Between Scylla and Charybdis

As I hunker down for this epic snowstorm that may or may not arrive tomorrow in the City, I have been working on my finances.  I do a few things at the beginning of the year, which I believe should help any investor remain disciplined and focused.

I would call myself an investor who is comfortable with risk, but over the years as I have amassed more capital I have shifted to preserving what I have as much as growing it.  The other issue is that I have always ignored Wall Street research, simply because much of it is momentum-based: if the stock goes up, then it’s a good stock, and if it goes down then it’s a bad one.

Of course, almost no one can tell the direction of a stock before-the-fact (unless you’re cheating).  You can be a lucky investor, but I want to be an intelligent one.  Moreover, not enough attention is paid to the business of a company and the trustworthiness of its management.  You want a company relentlessly focused on building shareholder value, cutting costs and overhead, deploying capital for the benefit of shareholders, not for fat-cat CEOs.  All in a marvelous business where the profit margins are high.  So the ethos of Wall Street, which seems to be “fleece the individual investor and even the taxpayer, if you can get away with it,” is what you want to avoid.

First, I re-balance my portfolios.  That is, if I want 40 percent in bonds, and 60 percent in stocks, if those are my targets, I check at the beginning of the year and move money to regain those targets.  What you are doing is moving money from your successes (say stocks, which climbed to 65 percent of your portfolio) to your failures (say bonds, which declined in relative value to your stocks, to 35 percent of your portfolio).  It’s systematic contrarian investing.  I recently read an article in the New York Times that showed how steadily saving for and re-balancing a diversified portfolio every year would have turned this past decade into an investing success, rather than the dismal failure it was for those who did nothing.

Second, I have been increasing my exposure to international stocks over the years, particularly emerging markets.  It’s simple.  The United States is a mature economy, with a dysfunctional political system which shows no sign of tackling our major problems.  The American share of worldwide stock-market wealth has relentlessly declined: in 1970, the U.S. stock market was 66 percent of world market capitalizations, in 2007 our share was 42 percent, in 2008, 29.9 percent.  It’s no secret that China, Brazil, India, South Korea, and so on are growing faster than we are.

So I invest in foreign-stock mutual funds, particularly index funds covering everything from developed economies to emerging markets.  Also, I make sure the mutual funds I own do not hedge the dollar.  Why?  I want the currency risk, for better or for worse.  That’s part of the diversification of international investing, and it’s also a bet against the dollar and our trade and budget deficits.  Our politicians will blame each other and vie for short-term power, until one day they will discover the mathematical oppression of our spending-beyond-our-means on unnecessary wars and gargantuan entitlements will have weakened us to a regional power, if that.

Third, I have diversified my portfolio to include things like raw land in Texas, where the demographics are excellent, and TIPS, or Treasury inflation-protected securities.  Although there is scant inflation now, and TIPS seem overbought because of the worries about the deficit, I believe you need a smattering of unconventional assets that will help you fight inflation when it rears its ugly head again, especially after we have printed truckloads of dollars.  There could also be a scenario in which interest rates are high, because of our weakened dollar and jittery creditors, and the American economy stagnant, our stand-of-living in a deleveraging decline.  Unconventional assets mean uncorrelated assets, and will mean less panic for you in whatever scary environment you find yourself in.

Over the past two years, I do feel something fundamental has changed.  The politicians in Washington have stopped working together; our democracy seems more ambush-demagogy than the voices of the people; the way we talk to each other, through TV and radio, in ten-second sound bytes, prevents us from understanding each other.  I just want my family to survive.

Investment Character

I am reading the biography Snowball: Warren Buffett and the Business of Life, by Alice Schroeder, and thoroughly enjoying it. Years ago I read Benjamin Graham’s The Intelligent Investor; I teach parts of Graham and Dodd’s Security Analysis; each year I read Berkshire Hathaway’s annual report to understand some of what they are doing and why.

I would not consider myself a Buffettologist in the sense that I copy whatever stock investments Warren Buffett makes. But I do try to understand what he does and why, and apply those principles to companies and industries I am familiar with. Do your own homework, I say. Understand where your money is, and why it’s there. That’s the way to be an intelligent, independent investor.

As I’ve read this biography, I am not surprised to learn Buffett was/is good at math and calculating odds; I am not surprised to learn his friend Charlie Munger is much the same way. Ideas pour out from their heads; they are passionate about investing, and they believe they are right. ‘Didactic,’ is how they describe themselves. Other words that come to mind are ‘relentless,’ ‘iconoclastic,’ ‘anti-social,’ and ‘obsessed with details.’ They are also honest, self-critical, and loyal to those whom they think deserve loyalty.

When I have taught my summer course on Investment Analysis, I have always argued that number-crunching is only half the battle to becoming a good investor. The other half, and maybe even the most important part, is having the right kind of character to be a successful investor. I think you can train someone to understand and calculate the right figures from annual reports, 10-K reports, and 10-Q reports. I think you can teach someone to use discounted cash flow analysis to get a sense of whether the current stock price correctly values, or undervalues, future earnings.

(I’m not surprised Ben Graham did not give much weight to future earnings, because I also believe projections into the future are dicey figures easily manipulated to prove whatever you want to prove. Understand the nature of the business at hand, and how it can remain profitable forever, or be easily susceptible to margin pressures, inflation, taxation and so on, and that’s how you can truly value ‘future earnings.’ You won’t get an exact number, but you’ll get a sense of whether this business is worth owning. It’s better to be approximately right than exactly wrong. I think Buffett said that.)

But my point is that while number-crunching is largely teachable, having the right investment character is for the most part not. I don’t care what anybody else thinks, and I don’t look for others’ approval of my investment ideas, nor for my clothing, nor for my unorthodox political positions, nor my blog entries. I have always been that way. As a toddler, my mother called me ‘viejo Josisah,’ which was the name of a crotchety old man she once knew in Chihuahua. I was grumpy; I loved being alone; I was, in a word, ‘didactic.’ Now I am a rumpled, ornery man on Broadway, with what I consider to be a plain look on my face but which my wife Laura says looks like a permanent scowl.

That kind of investment character makes it easy to go against the crowd, to not panic when others are decrying the end of capitalism as we know it, or to not join the party when the champagne corks fly to the ceiling because of Internet stocks, China, or whatever the next new fad is. I also don’t like debt. I try to keep things simple. I try to see things as they are, not as I wish them to be, at least for my investments. The recent market meltdown, although painful, was not enough to change my ways; I had enough liquidity to survive.

So ‘Know Thyself,’ that Socratic maxim, is so important to me as an investor. If you know you don’t have the right kind of investment character, then lowering your costs with an index fund is about the smartest thing you can do. If you think you have the right math skills and character, and you start running your own individual stock portfolio, and then you panic when others head for the hills, or you slavishly follow the momentum of euphoria, then learn from that. Those that learn from clear-eyed self-reflection and analysis will be winners on Wall Street. Those that don’t will embody Mr. Market’s schizophrenia.

Business News Blather

I used to watch the TV for business news. But now Kudlow’s and Cramer’s shouting leave even more ringing in my ears than the express trains zooming past the local subway stop at 86^th Street. I have read the Wall Street Journal for decades, but I have noticed that after Murdoch took over more news stories have political slants and headlines are unnecessarily more pessimistic in the age of Obama.

I don’t get the parade of blond people at Fox News. Are they really trying to be that obvious about who is in their camp and who they could care less about? The CNN anchors who read Twitter responses: are they serious about that? That isn’t democracy, but stupidity, on display for the world to see.

I have become a full-fledged media skeptic. I do think that many of the quick and easy responses encouraged by modern media are often nothing more than rants. That’s one of the reasons I have not allowed comments on Chico Lingo. I read other blogs for years, and still do, and the comments are rarely thoughtful or interesting. I figured if someone wanted to comment on what I wrote they could send me an email, and I have received dozens. Or they could start their own blog.

I know I am in the minority, in more ways than one, on turning away from the flotsam of the news cycle. My only use for democracy-as-hyper-mediocrity is that I try to take advantage of the paranoia or euphoria through my investments. I ignored the doomsday scenarios of March, and kept my investments exactly the way they were. So I have benefited from the recent run-up in stocks. New money I have added to my short-term bond portfolio, simply to have more emergency reserves in case we return to the brink of depression. I am also paying off debt in advance, even if my debt levels were relatively small compared to my net assets.

I watch the crazy flamingos of speculation, the fast money, the lightning rounds, and I am happy to be patient and contrarian and independent. Investors should do their homework, and this knowledge will allow them to ignore the garbage advice that washes up on their shores.

One of the reasons, as I pointed out to my wife Laura, that I did not panic after the recent vicious bear market was that my mutual fund and individual stock positions were still mostly in the black, or with slight losses, at the bottom of the precipitous drop. I have invested patient money, for decades in some cases, and so a downturn cuts into my gains, but isn’t deep enough to even put me in the red.

Too often I hear of friends who invest to get rich quick. To me, that’s not investing, but speculating. I even had a close friend who would invest for a major appliance, for a month or two, score a quick profit, and buy the refrigerator he needed. It was ridiculous to me then, and is ridiculous to me now. But most media outlets encourage this kind of behavior. In yesterday’s Wall Street Journal, oil traders who invest in oil futures for quick bucks were labeled “investors” in paragraph after paragraph. That’s editorializing in news stories, and makes the point against Obama that he is against “investors” in this market when he or his administration considers putting limits on oil traders.

I don’t think we should expect much from CNBC, the Wall Street Journal or Fox Business News in terms of investigative journalism. They are promoters of Wall Street, and sometimes that’s good and too often it’s horrible. The best single article I have read about the current shenanigans in the finance industry came from the New York Times, about how subprime brokers have resurfaced as dubious loan fixers, by Peter Goodman.

The individual investor has to protect himself. But ‘Caveat Emptor’ only works if there is full disclosure in plain English, if abusive behavior is eliminated and illegal behavior prosecuted, if you are not lied to by whoever is selling you stock in a company, a bond, or a mortgage. That’s the proper role of government and what George W. Bush could never understand.

Bear Market Blues

Another day, another drop in the Dow. We had an interesting discussion as a family yesterday: how to cut back on expenses to save as much money as possible. Laura and I told the kids about our investments, and how along with everybody else in this country we are suffering from this vicious, relentless decline in equities. We are okay, and I have never invested in anything fancy with the small portfolio of stocks I have, mostly in healthcare. Our portfolio has done better than the S&P 500 over the past fourteen months, yet it’s little solace to be down 35 percent even if the market is down 50 percent. The kids suggested turning off more lights to save electricity and eliminating cable and just watching TV on the Internet. I suspect many families across the country are having these discussions, and I know many are making much tougher decisions than whether or not to keep cable.

I wonder how this deep recession will affect our long-term attitudes. We have never been big spenders, and I have always paid off my credit card balances at the end of the month. I don’t like the punishing interest rates or late fees from plastic. I pay our mortgage fifteen days early each month; I try to be responsible. In our living room, I still have the speakers I had in college twenty-five years ago, but we do spend heavily on books and about once a week I buy a few culinary treats from Zabar’s. This economic downturn has forced me to ask myself many questions. Have we been careful enough with our finances? Are we ready for a long-term decline in the economy, in the stock market? Should we have saved even more money, and invested it even more conservatively, so that our kids can afford college in four years?

There is a great deal of self-doubt, self-assessment occurring in my head. I know I have not been reckless with our family’s finances. In comparison to what I hear in the news, of people investing in mortgages with teaser rates, of credit-card holders paying only the minimum with exorbitant interest rates on massive balances, of spenders who did not save much for many years but instead took out home-equity lines of credit, I know I did none of these things. We spent what we needed; Laura and I have saved 10-20 percent of our income each year; and I invested it. My friends and family have assured me I have been conservative with our finances, and yet I still feel I am failing. I simply want my family to be okay; I want my children to go to whatever college they want in four years.

Besides questioning myself, I am also angry. Angry at the ridiculous 21st Century version of American democracy. I find it more akin to several mobs shouting at each other, trying to sway the middle who simply wants to live in peace and with a modest prosperity. The democratic political and economic discussion to solve our problems, I have always believed, would only be as good as the character of the participants in this discussion. But what happens when ‘character’ is defined and warped by the means of communicating your message? We are losing newspaper editors and reporters every year, but TV pundits and braggarts on the radio, both experts of pithy sound bytes, define, ambush, and drive ‘political discussion.’

What will happen when we don’t even remember that there used to be a time when careful, self-critical, and even profound political debate defined at least a significant part of what occurred in the great American conversation to solve our problems? When we don’t even have the memory of a better political discussion, I believe we will become more mob-like, and less democratic. I believe we will be prone to radical influences with simplistic solutions, which in reality solve nothing. Be careful whom you pay attention to: the more you pay attention to them, the less you will be able to decide for yourself why you began to pay attention to them in the first place.

These are sobering times. Will we get sober leaders to help us out of this mess? Will we even have the capacity to listen to them anymore? I don’t know, but I am still hopeful.

Disastrous 2008, and the Need for Simplicity

Madoff. Blagojevich. Paulson’s bumbling of the bailout funds. Predatory lenders. Ted Stevens. Detroit’s Big Three Dinosaurs. Credit-card lifestyles. College funds and retirement savings going up in smoke. George W. Bush, and an Iraqi journalist who can’t aim a shoe. The news has given me a headache. The relentless scandals, the unseemly corruptions, moral responsibility in our culture in tatters, our economy shedding jobs quicker than Ocistar sheds his hair. The news in 2008 has often been a series of financial and political disasters.

We don’t trust our financial institutions to help us manage our money; instead many of them are out to sell you what will do you harm, to nickel-and-dime you with a barrage of fees, or to outright rip you off. We don’t trust our political leaders, who seem at best out of touch, or already sold-out to the highest bidder, or stupid and unapologetic and even proud of asserting that the fiascoes of their own creation aren’t really that bad, or are akin to ‘natural tragedies’ in which no one is truly responsible for anything.

It would be a miracle not to be depressed during the holidays during such a year, but I am not. I am indeed worried, I am cautiously hopeful about January 20, 2009, but I am not depressed. Why? Because I have always tried to keep my life simple, or at least as simple as I can make it given living in New York, and having a wife and two boys, and a stream of bills to pay every month, and so on. Here’s how I have kept it simple, and how those choices have helped me during these difficult times.

I take care of my family. That means, when my children come home from school, I am there to answer their questions on their homework, to help them discuss school issues, to cook dinner for them. Every night, before they go to sleep, my wife and I kiss our children goodnight. I rarely go out by myself, and the upcoming AWP conference in February 2009, in Chicago, will be that rare time when I travel without Laura and the kids. I like being a homebody. Perhaps I am not popular with those writer-friends who are constantly recounting their late-nights at poetry readings, or who are in residence at far-flung retreats, sequestered from their families, productive yet solitary. But that’s okay. I know who I am, and I love being with my family.

My wife and I spend only on what we need. I wear Gap pants, and about half of them have holes above the back pocket where my laptop rubs against me when I lug it around the Upper Westside. In our living room, we still have my speakers and Laura’s stereo receiver from college: we just attended our 25th Reunion at Harvard! We do have nice things --high speed Internet, an iMac, MacBooks-- but we tend to keep them forever, and we do spend on books. Hundreds of dollars on books. The kids’ bookshelves are double-stacked. We are not fancy people. We are book people. We love to read. We often do it together.

We have saved money. We do it every month. Laura and I have done it for over twenty years. We invest mostly in index funds, domestic and international, and the small portfolio of stocks I own I have owned for years. I have done my own research on these companies, years of reading annual reports and 10-K reports, and listening to analysts’ discussions with management. Saving and investing in this manner is laborious, and you can’t brag to your friends about what ‘hot stock’ you have found, because we don’t invest in hot stocks. We don’t day-trade. Indeed, we have ‘paper losses’ during the vicious bear market of 2008, but since we did not enter at the peak of the market, we will survive financially. I invest every month what we can spare for investing, and I invest wherever stocks have fallen the most. I am a contrarian, and I keep it simple.

This way of life has allowed me to make steady progress on my goals, and has kept me from making big mistakes. When the world seems to be shattering to pieces, I am still reading and I am still writing. Living a simple life, when you have friends pursuing the next million, or the next accolade, or the next conquest, requires having a sense of who you are. The night is cold outside, the wind from the Hudson River whistles through the canyons of buildings in Manhattan, and this hot cup of Red Zinger revives me for another day.