Freedom of Speech, Just Watch What You Say

By Keenan Mann

Take a look at the Facebook post below.  Its author is an elementary school teacher in McKinley, Texas, the scene of the recent meltdown of officer Eric Casebolt.  She posted the comments in reaction to news that Casebolt had resigned as a result of his actions and their aftermath:

I'm sure you can can guess what happened next, but just in case you're stumped, see the excerpt below from thegrio.com:

"After the post went viral and the backlash began, Fitzgibbon apologized.

The district has since come out to issue a statement concerning Fitzgibbon's termination from the school:

Frenship ISD is deeply disappointed in the thoughtlessness conveyed by this employee’s post. We find these statements extremely offensive, insensitive, and disrespectful to our Frenship community and citizens everywhere. … The employee whose account is responsible for the post will be relieved of her teaching duties at Frenship ISD.”

Yep, she dared people to do something about her for having an opinion and they did - quickly and resolutely.  

I'm guessing those responsible for Mrs. Fitzgibbons' ouster see it as progress.  And perhaps it is rightly viewed as such if the aim is the suppression of unpopular opinions.  But if that is the aim, those who have deemed it a proper one might do well to heed the words of Michelangelo, who is credited with saying, "The greatest risk to man is not that he aims too high and misses, but that he aims too low and hits."

Could any good have come out of a conversation, with or without Mrs. Fitzgibbons, about the viewpoints she expressed. Maybe, maybe not. But I'm guessing no progress can come out of a conversation that we can never have because we're afraid to for fear of losing our jobs or being unfairly labeled.

We can certainly outlaw speech that runs contrary to popular opinion in the name of progress, but in the end, any progress we claim in that regard will be illusory.  

Sure, fewer people with controversial opinions will speak of them publicly, but their views then will largely go on unchallenged and unchanged.

It's not that I agree at all with what she said, but rather that I agree that she had every right to say it.

In the context of the First Amendment, I think those who called for her dismissal have acted in a way that is just as thoughtless, offensive, insensitive, and disrespectful as the behavior they condemned.

So who's the real enemy of progress?  The person who tells you what they think or the person who tells you what to think?

Seems pretty obvious doesn't it?

KM

The 2008 Housing Bust Explained and the Huge Role Played by Government ... The Dangerous Illusion of Government 'Help and Knowledge' ... Facts Are Stubborn Things

On June 12 Keenan posted comments concerning the government created Consumer Financial Protection Bureau (CFPB).

This relatively new government agency was created pursuant to legislation known as Dodd-Frank which resulted from the politically correct but factually wrongheaded conclusion that the nation's biggest banks had caused the financial debacle in 2008. They were wrong about that.

An interesting and astounding aspect of government is that when its policies fail, more failed government regulations and laws are the result of those prior failures. Accordingly, following on the heels of the disastrous 'Affordable Housing Goals' of the 1990s, that's how this CFPB creature and Dodd-Frank came about in 2010. One bad law begets another.

Peter Wallison's 2010 book "Hidden In Plain Sight" describes in detail the dominant role of government in creating the 2008 financial fiasco from which we're still recovering. In a succinct but telling chart on page 231, Wallison highlights the situation thusly --- in 1980 only 1 of 400 home mortgages had a combined down payment of 3% or less. That became 1 of 4 by 2005 and 1 of 2.5 by 2007. Government decided to make homes 'affordable' by establishing 'Affordable Housing Goals' which resulted in 'reduced underwriting standards' for home buyers during both the Clinton and Bush administrations.

How's that for an example of government in action and non-partisanship from the Clinton and Bush 'royal' families? And then the Obama administration came to the rescue again with Dodd-Frank in 2010? Aren't We the People lucky?

And since government sponsored mortgage enabling brokerage entities such as Fannie Mae and Freddie Mac account for ~75% of U.S. mortgages, this was easy for the government to accomplish. According to the new government rules on home buying, virtually everyone could and should become a home owner. Thus, banks were 'encouraged' by government to ease up on such things as down payments, credit histories and the ability of borrowers to handle debt servicing payments after the mortgage was granted.

Down payments of 3% replaced the historical standard of 20%. Predictably, the low income earners and middle class buyers were hurt the most. Accordingly, instead of a $20,000 down payment to buy a $100,000 home, a buyer could either choose to finance that same home purchase with $3,000 down or buy a ~$700,000 home with the same $20,000 down payment. That created more demand, higher prices and a smile on the faces of builders, realtors and mortgage brokers. The party was on the government, and it was required that all interested parties participate fully. So they did, and the rest is history --- sad history but nevertheless real history.Yet the history isn't being told by our trusted elected officials. Nor will it be.

In any event, all this government 'help and encouragement' made for both a huge increase in home prices and demand by newly 'eligible' home buyers. In fact, home prices doubled between 1997 and 2007. Then the crash occurred and foreclosures followed. People were hurt and the government passed new legislation purporting to rein in the banks and related financial institutions.

But the government was the primary cause of the housing crash and the foreclosures that resulted. Not the banks.

And now we're getting ready for Act II as the credit conditions are becoming easier again in an attempt to get housing starts up.

In the 1980s President Reagan warned us about believing the dangerous phrase of 'We're from the government and we're here to help.' It's too bad we didn't listen to him then, and it's even worse that we're not listening now. But don't expect the politicians to come clean anytime soon, if ever. They are too busy 'helping' us -- and getting and then staying in office by being elected and then reelected, of course.

I read once that the greatest enemy of knowledge is not ignorance --- it's the illusion of knowledge. How true that is about We the People and our misplaced reliance on the help of our elected government gurus.

So now do you believe that we're being better protected from a future financial debacle by our government 'helpers?' I hope not, because I sure don't.

That's my take.

Thanks. Bob.

Successful Investing Is Similar To Successful Free Throw Shooting

It's NBA playoff time --- LeBron and his supporting cast vs. Stephen and his supporting cast.


LeBron is the athlete, and Stephen is the pure shooter. Both are great and virtually in a league of their own on the basketball court. Off the court, LeBron follows the advice and counsel of Warren Buffett, also in a league of his own when it comes to investing. Who Stephen listens to for investing advice, I know not.


But my guess is that he learned to shoot by watching his father Dell and by listening closely to what Dear Old Dad was telling him about shooting a basketball. Father Dell was a great NBA shooter and in a league of his own as well.


Successful investing is a lot like successful free throw shooting. To be great at either one takes time and plenty of practice and patience. The earlier one starts, the sooner one becomes good at it. Stephen Curry wasn't a born shooter. He became a 'natural' after years of practice, hard work and excellent early instruction.


And it's the same with individual investing success. The sooner one becomes good at investing, the greater investor he is likely to become over time. And here's the really good news. Becoming a great investor isn't nearly as time consuming nor as difficult as becoming a pure shooter in hoops. That makes achieving investing success the easier path for us mere humans to follow when pursuing investing 'greatness.'


What Stephen Curry's Free Throws Can Teach Investors has this practical advice for individual investors:


"The NBA loves player statistics–and I love looking at those statistics and thinking about what it may mean when it comes to your money.


Take 2014-15 NBA MVP Stephen Curry of the Golden State Warriors. The Wall Street Journal did a recent study looking at all of Curry’s 337 free throws during the course of the NBA season. When not wearing his mouthguard, Curry shot 198 for 214 from the free-throw line, which is a 92.5% shooting percentage. With his mouthguard on, Curry shot 110 for 123, which is an 89.4% shooting percentage. The real difference between these two is 3.1% (or 3.35% real growth), which is a substantial increase in free-throw accuracy.  Golden State Warriors general manager Bob Meyer said, “Maybe we should communicate that to him.”


So, what does this have to do with investing and making money?


First things first, most investors don’t take the time to actually review their strategy or their overall real performance. If you have taken a particular fork in the road with how you invest your money, isn’t it important to gather data to ascertain which part of your strategy is working well and which part is working less well? Without going through this step, you are sure to make continuously uninformed decisions, which will likely lead to lower-quality results.


Second, the difference in earning an extra 1% on your money over the course of 30 years could lead to hundreds of thousands dollars more in your pocket. So, if you knew (the mouthguard out) that a certain strategy, fund, investment, etc. was a higher quality longer-term performer, wouldn’t it be smart to do more of what has worked consistently well?


For instance, $100,000 invested at a 7% return over 30 years with no additional investments (assuming no taxes) would grow to $761,226. But with an 8% return, that $100,000 would grow to $1,006,226. That extra 1% annually would make a 250,000 difference!


What’s true about both sports and money is that small, incremental percentage gains on what you are currently doing can lead to huge results over the long term. It could thus make the difference between retiring early, retiring later or not having the possibility to retire at all."


Summing Up


My message to individual investors is a simple and straightforward one.


Start saving and investing early, don't pay for what you don't get, own stocks for the long haul, stay the course and reap the rewards after a successful adult lifetime of investing.


Earning an additional 3% annually on an initial investment of $100,000 would result in twice as much money as otherwise after 24 years and an enormous multiple of 4 times after 48 years.


1% is a lot, 3% is a whole lot and achieving this after a long period of time invested is great.


While we all can't be like Stephen Curry, by following common sense individual investing rules over time, we all can achieve great investing results for ourselves and our families.


That's my take.


Thanks. Bob.

What A TV Cop From The Old Days Might Said To Someone Who Disrespected America

By Keenan Mann

You may or may not know Erica Walker.  For those of you who don't, please take a few seconds to watch the video below.  Be advised that her language is a bit crude.  If you're like me though, you will be much more offended by what she does than what she says.

Now, for the TV cop intervention, we turn back the clock to the days of Dragnet and Joe Friday.  In the clip below, Friday and his partner could just as easily be addressing Mrs. Walker or the college students who do the same thing in the videos that cue up after hers as they are three males that represent their 1960s era equivalents.

I'm with Friday.  Our system is far from perfect but there isn't ANYTHING close to it.





KM.

Baylor Basketball Player Arrested For Stealing From Walmart

By Keenan Mann

The headline above was enough to grab my attention.  The story attached to it from the Waco Tribune is below:

"Baylor University basketball forward Rico Gathers was arrested Tuesday for allegedly stealing various household items from the Wal-Mart on Franklin Avenue.

The incident happened on June 1.

A store employee told police that a man he recognized as Gathers placed two pillows, a tote bag, a water dispenser and a trash can in a cart and left the store without stopping to pay for the items, according to an arrest affidavit.

The employee provided police with video from the incident, telling police the items were valued at $171, the affidavit said.

Gathers, 21, who is married and has a 1-year-old son, was arrested Tuesday and charged with theft under $500. He was released from the McLennan County Jail Wednesday after posting a $1,000 bond.

Baylor coach Scott Drew released a statement about Gathers’ arrest Wednesday afternoon.

“We are aware of the situation involving Rico Gathers and are in the process of gathering the facts to determine what transpired,” Drew said. “It would be inappropriate for me to comment further at this time.”

Gathers, who is from LaPlace, Louisiana, is entering his fourth season at Baylor. Last year he led the Bears in rebounding at 11.6 per game and was second on the team in scoring at 11.6 points per game.

He led the Big 12 Conference with 16 double-doubles, more than twice as many as any other player in the league, and was named first-team All-Big 12.

Last season Gathers broke the oldest individual record in Baylor basketball’s record book when he pulled down 28 rebounds in a win over Huston-Tillotson."

Okay, the facts seem  clear enough.  Mr. Gathers committed a criminal act for which he should face the consequences.  No argument from me there.  But Mr. Gathers does not at all seem to me to be your run-of-the-mill petty criminal.  

First off, he seems pretty responsible (shoplifting incident aside). Why do I say that?  Well, he's managed to make it to his senior year in college, he's 21, and has married the mother of his child.  

Second off, he's a hell of a hard worker.  How do I know?  Well he had 16 games where he had double figures in points and rebounds.  On top of that, he average double figure rebounds for the season.  Those are not easy things to do, and while they don't necessarily translate into an off-the-court work ethic, they are at least pretty good indicators.

My point here is that there is a 'dog that didn't bark'.  Sure, the newspaper headline barked that there was another criminal student-athlete who got busted, but what didn't get said?  

Before I share my thoughts on that, let me provide a bit of background for those of you unfamiliar with my Sherlock Holmes reference about the barking dog.   There was a story called The Hound of the Baskervilles in which Detective Holmes was called to an old English manor to solve the murder of the owner of the manor, which had occurred during the previous night.  As he he approached the house, Detective Holmes couldn't help but take note of the incessant barking of the dog.  Later, when getting details from people in the house he had an exchange where he pointed out the dog's noteworthy behavior:

From The Hound of the Baskervilles

Gregory : "Is there any other point to which you would wish to draw my attention?" 
Holmes: "To the curious incident of the dog in the night-time." 
Gregory: "The dog did nothing in the night-time." 
Holmes: "That was the curious incident." 

From the absence of barking in the night-time, Detective Holmes correctly deduced that the dog must have known the intruder.  As it turned out, the intruder/criminal mastermind stood to make a fortune from eliminating the the owner.

So what's curious to me about the Case of the Basketball Thief ?  

It's that no one has pointed out how odd it is that a student at a school with one of the most well funded athletic departments in the country couldn't come up with $171 for some essential household items.  

The coach didn't point this curiosity out.  Nor did anyone from the NCAA.  

They are both making a fortune off Mr. Gathers and his fellow high profile athletes around the country.

I would imagine that, if asked, the NCAA would argue that the $2,000 that they have generously allowed Mr. Gathers to legally earn while working as a student athlete should have been sufficient.

It obviously wasn't.

Again, a crime is a crime, so Mr. Gathers must pay for his.  But perhaps it's time to make crimes of some things that are currently legal so some others might be forced to adjust their behavior or be brought to justice.

KM

It's A Bird, It's A Plane....It's The Consumer Financial Protection Bureau

By Keenan Mann

There's a classic scene from the original Superman movie released in December of 1978.  In it, Lois Lane is dangling from a helicopter that is precariously perched, some fifty stories high, on the edge of the Daily Planet newspaper building.  After a few moments of struggling, Ms. Lane loses her grip and starts plunging to the ground as the assembled crowd watches helplessly.  I think you know what happens next, but since some things never get old, I've included a clip of that scene below for your viewing pleasure:

Lois Lane's perfectly timed and utterly practical reply to her hero has been etched in my memory ever since I first heard it all those years ago.

But, of course, that was just a movie.  In real life, there are no super heroes, although you wouldn't think so from reading the synopsis of the Consumer Financial Protection Bureau on it's website. I found myself there recently after reading an article that described how a federal appeals court had rejected a challenge to the constitutionality of the CFPB.  The article, "Challenge to Consumer Financial Protection Bureau Rejected by Appeals Court", was written for the Wall Street Journal by Brent Kendall.  It read in part:

"The decision was the latest loss for debt-relief firm Morgan Drexen Inc., which sued the CFPB in Washington in 2013, just weeks before the agency brought an enforcement action against the firm in a California federal court. The firm claimed that part of the Dodd-Frank financial-overhaul law that created the CFPB was unconstitutional. Among its arguments, the firm alleged the law delegated too much power to the bureau and allowed the agency to be funded outside the normal appropriations process.....In the California case, the CFPB alleged Morgan Drexen illegally charged tens of thousands of customers improper upfront fees for debt-relief services."

CFPB to the rescue!

Oh, and here's the synopsis on their website:

Creating the Consumer Bureau

Beginning in 2007, the United States faced the most severe financial crisis since the Great Depression. Millions of Americans saw their home values drop, their savings shrink, their jobs eliminated, and their small businesses lose financing. Credit dried up, and countless consumer loans—many improperly made to begin with—went into default. Today, we’re still in the process of recovering.

For many decades, rising wages and growing savings meant that American families tended to carry only modest amounts of debt. But wage stagnation that began in the 1970s—combined with rising expenses for housing, health care, transportation, child care, and taxes—pushed more families into debt. At the same time, households saw a significant increase in access to credit, and many of the old rules regulating credit were gone. In the 2000s, there were widespread failures in consumer protection and rapid growth in irresponsible lending practices. Many lenders took advantage of gaps in the consumer protection system by selling mortgages and other products that were overly complicated.

This left many Americans with loans that they did not fully understand and could not afford. Although some borrowers knowingly took on too much debt, millions of Americans who behaved responsibly were also lured into unaffordable loans by misleading promises of low payments. Honest lenders that resisted the pressure to sell complicated products had to compete with their less responsible competitors.

Even those who avoided the temptations of excessively risky credit were caught in its web. Those who never took out an unaffordable mortgage nonetheless saw the values of their homes plummet when neighbors lost homes in foreclosure. Those who used credit cards and home equity lines of credit judiciously saw across-the-board increases in interest rates on credit cards and contraction of outstanding lines of credit. And those who had saved regularly saw their retirement funds lose significant value and their cities and states cut back on services to make up for their own revenue losses. The costs of irresponsible lending were borne by tens of millions of American families.

In June 2009, President Obama proposed to address failures of consumer protection by establishing a new financial agency to focus directly on consumers, rather than on bank safety and soundness or on monetary policy. This new agency would heighten government accountability by consolidating in one place responsibilities that had been scattered across government. The agency would also have responsibility for supervision and enforcement with respect to the laws over providers of consumer financial products and services that escaped regular Federal oversight. This agency would protect families from unfair, deceptive, and abusive financial practices. The President urged Congress to give the consumer agency the same accountability and independence that the other banking agencies have and sufficient funding so it could ensure that powerful financial companies would comply with consumer laws.

In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau (CFPB). The CFPB consolidates most Federal consumer financial protection authority in one place. The consumer bureau is focused on one goal: watching out for American consumers in the market for consumer financial products and services.

In other words, the CFPB is saying, "Easy American consumers, I've got you."  But, knowing what we know about the over 100 trillion dollars of all-in liabilities that our government has, we should all respond to that reassurance as Lois did to Superman with, "Who's got you?"

And besides, even Superman, who was faster than a speeding bullet, more powerful than a locomotive, and able to leap tall buildings in a single bound, finally came to understand that even he couldn't save everybody all the time.  In one of the more poignant and meaningful scenes in the movie, upon realizing he had arrived too late to save Lois' life, Superman flew out into space and started circling the earth in a clockwise direction (since the natural rotation of the earth is counterclockwise).  When he was flying fast enough, he actually reversed the rotation of the earth and turned back time.  In doing so he was able to alter the sequence of events that led to Lois' death. The point of it all, to me anyway, was that you don't have to go around saving people if you set them out on the right path to begin with.

In the real world context that would mean arming people with practical knowledge about the benefits and perils of financial literacy and illiteracy.  And that would mean letting them know, for instance, that for-profit businesses exist to make a profit (which is perfectly fine).  It would mean teaching them about the effect of fees and interest rates on the money they borrow and the services they purchase. And, once they came to understand those very simple concepts, it would mean letting them know that if they freely chose to avail themselves of products and services that came with exorbitant rates and fees, they should not look to the government to save them because, unlike Superman, it couldn't do so without harming someone else.

Our politicians really should start to ask themselves whether they would be serving us better by creating faux hero agencies like the CFPB or by helping to create citizens who don't need heroes.

Of course, that would require those politicians to consider, in earnest, being something other than self serving, so don't look for that question to get asked any time soon.



KM

As The Obama Care Subsidy Decision Looms We'll Soon Find Out Whether Or Not It's Important To Say What You Mean

With King v Burwell set to be decided this month by the Supreme Court, we will soon learn the fate of the Obamacare subsidies for those who purchased their insurance through federal exchanges. The plaintiff in the case is arguing that the subsidies are illegal since the wording of the law clearly stipulates that subsidies are only available to those who purchase insurance through state established exchanges. Find below the basis for their argument:

From Wikipedia

The ACA legislation includes the language "enrolled in through an Exchange established by the State under 1311". As implemented by the IRS, ACA regulations use a more broad definition encompassing both the state exchanges and the federal exchanges set up under section 1321.[7] The legislation includes the phrase "established by the State under 1311" in nine different locations.

Internal Revenue Code section 36B, enacted as part of the ACA, includes the following provision:

In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.

(2) (a) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer's spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 [1] of the Patient Protection and Affordable Care Act, [...]

Secretary Burwell with President Obama

The plaintiff is claiming the federal subsidies harm him because without them he would not have to purchase healthcare insurance since the premium on the cheapest plan available to him would exceed eight percent of his annual income.

The defendant, which is essentially the federal government embodied by the current Secretary of Health and Human Services, Sylvia Mathews Burwell, is arguing that the intent of the law should carry more wight than the wording.

Meanwhile, President Obama, much to his discredit, is on a King v Burwell speaking tour of sorts, trying to win in the court of public opinion and perhaps even influence the esteemed members of the Supreme Court.  Here's what Obama said monday in Austria, according to the Wall Street Journal:

"There is no reason why the existing exchanges should be overturned through a court case. It has been well documented that those who passed this legislation never intended for folks who were going through the federal exchange not to have their citizens get subsidies,” Mr. Obama averred. That conveniently ignores comments by ObamaCare architect Jonathan Gruber,..."

You may recall that Jonathan Gruber, an MIT Economist who was one of the key architects of the Affordable Care Act, said on more than one occasion that they took advantage of the "stupidity of the American voters" in getting the bill passed.  But that's not even what the WSJ staff was referencing when they invoked his name.  Instead they were referring to separate statements he made on January 10, 2012 and January 18, 2012.  See the key parts of both statements below:

From Jan 10 statement according to Reason.com:

"...by not setting up an exchange, the politicians of a state are costing state residents hundreds and millions and billions of dollars....That is really the ultimate threat, is, will people understand that, gee, if your governor doesn't set up an exchange, you're losing hundreds of millions of dollars of tax credits to be delivered to your citizens." - Johnathan Gruber

From Jan 18 statement according to Reason.com:

"What’s important to remember politically about this is if you're a state and you don’t set up an exchange, that means your citizens don't get their tax credits—but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that's a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges. But, you know, once again the politics can get ugly around this." - Johnathan Gruber 

Clearly the ACA architects intended to coerce the states into setting up their own exchanges. And clearly that plan backfired as only 16 states set up exchanges.  That's when the powers that be in the administration decided to flout the law they had pushed through Congress and provide the subsides anyway, in direct violation of the law.

President Obama still sees nothing wrong with that.  In fact, he even backhandedly criticized the Supreme Court for even taking the case and at the same time suggested that they quickly do what most smart people would do when he recently said:

"And so this should be an easy case. Frankly, it probably shouldn’t even have been taken up. And since we’re going to get a ruling pretty quick, I think it’s important for us to go ahead and assume that the Supreme Court is going to do what most legal scholars who’ve looked at this would expect them to do.”

If you've ever wondered what elitism was, the quote above is as good an example of it as you'll ever see.  Mr. Obama is suggesting that the opinions of so-called legal scholars (that share his view of course) should be the guiding light.

Well, I'm no legal scholar, so pardon me for having an opinion, but it seems to me that if a law is written, explicitly requiring condition X to be in place before Y can happen, it would be quite easy, even for a layman like me, to determine whether the existence of Y was legal or not.

I hope the Supreme Court agrees.



KM

Investing Really Shouldn't Be Risky Business

By Keenan Mann

In the movie Risky Business, circa 1984, Tom Cruise, who plays a character named Joel Goodsen, has an adult-language philosophical moment with a college recruiter from the University of Illinois who has made a backhanded criticism of Joel's academic efforts after reading his high school transcript.  If it had not already been, I suspect that Joel's classic response, "You know Bill, sometimes you just gotta say, 'what the f#@k''', became a mantra for many who watched the film. After all, who could argue against the idea that one should live for the moment, given that life is short and stuff happens, right?

Well, New York Times financial writer, Jeff Sommers did - kind of anyway.  In a recent article, he shared this stunning conclusion based on research by Boston research firm, Dalbar: 

"The numbers show that most people who are lucky enough to have money to invest end up underperforming the markets by staggering margins. A big reason for that is living in the moment — acting in response to ephemeral events....Most of us would be much better off we focused relentlessly on the far horizon, sticking with a simple and cheap plan for getting there....When investors think short-term and try to time the market, they haven’t done very well. They have been leaving a lot of money on the table."


Mr. Sommer's also concluded the following based on data from Dalbar:

"For the two decades through December, Dalbar found, the actual annualized return for the average stock mutual fund investor was only 5.19 percent, 4.66 percentage points lower than the 9.85 percent return for the Standard & Poor’s 500-stock index. Bond investors did even worse, trailing the benchmark Barclays Aggregate Bond index by 4.71 percentage points.

In isolation, these figures, which aren’t adjusted for inflation, may seem small. But they aren’t when they recur year after year. In fact, because of the effects of compounding — in which a positive return in one year adds to your stash and can grow further in subsequent years — those annualized numbers translate into life-changing disparities.

Consider a $10,000 investment in the S.&P. 500 index. Using the Dalbar rates, my calculations show that with dividends, that $10,000 would grow to $65,464 over 20 years, compared with only $27,510 over the same period for the return of the average stock mutual fund investors.

That gap grows over time. At those rates after 40 years, with compounding, the nest egg invested in the plain vanilla stock index would grow to about $428,550, compared with only $75,680 for the average returns of stock mutual fund investors, a $352,870 difference. Disparities of this order have been showing up year after year in the Dalbar numbers. And with so many Americans forced to rely on their own investing acumen because of the decline of traditional pension plans and lax government rules about financial advice, these awful returns really matter."

So why do the index funds do so much better that the active mutual fund managers?  Well for one the fees are significantly lower with the passive index funds (recall rule number 4 of Warren Buffet's Five Bedrock Principles from Bob's recent post was, 'When in doubt, choose the investment with the lowest fee."

In addition to fees eating into the returns though, the aforementioned ephemeral events, which typically receive wide coverage by the news outlets, also play a big part. Those events can lead to big swings in asset (stock/bond) prices.  Those price swings in turn can lead to emotional reactions from investors, which, in turn, lead to emotionally based trading activity. Emotions in this context are bad. More to the point, emotions and investing don't mix as they often result in contra trading behavior. Buying high and selling low, in other words.

In that vein, I have a few friends and relatives that I help with their investing.  The first thing I've tried to gauge with each of them is their tolerance for risk (volatility actually).  I've basically said to all of them some form of the following:  "The market will go up and the market will go down. Sometimes it will go up big and sometimes it will go down big.   Over the long haul though it has always tended to go up.  But if you're going to panic when it goes down, then you shouldn't be in the market"

Warren Buffet has a little different take.  It been said that he advocates, "Being greedy when everyone else is being scared and being scared when everyone else is being greedy."  One interpretation of that philosophy could lead to in-the-moment type reactions.  Panic buys or sells based on market swings, in other words, which could work against the best of long term investment strategies.  Certainly that's not what Mr. Buffet is suggesting.  I think the correct interpretation isn't about greed at all but rather prudence, which requires having a plan and sticking to it.

All that read and understood, are you to conclude that living in the moment is bad?  That depends.  If you're talking about life events outside the investing world, absolutely not.  In those cases, take the advice of proffered in one of my favorite songs (video below) and dance.  

Or take Mr. Sommer's sage advice and, "Live for the moment, but invest for the future."


KM

Cops Can Be Thugs Too, But What Do We Do About It?

By Keenan Mann

By now, you have probably seen or heard about the video of the Texas police officer harassing and assaulting a crowd of young black kids who appear to have been attending a pool party in a suburban neighborhood in Dallas.  The entire video is disturbing, but there are a couple of events contained therein that are particularly so.  The first is the manner in which one young black girl was manhandled by this supposed peace officer.  The video clearly shows the young lady walking away after being told in the most crude, filthy and, disrespectful language possible to do so by the cop.  At that point, the cop, seemingly affronted by the fact that his uniform and his vulgar utterances weren't commanding any respect, grabbed the young girl from behind and pulled her back into the fray.  He then wrestled her to the ground, using some of the most severe hand to hand police tactics at his disposal

The scene is disturbing not only because this girl looks to be barely a hundred pounds (by all accounts she's fifteen years old) but also because she never appeared to be a threat to the officer and, once in his custody, never appeared to be fighting him,

That lead to the second disturbing incident in which two young black men, reacting on what appeared to be moral instinct rather than the common sense that should always be their guide in dealing with an authority figure who has a weapon, tried to come to the aid of the young girl who was clearly being assaulted by the cop.  With the girl sitting on the ground in the cop's grasp, the two young men approached and indicated their displeasure with the treatment the girl was receiving.  At that point, the cop jumped up and drew his weapon on the two boys and then proceeded to chase them with his weapon still drawn.  Then two other cops, who appeared to have been acting appropriately, rushed in and caused the first cop to lower his weapon.

All of this happened in broad daylight with young kids and some adults watching.

Another noteworthy thing on the periphery of this scene was the spectacle of two very polite young black men who were being forced to sit on the ground by a belligerent-for-no-apparent-reason cop. Their mannerisms were text book.  'But sir this' and 'but sir that' was all that could be heard coming from their mouths.  Still they were treated as if they had done something wrong.  The rogue cop even told them they were part of the problem when clearly it was the other way around.

As to what was the cause of the scene, apparently there was a pool party in a gated neighborhood. Someone who lived in the neighborhood got some passes for some of her non-resident friends. Then word spread about the party and kids without passes began jumping the fence to get to the pool.  At some point a resident (reportedly a white woman) took exception to the presence of the uninvited attendees and supposedly addressed one or more of them a niggers.  Apparently a physical altercation ensued and the police were called.  The aftermath is the subject of the scene below.

This incident occurred on June 5th.  The cop was put on administrative leave on June 8th.

What took so long and why was the punishment so inconsequential you ask?  Good question.

The answer is not that all police and police departments are racists.  And it's not that all cops are bad. It's that the system in which cops operate is designed to protect the good ones and the bad ones, even after the bad ones have shown themselves to be unworthy of protection.

Sadly, this cop works in the public sector and is protected by a public sector union, so his interests are being put ahead of those he has harmed.

The moral of the story?  When we organize agains ourselves, we always lose.  Public sector unions, in this case police unions, are a clear demonstration of this assertion.  If this cop couldn't have hidden behind his local union representative, he would have been tossed out on his butt three days ago. Instead, the good citizens of Dallas are paying his salary while he sits at home and we all watch police/community relations deteriorate further.
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I'm guessing he'll still lose his job, but it will take far too long to get there and that's a shame.

The system needs some fixin'.

Deming has been proven right again.



KM

Common Sense Investing for the Long Haul Should Be Both Easy and Extremely Successful ... Start Early, Buy Shares of Solid Companies and Stay the Course

Warren Buffett has a unique track record as a tremendously successful long term investor. His methodology has followed the common sense based way. In so doing, he's paved the way for the rest of us mere mortals.


The 'secret' lies in knowing, internalizing and adhering to the 'rule of 72' which reveals a simple mathematical reality --- money will double each time (1) the combination of years invested multiplied by (2) the average annual percentage rate of return (3) equal 72. It's as simple as 1-2-3.


By following this rule of 72 (4x18, 18x4, 6x12, 12x6, 8x9 and 9x8, as examples), and investing in a diversified portfolio of solid companies for the long haul, the results can be astonishing. This boring and unsophisticated method isn't sexy, but it is successful


My only argument with the following rules of the road attributed to Mr. Buffett is the one about diversification. The plain fact is that for those with a long term perspective and the emotional intelligence to stay the course when the 'fit hits the shan' from time to time, which it inevitably has done and will continue to do in the future, stocks for the long haul are the very best investment of choice.


The risk reward factor always favors stocks compared to fixed income, real estate, gold and other assets. And as interest rates are now at historically low levels, fixed income investments won't prove to be good investments for the foreseeable future, assuming we want our investments to earn more than the rate of inflation, which we do. Even target fund investors should beware.


Five Bedrock Principles for Investors is subtitled ' Brilliance isn't the only key to Warren Buffett's investing success. See rule No. 5:'


"The U.S. economy shrank last quarter. The Federal Reserve is widely expected to begin raising interest rates later this year. U.S. stocks are expensive by many measures. Greece’s national finances remain fragile. Oh, and election season already is under way in the U.S.


Investors who are tempted to sell risky assets and flee to safety don’t have to look far for justification.


If you are one of them, ponder this: Most of what matters in investing involves bedrock principles, not current events.


Here are five principles every investor should keep in mind:


1. Diversification is how you limit the risk of losses in an uncertain world.

If, 30 years ago, a visitor from the future had said that the Soviet Union had collapsed, Japan’s stock market had stagnated for a quarter century, China had become a superpower and North Dakota had helped turn the U.S. into a fast-growing source of crude oil, few would have believed it.


The next 30 years will be just as surprising.


Diversification among different assets can be frustrating. It requires, at every point in time, owning some unpopular assets. . . .


2. You are your own worst enemy.


The biggest risk investors face isn’t a recession, a bear market, the Federal Reserve or their least favorite political party.


It is their own emotions and biases, and the destructive behaviors they cause.


You can be the best stock picker in the world, capable of finding tomorrow’s winning businesses before anyone else. But if you panic and sell during the next bear market, none of it will matter.


You can be armed with an M.B.A. and have 40 years before retirement to let your savings compound into a fortune. But if you have a gambling mentality and you day-trade penny stocks, your outlook seems dismal.


You can be a mathematical genius, building the most sophisticated stock-market forecasting models. But if you don’t understand the limits of your intelligence, you are on your way to disaster.


There aren’t many iron rules of investing, but one of them is that no amount of brain power can compensate for behavioral errors. Figure out what mistakes you are prone to make and embrace strategies that limit the risk.


3. There is a price to pay.


The stock market has historically offered stellar long-term returns, far better than cash or bonds.
But there is a cost. The price of admission to earn high long-term returns in stocks is a ceaseless torrent of unpredictable outcomes, senseless volatility and unexpected downturns.


If you can stick with your investments through the rough spots, you don’t actually pay this bill; it is a mental surcharge. But it is very real. Not everyone is willing to pay it, which is why there is opportunity for those who are.


There is an understandable desire to forecast what the market will do in the short run. But the reason stocks offer superior long-term returns is precisely because we can’t forecast what they will do in the short run.


4. When in doubt, choose the investment with the lowest fee.


As a group, investors’ profits always will equal the overall market’s returns minus all fees and expenses.


Below-average fees, therefore, offer one of your best shots at earning above-average results.


A talented fund manager can be worth a higher fee, mind you. But enduring outperformance is one of the most elusive investing skills.


According to Vanguard Group, which has championed low-cost investing products, more than 80% of actively managed U.S. stock funds underperformed a low-cost index fund in the 10 years through December. It is far more common for a fund manager to charge excess fees than to deliver excess performance.


There are no promises in investing. The best you can do is put the odds in your favor. And the evidence is overwhelming: The lower the costs, the more the odds tip in your favor.


5. Time is the most powerful force in investing.


Eighty-four year old Warren Buffett’s current net worth is around $73 billion, nearly all of which is in Berkshire Hathaway stock. Berkshire’s stock has risen 24-fold since 1990.


Do the math, and some $70 billion of Mr. Buffett’s $73 billion fortune was accumulated around or after his 60th birthday.


Mr. Buffett is, of course, a phenomenal investor whose talents few will replicate. But the real key to his wealth is that he has been a phenomenal investor for two-thirds of a century.


Wealth grows exponentially—a little at first, then slightly more, and then in a hurry for those who stick around the longest.


That lesson—that time, patience and endurance pay off—is something us mortals can learn from, particularly younger workers just starting to save for retirement."


Summing Up


There you have it.


Simple rules for long term successful investing.


For long term investors, it's that last double (or two) that will determine an individual's investing success over the years.


So starting early and staying the course is essential.


In the end, our emotional side will prove to be as, or perhaps even more, important than our rational side.


That's my take.


Thanks. Bob.

Free Choice and Taxing Americans

Americans are free to choose where to live and work and spend our own money (the 'my own money' MOM way). That freedom to choose how to spend our own money doesn't extend to taxation and K-12 education, of course, but that's another story for another day.

Politicians are 'in business' to spend the people's money by taxing as few as possible as much as possible and then borrowing the rest, thereby postponing tax increases for after they have left office.

But it's all getting out of hand and coming to a head as politicians have overspent and overpromised excessively through the years. They are trying to levy taxes on anyone who has money but not many votes. And that brings us to corporations.

Of course, corporations don't really pay taxes --- people do. In some cases, it's the shareholder and in others, it's the consumer in the form of higher prices. But make no mistake. People pay taxes and not inanimate entities such as business enterprises.

Connecticut Tax Boomerang relates the developing story of taxation in 'revenue challenged' states these days. Politicians and residents of Illinois, New York, Massachusetts, California and lots of other states should take notice:

"The last time we visited the formerly great state of Connecticut, Democrats were preparing to raise taxes again after promising not to when they ran for re-election in 2014. This week they did the deed, and the politicians seem shocked that the business community is in revolt.

The blue-state paragon’s two-year budget of $40.3 billion includes a $1.5 billion net increase in taxes and fees. The top marginal individual tax rate rises to 6.99% from 6.7%. But the biggest blow is making permanent a 20% surtax on a company’s annual tax liability—a tax on a tax—and for the first time taxing Connecticut companies on their world-wide income, rather than what they earn in the state.

General Electric, long a Connecticut fixture, protested that the state is “retroactively raising taxes again,” which “makes businesses, including our own, and citizens seriously consider whether it makes any sense to continue to be located in this state.” Aetna, the giant health insurer and pillar of Hartford, said the bill would “undermine the competitiveness” of companies and “lead to an exodus of jobs and business from the state.’’

The biggest shock came Thursday when GE CEO Jeffrey Immelt told the company’s Connecticut employees that he has “assembled an exploratory team to look into the company’s options to relocate corporate HQ to another state with a more pro-business environment.”

Mr. Immelt . . . said Connecticut had raised taxes on GE five times since 2011. “I believe we should pay our fair share and that all of us should give back to our communities,” he wrote. But he added that “we can compare Connecticut with other states where small and large businesses have a better environment to thrive and compete.”

Democrat Dannel Malloy, the nation’s worst Governor since Pat Quinn lost in Illinois, quickly replied that he’s open to tweaking the latest tax punishment. And perhaps he is—for big companies like GE or Aetna. These are high-profile outfits that can do him a lot of political harm if they flee.

But what about the small and medium-sized companies that can’t get headlines from a press release? These unheralded employers are the lifeblood of any state’s economy, and they haven’t been investing or hiring as Connecticut’s economy has stagnated under the tax and regulatory assault from Mr. Malloy and his public-union allies.

Connecticut is now on the Illinois treadmill of higher taxes, which leads to slower growth and less revenue, which prompts another tax increase, and so on. Congratulations to Mr. Immelt and Aetna for speaking out. The best way they could help the people of Connecticut now would be to leave the state, which might finally shake the public enough to stop electing politicians who think they can fleece the private economy without consequence."

Summing Up

Freedom is a terrible thing to waste. And as American citizens we are free to choose the cities and states where we live, work and pay taxes --- even the politicians we elect to 'represent' us.

Nevertheless, our elected politicians of all stripes have been playing silly and expensive games and 'taxing' the goodwill of the American people for far too long now. Their actions and inactions have made the American economy weaker as well.

We the People, wherever we live and work, need to speak up and act like it's our country --- because it is.

And living within our means and taxing 'ourselves' as little as possible are both necessary and worthy objectives for all Americans, including our elected 'representatives.'

That's my take.

Thanks. Bob.

The Role of Education, Graduation and Knowledge in Realizing The 'American Dream' .... As More Americans Work Hard to 'Live the Dream,' The Better and Stronger Our Land of Opportunity Will Be

We like to think of America as an egalitarian society where through hard work, sustained effort and education, anyone can climb from the bottom to the top of the ladder, or as is more likely the case, at least do better economically than prior generations have done. Living the American Dream today is still definitely doable, but it's not an automatic given.

And success takes both individual effort and the support of others. Many of us receive that needed support from our parents --- but some don't. That's where the need for a broader community effort comes into play.

{NOTE: Higher education is an important ingredient in the pursuit of material success, but the word education includes all legitimate credentials, however attained, including technical and community college degrees. In this regard, please refer to A Bachelor's Degree Isn't the Only Path to Good Pay which is subtitled 'Evidence shows that associate degrees and specialized-training certificates can also lift workers into the middle class.'}

In any event, economic mobility and the opportunity to make our own road makes up American Exceptionalism. Striving for economic success, however we choose to define that term, definitely plays a big role in reaching for the 'American Dream.' And whatever we choose to do or try to do, the goal of 'reaching for that which currently exceeds our grasp' is definitely worth pursuing with conviction.

But if we're truthful about what it takes to reach this often elusive 'American Dream,' it's necessary to acknowledge that it's simply not as easy for some to climb the ladder of opportunity as it is for others. The American dream of equal opportunity isn't ever really an equal one in fact. Opportunity is never perfectly equal, and this inevitable condition of inequality starts at birth and continues uninterrupted throughout our lives. But our opportunities as Americans are less unequal here than any other place on earth, and that's good enough for me. I suspect it's good enough for you as well.

Those who are fortunate enough to grow up as part of an intact family with educated parents and a healthy financial situation have a clear head start in life. While that shouldn't surprise anybody, a new study sheds meaningful light on how difficult it is for the poor to succeed in America compared to the middle class.

Why the American Dream is Unraveling relates the story of the plight of the poor compared to the inherent advantages of growing up in middle class America:

"In “The Adventures of Huckleberry Finn,” the young protagonist gripes about his adoptive mother’s efforts to “sivilize” him — particularly at the dinner table, where he observes that each dish is cooked and served separately.

“In a barrel of odds and ends it is different;” Finn says. “Things get mixed up, and the juice kind of swaps around, and the things go better.”

I thought about that line while reading Robert Putnam’s “Our Kids,” a jarring study of the growing opportunity gap between rich and poor children. America would like to think of itself as Huck’s “barrel of odds and ends,” a kind of democratic stew. But, as Putnam shows, our society is increasingly more like his adopted mother’s meal, with each dish cooked separately and cordoned off into different compartments on the dinner plate.

The upper-middle-class families Putnam profiles separate themselves into affluent suburbs, with separate public schools and social spheres from those of their poorer counterparts. As a result, the poorer children not only face greater hardships, but they also lack good models of what is possible. They are effectively cut off from opportunity.

“The most important thing about the experience of being young and poor in America is that these kids are really isolated, and really don’t have close ties with anybody,” Putnam [said}. “They are completely clueless about the kinds of skills and savvy and connections needed to get ahead.”

His analysis shows how family structure, parenting practices, schooling and health habits correlate with diminishing opportunities for poorer children.
For instance:

Children of poorer, less educated parents are far more likely to grow up in single-parent homes.

                        

Educated, wealthier parents are able to devote considerably more time to childcare.

                                       

 Due to lack of support networks and good models, perhaps, the highest-scoring poor children are less likely to graduate college than the lowest-scoring wealthy children.

                                                                          

Putnam does not fault the wealthier parents for seeking the best for their children. “Perhaps unexpectedly, this is a book without upper-class villains,” he notes.

But he makes the case that it’s not only in the moral interest of wealthier families to help improve the prospects of poorer children but also in their own economic interest. The U.S. economy would get a major boost if the opportunity gap were closed, he says. We cannot continue to live in our own bubbles, or compartments on a plate, without consequences, he suggests.

“What I hope people take away is that helping poor kids, giving them more skills and more support would economically benefit their kids,” Putnam said."

Summing Up

Many of us grew up in families where our parents hadn't attended college. They worked hard and sacrificed in order that we could have the opportunities they never had. For us to achieve a solid education and start in life was often their 'dream.'

In other words, many of our parents 'encouraged' us to do what they had not been able to do --- get a good education by going to and graduating from college. 

So it's never acceptable for us as individuals to claim that we can't do that which our parents were unable to do. In fact, we're always supposed to do what they weren't able to do. That's a vital ingredient of living the 'dream.'

The American opportunity for living a 'good life' and achieving upward economic mobility is real. But exercising that choice and making the required effort in order that 'our reach can exceed our grasp' is for each of us to decide.

Still, those of us who have been fortunate would be well advised to offer a helping hand to those who follow --- and especially the less fortunate among us. Taking the time to 'look back' and lend a helping hand is also an important part of being an American.

We'll finish today's 'sermon' with three related questions.

(1) Since freedom of choice is also an integral part of the American way, when will we start allowing parents to use taxpayer supported vouchers so their kids can attend the schools of their choice? It won't cost today's taxpayers anything, and it would make a stronger and better America tomorrow.

(2) And while the teachers' unions and other defenders of the educational status quo won't like that idea, so what? Whose country is it, and don't We the People owe at least that much to today's kids and tomorrow's adults?

(3) Isn't it a national shame that we are not realizing better educational outcomes by not extending a helping hand to those who need one?

That's my take.

Thanks. Bob.

Simple 'Rules of the Road' to Be Followed When Considering Investment and Other Financial Advice

There are three fundamental 'rules of the road' which individual investors should follow when investing in stocks, bonds, and other asset classes.

These rules of thumb should also be adhered to when considering such things as student loans, credit cards, car loans, home mortgages and home equity loans.

It's the simple adoption of the MOM (My Own Money) principle and practice of personal financial management.

We'll begin our journey today with financial assets and three keys to properly selecting investment advisers when choosing mutual funds. Picking Active Funds: Look Beyond Performance contains useful advice for long term investors:

"Stock pickers might be making a comeback, or at least their performance so far this year suggests so. But figuring out how to choose the best fund to put your money in may not be as easy as picking the best performer.

Here are three measures to apply in evaluating an actively managed stock fund:

The cost

Index funds are on average cheaper than actively managed funds. The average U.S. stock index fund has an expense ratio of 0.73%, compared with 1.24% for stock funds that are actively managed, according to researcher Morningstar.

But some actively managed stock funds are much cheaper than others—and lower costs generally put investors in a stronger position to log higher total returns. Indexing giant Vanguard Group is one company known for low fees on actively managed funds, but historically active managers like Fidelity Investments also offer low-fee products.

Is the manager really active?

The last thing you want to do is end up with a so-called “closet indexer,” a fund manager that charges a higher fee than an index fund but is essentially running one anyway. “You can’t beat the index unless you differentiate yourself,” says Morningstar analyst Alec Lucas.

Some in the industry use a measure called “active share,” which looks at the extent to which the holdings in an actively managed portfolio differ from those of a benchmark index. But keep in mind that being different from an index is no guarantee of market-beating results: The manager might choose stocks that perform worse.

Skin in the game

An important but sometimes overlooked metric is how much a fund manager has invested in his or her own fund. The Securities and Exchange Commission requires fund managers to disclose how much they hold in a fund, but not very frequently and only in a dollar range.

That ownership information can still be useful though. In a recent study, Morningstar found that funds in which managers invested nothing had the lowest success rate, while those funds whose managers had more than $1 million invested had the highest. (The information is in the fund’s Statement of Additional Information, often available on the fund company’s website.)

“If it’s your own money, there’s more incentive to pay that much more attention” to performance, Mr. Lucas says."

Summing Up

Don't pay for what you don't get. In the mud of the marketplace, it's best to follow the caveat emptor way each day and all day --- aka 'Let the buyer beware.'

And try hard not to trust and not to do business with someone who is primarily interested in getting his hands on as much money of yours as he can.

Understand the long term relationship of ongoing costs incurred to eventual rewards realized.

And know that money not spent on the non-expert 'experts' is available to you and can be invested the MOM way for the long haul.

Finally, and early in life, get to know and internalize the rule of 72. The effect of compounding is real and it's huge.

The rule of 72 applies to reading and writing, financial knowledge, debt management, asset accumulation, cost control and a life well lived.

That's my take.

Thanks. Bob.