turbulence but about everything; nothing seems to make the stock markets, or, lately, the bond markets, go down.

Equally smart observers point out that there have been many times when people thought the geopolitical situation has rarely been worse, but the world didn’t end and the markets weren’t fazed, largely because the markets seem to operate independently of geopolitics.  The markets have grown used to, and prospered despite, the obtuseness, or worse, of the politicians.  Further, these observers argue that the very fact that smart people are warning of complacency shows that not everybody is complacent.

These bright bulls point out that it is earnings that drive the markets, and earnings, for the most part, are just fine.  Equally bright bears point out that it is future earnings that drive markets, which are perhaps nature’s most efficient and effective discounting mechanism.  A still debt laden economy, weak consumer spending, tepid consumer confidence, and confusing, but largely bearish, economic news out of China don’t bode well for future earnings  These bears point out that the still lukewarm economy, combined with the aforementioned geopolitics, does not present a scenario in which we should be experiencing near record highs in the major stock averages.  Bulls scoff, arguing that record highs are just numbers.  With the S&P trading in the neighborhood of 16-17 times projected earnings, the markets are at best only mildly expensive.  Bears trot out measures like the CAPE ratio, which adjusts earnings for the business cycle and smooths them over the last ten years, is trading at 25, a level that has been reached only in 1929, 2000, and 2007.

The bears argue that, with the 10 year treasury at 2.33% and the 30 year at a calendar year low of 3.07%, bonds are ridiculously expensive and that it is these low rates that provide the helium that inflates our stock markets.   Bulls argue that with the German and Japanese 10 year government bonds at 0.87% and 0.49% respectively, treasuries don’t look rich at all; in fact, they might be cheap.   On the other side of the equation, some observant bulls are pointing out that with U.S. corporate spreads still very tight, treasuries might be cheap not only relative to foreign government bonds but also relative to credit sensitive U.S. paper.   So not only may treasuries be a better value than is commonly supposed but continuing low, and maybe falling, rates will further sustain the stock market.

So what is the point?  Do I delight in confusing my readers?  The latter is certainly not true.

One side of this argument will turn out to be right; the markets, both bond and stock, will either go up or go down.  (They could trade sidewise, in which case both sides will claim victory, but I digress.)   But given the strength of arguments on both sides, those who emerge correct will do so by nearly sheer luck.   Predicting markets is little more than a game of chance, a fool’s errand.  

The two most salient conclusions one can draw from the serendipitous nature of market prognostication are

·        We waste a lot of time and brainpower, in this country and throughout the world, trying to do the impossible—call the markets.  Very smart people are paid very handsomely to do things they can’t do (i.e., call the markets) because people understandably place a very high value on their hard-earned money and still believe that they can get a jump on the markets by listening to the smart guys.  What if those wonderful brains on Wall Street and in the City of London spent their time curing diseases, finding new forms of energy, or working out the logistical and infrastructure problems that look to be a profound source of economic difficulty in the future?  Not only would it be a better world, but everyone would make more money.  The two, by the way, are not at all mutually exclusive; quite the contrary.  But I digress…again.

·        The best course of action for the investor is not to chase the pied piper of market beating returns.  Instead, the investor should, as best as s/he can, determine how much risk s/he is willing to take and set up, alone or with the help of a genuine financial advisor, a balanced portfolio of index or index like products that conforms to that risk profile.  And then rebalance religiously.  See INDEX INVESTING:  COULD ITS SUCCESS BE ITS UNDOING?, 8/23/14 and INDEX INVESTING:  “YOU (DON’T)GOTTA HAVE HEART…”, 8/21/14

CHICAGO’S DAY FOR THE JACKIE ROBINSON WEST LITTLE LEAGUE: HAVE THE POLS ANY SHAME?

8/27/14

Today was a glorious day in Chicago, the day when my home town honored the U.S. Little League champion Jackie Robinson West kids with a parade and other festivities.  The parade kicked off at Jackie Robinson Park on 105^th and Morgan and proceeded north on Halsted Street, passed Comiskey Park (er, sorry, U.S. Cellular Field), turned east on 35^th to Indiana and eventually made its way over to Michigan Avenue and Millennium Park.   It was supposed to be a glorious day and, for the most part it has been, except…

At the kickoff of the parade, at 105^th and Morgan, an observer, casual or otherwise, could not be faulted for wondering who was being honored by the event.   The kids made a cameo appearance, as did their parents.  But who was there, front and center, seizing the limelight?    This is Chicago, Illinois, so you know the answer…the politicians.

There they were, a cast of blowhards that is drawn to such events like hungry dogs to prime steak…Governor Pat Quinn, Mayor Rahm Emanuel, Attorney General Lisa Madigan, County Board President Toni Preckwinkle, Congressperson Robin Kelly, Alderman Carrie Austin, et. al…the usual suspects, turning what should have been a great day honoring some great kids into yet another occasion for self-aggrandizement.

Have these people no shame?  

They have spent our state and our city into bankruptcy.  They have made careers of shaking down the (admittedly, in many instances, not all that uncooperative or put upon) private sector for their nefarious ends.  They have been largely responsible for our city and state having become less and less livable.  They have ruined what was perhaps one of our nation’s greatest states, which combined the bustling, vital, and exciting city of Chicago with a downstate that serves as a vital component of the nation’s breadbasket and an exemplar of the type of small town values that made this country what it once was.  They have stolen and pillaged everything that wasn’t, and much of what was, nailed down. And now they have stolen the well earned limelight the citizens of our great city would like to have cast on a much deserving crew of magnificent kids.

How can one describe these poltroonish politicasters?   They are popinjays, professional narcissists, barnacles on the ship of state.   They are empty suits, carnival barkers, entitled, whimpering no-accounts.   Shameless leaches.   Self centered snakes and scalawags.  Benighted bindlestiffs on an endless, undying quest for the next microphone and/or camera.  Bleating, bumptious boors.  Contemptuous caitiffs.  Jejune jackasses.

Seizing the glimmer of glory granted to a group of great kids, not being able to envision anybody but themselves and their fellow professional narcissists getting any glory…is there any depth to which these despicable human beings will not sink?

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

SENATOR CHUCK GRASSLEY: FAREWELL TO “…A FARMER (?) FROM IOWA WHO NEVER WENT TO LAW SCHOOL”

8/27/14

I’ve never been a big fan of retiring Iowa Senator Chuck Grassley (R. Iowa).  It’s not that I have many problems with the man philosophically, other than his incessant pork barreling, largely in the form for his ardent support for wind power and ethanol.  But one can hardly blame a politician for supporting industries so vital to the state he represents; it’s the way the game is played.   What really bothers me about Chuck Grassley, though, is that he has been in the Senate since 1981, when I was getting my MBA at the great University of Iowa, which was a long, long time ago.   Yours truly would support no politician, even one with whom I was in perfect philosophical sync (Scary thought, but I digress.), who stayed in one office for what will have been 24 years when Mr. Grassley retires and who has been in public office for 55 (!) years.  I have no use for career politicians and am an ardent fan of term limits.  In fact, as most readers have picked up, I am nearly at the point of thinking that the very desire for public office should disqualify one from public office.

So while there are plenty of worse senators than Chuck Grassley, I remain no fan of this man who has made his living feasting at the public mammary gland for nearly 3/4 of his biological life.

However…

My feelings regarding Mr. Grassley would have warmed considerably months ago when U.S. Representative Bruce Braley, the Democrat who is running against State Senator Joni Ernst for Mr. Grassley’s senate seat, castigated the Senator several months ago as

“…a farmer from Iowa who never went to law school.”

 Way to campaign for a U.S. senate seat from Iowa, Mr. Braley.  But I digress.

An Iowa farmer who never went to law school?   If that were true, I would have wanted Mr. Grassley to be not a senator, but president of the United States, or emperor of the universe, if the last were possible.  In any case, we surely could use more Iowa farmers who never went to law school in public office.

Alas, though, Mr. Braley’s characterization of Mr. Grassley as “a farmer from Iowa who never went to law school” is largely untrue.  Mr. Grassley was born in 1933.  He entered the Iowa legislature in 1959, when he was 26.  How much farming could he have done before the age of 26?  It is, of course, possible that Mr. Grassley farmed in the 16 years he was in the legislature before entering the U.S. House in 1975; state legislating is supposed to be a part time gig.  So maybe Mr. Braley is correct in his characterization of Mr. Grassley as “a farmer from Iowa,” at least in the sense that he was at one time a farmer.   Further, Mr. Grassley didn’t go to law school, and he attended the University of Northern Iowa.  So he has those things going for him.  From what I hear, he’s also great on constituent service, even above and beyond the aforementioned pork barreling.

So, all in all, the people of what is perhaps the Union’s greatest state could have done a lot worse than Chuck Grassley.   That does not make me any less enthusiastic in wishing him Godspeed.   But I certainly hope Senator Grassley is will not be replaced by Bruce Braley; even a four term senator would be preferable to a man of such poor judgment and utter disdain for his constituency.

INDEX INVESTING: COULD ITS SUCCESS BE ITS UNDOING?

8/23/14

The index fund bandwagon is getting more crowded.   Yours truly has been an ardent advocate of such passive investing (a term I don’t like much, even in connection with index funds, but that is grist for another mill) for 20+ years.  Warren Buffett, one of the few active managers who has managed to beat the indices over long periods of time, appears to have gotten on the bandwagon more recently.  (See the already seminal INDEX INVESTING:  “YOU (DON’T) GOTTA HAVE HEART…”, 8/21/14)  Now the Wall Street Journal’s Jason Zweig (“The Decline and Fall of Fund Managers,” WSJ, page B1, 8/23-8/24/14) reports that Charles Ellis, the founder of Greenwich Associates and an icon in the fund management industry, says that the day of the stock picker has passed and that

“With rare exceptions, active management is no longer able to hold its keep.”

There is something though, that we have to keep in mind when predicting or anticipating the demise of active management.  While this consideration is probably more valuable as an intellectual exercise than as a practical investment tool, it is worth pondering. 

If Mr. Ellis is right and, as a consequence, active managers (and, probably more importantly, active analysts) lose their jobs in large numbers,  fewer people will be doing the research they think will enable them to beat the markets and thus the mechanisms for information getting “into” the markets (i.e., to be reflected in securities prices) will get rusty.  The market will thus become less informationally efficient and thus the markets will get easier to beat, weakening one of the major arguments for index investing.  That will induce more people to invest their money with active managers and start the circle turning again, making the market more efficient and harder to beat and thus increasing the allure of index funds.  This is one of those self-correcting mechanisms that is endemic to finance and economics.

As I tell my finance and investments students, the great irony of the efficient market theory is that it only has validity because not everyone believes it.   If everyone believed the efficient market theory in its strongest form, no one would bother to do the research necessary to make the market efficient.

We certainly don’t have to worry about the world going entirely to indexing and thus destroying the efficiency of the markets, which is the very underpinning of index investing.  There will always be a lot of (primarily young and inexperienced) people who are certain that they can beat the markets; yours truly used to be one of them.  And we probably don’t even have to worry about a precipitous deterioration in the markets’ efficiency because of a sharp falloff in active managers and active management; there will always be legions of people chasing the dream of consistently beating the market.  But it is worth considering, from an intellectual standpoint if nothing else, the consequences for index investing of its own success.

THE REDFLEX SAGA: WHAT DO MARTY O’MALLEY AND A CANARY HAVE IN COMMON?

8/21/14

The man whom I referred to as “mysterious “consultant” Marty O’Malley” has decided to cooperate with the feds in their ongoing investigation of Redflex’s nine figure red light camera contract with the city of Chicago.  (See my posts on this issue going back to October, 2012; the first, on the now defunct Rant Political, is reproduced below, following this piece.)   Mr. O’Malley was indicted in connection with l’affaire Redflex earlier this month, along with former Redflex USA CEO Karen Finley.  John Bills, the former city official most intimately connected with the Redflex affair, was also indicted with Ms. Finley and Mr. O’Malley; in Mr. Bills’ case, that was his second indictment in connection with the case.   Mr. O’Malley, who faces five years in the hoosegow, is expected to plead guilty as part of his deal with the feds.

As I’ve said ad nauseam, going back to the dawn of the Redflex caper, if anything has the potential to bring down some very big people in Chicago, it is this scandal.  Clearly, the feds aren’t going through all this scandal to put John Bills, a deputy managing commissioner of the Chicago Transportation Department and a precinct captain (albeit a very good and important precinct captain) for Mike Madigan’s 13^th Ward Regular Democratic Organization, away.   And it would seem that a deputy managing commissioner is not in a position to have much influence over a contract the size of Redflex’s red light camera contract, at least not in Chicago.  But do read my 5/18/14 post (REDFLEX:  COULD JOHN BILLS HAVEPULLED THIS OFF (NEARLY) ALONE?, Rant Lifestyle); in it, I outline a plausible scenario under which Mr. Bills could have acted alone:  perhaps Mr. Bills, a man of powerful persuasion skills and, reportedly, figurative cajones the size of church bells could have convinced the naïve suits at Redflex that yes, indeed, he did have the power to make things happen.  The smart money, though, has to be on Mr. Bills being something of a pissant in this whole caper.  The feds seem to think so and would like to get to the real decision makers.

So Mr. Bills seems to be the ball game here.  Does he risk going away for a long, long time with both Mr. O’Malley and former Redflex Executive VP of sales, Aaron Rosenberg, cooperating against him?   Theoretically, both Mr. Bills and Ms. Finley could go away for life.   What, or who, would a man give in exchange for his life?

A further note, which might not mean anything but is still interesting:

When the first reports of the Redflex tale emerged, the Tribune reported Marty O’Malley was a member at St. Bede Parish, on 82^nd and Kostner (just a few blocks from one of my favorite pizza places, Vito and Nick’s, or Nick & Vito’s, which is easier to say but not quite official.  I have to say that, based on our last few visits to this south side institution, Vito & Nick’s is a little off its game; perhaps it has something to do with the place’s having been on Diners, Drive-Ins, and Dives, but I digress.), as was and, supposedly is, John Bills.   These two guys living in the same parish, as I explained in a lesson the social mores of my species (i.e., south side Irish Catholic), made Mr. O’Malley’s claim that he didn’t know John Bills until they started working on the Redflex deal highly suspect.  Now it is reported that Mr. O’Malley lives in Worth, a suburb several miles southwest of the 13^th Ward, outside the borders both of  St. Bede and, obviously, of Mike Madigan’s 13^th Ward.   Does this give Mr. O’Malley’s “I didn’t know the guy until we started working on Redflex” argument any more credibility?   Maybe.

But maybe not.   Worth is clearly not in Mike Madigan’s ward and is not in his 22^nd state House district.  But that doesn’t mean that Mr. O’Malley, though living in Worth, is not a parishioner at St. Bede.  We, for instance, belong to a parish in my old neighborhood even though we don’t live anywhere near the church.  Perhaps Mr. O’Malley once lived in St. Bede, has moved to Worth, but prefers to go to church, and maybe remain otherwise active, in his old parish.  This is very common behavior among us south side Irish types. 

More saliently for this case, Mr. O’Malley doesn’t live in the 13^th Ward but is active, at least financially, in its politics; he, according to the Tribune’s story back in October, 2012, admits to contributing $1,000 in 2007, $1,500 in 2009. and another $1,500 in 2010 to Mr. Madigan’s political operations.  Remember, too, that Mr. Madigan’s influence emanates throughout the whole state, but its intensity increases as one nears his 13^th Ward base of operations.  He is especially entrenched in the southwest suburbs, like Worth and Oak Lawn, where many of his former 13^th Ward and 22^nd District constituents and their adult children have moved as part of the white flight that has characterized the southwest side of the city over the last few decades.

Given their possible, though admittedly stretched, parish connection and their much more likely 13^th Ward connection, it remains highly doubtful that Mr. O’Malley’s contention that he didn’t know John Bills until they started working together on Redflex is true.  Now, the Tribune is describing Mr. O’Malley as Mr. Bills’ “longtime friend,” so who knows where this perhaps trivial aspect of the story is going?   It has been a long time, one supposes, since the Redflex contract was won in 2005 and even longer since the maneuvering began for this contract.  But from the perspective of guys the vintages of Messrs. Bills and O’Malley (53 and 74, respectively) and yours truly (somewhere between those two), nine or so years seems like the blink of an eye.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

MY FIRST POST ON THE REDFLEX DEAL, as promised above:

REDFLEX TRAFFIC SYSTEMS AND CHICAGO POLITICS:   TRUTH NEARLY AS INTRIGUING AS FICTION

10/18/12

The City of Chicago has just scratched the surface in the malodorous dealings of Redflex Traffic Systems, Inc., which supplies the city with red light cameras.   Redflex has been barred from bidding on the city’s upcoming speed camera system after having paid a hotel bill for a city purchasing agent and covered up this indiscretion for two years. Redflex continues to be the vendor for red light cameras for at least the time being.  The background story of Redflex and its dealings with the powers that be in Chicago politics is, typically, murky but, er, interesting.

Redflex Traffic Systems was among several companies bidding for the red light camera contract in Chicago back in the early part of last decade; it won the contract in 2005.   The city official in charge of overseeing the contract was (Get this title; talk about bureaucracy!)  Managing Deputy Commissioner of the Department of Transportation John Bills.  John Bills was, and is, a substantial figure Illinois House Speaker, Chairman of the Illinois Democratic Party, and Ward Committeeman Mike Madigan’s 13^th Ward Regular Democratic Organization, serving as a registrar, or the guy who supervises collection of signatures on candidate petitions, for Mr. Madigan.   One supposes that Mr. Bills is also a precinct captain for Mr. Madigan, but I can’t verify that.   Mr. Bills also lives in St. Bede Parish on the southwest side, which is also Mike Madigan’s parish.  

Redflex just happened to hire as its “consultant” on the red light camera project one Marty O’Malley, who also lives in St. Bede.   Mr. O’Malley claims no affiliation with Mike Madigan’s organization, but admits to contributing $1,000 in 2007, $1,500 in 2009. and another $1,500 in 2010 to Madigan’s political operations.   These contributions were made possible largely by the commissions Mr. O’Malley earned on the red light camera sales, but more on that later.   Mr. O’Malley denies having known Mr. Bills, or Mr. Madigan, before he and Mr. Bills started working together on the camera project.   Mr. O’Malley’s not having known Mr. Bills is plausible, given their ages; Mr. O’Malley is 72, Mr. Bills is 51.   But, for those of you unfamiliar with the mores of the southwest side, one’s parish is a big thing; it often is the center of many of one’s activities, spiritual and otherwise.

As it turns out, Redflex won the contract and Mr. O’Malley, who denies that he used political clout or geographical proximity to either Mr. Bills or Mr. Madigan when interviewing for the consultant job, got a commission of $1,500 per camera, more, according to Mr. O’Malley, than he was expecting.  His total payday came to $570,000.   Some of that, as we learned above, made its way into Mike Madigan’s political coffers.  Mr. Bills denies playing any role in getting Redflex the contract; Mr. Madigan, as far as I know, has not been asked if he had any role in this deal.

There was a small fly in the ointment.  It seems that, according to Mr. Bills, he was in Arizona for a Cubs pre-season game (That a guy from St. Bede would have any interest in a Cub game makes this story suspicious on its face; perhaps Mr. Bills was going to root for the opposition, thus adhering to a proud south side tradition, but I digress.) and didn’t have a hotel reservation.  He called a Redflex executive (Redflex has offices in Phoenix.) to see if he could help out.  Redflex booked him a room in a luxury hotel and the bill somehow never found its way onto Mr. Bills’ credit card, which he didn’t notice for quite some time.   For this minor transgression, and for two yeas of covering it up, Redflex is banned from bidding on the speed camera contract.   Mr. Bills also retired from his Managing Deputy Commissioner of the Department of Transportation job last summer after 32 years of working for the city.  No one has said Mr. Bills' retirement and the Redflex problems are related, but who’s kidding whom?

And it gets better…

Since these shenanigans have taken place, Mr. Bills has been appointed by “reform” Cook County Board President Toni Preckwinkle to a position on the Cook County Employee Appeals Board.  This position is part time and pays part time ($35 grand a year), but includes health benefits.  The Appeals Board has long been known as a receptacle for hacks who have somehow run afoul of either the law or the vicissitudes of the voting booth.  Ms. Preckwinkle will not say whether Mike Madigan recommended Mr. Bills for the job.

So…

A minor figure in this drama loses his job for accepting $500 in accommodations from a city vendor.   The vendor keeps its current contract but can’t bid on a new one, though the city Inspector General is investigating the case. 

It looks like there is more to this story and that there are more important people involved than Messrs. Bills and O’Malley.   How likely is it that larger heads will role?   For a hint, take a look at my two novels of Chicago politics, The Chairman, A Novel of Big City Politics and The Chairman’sChallenge, A Continuing Novel of Big City Politics.

INDEX INVESTING: “YOU (DON’T) GOTTA HAVE HEART…”

8/21/14

The Wall Street Journal reports this morning (“Investors Pile Into Vanguard, Eschewing Stock Pickers”, page A1, 8/21/14) that investors are buying into index funds big time, driving Vanguard’s assets under management (“AUM”) to almost $3 trillion and making Vanguard’s Total Stock Market Index Fund the largest mutual fund in the world.  (A note is in order here; Vanguard, a firm that I advocate and highly respect is widely known as THE passive manager.  While it is the premier passive manager, and the virtual inventor of the index fund in practice, Vanguard has a big actively managed fund business, just about all of which is done through sub-advisors.  Further, you don’t have to invest with Vanguard to invest in passively managed index funds; most fund managers, even those, like Fidelity, who pride themselves in being great active managers, have substantial businesses running passive index funds.  Most of you knew that, but my readers span a wide range of financial sophistication, so I wanted to clarify that.)  Further, money flowing into index funds exceeded money flowing into actively managed funds by a factor of 6 last year and by a factor of over 2 this year.

Some of this influx has been attributed to something Warren Buffett, one of the few active (in his case, VERY active) managers who has beaten the indices over long periods of time, wrote in Berkshire Hathaway’s letter to investors in March.  He stated that he gave the following advice to the trustee of his estate:

“…put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund.  (I suggest Vanguard.)”

Great minds apparently think alike (See below.); some just get to the party later than others, but getting there, not when they get there, is the key.  But I digress.

The world seems to have caught onto the argument, long advocated by yours truly (See, inter alia, EXOTIC INVESTMENT PRODUCTS FOR THE “AVERAGE GUY”:   WHAT’S THE POINT?, 8/16/13 and the posts to which it will refer you.), that index funds are the way to go.  Combine the inherent efficiency of the financial markets with the low cost and lack of manager risk of index funds and you are nearly sure to beat active managers over meaningful periods of time by investing in index funds.   Just about all my money is in index funds. 

(A point of digression here:  So why do I have any actively managed money?  That’s a long and not all that interesting story that I will save for another time.  For now, suffice to say that almost all of my non-index money is invested in funds that use screening techniques and thus eliminate, or at least minimize, manager risk, much like index funds, and keep costs reasonably low, though not as low as index funds.  I like to refer to them as “index-like” products and they play a limited role in my portfolio.  Much of my remaining non-index money is there to entertain myself, to indulge my market prognostication propensities while keeping my acting on those propensities away from amounts of money that would really matter.   So, while I don’t have ALL my money in index funds, I eat my own cooking; just about all of it is in index funds.  Of course, lately, all my money doesn’t amount to very much, but that is another issue.)

Many years ago, when I was managing portfolios at a big Chicago bank, I appeared at a forum sponsored by a major mutual fund company with whom we did business.  This particular family of funds, which will remain nameless, was and is primarily an active manager and an advocate for active management.  At this forum, I was there to represent the passive investing argument and the deck was stacked against me, but the sponsoring fund family was, and is, good people and I was confident enough in my argument that the set-up didn’t bother me.

After I made my pitch for index funds, the firm’s representative said something like (paraphrasing, not quoting; it was a long time ago):

What Mark is advocating is putting your money with a manager who has no brain.   Does that make any sense?

It looked as though he had me, until I retorted

Yes, I agree that an index fund has no brain.  But it also has no heart; it invests without emotions.  In your life, when you’ve made mistakes, was it because you weren’t smart enough to avoid those mistakes or because you let your emotions get the better of you?  

The answer, to most people was obvious.  I went on.

It’s the same with investing.   For the most part, money managers are very smart people.  (Perhaps I exaggerated a bit here, but I digress.)   It’s not a lack of intellect that gets them into trouble.  It’s their emotions.   They won’t sell a losing position that is getting worse.  They won’t add to a losing position that is only becoming an even more compelling value.  They continue to add to a winning position that has gotten way too rich.  It’s human nature that leads to investment mistakes.  Index funds eliminate the emotion from the process.  So, yes, I would rather invest with a manager with no brain…as long as it also lacked a heart.

I don’t know whether I won the day there, but I was quite happy with my defense of index funds and passive investing.  I have more or less stuck to that philosophy until this very day and probably will for the rest of my life, with at least one caveat:

Index investing does not entirely remove the emotion from investing.  Effective index investing (or even active investing) still requires nearly religious rebalancing (See, inter alia, Bill Gross Has A “Bad” Year:   Lessons For Your Portfolio, Rant Lifestyle, 1/4/14) and emotion can certainly get in the way of effective rebalancing; who wants to sell “winners” to buy “losers,” which is one of the things rebalancing forces us to do.  So to nearly eliminate all emotion from investing, even the dangerous emotions that come into play at rebalancing time, one would have to invest in a balanced index fund, or set up an arrangement in which your index funds are automatically rebalanced for you by the fund company.  Such arrangements are growing increasingly common.  Or you can do what my clients (at the time, mostly institutions) did:  hire a manager to do the emotionally wrenching things for you.

If you want to entertain yourself, do what I do:  watch “The Godfather” again, read a compendium of the musings of H.L. Mencken, watch “Shark Tank,” drive long distances in a car with a manual transmission and satellite radio, watch Big 10 football and basketball, read and write about politics…and maybe trade a few dollars like a scalded dog and hope to keep your underperformance, or outright losses, reasonable.  If you want to invest sensibly, buy index funds and religiously rebalance.

THE WALL STREET JOURNAL ON THE ISLAMIC STATE: “I WAS FOR IT UNTIL I WAS AGAINST IT”?

8/21/14

The Wall Street Journal editorialized this morning (Friday, 8/21/14, “So What Will You Do, Mr. President”) that the U.S. should “do what it takes to defeat these enemies of American and a civilized world.”  The editorial urged President Obama to take some concrete action, apparently beyond the air strikes he has already authorized, to defeat the Islamic State (“IS”), the band of terrorist thugs and crazies also known as the Islamic State in Iraq and Syria (“ISIS”) and the Islamic State in the Levant (“ISIL”) depending on the day and the mood of the politicians and the media.

Even hard core non-interventionists like yours truly are at the point at which we would advocate some action, including heavy and concentrated U.S. air strikes, against IS, especially in the wake of IS’s unspeakable beheading of American citizen and journalist James Foley.   We have few arguments with the Wall Street Journal in that regard, though we suspect the Journal would like to see more than air strikes; the Journal has long seemed to back a recommitment of U.S. ground troops to Iraq after loudly protesting the withdrawal of our troops from the untenable nation.

The Wall Street Journal’s argument weakens, however, when we consider that, just a few months ago, that voice of the neocons was arguing for air strikes in support of IS in Syria.  The Journal wanted the U.S. to conduct air strikes to support the rebels against Syrian President Bashar Assad, whose most salient opponent in Syria was not the reportedly “moderate” Free Syrian Army, but the already radicalized ISIS.   While the Journal, and the neocons for which it is the major mouthpiece, expressed no sympathy for ISIS, the actions it advocated, and the toppling of Mr. Assad in which it helped those actions would result, would have been an injection of some pretty high-powered steroids into ISIS and its zeal to terrorize and radicalize the Middle East.

Further, the Journal was all for the American invasion of Iraq, perhaps the most salient result of which was the establishment of al-Qaeda in Iraq, which morphed into IS.  See 8/19/14’s DAN COATS BLASTS THEISLAMIC STATE…BUT IGNORES HIS OWN CULPABILITY at Rant Lifestyle.

The Journal and its neocon fellow travelers first prescribed an action that created the Islamic State.  Now they want to fight the Islamic State in Iraq but ally ourselves with the Islamic State in Syria.  Such apparently contradictory advocacy does not appear contradictory at all to those of us who believe that the basic neocon tenet is “Any way, any time, anywhere”…as long as the arms merchants, who support neocon pols and the neocon movement in general, can make some money.

GO AHEAD, DRIVE LIKE AN IDIOT; YOUR LUXURY CAR’S ELECTRONICS WILL BAIL YOU OUT

8/20/14

CNBC, among other networks, has been featuring ads for Lexus of late that highlight Lexus vehicles’ passive electronic safety devices.   In an ad I just saw, a mother driving a Lexus SUV turns around completely to attend to her child seated in a safety seat in the backseat of the vehicle.  In doing so, she wanders into the oncoming lane of traffic and only turns around to face the road when she hears the blaring horn of an approaching semi.  Her Lexus automatically stops, avoiding certain death, or worse, for her, for her innocent child, and for the equally innocent semi driver.  What horrible fate befell those driving behind the frantically breaking semi (and Lexus) is left to the imagination.

Hmm…

The message here is clear:  You can drive your Lexus like a total a—hole, but don’t worry; the car’s electronic gizmos will save you.   So go ahead and drive inattentively. Ignore your primary job when behind the wheel (driving) and attend to life’s more urgent matters, like sending that text, checking that e-mail, gazing at the nav screen, or immediately attending to the slightest hint of discomfort from your child.   Do the sorts of things that normally would put you at risk of life and limb because your car can save you.  Driving no longer requires skill or attention, thanks to Lexus.

Yours truly is only picking on Lexus because that overpriced Toyota brand seems to run this same ad repeatedly and I happen to see it on CNBC.  Other carmakers, and especially “luxury” (whatever that means) car makers use the same approach with varying degrees of fidelity.

The whole “Now you can drive like a moron because the electronics will save you from your utter stupidity and lack of responsibility or concern for anyone but yourself and (maybe) your immediate loved ones” approach genuinely infuriates those of us who simply love to drive.  By “drive,” in this instance, I mean really drive…attentively, safely, skillfully, hopefully manually, and, yes, in a spirited manner.  Slow does not equal safe.   There is no lack of speed that will overcome lack of attention, but I digress.  The ads that embody the “drive foolishly because we have your back” approach encourage the types of imbecilic driving that is becoming increasingly prevalent on the nation’s highways and byways.   More importantly, this inattentive, who gives a rat’s hindquarters what I do because my expensive car will bail me out, approach to driving dramatically increases the danger factor on America’s roads, regardless of the gizmos we pack in our cars.

One of my favorite bumper stickers is

“It’s car, not a phone booth.”

(Incidentally, my favorite bumper sticker is

“Forget world peace; envision using your turn signal.”  But I digress.)

Now we need a new version of the first sticker, something like

“It’s a car, not a phone booth, office, e-mail reception area, restaurant, grooming station, opinion forum, TV room…”

But I fear such a long bumper sticker would be counterproductive, or at least ironic; reading the whole damn thing would require too much diversion of attention from the task at hand.  

PAT QUINN TO BLACK VOTERS: BRUCE RAUNER = RAHM EMANUEL?

8/18/14

Bruce Rauner, according to the polls, holds a big lead in the 2014 Illinois governor’s race.   My asking around, and my instincts, tells me that the polls are right.  Even natural Pat Quinn voters (liberal women, union members, even friends of mine who know Mr. Quinn and voted for him out of a sense of Fenwick affinity in 2011) have told me they won’t, even can’t, vote for the Governor this time around.   One would be a fool to write off Pat Quinn’s chances in any election; he is a great campaigner and a very clever politician.  (See, inter alia, 2014 Illinois Gubernatorial Election Year Rag:   “Hand Me Down My Bulletproof Vest…” (Rant Lifestyle, 1/20/14) and PAUL VALLAS ON THE TICKET:  PAT QUINN MAKES ANOTHER BRILLIANT MOVETOWARD RE-ELECTION, 11/8/13.)   Plenty of former politicians got that way underestimating Pat Quinn.

But Pat Quinn is clearly in trouble.  If he is to win, he has to do a lot of things, and one of those is to shore up his loyal base among black voters, primarily in Chicago.  How can he do that?

Black voters, if one believes the polls, don’t like Mayor Rahm Emanuel.   Rahm Emanuel has endorsed Pat Quinn but he is a close friend of Bruce Rauner.  Mr. Rauner helped Mr. Emanuel become wealthy during the Mayor’s brief stint as an “investment banker,” the two have done business together, and they even vacation together.   So at least one strategy would appear to hold some potential for Pat Quinn:  convince black voters that a vote for Mr. Rauner is a vote for Mr. Emanuel.

This will be difficult, especially when Mr. Emanuel is publicly, if not all that enthusiastically, endorsing Pat Quinn and Mr. Quinn is doing nothing to deflect that endorsement; after all, Mr. Quinn needs all the votes and financial support he can get.  But this is what political operatives of an especially Machiavellian, some might say sneaky, variety are for.   Somehow, the back channels have to be cultivated.  The word has to get out on the street, but only on some streets, that Mr. Emanuel is secretly backing his old pal Bruce Rauner and that support for Mr. Rauner is de facto support for Mr. Emanuel.

Can Pat Quinn pull off such a feat?   Despite his much vaunted, but now tarnishing, reputation as some sort of Mr. Clean, he has not survived nearly forty years in Chicago and Illinois politics by being some kind of choir boy.  One can be confident that Mr. Quinn has plenty of dirty tricksters in his indirect, or maybe direct, employ.   One can be confident that Mr. Quinn will try, or is trying, such a Rauner=Emanuel tactic, if only because he is almost at the point at which he will need to try anything.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

KAREN LEWIS, THE HUMAN MONOPOLY GUY: SOME QUESTIONS THAT HAVEN’T BEEN ASKED

8/14/14

We learned through the Chicago media yesterday that Chicago Teachers’ Union (“CTU”) President and potential mayoral candidate (See TONI PRECKWINKLE RULES OUT A RUNFOR MAYOR OF CHICAGO…MY READERS YAWN, Rant Lifestyle, 7/15/14 and the posts to which it will direct you.) Karen Lewis owns….

--a house in the very expensive Kenwood neighborhood (where the President purports to live but to which he has no intention of returning once he finishes his current gig; how ya’ gonna get ‘em back to Kenwood once they’ve seen, well, everything?  But I digress.), purchased in 2007 for $405,000.

--a summer home in Union Pier, Michigan that has been in the family since 1961.

--a condo on the big island of Hawaii, bought in 2011 for $240,000,

--two time shares in Hawaii,

--a time share in New York

--a time share in Mexico, and

--a time share in Colorado.

The predictable reaction was swift:  Karen Lewis is a hypocrite, who spends her time decrying “people of wealth and privilege” who “don’t have a clue about poverty” and castigating Mayor Rahm Emanuel as “Mayor 1%” while claiming that she, Ms. Lewis, is ‘not egotistical or rich.”  The first part of that last argument was comical even before the news of Ms. Lewis’s vast real estate holdings leaked, but, again, I digress.

Several other, more rational but not as obvious, responses came immediately to yours truly’s mind, one with the help of his wife:

One response could be that making $200,000 per year (Ms. Lewis’s combined salaries as CTU President and executive vice-president of the Illinois Federation of Teachers (“IFT”)) makes one comfortable but does not make one rich.  No level of income makes one rich; being “rich” is a balance sheet concept, a measure of wealth.   Getting “rich” involves not only making money but saving and investing that money.   Income is an income statement concept, a measure of how much one makes in a given period of time.   Large incomes do not necessarily, and often don’t, correlate with wealth.  Lower income people who know how to save can be far richer than high income people who fritter their money away on desperate attempts to fill the holes in their souls on the latest gimcracks that the rest of the herd tells them they simply must have.  Apparently, for all of Ms. Lewis’s vast education, she didn’t take, or pay much attention in, Accounting 101 or much beyond the rudiments of Finance or Economics.  Neither did most of the people who make their livings commenting on politics or economics, but that is another issue.

Leaving the rich vs. high income misconception aside, $200,000 is indeed high income but is nowhere near the Rahm Emanuel/Bruce Rauner income leagues.  If you make $200,000, good for you and God bless you; you are doing very well.  But I have news for you:  $200,000 is not an especially high income in today’s world.

A few other responses could be born of Ms. Lewis’s defense of herself.  She argued that she is highly educated…

“You are supposed to go to school, become educated.  I have an Ivy League diploma.  (I thought they were called “degrees” in college; “diplomas” are issued by grade schools and high schools.  Or so I thought.  But I don’t have an Ivy League diploma or degree so what do I know?   Okay, how to digress, but what else?)  I have two Master’s degrees.   I’m a board-certified teacher.”

There are so many things wrong with this reply that I, even without benefit of an “Ivy League diploma” hardly know where to begin.  Ms. Lewis more than implies that the purpose of education is to make lots of money.  Yours truly understands that getting employable, even rich, is certainly most people’s object in going to college and I am no exception; I majored in Accounting and got an MBA with a Finance concentrations, hardly scientia gratia scientia.  But one, and especially one in the education business, like Ms. Lewis, would like to think that there is more to education than improving one’s income potential; after all, it’s called “college,” not “trade school.”  But apparently Ms. Lewis has dispensed with the idea that the value of an education transcends job preparation.

Further, if one is interested in making money, the education field is not the first field that comes to mind.  If Ms. Lewis feels entitled to make lots of money because she has an “Ivy League diploma” and “two master’s degrees,” and if making money was her goal in pursuing these degrees, perhaps she should have gone to law, medical, or business school.   Being a “board-certified teacher” does not normally put one in a position to buy homes in Hawaii and Union Pier and time shares in New York, Hawaii, and Colorado.  Apparently, though, it worked for Ms. Lewis.

Even further, if one wants to get rich and buy homes in Hawaii, one generally doesn’t, or at least ought not, go into the business of running a union.   Yes, I know this sounds, and is, naïve, but the idea of becoming a union big shot should be to defend the interests of your fellow members against the otherwise overwhelming powers of their bosses.   Ms. Lewis, however, has decided that she is entitled to make more than any of her members and to “earn” a considerable multiple of what her average member makes.   This makes her not at all unique among union bosses, but could she and those union nabobs at least show a little shame?   Apparently not.

Ms. Lewis, in her own awkward defense, went on to point out that she makes more than even the most highly paid teacher because she is paid for a full working year, not the 39 week year her members put in. 

Hmm…

It is standard cant among the education profession that one should not pursue a career in that field because one “wants summers off.”  Colleges of Education drill that into their students.   The commercials run by teachers’ unions constantly emphasize that teachers work tirelessly, year round for “our children.”   Now Karen Lewis comes back and tells us that this is all a bunch of baloney, that her members don’t deserve to make nearly as much as she does because, after all, they only work 39 weeks a year.  It’s that shame thing again, a concept with which Ms. Lewis has little if any familiarity.

As my wife and I considered the Lewis story, my better half brought up another point.   Ms. Lewis says that she works very hard.  Even though she is paid for a 50 hour work week,

“I wish I were working 50 hours.  My day usually starts at 7 in the morning, and, if I’m lucky, I’m home by 10 at night.  I work really long hours.”

Where, my wife asked, does such a busy woman find time to visit all of her homes, time shares, etc.?   Something doesn’t add up.

Another thought that came to me concerned Ms. Lewis’s qualifications for the job of mayor of Chicago, to which she aspires but which she will never hold.  I don’t care what the polls are saying now; no one is going to beat Rahm Emanuel in 2016.  He has all the money and all the organization and can buy all the votes he needs in all the demographics he needs.  There, I’ve said it again…and did so in yet another digression.  Getting back to my point, one would think that the mayor of our once great city would know something about finance and investing.  Ms. Lewis, though, betrays her financial ignorance not only in her confusion of the concepts of having a high income vs. being rich but also in her apparently heavy investment in time shares; she apparently owns four of them.  Until someone comes up with navel lint futures (and who knows, in this era of brilliant “financial innovation,” our deep thinkers in the investment/trading industry might come up with such a useful financial tool), time shares will remain the worst investment out there.  Yet Ms. Lewis has apparently backed up the truck on this load of financial excrement.  How much judgment does that show?

Finally, my biggest concern about Ms. Lewis’s three homes and four times shares is another worry that no one, as far as I know, has mentioned.  It centers on both the concept of wealth vs. income and, more saliently, Ms. Lewis’s financial judgment.  I fear she is financially severely overextended and fear even more intensely that it is her lack of financial acumen that has dug her into this hole.

Think about it.  Ms. Lewis makes $200,000 per year, a very nice income.  But $200 grand is not enough to support a $405,000 primary residence, two secondary residences, and four time shares, none of which, with the possible exception of the Mexico time share, is in an especially affordable area.  And what about the costs of flights to Hawaii, Mexico, etc., to use her properties?  Being a financial person, yours truly’s first thought when I read of Ms. Lewis’s amateurish attempts at real estate moguldom was Ms. Lewis’s probably, er, highly leveraged financial condition.   Then I thought that maybe her husband had some dough, but he is a retired CPS gym teacher.   This is Chicago, and anything is possible, one supposes, but retired gym teachers aren’t generally rolling in dough.  

One can come to two possible conclusions concerning Ms. Lewis’s personal financial situation:   Ms. Lewis is not disclosing all of her income or Ms. Lewis has spent herself into oblivion, displaying a complete lack of financial acumen and showing, at least in this respect, a remarkable similarity to our former Governor Rod Blagojevich.  I’d bet on the latter, but neither bodes well for Ms. Lewis’s possible political aspirations...or her leadership of her union.

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

IOWA AND ILLINOIS: THE I SCHOOLS STILL HANG TOUGH IN THE PARTY SCHOOL RANKINGS

8/9/14

Now that, according to the Princeton Review,  Syracuse has knocked one of my almae matres (Iowa) from the top spot among the nation’s party schools and my other alma mater (Illinois) has fallen to #5, perhaps it is time to revisit my musings in the wake of last year’s ratings. 

Punch line:  Yours truly does not understand why the party school title carries such stigma; kids can study, achieve, AND have a good time.   Illinois and Iowa provide abundant evidence of what should be this self-evident truth; America (and the world, for that matter) isn’t run by people who spent every minute of their college years in the library.  Yours truly surely didn’t, but I digress.

Update since the below was written:  While our daughters continue to excel at Iowa and Indiana, our son has begun his college search and, while Iowa remains very much in his sights, he is quite enamored of Illinois.   While the party school reputations of Iowa and Illinois have not entered into his calculations, they have not dulled his, or his parents’, enthusiasm a whit.

Here is last year's post:

THE NATION’S GREATEST PARTY SCHOOLS:  THE I’S HAVE IT!

8/7/13

The Princeton Review has come out with the results of its 2013 nationwide poll of 126,000 students regarding the quality of, er, recreational activities, in our nation’s institutions of higher learning.   According to these observers, who apparently know of what they speak, the nation’s top five party schools are…

1. The University of Iowa
2. The University of California at Santa Barbara
3. The University of Illinois
4. West Virginia University
5. Syracuse University

As loyal readers know, two of these schools are very close to yours truly’s heart.   I got my MBA at Iowa.  My oldest daughter attends the University of Iowa.   And my wife and I aspire, at some point in the future, to live in or around Iowa City, which has to be, in our and many’s opinion, the best place in the world to live, but that is grist for another mill.  I got my undergraduate degree (BS, Accountancy, as they call it, which makes it sound not like a subject but rather a disease, but I digress).  Until I met my wife, those four years in Champaign-Urbana were the best four years of my life.

One supposes that, as an alum of Illinois and Iowa and the father of a student at the latter, I should be perplexed at the notion of these institutions’ being widely regarded as great party schools.  But I’m not.

While no one, and least of all yours truly, condones excessive drinking (or any underage drinking) or some of the other activities that fall under the general heading of “partying,” what is wrong with having a good time?   If my two almae matres were pure party schools, offering little academic challenge or opportunity for intellectual or career enhancement, I would indeed be sullen and down-in-the-mouth about this latest development.  But neither school is a non-stop party; far from it.

Regarding the Big U downstate…

Illinois and its students consistently rank in the top five universities in the country by employers.  Its business, and especially its engineering, math, and science programs, are among the best, if not the best, in the nation.  22 Nobel Prize winners are, or were, associated with the Big U as either alumni or faculty members.  If you are an Illinois resident, Champaign is perhaps the best bargain out there in higher education.  And if you a resident of South Korea or China, you know the U of I; much of the technological infrastructure of both countries, and of others, has been built by U of I alums.

Regarding the University of Iowa…

Iowa has long been widely recognized as both the easiest Big 10 University to get into (though with the entry of Nebraska (another great place to go to college), Maryland, and Rutgers (no opinion yet on these interlopers) into the family, Iowa may have lost that distinction) BUT the most difficult Big 10 University to stay in.   (This juxtaposition of the difficulty of gaining entry and maintaining student status makes Iowa something of the opposite of Harvard (i.e., the U of I (either U of I) of the East) and its Ivy League colleagues, where the only difficult endeavor is getting in, but I digress.  At least I do so parenthetically in this case.) Perhaps the attractions of downtown Iowa City have something to do with the latter, but mostly the difficulty of remaining enrolled at Iowa has to do with its very challenging general ed requirements.   Freshmen and sophomores at Iowa are frequently heard to complain that none of their friends at (name just about any other Big 10, or any, for that matter, university) have to work as hard as they do.   I know from personal experience; thank God my daughter is starting her junior year.

The health related fields at Iowa are always among the best in the country.  (Again, personal experience; my daughter is in the 6^th rated nationally Nursing program.)  The Tippie School of Business is perhaps the most underrated business school in the country, and I say that fully aware that it is always in the nation’s top 50 business programs.  The Iowa Writer’s Workshop is the best in the country.   And Hawkeye sports?   You have to experience the enthusiasm, near pandemonium, of an Iowa football game to believe it’s real.   And watch Hawkeye basketball this year; Fran McCaffrey and the guys are going to surprise a lot of people this season. 

And then…

there is just being in Iowa City.   What a beautiful campus and town, what great people, what a place…and this from a non-drinker, non-partier guy who has seen something of the world.  (Don’t misunderstand me; I was not a non-drinker, non partier when I attended either of these institutions.  I am speaking of my current status in my advanced age.)

So would I rather not have my two almae matres at the top of the national party school rankings?   Maybe.   But does their achieving such notoriety, in many people’s eyes, make me think any less of either of these two academic giants and all-around great places to spend one’s college and/or grad school years?   Absolutely not.   I love both my schools, would gladly and gratefully go to either again if I had to do it all over again, am delighted that my daughter goes to one of them, and would strongly recommend them to anyone seeking a place to matriculate.   And, yes, they are both a very good time; is that something of which to be ashamed?