HandsOn

Re: Fundamental adjustments

ben egbert — Sun, 07 Dec 2008 22:43:34 GMT

Toni B:
Ben,
I don't think we will ever have a risk free investment climate. No one can predict the future, so no one can ever totally eleminate risk. The hedge funds thought that their financial engineering was doing it, but obviously they did not eliminate their market risk. If they had they would not be falling like flies now. It seems to me that the country is taking its biggest gamble right now. The Federal Reserve and the Treasury Dept have been turned into the largest hedge funds the world has ever known. Only the future can tell if that gamble will pay off.

Toni

Hi Toni, to be sure you understand me, I am not against risk, I think risk is healthy. I am against excessive steps to eliminate it. As you say, the current activities may be the biggest risk of all by means of unintended outcomes.

Re: Fundamental adjustments

Toni B — Sun, 07 Dec 2008 22:39:29 GMT

Ben,

I don't think we will ever have a risk free investment climate. No one can predict the future, so no one can ever totally eleminate risk. The hedge funds thought that their financial engineering was doing it, but obviously they did not eliminate their market risk. If they had they would not be falling like flies now. It seems to me that the country is taking its biggest gamble right now. The Federal Reserve and the Treasury Dept have been turned into the largest hedge funds the world has ever known. Only the future can tell if that gamble will pay off.

Toni

Re: Fundamental adjustments

ben egbert — Sat, 06 Dec 2008 16:42:00 GMT

dreemer:
Ben said: Equity holders are dead last, bond holders just a bit better.
This is kind of off-topic, but I watched an interview with Nassim "Black-Swan" Taleb a few nights ago, and he mentioned that investors underestimate the risk of an unforeseen event devastating the bond market. His portfolio suggestion was 85% cash, 15% in the riskiest investments you can find. He didn't specify what those risky investments might be.
I though it was an interesting way to construct a portfolio. Risk-free cash and a small amount of high risk investments could give you a similar return to what an "average risk" equity and bond portfolio could return, but with the 85% cash assuring that your portfolio will never go to zero.
-dale

Hi Dale:

Interesting idea. But the more I think about it, the more I am inclined to keep my current portfolio as is. I am about 60/40 now, 60% value style mutual funds, the rest cash and bond funds. The bond fund is corp oriented.

My reasoning is that my equity funds have lost close to 50% of their value this year alone, but are still worth nearly as much as what I paid for them after distributions are considered. They will continue to pay out distributions and they are nearly free to me. My bond fond is nearly this way.

It is clear to me that capitalism will have a political head wind in the coming administration, but it will take longer than that to completly dismantle it, and I suspect the public sentiment will turn more capitalistic after a taste of socialism.

As Doc says, capitalists are smarter than socialists. Somewhere else I read that if you divided up the wealth equally between all the people, in five years the rich would have it all back again. Not sure about five years, but I do believe the general concept.

Re: Fundamental adjustments

Dr Stock — Sat, 06 Dec 2008 16:25:28 GMT

dreemer:
This is kind of off-topic, but I watched an interview with Nassim "Black-Swan" Taleb a few nights ago, and he mentioned that investors underestimate the risk of an unforeseen event devastating the bond market. His portfolio suggestion was 85% cash, 15% in the riskiest investments you can find. He didn't specify what those risky investments might be.
I though it was an interesting way to construct a portfolio. Risk-free cash and a small amount of high risk investments could give you a similar return to what an "average risk" equity and bond portfolio could return, but with the 85% cash assuring that your portfolio will never go to zero.
-dale

Actually this is very similar to the what many option investors did years ago, before the equity mania of the 90's+ ... 10% or so in options, the remaining 90% in T-bills. Sometimes called a barbell strategy. Many other variants are possible of course.

Regards,
Doc

Re: Fundamental adjustments

dreemer — Sat, 06 Dec 2008 15:37:50 GMT

Ben said: Equity holders are dead last, bond holders just a bit better.

This is kind of off-topic, but I watched an interview with Nassim "Black-Swan" Taleb a few nights ago, and he mentioned that investors underestimate the risk of an unforeseen event devastating the bond market. His portfolio suggestion was 85% cash, 15% in the riskiest investments you can find. He didn't specify what those risky investments might be.

I though it was an interesting way to construct a portfolio. Risk-free cash and a small amount of high risk investments could give you a similar return to what an "average risk" equity and bond portfolio could return, but with the 85% cash assuring that your portfolio will never go to zero.

-dale

Re: Fundamental adjustments

EagleTed — Sat, 06 Dec 2008 14:16:10 GMT

Ive been accused of being "overly optimistic" when it comes to America's future. Perhaps I'm not a realist in that regard. But, how can anyone watch Ray Charles' America and not be optimistic?

(Thanks to BGF for the link)

Re: Fundamental adjustments

EagleTed — Sat, 06 Dec 2008 00:07:43 GMT

ben egbert:
EagleTed:

Financial center of the world, but sadly that sector may have mortally damaged itself with their stupidity. As someone wrote, it wasn't greed that killed the investment banks, everybody knew they were greedy, it wasn't a reputation of being con-men that killed them, it was being seen as stupid that killed them. Folks will invest with a greedy con-man if they're making money, but nobody will invest with people who are seen as being stupid.
This deserves its own reply, very good point. So where does the financial center move to if we lose it?
This also raises another question. Europe, Russia, even China have pseudo capitalism these days. Sort of state assisted capitalism. Not sure how it operates. It appears that we are headed down that road. I wonder if stocks are the right way to raise capital, perhaps bonds may be better.
Here is my reasoning. The stock market is a sort of high stakes game where risk is rewarded with potentially high gains, and losing can mean losing everything. Bonds are generally less rewarding and less risky. In a climate where losing is no longer politically acceptable, the stock market seems out of place.
I am reminded that this all started with Ralph Nader, and his "Unsafe at any speed". This shifted us from a nation that understood risk and accepted the consequences to a notion that govenment had to protect us from all risks. Losing is no longer an option.

Today, the US Fed and Treasury is the financial capital of the world. Money is flowing into US T-bills at an extraordinary rate. Which makes them a risky investment for the future. Those yields are going to go up, sooner or later, and bond prices are going to fall fast when they do. Company bonds seem much less risky, as some have decent yields today.

Fear creates opportunities. I believe ten years from now people are going to regret selling their stocks and putting it in "safe" T-bills. In essence, they are only paying the US government to protect their money. Yields are less than inflation. When it turns, it'll turn hard.

I also believe America will retain it's status as the financial center of the world, but with all the investment banks gone, it'll be more conservative, highly regulated business practices with less rewards. The risk seekers will have to find another home. Perhaps an Asian country will pick up the slack. Perhaps the Swiss, who knows?

Re: Fundamental adjustments

ben egbert — Thu, 04 Dec 2008 22:28:49 GMT

capecod:
One fundamental adjustment we are making right now is a repricing of equity risk. Both the distribution and asset management arms of the financial services industry, aided and abetted by academic researchers, convinced folks that individual equity issues and portfolios are less volatile than they are in fact and that they should constitute a high proportion of retirement-oriented portfolios. Buy-and-hold was the invention of an industry that required a stable outlet for literally trillions in profitably underwritten marketable equity issues. While residual interests like equities and partnership interests will always have a place in a balanced investment strategy, IMO it's quite likely that asset allocation models a few years from now will look more like those typical of European private banks / high net worth strategies...where "aggressive" maxes out at about 40% equities and "conservative" may during some periods include none at all. Equities will remain great trading vehicles, and annual turnover in the equity components of managed portfolios will sometimes be minimal and at other times be several hundred percent.
Regards, Dick

You just made an argument for my conjecture, IE, stocks may find a reduced roll in the raising of capital. Your point that investors may reduce their equity percent means equity will be harder to raise in the future, and will be aimed at blue chips.

What could that mean? Less capital raised? New companies will need to be less risky. Less risk means less chance for new development and slower growth of new break-through technologies.

How else is it done? Venture capitalists will want an IPO to get back their investment.

Re: Fundamental adjustments

capecod — Thu, 04 Dec 2008 17:33:06 GMT

One fundamental adjustment we are making right now is a repricing of equity risk. Both the distribution and asset management arms of the financial services industry, aided and abetted by academic researchers, convinced folks that individual equity issues and portfolios are less volatile than they are in fact and that they should constitute a high proportion of retirement-oriented portfolios. Buy-and-hold was the invention of an industry that required a stable outlet for literally trillions in profitably underwritten marketable equity issues. While residual interests like equities and partnership interests will always have a place in a balanced investment strategy, IMO it's quite likely that asset allocation models a few years from now will look more like those typical of European private banks / high net worth strategies...where "aggressive" maxes out at about 40% equities and "conservative" may during some periods include none at all. Equities will remain great trading vehicles, and annual turnover in the equity components of managed portfolios will sometimes be minimal and at other times be several hundred percent.

Regards, Dick

Re: Fundamental adjustments

ben egbert — Thu, 04 Dec 2008 16:43:15 GMT

EagleTed:

Financial center of the world, but sadly that sector may have mortally damaged itself with their stupidity. As someone wrote, it wasn't greed that killed the investment banks, everybody knew they were greedy, it wasn't a reputation of being con-men that killed them, it was being seen as stupid that killed them. Folks will invest with a greedy con-man if they're making money, but nobody will invest with people who are seen as being stupid.

This deserves its own reply, very good point. So where does the financial center move to if we lose it?

This also raises another question. Europe, Russia, even China have pseudo capitalism these days. Sort of state assisted capitalism. Not sure how it operates. It appears that we are headed down that road. I wonder if stocks are the right way to raise capital, perhaps bonds may be better.

Here is my reasoning. The stock market is a sort of high stakes game where risk is rewarded with potentially high gains, and losing can mean losing everything. Bonds are generally less rewarding and less risky. In a climate where losing is no longer politically acceptable, the stock market seems out of place.

I am reminded that this all started with Ralph Nader, and his "Unsafe at any speed". This shifted us from a nation that understood risk and accepted the consequences to a notion that govenment had to protect us from all risks. Losing is no longer an option.

Thanks all, a condensed general reply

ben egbert — Thu, 04 Dec 2008 15:51:29 GMT

Dimes 2.

I think you see this much as I do. Work is no longer labor, but time, and can take place anywhere. Being retired, you know that staying home is much cheaper than commuting to work.

Doc Stock:

I agree, we are flexible, and will figure this out. My point here is that we may be in for a new era where much of the old way of life has been replaced with something new. New work styles, new transportation modes, new methods of funding companies.

Anil:

I think you gave me an idea, the finance economy. We already have a service economy. I am not whining so much about the place of equity in the scheme of things, other than I think it should be higher than rescuing dead beats.

This is all about faith. We expected the Government to rescue Fannie Mae, even though we all knew it was never a guarantee. They did sort of, they saved the bond holders, but not the equity holders. We had our eyes open, and opened. I for one would have voted against any bail out, I guess I am a Darwinist. I read a comment by somebody yesterday that said Capitalism is Darwinian, I thought yes, so what? How else do you purge the losers from the system?

ET. You always manage to find a bright side. I agree with you, a service economy is not a bad thing. Fact is, I think some of your older messages helped me come to this conclusion.

To all, at this stage of my life, I have no problem with an overall reduction of high growth rates as a means to increase overall wealth. Much of what we call a high standard of living is flash without substance. Give me good health, a decent home, the ability to do some traveling and life is good. I don’t need a yacht, a ¼ million dollar RV, or any of those trappings to feel well off. I do need to get some feeling that my investments are not headed to zero. I could do ok if they stay flat over the next 20 years.

But if my investments become pawns in a political game played out by some knuckle headed modern day Robin Hood, my bile will rise. I do have an intellectual problem with government capping wealth. When you limit rewards, you limit effort, you get mediocrity.

Re: Fundamental adjustments

EagleTed — Thu, 04 Dec 2008 14:32:10 GMT

In defense of the Service Economy, my state used to be a sweat shop textile economy, with agriculture thrown in. We suffered low wages, back breaking work ever since Reconstruction. Only when Georgia became a Service Economy state did we join the Union in prosperity. The textile mills have moved overseas, thank God. What's left of them are highly mechanized, with employees on hand to watch for machine glitches.

Most don't know it, but America in 2007 manufactured more goods than any year in history. It's just a lot more mechanized, robotic, cost effective, less labor intensive. High labor costs have forced companies to become more efficient. Symbolic of the shift is foreign owned factories in the US. They don't have the baggage that old American smoke stack companies have.

And yes, America has become the Financial center of the world, but sadly that sector may have mortally damaged itself with their stupidity. As someone wrote, it wasn't greed that killed the investment banks, everybody knew they were greedy, it wasn't a reputation of being con-men that killed them, it was being seen as stupid that killed them. Folks will invest with a greedy con-man if they're making money, but nobody will invest with people who are seen as being stupid.

Re: Fundamental adjustments

AKHalea — Thu, 04 Dec 2008 14:04:31 GMT

Ben : Not sure I am surprised by the facts that stockholders are holding the "bag". By the nature of equities, they are the "Residual" or what is leftover after all bondholders are paid etc. Govt's obligation is first to make sure this house of cards of our "Finance Economy" does not crumble to pieces. Granted what they are doing seems like piecemeal and there are plenty of problems and it could have been done better.

I just feel that equity holders, by the nature of the vehicles (equities) they hold are the last ones to be paid. So why should we be surprised? When the going was great, equity holders got a leveraged boost (because their residual holdings went up a lot higher than the asset prices). Anyway, I just don't think there is or was an orchestrated effort against the investors /stockholders. JMHO .... Anil

Re: Fundamental adjustments

Dr Stock — Thu, 04 Dec 2008 13:36:57 GMT

Hi, Ben.

It's hard to look upon the current situation and the massive government intervention in the markets we're seeing without being concerned. I don't believe anyone, including the architects of these so-called plans to rescue the economy, really grasps the longer-term consequences, and IMO it's likely that there will be a number of unforeseen problems as a result.

Notwithstanding my expectations for some pretty rough sledding and nasty surprises ahead -- not to mention, my demonstrated propensity towards cynical caution when it comes to things like this :) -- the true contrarian in me has a great deal of faith in the ability of people to adjust and adapt in the most surprising ways when the situation demands it. It's been a long time since Americans have been put to the test, but I expect to see good things come out of all of this, eventually. But I believe a good deal of patience will be needed ... we didn't get into this mess overnight, and won't get out of it quickly, either.

Regards,
Doc

Re: Fundamental adjustments

dimes2 — Thu, 04 Dec 2008 05:48:27 GMT

Hi Ben

I think you and I are about the same vintage .I remember teachers saying to me that the "biggest problem our generation would have in life, was what to do with our free time". They of course, where referring to the advent and far reaching possibilities of the computer.For my entire working career ,in a complex profession from which I retired some 9 years ago, I felt that they were wrong, because as far as I was concerned the computer created work...... reams and reams of it.However, just maybe it took some 35 years to build up usable databases from which the computers could become totally productive and reliable. Just maybe, we are here now, at the place our teachers were preparing us for? This indeed could mean a slightly lower standard of living and a shift to a shorter work week/day, or even job sharing.Early retirement may become the norm and like our teachers said, the biggest problem working people will have, is what to do with their spare time? I see a greater emphasis on the arts, sports,crafts etc.