Who Knows?

This week has been highlighted by the confession of Bernard Madoff of Madoff Investments for his $50 billion "ponzi" scheme. Mr Madoff started his firm in New York in 1960, initially it was a market makier for Wall Street, broker/dealer. Subsequently, Mr Madoff began managing money for individuals and institutions. He is a past president of NASDAQ and a respected professional on Wall Street. His success was unprecendented, he promised as much as a 20% return. His performance was positive until he confessed this week. Many sophisticated investors and institutions invested enormous sums of money. He did not hide his strategies, using equities and options. This is where it gets strange based on his strategy and based on the published volume of options he could not have traded the amount of money he purported to have under management. It would be impossible. The question becomes how could some of the most prominent banks in the WORLD and many very successful and sophistcated people blindly invest with Mr Madoff? What would possess them to believe the results without proper due diligence? I believe it is because they wanted to believe because they were 'rich' they should earn above average returns with little or no risk. They were wrong. As I have said because these are Free markets no one can consistently beat the market, no one knows the future. The most prudent way to invest is to own equities, have a long term focus, diversify and rebalance. Any other method is in essence gambling and speculating with your money.

Enough

The press has kept us informed on what is happening to our economy and our lives. Or have they? We are being told that the way out of this financial crisis is to borrow money. The federal governement wants us to believe that we should keep on buying even if we have to borrow money to do it. But isn't this approach the reason we have a crisis right now. Banks were encouraged to borrow money to home buyers, even if they did not qualify. I believe most banks are responsible and actually wanted to be paid back for the loans. Everyone believed real estate values could not go down, well real estate values can go down when their is no one left to buy. Wall Street took on more risk than any rational person would, risking everything. They were wrong. It is true we get out of a recession by spending money, but not by borrowing money to spend. Perhaps a new strategy should be if you want something save your money until you can buy it. As a guide I have a book titled "Don't Buy Stuff You Can't Afford" its a one page book and very simple. The basic premise is work and sacrifice is the road to success not speculation and credit. We have had a money party and now we have a money hang over. We must get back to saving...stay invested...Diversify...Rebalance.

Best and Brightest

The historic financial crisis we are now experiencing actually has some positive elements, one of which is the best and the brightest leaving 'Wall Street'. The best talent migrates to those fields offering the most reognition and highest pay. As a result of the meteoric pay in the financial industry, an entire generation of the best and the brightest young people seeking careers as financial engineers. There are already signs that the return to reality on pay levels is leading some of that talent towards careers in science, medicine, real engineers, research, manufacturing and the list goes on. Their drive and abilities are going to be put to much better use. This will result in improving lives through improved technologies, health care and increased productivity, which in turn will result in improved profitability and efficiencies. In the long run, I believe, the world will be much better off. The free markets will always adjust to changes. As we all know the only constant is that things will change. Which is why it is futile to attempt stock picking and market timing. To succeed we must invest...diversify...rebalance and stay disciplined.

Words of Wisdom

These are extraordinary times, we have not experienced a down period such as this for most of our lifetimes. We are all concerned about the future, the unknown. There is no one who can predict the future consistently. It can be best said by one of the best, Warren Buffet in his October 17, 2008 New York Times opinion piece: Over the long term the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts: the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president, Yet the Dow rose from 66 to 11,497. You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and proceeded to sell when the headlines made them queasy. Good advice from one of the most successful..stay invested..diversify..rebalance.

Free Markets!!

There have been many opinions on what to do with the automakers. Should we save them? Can we save them? No one really knows for sure. The business model utilized by the automakers is antiquated and inefficient. Would $25 billion save them? I have my doubts. The pain of allowing the automakers to fail would be hard, but attempting to save them might just delay the inevitable and cost the taxpayers more money for no return. Free markets demand that only well managed and efficient companies should survive. However the ripple effect would be deep and far reaching. The debate will continue. Should poorly managed companies be saved because they are BIG? Is the current management team capable and or willing to make the necessary changes? I do know that free markets work in the long run. The market rewards the companies with efficient processes and with the ability to remain flexible. We are investors not market timers or predictors. We have developed a scientific portfolio and investment policy statement. We must not allow these events to alter our ultimate goal. Stay invested...diversify...rebalance.

Fee Disclosure in your 401k Plan

Brokers and 401(k) providers often claim to sell inexpensive 401(k) plans, sometimes even promising to operate plans for free. Here’s how they do it: Providers offset up-front discounts by making employees select from investments with very expensive fees. While an investment with 1.4% fees might not sound like much, a mere 1% increase in fees can decrease the value of a $100,000 investment by $66,254 over 20 years, assuming an annual return of 7%. Unlike administrative fees, investment fees are not directly billed. Instead they are subtracted from individuals’ account balances each reporting period, reducing individual returns, often without knowledge of investors. These fees are not one-time charges, but are deducted from individuals’ accounts for as long as they participate in the plan. And since investment fees grow as individual accounts balances grow, those who save the most are penalized the harshest. Plan providers rarely discuss investment fees. In fact, by law they are only required to disclose investment fees during enrollment, after employers have purchased the plan, making it almost impossible for participants and employers to effectively comparison shop. This all will be changing very soon, as the regulators will require full fee disclosure. The best plan of action is to have an independent analysis done on your plan.

The System

There has been a great amount of discussion and opinions on the market conditions we are dealing with. I recently read an article that said Modern Portfolio Theory no longer works, market timing is the way to go. I will admit that no strategy always works, however going from one strategy to another and trying to out guess the market will inevitably lead to failure. The different opinions out there today are trying to work on the investors emotions, that someone else has the 'answer'! No one can consistently predict the future, by remaining disciplined to a proven strategy the investor will succeed in the long run. Financial institutions such as Merrill Lynch and Fidelity have hundreds of money managers, stock pickers, on staff because they know a few will get lucky and pick the right stocks or strategy, they then promote these lucky pickers or strategists. The result is the investor moving their money to the lucky pickers or strategists, which makes more money for the financial institutions. These institutions criticize strategies such as Modern Portfolio Theory because they make less money on trading. I encourage you not to fall victim to this hype stay disciplined to a proven strategy. In the long run you will succeed.