Seeking Alpha

Joseph L. Shaefer's  Instablog

Joseph L. Shaefer
  • on Portfolio Strategy & Asset Allocation
Send Message
Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. Joe retired as a senior executive at Charles Schwab and Co. to found Stanford Wealth Management, LLC, in 1990. He also spent 36 years in a very different leadership... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
View Joseph L. Shaefer's Instablogs on:
  • “Because We Can’t Afford It:” Reining in Government at All Levels

    [New Plan: SA requests that articles have an investing theme and, preferably, recommendations -- reasonable, since this is an investing site.  But some issues that affect investing don't fall neatly into that category.  Like, say, how the country is being run.  But doing justice to the subject requires more than just a comment.  It's those kinds of articles I'll post on my Instablog going forward.  Like this one...]

    I didn’t think I was poor growing up because everyone around us lived in the same apartments and drove the same cars, etc.  That was what it was like growing up in the enlisted areas of military bases in the 1950s.  It caused me no offense when I asked my parents if we could go to Disneyland and they answered, “No, son.  We can’t afford it.”  This seemed then, as now, a perfectly logical rejoinder to me.  So I went outside and played sports and we had a barbecue at the neighbors’ house that Sunday.  Disneyland, no.  Sports and BBQs, yes.  I certainly didn’t feel deprived.

     

    When I got older and we lived on the local economy, the disparity in wealth and toys was more visible.  Some of the rich kids drove 1964 GTOs, some of us drove ’57 Ford Fairlanes we paid $345 for.  The trade-off was, they got the shallow girls, we got to learn a lot more about mechanical stuff!  I didn’t resent them for having something I didn’t; I just resolved to do well in life so if I wanted a ’64 GTO I could buy one.

     

    We seem to have forgotten the lessons our Depression-era parents or grandparents (OK, for most readers, great-grandparents) taught us: “We can’t afford it” is an OK thing to say.  There is no shame in it, particularly in a nation and culture in constant flux, where mobility is a constant and upward mobility a constant desire. 

     

    I note this because I just saw the latest USA Today Gallup Poll that found nearly 5 of every 8 Americans “opposing” the question, “Would you favor or oppose a law in your state taking away some collective bargaining rights of most public unions?”  That wasn’t the shocker.  Even though collective bargaining in recent years has broken down over such “job” issues as which colors are most soothing for a worker’s break area and dictating what the proper temperature will be for school classrooms, Americans still have this notion that fair play means unions should hold the power to force concessions from “management.”

     

    Of course, unions in the private sector need and, in most cases, have that sort of “equivalency” power.  They use it to ensure safe working conditions, health care coverage, and many other workplace essentials as well as, let’s face it, to grant seniority to those who have been paying union dues the longest and to get the most salary and benefits they can.  All of which makes sense for them and, ultimately, for the private sector.  After all, the natural check-and-balance that makes the Hegelian dialectic work in this environment is that the workers know better than to push too hard, lest the company fail and they all end up out on the streets because of their own greed.  So they get as much as they can within reason.

     

    Regrettably, the same dynamics do not apply in the public sector.  “Management” – in this case the politicians whom the taxpayers elect – have had no incentive to push back against any public sector union demand.  All it would do is cost them votes and create saboteurs within the system.  How would it look to have “your” employees carrying signs for your opponent in the next campaign?  Besides, it’s all tax (“shareholder”) money, not “management’s”, so why not just give the public sector unions what they want and keep peace in the family?

     

    But even if public sector unions were like private sector unions, and even if it were an honest negotiation between the two parties, the American public still seems incapable of saying, “We can’t afford it.  For, as the poll went on to show, even though our government entities are broke – in many cases hard-broke – 71% of those polled oppose increasing sales taxes, income taxes or any other taxes to be able to balance the budget.  53% oppose reducing pay or benefits for government workers.  And 48% oppose eliminating or even reducing any state government programs, funded or unfunded.  (With 47% in favor and 5% “Don’t Know.”)  PS – I can understand the decision not to take part in a poll; I regularly turn them away.  But once you’ve signed up for the thing, how can you “not know” whether you oppose or favor the concept of eliminating or not eliminating the annual “Pull a Weed Day” parade?

     

    The point is, would 71% of Americans, in their personal lives, decide they can keep spending more than they make every year?  Would 53% say it’s OK for management to take an outsized piece of the corporate pie even as their own real purchasing power is declining?  Would 48% willingly give an extra 10 or 20 bucks to the door-to-door solicitor who pleads to keep the “Pull a Weed Day” parade going?  If we can’t afford such incongruities in our everyday lives, why then are we willing to accept them in our collective and community lives? 

     

    As Mr. Dickens observed so wryly and so long ago,

    “Annual income twenty pounds, annual expenditure nineteen six, result happiness.

    Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

     

    The annual income of our federal – and most states’ – budget is twenty pounds.  Their annual expenditure is as much as forty pounds.  Stop the madness!!  Repeat after me, “We can’t afford it.”

     

    What to do at the individual level to correct this horrid non sequitur? Like you, I think tax rates are quite high enough, thank you, but I don’t mind paying more in taxes.  So my plan is to make the smartest investments I can in the best companies I can find and raise the amount of my annual profits so I make an even larger contribution, via my taxes, to the fiscal health of my state and my country.  If you and I do our part to increase the amount of money paid in taxes in this manner, we have every right to expect government to trim its spending, cut dumb programs that we can’t afford, and rein in the ridiculously high pensions and benefits some local, state or federal workers enjoy (usually heavily slanted in favor of those at the top and those who’ve stayed the longest, but I repeat myself.)

     

    It could happen. It’s not likely, but it could happen!

     

    Rather than discuss specific securities or sector recommendations, may I instead leave you with this “macro” investment suggestion: try to buy good value at low prices; that would be the investing corollary to the above -- “We can afford this because it represents good value.”  And say, “We can’t afford it” when it doesn’t represent good value.  It’s the same, whether in politics, economics, or investing.   
    If we can’t afford it, we shouldn’t be doing it.  If you would like our take on what is affordable today in the investment world, you are welcome to review our previous articles for your own due diligence… 

    Mar 09 2:35 PM | Link | 48 Comments
  • Winning “The Money Game” – Timeless Classics, Final Selection

     

    This is the final review of the Top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My criteria to be a “classic”? Brilliant and original investing insights and accessible writing that still speaks to us today. To be considered a “classic,” the book must have stood the test of time. These 10 qualify; they were published as far back as 169 years (and as recently as 43 years) ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since... (Of course, if you want to buy my more recent book as well, who am I to discourage you?!!!)

     

    In chronological order of their original publication, here are the preceding 9 reviews:

    Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)

    The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)

    Reminiscences of a Stock Operator, by Edwin LeFevre (1923)

    Security Analysis, by Graham & Dodd (1934)

    The Battle for Investment Survival, by Gerald M. Loeb (1935)

    Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)

    The Intelligent Investor, by Benjamin Graham (1949)

    The Art of Contrary Thinking, by Humphrey Bancroft Neill (1954)

    Common Stocks and Uncommon Profits, by Philip Fisher (1958)

     

     

    And now #10, written in 1967 by ‘Adam Smith’, the pseudonym used by Jerry Goodman, a successful novelist, screenwriter, non-fiction writer and (hence the pseudonym when writing about Wall Street and stock markets) the former editor of the financial monthly Institutional Investor.

     

    I began this series with Charles Mackay’s  1841 Extraordinary Popular Delusions and the Madness of Crowds.  It is only fitting to end with The Money Game.  Both books, though written 126 years apart, offer timeless insights into how investors (including, in the latter book, allegedly “professional” investors) provide substantive food for thought on how investors make and lose money in the markets. 

     

    Mr. Goodman delves a bit more deeply into fundamental  and technical analysis, accounting practices, behavioral finance, random walk theories and such than Mr. Mackay did, but in the final analysis the game is about the players, not the rules or the features of the board.  Some players are serious solely about leaving with a greater net worth than they came with; but others are motivated by a desire to win, or to beat others (not always the same thing), or to get the adrenalin flowing, or to avoid bigger decisions, or for a myriad of other reasons.  Understanding this makes the vagaries and vicissitudes of the market easier to accept, if not to understand.  As he says most succinctly in his first Irregular Rule: “If you don’t know who you are, this [the market] is an expensive place to find out.”  But the most important Irregular Rule, still dealing with people, albeit in this case the people you want to see running the companies whose stocks you own, is “…find smart people, because if you can do that, you can forget a lot of the other rules.”  (Predating Warren Buffett by some number of years…)

     

    In the second paragraph of the very first page of the book, Goodman tells you what it’s all going to be about: “This is a book about image and reality and identity and anxiety and money.”  When he says “image,” he refers to what government or a corporation or Wall Street tells you is true.  When he says “reality,” he refers to what is really true. As he pens a bit further on, echoing Mackay, as well as great investors before and since, “Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes…”

     

    After devoting Part I of the book primarily to market and investor psychology, he turns in Part Two to “Systems,” be they academic roads to finding the perfect and occasionally efficient frontier or the technicians’ zeal to be right, even if they are not rich.  One may say every day that prices can be predicted from the past moves, while the other says (this week) that there is no way to beat the market, so you may as well simply buy an index fund.  Which is the best system?  Neither – and none, including today’s quants’ belief in the infallibility of computers, algorithms and programmed trading.   Goodman shows that all “systems” depend on analyzing something that has happened before to predict what will happen next.  This may well work in academic papers or in an algorithm, but you cannot reduce the whims of 50 million souls to an algorithm.  And you never will.

     

    In Part III, the author deflates any notion that the “professionals” have any special relationship with the Clue Bird that is unknown to the average investor.  True they have more information – but they have no better information.  And they are as subject to the emotions of their Everyman counterpart when faced with making the tough decisions.

     

    If some of these conclusions seem obvious, it is not because they were once obvious, but rather because authors like Jerry Goodman made such a convincing case that we finally began to take them as truisms.  The delightful discovery here is that he does it with great wit, great verve, and great humor.  Good writing about a great subject or great writing about a good subject, the result is the same: a great read.

     

    Think not that this book is dated, any more than  a mere 159 years makes Extraordinary Popular Delusions and the Madness of Crowds dated.  Whether it is the Go-Go Sixties of Goodman’s day, the dot-com New Economy Nineties, or the Real Estate Will Never Decline 2000s, those in the game rely more than they know on their passions, hopes, and dreams.  Just change the names of the companies or the sectors and you’d never know which of these periods, or some other, you were in.  Reading The Money Game will give you that perspective – and maybe even a shot of inner peace for context!

     

     

     

    Disclosure: No positions mentioned. These books are about lifetime knowledge, not flash-in-the-pan trading.

     

    Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

    Dec 27 11:36 PM | Link | Comment!
  • If Citi’s 2011 Prediction is Correct, Look Out Below!


    As Mark Twain once said, “History doesn’t repeat itself, but it does rhyme.”

     

    If you agree with the estimable Mr. Twain, then a combination of:

    Investor sentiment near all-time highs,

    The paucity of analysts forecasting anything but rosy times in 2011,

    An unusual lack of volatility, and

    Complacency on the part of investors to the point of not even bothering to check prices, then…

    This recent report from Citi’s research department on the prospects for 2011 makes for a chilling potential “rhyme” with some ugly past markets.

     

    The table below comes from Citi, though I first saw it reproduced in an article at a website called lateralthinking.biz, to whom I give full credit.  Quoting from the Citi analysts:

     

    "Over the course of this year we have constantly referred to what are the only three market overlays we think fit with the current price action in the stock market.  Our favorite for some time has been the spooky chart of 1929-1939, which we have been watching since 2003. A very close second- but fast becoming a potential number 1 choice has been the overlay of 1966-1976. And a relatively distant third has been the chart of the 1906-1909 period.

     

    "It is these charts that have led us… to surmise that 2011 will not be a good year for the stock market.” 




    Here is the chart to which they refer:

                                                              

    Citi’s analysts continue:

    "Bottom line: Our favorite overlays suggest for the DJIA:

    The market peak may be posted as early as the opening days of January, 2011 (possibly even January 3 as per the other three examples) with a down January in the region of 5%.

     

    We will see an intra-year bear market next year (a decline of more than 20%).

     

    We will close the year down double-digit percentages (approx. 16%).


    "What will that catalyst be?  Likely one of two things:

     "The bond market falling sharply as it did in 1977, sending yields higher and fuelling inflation, or supply fears, or both.

     "Europe imploding. While this could stress our positive view on the dollar, fixed income, and commodities, this dynamic still supports our bearish equity view."
     


    I don’t share their view that we must rhyme with the “spooky chart of 1929-1939,” but I share their concerns that most investors and almost every single analyst predicting 2011 are collectively whistling past the graveyard. 

    I believe the level of complacency right now is typical of lemmings following each other saying bemusedly, “Hey, where’s everybody going?  And shouldn’t I be a part of it?” 

    Like Citi's analysts, I believe we will experience a pullback some time beginning in the first quarter.  This will come as a disappointment to our clients and subscribers, as well as most Seeking Alpha readers, because we are, all of us, tired of this nonsense!  We’re ready for a market we can invest in and leave our funds in without having to watch it like a hawk or trade in and out of.

    We’re close, I believe – but not quite there yet.  This kind of complacency demands at least one more shakeout.  But where I part company with Citi’s scenario is 2011 after a lesser shakeout has run its course.  Even if they are correct and the market were to plunge 20% -- a scary ride for those 100% invested – I think it will recover along with the US and global economy.  Ireland, Greece, and US home sales get all the headlines right now, but other nations and other sectors of the US economy are both undergoing upward revisions, increased sales, lower costs, higher quality, etc. These are the inevitable results of economic recessions.  Stock markets?  Their machinations are considerably harder to predict!

    If Citi is correct, what would 2011 look like?  You don’t have to imagine it.  My friend and competitor Sy Harding at streetsmartreport.com has drawn the following chart of the years 1938-1940, which history shows does bear an uncanny resemblance to 2009 to 2010 and which Citi believes will likely play out in 2011 in the same way it did in 1940.  Here is Sy’s chart: (In Citi’s view 1937=2008, 1938=2009, 1939=2010, and 1940=2011…)

     

    Does this look 
    a lot like 2009?             2010 ?                2011 ???

     

    If history were to rhyme “exactly” you should expect a Dow that drops to 9000 or so by mid-2011, then a partial recovery that leaves the markets still down for the year. 

    My own expectation is not so dire, but I am, wearily and reluctantly, and for all the reasons I mentioned above, once more raising cash for our own and our clients’ portfolios.  That way, whether I am correct or Citi is correct, we will have the cash to be a buyer when the shakeout, whatever its amplitude and duration, occurs.  Unlike Citi's analysts, I believe that 2011 will most likely finish higher, not lower, for the year.  Even more importantly, I recognize that we are still not yet back in that precious stage where we can afford to be complacent buy-and-hold investors.

    Like many of you, I look forward to a return to the days when my clients don’t wonder why I am “trading” so much.  I hate to trade; I love to buy quality and hold it.  But I will do what I must to protect our clients’ assets in what I imagine will be a difficult time.  Then I will be able to buy, hold and spend at least part of my days on more important pursuits like writing books, skiing, SCUBA diving and hiking.  But not until then…

     

    Disclosure: Much as we hate to, the level of complacency and general outlook for the short term force us to once more raise our cash positions.  We go into 2011 with more than 50% in cash.  If/as the market does decline, either to Citi’s doomsday level or my more sanguine one, “the man with cash is King.”

     

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

     

    Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

     

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

     

     

     

     

     

    Tags: DOG, macro view
    Dec 23 4:16 PM | Link | 1 Comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.