WHAT NOW? TIPS FROM FROM THE EXPERTS
6-16-09 NYTimes "Greed Layered on Greed, Frosted With Recklessness"
- "Fool's Gold" and "Dumb Money"
Michiko Katutani reviews two books on the financial meltdown: "Fool's Gold" by Gillian Tett and "Dumb Money" by Daniel Gross. Read these books if you want to know why we're in the biggest recession since the 1930s.
Excerpts from "What Now?" by Jeffrey Goldberg in The Atlantic, May 2009
Jeffrey Goldberg, a successful writer who has recently lost a third of his life savings after "paying a premium for quality research" advice from Merrill Lynch and others, asked a number of investment gurus what he should do now? Here are some exerpts from the experts ranging from Robert Soros to Bill Gross to survivalist Cody Lundin. I think you may find the answers he got amusing if not a solution to your financial future.
Richard Bernstein, Merrill Lynch chief investment strategist--Extend your financial horizon; the probability of losing money decreases as the time horizon lengthens; "You have to give an investment strategy time to reach gestation."
[Goldberg--"But my investment strategy gestated for 15 years. Then it died."]
Daniel Kahneman, Nobel prize behavioral economist--"You no longer know the world you live in. You played by the rules, the rules benefited you.The world functioned according to some regularities. Right now, it's unclear what rules apply. There is a new regime. What seemed prudent earlier has disappeared. I'm surprised Americans aren't more panicked. "
Robert Soros, son of George Soros and deputy chairman of Soros's fund, told me that my crucial mistake was to believe that the brokers and wealth managers and cable-television oracles who make up the financial services complex actually had my best interests at heart. "You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right? It's not. It never has been. Wall Street is a place where whatever can be sold will be sold. You are the consumer of their dreck. What they can sell to you, they will sell to you."
"But they told us..." "They lied. Do not for a moment think that a brokerage firm is your friend."
"So who's my friend?"
"You don't have one. This is the market."
"So, what about Chuck Schwab?"
"All brokers move products based on volume and commission."
Goldberg asked Larry Gellman, finance industry iconoclast, why Merrill had stopped calling. Gellman: "If the head of Merrill Lynch and every other investment bank had their way, no individual broker would ever recommend an individual stock or bond to a retail client again. They have gotten out of the brokering and advising business and gone all in to the "wealth management" business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don't lose all of it at once. And, by the way, people with less than $10 million need not apply."
At a gathering of financial gurus at the Fifth Avenue apartment of Boaz Weinstein, one of the early innovators of credit default swaps, Goldberg found a veritable golden lode (or load?) of investment advice. Two friends separately and quietly suggested that Goldberg buy gold, and right now, "to guard against the massive debasement of the dollar." Then another friend approached--"You don't want to be long gold. The dollar is the currency of last resort for the entire world. There's little chance of debasement." Goldberg asked Bill Ackman, founder of Pershing Square Capital, "What is your advice right now for an investor with $50,000-$200,000 to invest?" [The wizards in the room were having difficulty calculating figures of such humble size, reacting as if I had asked Bill "I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?"]
But Ackman answered--"First, it depends on when you're going to need the money. You have to be prepared to put your money away for 5 years or more. Buy a house. I think it's a great time to buy a house. But put a 20 percent down payment, get a good mortgage...The rest put in a very broad index fund--a Wilshire 5000 type index fund..." [ Goldberg--"I think Ackman might not have been accustomed to talking to people like me, which would help explain why he sounded suspiciously like a Merrill Lynch financial adviser."]
Goldberg asked Ackman "What are the chances we're going into that death spiral?"
"We're in it!" Ackman replied. "Whether or not we're going to die is another question."
"What's the chance we're going to move to a barter economy?" Ackman: "I think it's small." I was hoping it was zero.
Cody Lundin, survivalist standing outside barefoot in shorts in a foot of snow--"The way I see it, it's all a con game Wall Street has always been an illusion. Now it's an illusion that's crumbling." Lundin advised that I try making a fire with sticks, eating mice and going without electricity for a week "to see where it hurts." Lundin himself eats mice and rats he traps at his off-the-grid passive solar house in the wilderness because "why waste protein?"
On investing, Cody said "I don't believe in the intangible economy; I believe in the tangible economy, I buy tools, food, or land. I like to be able to see what I'm buying. And I really don't like debt, so I'd rather not hav certain things than be in debt to anyone. I just feel better that I don't owe money, and I feel good knowing that I can take care of myself."
Bill Gross, bond guru founder PIMCO--"Thrift, not mouse-eating thrift, but more moderate forms of thrift--is quickly becoming the norm, as a result of society's massive over-leveraging. Risk taking went over the edge. We are inventing something new. We're very afraid. mentality for the rest oWe know from the Depression that people who lived through it didn't change their socks.mentality. For the rest of their lives they were sewing their socks. They refused to take a lot of chances. My sense is that it will take 10 or 20 years to find that spark of risk-taking in people again."
Seth Klarman, leading value investor, apostle of Benjamin Graham, author of value investing Bible "Margin of Safety"---"It's always smart to prepare for disaster. In investing that means holding disaster insurance...The overwhelming majority of people are comfortable with consensus, but successful investors tend to have a contrarian bent. They like stocks better when they're going down. People panic when when stocks are going down, so they like them less when they should like them more.
One of the themes of "Margin of Safety" is that people like Goldberg aren't equipped to be investors. "No one knows what he's doing unless he's a full-time professional. As in many professions, full-time professionals have an enormous advantage. He agreed with Robert Soros that Wall Street treats the small investor not as a client but as a source of ready cash. The average person can't really trust anybody. They can't trust a broker, because the broker is interested in churning commissions. They can't trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them. And now it's even worse because even the most sophisticated people have no idea what's going on."
Klarman asked Goldberg if he had a mortgage and whether the amount he owed on the mortgage exceeded what he had invested in the market and if he liquidated his stocks he could pay off his mortgage. Goldberg replied that he could. Klarman--"So you are leveraged. Why are you keeping your money in the market? It's because you think you're going to make more in the market than the interest you're paying on the mortgage? Goldberg--"Yup." Klarman, "Well, are you?" Goldberg, "Uh, no, but I'm getting the mortgage interest deduction."
Klarman, "Yes the interest is deductible. buit if you had capital gains in the market, you'd pay taxes on those. In the aftermath of this financial crisis, I think everyone needs to look deep within themselves and ask how they want to live their lives. Do they want to live close to the edge, or do they want stability? In my view, people should have a year or two of living expenses in cash if possible, and they shouldn't use leverage anywhere in their lives."
Goldberg asked Bill Gross what he should do. Gross repled "The system is rigged. It's difficult for the average investor to even conceptualize what we're talking about. For this reason I think financial advisers are still worthwhile, but the average investor can no longer pay them what they felt they were worth. You should find someone who isn't over-promising or overcharging."
Klarman--"There's enormous pressure to provide conventional advice and tremendous pressure against providing unconventional advice. Advisers only recommend what's conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they're not likely to move away from that, not matter how extreme valuations are. They're not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn't a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor isn't getting Warren Buffett to look at his portfolio; he's getting a printout from a computer mode."
Goldberg concludes "I no longer expect to get rich. It makes me happy to realize this. It also makes it easier to give more money to charity. In retrospect, I can't imagine what led all of us to believe that we could regularly expect double-digit annual returns on our money, for doing no work. Maybe this attitude will cause me to miss the next great run-up. No matter. I'll take 3 or 4 percent gains a year, or 1 or 2, if necessary. I'll keep mre cash on hand. I'll keep a two-week supply of meals-ready-to-eat, bottled water, and lanterns in my basement. If things get bad, I'll take my family and drive west, to find Cody Lundin. And if the bottom truly falls out, I'll find a mormon and ask him, politiely, if he'll share."
Follow the above advice and you can't go wrong! Good luck!
Stock Market Analysis for Sophisticated Investors Only
- Stock Market Analysis for Sophisticated Investors Only
Hedge Fund Blues Merle Hazard Meets Arthur Laffer and Sings "In the Hamptons."