Goldman Reports Massive $0.84 Loss Per Share, Prop Trading Loss Of $2.5 Billion

Tuesday, October 18th, 2011

via ZeroHedge.com

Topline bloodbath Summary: Net revenues in Investment Banking were $781 million, 33% lower than the third quarter of 2010 and 46% lower than the second quarter of 2011. Net revenues in Financial Advisory were $523 million, up slightly from the third quarter of 2010. Net revenues in the firm’s Underwriting business were $258 million, 61% lower than the third quarter of 2010. Net revenues in both equity underwriting and debt underwriting were significantly lower than the third quarter of 2010, reflecting a significant decline in industry-wide activity. The firm’s investment banking transaction backlog increased compared with the end of the second quarter of 2011. Net revenues in Institutional Client Services were $4.06 billion, 13% lower than the third quarter of 2010 and 16% higher than the second quarter of 2011. Net revenues in Fixed Income, Currency and Commodities Client Execution were $1.73 billion, 36% lower than the third quarter of 2010. And so on. As for the number everyone in #OWS is looking for, “The accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as benefits) was $1.58 billion for the third quarter of 2011, a 59% decline compared with the third quarter of 2010. The ratio of compensation and benefits to net revenues for the first nine mo nths of 2011 was 44.0%. Total staff levels decreased 4% compared with the end of the second quarter of 2011.” In a nutshell: for the first time in probably since the Lehman crisis, Goldman reported a massive loss in its prop trading division of $2.5 billion, and also based on LTM accured comp benefits and the total staff at period end of 34,200, average compensation amounted to $358,713/employee.

P&L breakdown:

And the carnage visually:

Tags: Accrual, Accured, Amortization, Backlog, Bloodbath, Carnage, Commodities, Compensation And Benefits, Discretionary Compensation, Fixed Income, Gold, Goldman, Institutional Client Services, Investment Banking, Lehman, Massive Loss, Nths, Nutshell, Ows, Second Quarter, Staff Levels, Year End
Posted in Commodities, Gold, Markets | Comments Off

“Fed Between a Rock and Hard Place,” says Goldman’s Jan Hatzius

Thursday, June 23rd, 2011

Goldman Sachs’ economist Jan Hatzius appeared on CNBC late yesterday to explain his theory.  In a nutshell, the Fed has nowhere to go – if it stands down, the U.S. economy faces slow growth; if it continues easing (QE) it faces threatening levels of inflation.

Video

Here are Hatzius’ main news conference points:

MAIN POINTS:

1.    Fed Chairman Bernanke’s press conference included many details but few major surprises. On activity, he expressed relatively low conviction, saying “We don’t have a precise read on why this slower pace of growth is persisting” (note that quotes come from the real-time transcript, which may be revised slightly). However, consistent with the FOMC’s forecasts (see below), he emphasized that he thought that some factors restraining growth were temporary.

2.    On inflation, Chairman Bernanke also cited temporary factors, particularly a pickup in auto prices related to supply chain disruptions in that sector.

3.    Guidance on the near-term policy outlook was relatively clear: more quantitative easing is unlikely due to reduced deflation risks. He gave two lengthy responses on this issue, and made clear why conditions last year differed from today. Most importantly: “at that time inflation was low and falling, [and] many objective indicators suggested that deflation was a non trivial risk”. He also noted the pickup in payroll employment over the last few quarters.

4.    At the same time, his remarks hinted that the FOMC has in fact discussed easing options. Specifically, he said options could include: 1) securities purchases, which could be structured in various ways; 2) a cut in the interest rate on excess reserves; 3) guidance on how long the Fed will wait to sell securities; and 4) or “a fixed date to define extended period”. With regard to the extended period language, he revised his remarks from the last press conference, in which he said the extended period language meant “there would be a couple of meetings probably before action”. Today he said: “I think the thrust of extended period is that we believe we’re at least two or three meetings away from taking any further action, and I emphasize ‘at least.’”

5.    The Fed revised down its central tendency forecasts for GDP growth in 2011 to 2.7-2.9% to from 3.1-3.3%. It also reduced its 2012 GDP forecasts. For 2011, the cut was slightly smaller than we had expected, but for 2012 it was a bit larger. The committee also revised up its forecast for core inflation by 1-2 tenths, a bit more than we had anticipated.

Hatzius’ conference notes courtesy of ZeroHedge.com.

Video: CNBC

Tags: Auto Prices, Cnbc, Conviction, Disruptions, Economist, Excess Reserves, Fed Chairman Bernanke, Fomc, Goldman Sachs, inflation, Interest Rate, Main News, News Conference, Nutshell, Objective Indicators, Payroll Employment, Policy Outlook, Qe, Quantitative Easing, Sector 3
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Can the World Hold 7 Billion?

Thursday, January 6th, 2011

Some time this year, there will be 7 billion people on the planet. If we all stood shoulder-to-shoulder, we would fit inside the city of Los Angeles.

National Geographic just kicked off its year-long series dedicated to this global milestone. Check out this video.

According to National Geographic, no human had lived through a doubling of the human population before the 20th Century. Now, there are people on this planet who have seen it triple. In fact, the world population hasn’t fallen since the Black Death wiped out nearly 60 percent of Europe’s population.

The problem with population isn’t space—we have plenty of it—it’s resources. Nearly 1 billion people go hungry every day and 20 years from now there will be 2 billion more mouths to feed.

If you’re analytical, you can think of it this way—the Earth has a finite number of resources but the demand and use of these resources are the variables. That demand not only depends on the number of people, but how intense their usage is.

Today, usage intensity is picking up in the emerging world—which happens to be home to the majority of the global population. As these people move, for example, from using bicycles to cars, or candles to electricity, the pressure on that finite amount of resources rises.

This, in a nutshell, is why we’re positive on natural resources—the supply of resources is limited while the demand is rising. Daily, monthly and even yearly fluctuations in demand or geopolitical events will cause volatility in prices, but the overall supply/demand fundamentals remain intact, and we believe these fundamentals lead to higher prices for these increasingly rare commodities.

Since this population theme is a cornerstone of the natural resources story, we’ll check back in on the National Geographic series as it progresses.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Tags: Bicycles, Black Death, Commodities, Cornerstone, Finite Number, Fluctuations, Geopolitical Events, Global Population, Human Population, Intensity, Milestone, Mouths, National Geographic, National Geographic Series, Natural Resources, Nutshell, Rare Commodities, Shoulder To Shoulder, Volatility, World Population
Posted in Commodities, Energy & Natural Resources | Comments Off

Howard Marks’ Scrapbook On Lessons From A Rhyming History

Thursday, December 2nd, 2010

As always, a must read letter (which is a compilation of many prior Howard Marks missives: “Thanks to the tendency of investors to forget lessons and repeat behavior, it sometimes seems there’s no longer a need for me to come up with new ideas for these memos. Rather, all I have to do is recycle components from previous memos, like a builder reusing elements from old houses”) from the chairman of Oaktree who, prudent as always, cautions against the latest episode of Fed-funded irrational exuberance: “Investors who engaged in aggressive behavior just a few years ago experienced significant pain as a result. Perhaps the punishment was too brief, and perhaps it was reversed too soon. Thus some are acting aggressively once again. It’s possible that such behavior won’t be punished again the second time around, but prudent investors shouldn’t take the risk.” On the other hand, whole countries are now at stake should the market decline. Taking on one central bank is tough… Taking on all the printers in the world may be a task that only nature can eventually tackle.

In a nutshell, to Marks, the three key trends exhibited by the most recent batch of exuberance is as follows:

• rising confidence and declining risk aversion,
• emphasis on potential return rather than risk, and
• willingness to buy securities of declining quality.

We agree and disagree with Marks’ conclusion: as never before has the very fate of the economic system been tied in with the continued ramp in Ponzi markets, any ability to derive history lessons fails. For the central banking cartel this is it: a do or die moment, in which the die is not even a possibility. Just like buying CDS on the US used to be considered the dumbest trade ever (what counterparty pays if the trade succeeds?) so now outright shorting of asset classes is futile: it will succeed of course, eventually, but when it does it will mean a total overhaul in the economic system. As such any and all paper profits will be irrelevant.

From Oaktree: “Open and Shut” (link)

Open and Shut 12_01_10 –

Tags: Aggressive Behavior, Asset Classes, Cartel, Central Banking, Compilation, Economic System, History Lessons, Irrational Exuberance, Market Decline, Memos, Nutshell, Oaktree, Old Houses, Prudent Investors, Ramp, Risk Aversion, Scrapbook, Second Time, Stake, Willingness
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Richard Russell: “A hard rain lies ahead”

Wednesday, July 21st, 2010

Love him or hate him, 85-year old Richard Russell is the doyen of investment letter writers – having been at it for more than half a century – and his views as expressed in his daily Dow Theory Letters always make for stimulating reading. The paragraphs below summarize the R man’s “big picture” view of the U.S. stock market.

“I want to say that I have a number of reasons for being convinced we have been in an upward correction [referring to the rally that commenced in March 2009] in an ongoing primary bear market. Some of this is based on my interpretation of the 50% Principle, plus my analysis of the very poor action of the “internal market” [i.e. market breadth] over recent weeks.

“I envision the Dow dropping to test, and possibly violate, the 6,547 level. I don’t know whether this will take place this year, but I wouldn’t be shocked if it does. It would not surprise me if the Dow tests the 6,547 level. And if that happens, I can almost guarantee the US will have sunk into the much-feared “double-dip” recession.

“If the US begins to shrink into a double-dip recession, I expect the Obama administration to go ‘wild’ with new stimuli and ‘make-work’ programs, all of which will be financed with higher taxes (‘soak the rich’) and a further major expansion of the Federal Reserve balance sheet. I would also expect every central bank in the world to simultaneously open their money-printing spigots wide, wide, wide.

“Conclusion in a nutshell: the secret of the forthcoming picture lies with the action of the U.S. stock market. Again I’ll remind my subscribers that the function of the stock market is to discount the future, not to mirror the present. All news is history. Or as Wall Street puts it, “news known is news discounted”.

“One of the biggest mistakes amateurs make is to think something they know is unknown and not already discounted by the market. Despite this, the media insist on describing every move of the stock market as being a reaction to some current event or some new government statistic. They couldn’t be further off the mark. As I read it, the poor action of the current stock market is telling us that the future for the U.S. is bearish and a hard rain lies ahead.

“At this juncture, sophisticated, wealthy people are not concerned with increasing their fortunes, rather they are searching for ways to conserve what wealth they have.”

Source: Dow Theory Letters, July 19, 2010.

Tags: Balance Sheet, Bear Market, Big Picture, Double Dip Recession, Dow Theory Letters, Doyen, E Market, Federal Reserve, Half A Century, Hard Rain, Investment Letter, Letter Writers, Market Breadth, Money Printing, Nutshell, Reserve Balance, Richard Russell, Spigots, Stimuli, U S Stock Market
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Tom Bradley’s Thoughts on ETFs

Tuesday, April 27th, 2010

Tom Bradley, CEO of Steadyhand Funds, shared his thoughts about ETFs in a Globe and Mail editorial, April 16, 2010. His thoughts are relevant and worthy of consideration: In a nutshell, Bradley says

1) that ETFs are not all as simple as they’ve been made out to be,
2) they’re not so predictable,
3) their fee halo sometimes shrouds hidden fees,
4) they can sometimes be illiquid, and don’t always trade at a price (or at NAV) that is fair to the average investor,
5) 90% of the offerings are suitable for 10% of investors
6) talk of ETFs is often over-generalized.

Not that simple…

Will I own stocks, commodities or derivatives? Is there any leverage? What index is the fund replicating? Is it currency hedged? How well does it trade? Are there other fees or costs?

In the rush to catch the wave, the ETF providers have cluttered what was a pristine landscape just a few years ago.

Not so predictable…

And in general, the tracking error of ETFs (the amount a fund’s return diverges from that of the target index) have widened over the past few years. According to the Wall Street Journal, U.S. ETFs on average missed their targets by 1.25 per cent in 2009, more than double the 2008 gap.

Their fee halos…

Despite the trend to higher fees, there is still a halo around ETFs. This was particularly noticeable recently when some actively managed ETF’s were rolled out and the 20-per-cent performance fee was hardly mentioned in the commentaries.

They trade at a price, not NAV…

However, many of the new funds are extremely illiquid and require trading experience to ensure that the price paid is at or near the value of the fund. For long-term investors who are looking for cheap, broad-based market exposure, negotiating a trade in the open market and paying a brokerage commission is not always so great a deal. For some, buying a mutual fund after the market closes at net asset value (calculated to four decimal points) may be more appealing and practical.

The 90/10 Rule…

It’s all about market timing, sector rotation and trading. In other words, we have arrived at a point when 90 per cent of new offerings are suitable for only 10 per cent of investors.

Let’s stop over-generalizing…

We can no longer naively say that ETFs are simple, low cost, index-based, tax efficient and have a trading advantage. Or conversely, that mutual funds are none of those things. It’s time to stop generalizing and go back to the beach in search of the next wave.

Source: The Globe and Mail, ETF providers have cluttered a pristine landscape, Tom Bradley, April 16, 2010

Tags: Asset Value, Brokerage Commission, Commentaries, Commodities, Decimal Points, Derivatives, ETF, ETFs, Gap, Globe And Mail, Halos, Leverage, Market Exposure, Mutual Fund, Nutshell, Performance Fee, Pristine Landscape, Target Index, Term Investors, Tom Bradley, Tracking Error, Wall Street Journal
Posted in Commodities, ETFs, Markets | Comments Off

Technical Talk: Respect the S&P’s Uptrend

Saturday, April 24th, 2010

The comments below were provided by Kevin Lane of Fusion IQ.

As seen in the chart below the S&P 500 hit the lower end of an up channel yesterday [Thursday] (lower green line and arrow) and subsequently rallied well off the lows to close back within the channel. As long as prices stay above this area (1,186 on the S&P 500) the uptrend and long positioning need to be respected.

Overhead the S&P 500 is stalling in the 1,213 to 1,210 area. For the market to leg up towards is next upside target of 1,300 the index needs to clear out these levels.

So in a nutshell, if the S&P 500 moves below 1,186 the near term trend turns bearish. However, a move above 1,213 will extend the current bullish move. [PduP: The Index closed the week at 1,217.]

Source: Kevin Lane, Fusion IQ, April 23, 2010.

Tags: Area 1, Arrow, Current, Fusion, Iq, Kevin Lane, Lows, Nutshell, Positioning, Respect, Target, Term Trend, Uptrend
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WealthTrack: Interview with Charles Ellis and Jason Zweig – Valuable lessons from the financial crisis

Sunday, April 18th, 2010

CONSUELO MACK: This week on WealthTrack, the most valuable lessons learned from the financial crisis. Renowned portfolio consultant Charley Ellis and respected personal finance columnist Jason Zweig teach the investment class next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Sometimes it is necessary to stand back and take stock. That is what many WealthTrack guests and I have been doing in recent months as we digest the psychological and investment damage done during the financial crisis and what it means for our risk tolerance, our investment expectations and strategies going forward.
One of the best parts about anchoring WealthTrack is I get to choose my guests. I have interviewed a series of great investors through this crisis and ongoing recovery. Today I will be talking to two financial thought leaders, Charley Ellis and Jason Zweig, who are among the most thoughtful and insightful students of the art of investing. I will ask them for the lessons we should all learn from the financial system’s implosion and its aftermath.
But first I want to share some basic principles told to me by great investors such as Bruce Berkowitz, Robert Rodriguez, and Jean Marie Eveillard.

Here are a few in a nutshell:

The unthinkable can and will happen: markets can shut down, home values can plunge, credit can disappear, and the government can change the rules.

Next lesson: In times of crisis, risk assets, like stocks and bonds, go down excessively. But don’t panic. They also recover excessively. One of the biggest regrets among great investors is they didn’t buy more on the way down to participate on the way up.

Another lesson: A constant cushion of cash is a must for every portfolio to survive and take advantage of the unthinkable. Bruce Berkowitz calls cash “financial valium.” It lets him sleep at night and gives him the flexibility to jump on opportunities when others cannot.

And finally, Every portfolio needs a core of protection: those investments that zig when all others zag, that are non-correlated to risk assets like stocks and bonds. The core of protection includes cash, gold and U.S. Treasury securities.

What wisdom do financial thought leaders Charley Ellis and Jason Zweig have to share? We’ll find out next on Consuelo Mack WealthTrack.

What are the most valuable lessons we can learn from the financial crisis and its aftermath? Well, we are fortunate to be able to turn to two financial thought leaders to find out. Our first guest is a legendary investment consultant to large institutional investors, government organizations and wealthy families. He is also the author of fifteen books, including Winning the Loser’s Game, which is an investment classic, and his latest, The Elements of Investing, which he co-authored with Princeton economist Burt Malkiel. Charley Ellis is a force for good and wise counsel in countless activities and organizations and rarely appears on television.
Our second guest is another WealthTrack regular. He’s Jason Zweig, the highly respected Intelligent Investor columnist for The Wall Street Journal. He is also the author of Your Money and Your Brain, which is a fascinating tale of how biology drives investors to make stupid mistakes, and most recently, The Little Book of Safe Money. It’s great to have you both here.
So What I wanted to talk about on this edition of WealthTrack is the lessons learned from the financial crisis that we’ve been through and the aftermath. So Charley Ellis, the most difficult question that I can ask you is, do the markets really have anything more to teach Charley Ellis? Was there anything that you learned that was new, any revelation from what we’ve just been through?

CHARLES ELLIS: Absolutely. I was like everybody else that I know, totally surprised at how severe, powerful, forceful and out of control the violence in the market really was. If you had said to me a couple years ago, gee, do you think the market’s a little high, I would say yes. I was going around to everybody I could get, don’t be on margin, don’t borrow money, but the idea of clean it out and get the hell out of the fight zone and get back to some safe place and wait until the storm was over, I didn’t see it coming at all. It’s a great lesson.

CONSUELO MACK: So knowing what you know now, number one, one of the things that I’ve talked about, the great investors and financial thought leaders that I talked to, now we all know the unthinkable can happen. So the question is, is there something we should be doing differently because the unthinkable can happen?

CHARLES ELLIS: The answer depends on if we’re doing the right thing, do we want to do something differently? The answer is no. And I must say, when you say the “unthinkable,” unthinkables do happen every 30, 40, or 50 years, of about the same magnitude and they’re always horrific, but the idea of being able to say somewhere in 30, 40, 50 years it will happen again doesn’t do anybody any good because that means once in your lifetime, maybe twice in your lifetime if you’re unfortunate. But these things do happen. I think it’s important for all of us to recognize that’s part of life as an investor.

CONSUELO MACK: Great. Yes. Jason, you told me that there was something you should have known but you’d forgotten. And that was that we should be paying attention to a lot more things, right?

JASON ZWEIG: Yeah. Yeah, I think for me, Consuelo, the main lesson is I and many other investors didn’t have enough on our dashboards.

CONSUELO MACK: Meaning?

JASON ZWEIG: Well, we were looking at the instrumentation right in front of us, namely the stock market and equity valuations and we weren’t really looking at the indicators off to the side. And much as Charley just described in 2007, when I looked at the stock market, I didn’t see a bubble, because in the strict sense, there wasn’t really a bubble in the stock market.

CONSUELO MACK: Right.

JASON ZWEIG: The bubble was in the housing market, which I was well aware of, and I warned a lot of people about.

CHARLES ELLIS: So did I.

JASON ZWEIG: At least in private life.

CONSUELO MACK: Right, who owned homes or wanted to buy second homes and you were saying don’t speculate in the housing market.

JASON ZWEIG: Right. What was not clear, but with hindsight should have been clearer, was that that bubble would spill over into the equity markets. And one good lesson from history is that bubbles are contagious. They go from one asset to another. They go from one economy to another. And we all had formed the habit of just looking at the thing on the dashboard right in front of us. And not looking to the side.

CONSUELO MACK: Right. So just your investment portfolio and not taking into account that the whole financial system could essentially freeze up. So Charley, in The Elements of Investing, which is just a wonderful, wonderful, small, perfect little book, you know, one of the chapters is diversify, and this is something I’m sure a lot of people ask you. Even if an individual was diversified across, you know, all risk assets, now we call them risk assets- we didn’t call bonds and stocks risk assets. Now we’re saying. But if you were in stocks, bonds, alternative investment, real estate, everything just got creamed.

CHARLES ELLIS: Correlation to one and down.

CONSUELO MACK: So now what do you tell us? What is the lesson about diversification?

CHARLES ELLIS: That’s diversification this way. There’s another part of diversification, and that’s this way. And if you diversify over time so that no one year, no one day, no one five-year period really makes a dominant impact on your investing because you’re spreading your investment over a long period of time, that’s a different kind of diversification. And most everybody has more of that diversification already than they realize, and they ought to be living with it and using it and taking advantage of it.

CONSUELO MACK: I don’t get that. But you’re saying if you have a long-term horizon, that what happened in 2008 or 2009 doesn’t matter?

CHARLES ELLIS: It does matter, but it doesn’t matter nearly as much.

CONSUELO MACK: Right.

CHARLES ELLIS: Easy illustration. If you look at weather in this wonderful city, there are times when the weather is really hot, really cold, rains like the dickens, you should have seem that snowstorm. That’s very disruptive. People cancel school and don’t go to work, a lot of other things. But if you look at it in terms of climate, over a period of five years, nobody particularly minds the fact that once in a while it’s a terrifically hot day or terrifically cold or there’s a lot of snow. As an investor, if you have to know what your investments are every day, you’re making a mistake. You should take some of your portfolio and put it into I know what it is, it’s in short term or cash, I can get it whenever I need it and so I don’t have to worry about the day-to-day or even month-to-month or year-to-year ups and downs of my long-term investing, which will stay there for 20 years, 30 years, 50 years.

CONSUELO MACK: So that’s an important lesson. The diversification means you’ve got to have that cash cushion. You’ve got to have non-correlated assets like gold and U.S. Treasuries. So that’s a lesson of what true diversification is, as well, both time and also across very different asset classes.

CHARLES ELLIS: You should never invest what you can’t afford to have in the market going up and down. You should keep that part of your investments in cash or in some ready reserve so that you can think comfortably about the long term, even though it is sometimes horrific.

CONSUELO MACK: All right. That was really terrific, Charley. So Jason, what’s another lesson that you learned?

JASON ZWEIG: Well, I think another lesson, Consuelo, is that people don’t understand themselves very well. The reason I find investing endlessly fascinating is not because of the intricacies of financial analysis but because of what it tells us about human nature.

CONSUELO MACK: Your Money and Your Brain, which is the book you wrote. You’ve written a lot about behavioral finance. Tell us the key thing to understand.

JASON ZWEIG: I think the key thing here is that people like to believe that they understand themselves very well, after all, of all the things in the universe, what should we understand the best? It would be that thing that looks at us in the mirror every day, but how many investors in 1999 said, “I have a high tolerance for risk?” How many investors in 2007 said, “I have a high tolerance for risk?” Millions, maybe tens of millions. And what happened is people learned a lesson, but they learned too narrow a lesson. Ten years ago during the internet bubble, the lesson people learned from losing 95% of their money was, I’m never going to buy a hot internet stock again.

CONSUELO MACK: Right.

JASON ZWEIG: Not the lesson they should have learned, which is I’m never going to chase hot performance again. Instead it was, I’m never going to buy another dot com stock, so then they promptly starting flipping condos in Miami Beach or Phoenix.

CONSUELO MACK: So what’s the lesson we’ve taken now? A lot of people are saying, I’m never going to buy another stock again. I’m going into bond funds. What’s the wrong lesson people are taking away from our recent experience?

JASON ZWEIG: Well, maybe let’s talk first about the right lesson.

CONSUELO MACK: All right.

JASON ZWEIG: I think one sensible thing people could conclude from what’s happened in the past couple of years is, if you held on to your stocks and perhaps better still, if you held on to them and you added more money to them throughout all of this turmoil, then you really do have a high tolerance for risk. You now know something. You’ve learned something.

CONSUELO MACK: About yourself.

JASON ZWEIG: About yourself from this crisis that you never could have found out in good times. That’s a very positive thing. On the other hand, if you sold in late 2008 and early 2009 and now you’re tempted to buy more stocks again because the stock market has gone up 70%, you are making the same mistake you made the last time. What you should learn from the pain you felt is, I don’t like pain, and I’m not very good at it.

CONSUELO MACK: Therefore?

JASON ZWEIG: Therefore I shouldn’t put more money in the stock market when it goes up. In fact, maybe I shouldn’t have that much money in the stock market at all because I’m not very well suited for it.

CONSUELO MACK: Charley, indexing, and both of you are fans of index funds because they’re low cost. You feel that you…

CHARLES ELLIS: Well, they’re successful. That’s the real reason.

CONSUELO MACK: All right. They’re successful.

CHARLES ELLIS: Over a ten-year period, index funds beat 60% of mutual funds. Over a 20 year period, it gets up to 80%. Over a 30 year period, it’s 85%. You can never tell who is going to be one of the winners. There’s only one decile that is in any way predicted, and that’s the dreadful bad decile tends to stay bad. If you’re really a dummy at investing, you keep making mistakes quite a long time. But the rest of it’s all random.

CONSUELO MACK: Again, in The Elements of Investing, one of your chapters is Index. Again, I come back to the question that I asked before, certainly there were mutual funds that performed a lot better than the index funds, especially during the market decline. There were mutual funds that actually protected themselves. We’ve talked to a number of portfolio managers who did much better. It’s very hard to make up for the kind of losses that we just experienced in the last two years. So is indexing, isn’t there a lesson? Is there a lesson to be learned about indexing?

CHARLES ELLIS: Yes, more people should be indexing by quite a great deal than now do it. And if they had a chance to really study all the data, they would find they really ought to be indexing. And if they spent a lot of time with people who have got a lot of exposure and experience- Burton Malkiel and I added together, 100 years of experience and all we’re doing is indexing. There’s a reason for that. It’s not because we’re lighthearted or because we’re dimwitted, it’s not because we’re not willing to try. It’s because this is a place where it just doesn’t pay. There’s a lot of different ways for analogizing. For me, Autobahn in Germany, and I said to my two sons who were then mid-teens. I said, here, you can go as fast as you want to, have you guys ever gone 100mph? Gee, no, dad, let’s- so we drove at 100mph. And they said, dad, go faster. And I said, not a chance. We’re slowing down now.
If you were an active investor, you’re taking a chance that you are smarter than some of the smartest people in the world who are enormously committed to beating your socks off, and they’ve got all kinds of resources you don’t have. It’s like me going out and playing on the football field with the Green Bay Packers. Yeah, I can put on a uniform, I can put on cleats and look like, probably from a distance, like I might be a small Green Bay Packer, but when I get out there, I’m going to get clobbered because they do that for a living. They know what they’re doing and I don’t.

CONSUELO MACK: So even in times of financial crisis, you stick to your game plan. You stick to indexing, you don’t try to go with an investor who’s much smarter than you are in a mutual fund that has a good track record that actually might perform better than an index fund?

CHARLES ELLIS: Might. But Consuelo, the hard, cruel reality of life is, no one can tell you who it’s going to be until it’s all over.

CONSUELO MACK: Right.

CHARLES ELLIS: And there is no predictive power that anybody has been able to find. And there are thousands of people looking for that predictive power.

CONSUELO MACK: Yes, there are.

CHARLES ELLIS: I will grant you that Warren Buffett, my favorite investor, will probably do better.

CONSUELO MACK: And you invest in Berkshire-Hathaway, correct?

CHARLES ELLIS: I do, have done for almost 40 years. I think he’s going to be able to do it for as long as he wants to. But I couldn’t possibly predict who is the next best chance for being Warren Buffett. Warren is a fabulous individual. The rest of us aren’t.

CONSUELO MACK: Final question before we get to the One Investment- trust in Wall Street firms and banks have been, if not destroyed, just damaged beyond belief. And Jason, is the game rigged to the detriment of individual investors?

JASON ZWEIG: Well, in a sense it is, Consuelo. Really in the sense Charley just described, which is the table is tilted. And because of the expenses you have to incur in the attempt to beat the market, you’re very unlikely ever to be able to do it. There is a basic perceptual problem though, which is given what’s happened on Wall Street in the past couple of years with hundreds of millions, in fact, billions of dollars of bonuses being awarded to people who basically…

CONSUELO MACK: Lost us trillions of dollars; we invested with them and they lost trillions of dollars.

CHARLES ELLIS: No, no, not fair.

JASON ZWEIG: We’ll talk about that another time.

CONSUELO MACK: No, but quickly, and then let’s hear Charley.

JASON ZWEIG: Let’s get at the perception. The perception is reality because even if people perceive something that didn’t happen, just try talking them out of it. There’s an enormous depth of public anger in this country from people who feel that they lost money and the people who lost it for them…

CONSUELO MACK: Made money.

JASON ZWEIG: Made money.

CONSUELO MACK: Charley, what’s wrong with that assertion?

CHARLES ELLIS: People lost a lot of money, there’s no doubt about that. They did not lose it because of most of the people on Wall Street. I have three individual people that I would identify very quickly as people who really contributed to the difficulties. One was at Merrill Lynch, one was at Lehman Brothers and one was at Citigroup in very high positions. In every case, they lost control of their organization. If the compensation system says you get paid a lot if you happen to win, you’ll have people trying very hard to flip 20 coins in a row and get heads every single time. And the systems got out of control, and that was a bad management situation. It wasn’t that the individual was doing the wrong thing. It was the senior people allowed them to do the wrong thing and rewarded fabulously for doing whatever would work.

CONSUELO MACK: Right.

CHARLES ELLIS: I can understand why people are angry, but they are making a mistake if they’re angry all the time at Wall Street. They should be angry at the way the system was set up that allowed those who were in the system to make behavioral situations that created a terrific amount of trouble.

CONSUELO MACK: All right. So that’s going to be the top of another discussion with you two, and I’m going to get you back to do that because it’s the compensation system that’s probably, the incentive system on Wall Street that really needs to be fixed. But it’s time for our One Investment because our viewers want some investment ideas from you, Charley Ellis. So you’re saying think global.

CHARLES ELLIS: I’m all in favor of indexing. I’m all in favor of broad diversification as you diversify across the entire world and a world index fund is the way to go.

CONSUELO MACK: And Vanguard Global Equity Fund (VHGEX), which is a recommendation by Morningstar, as well, and you are on the Vanguard board of directors because you believe…

CHARLES ELLIS: I was on. I completed my service.

CONSUELO MACK: Was on. You believe in what Vanguard is doing. Jason Zweig, job hedge, very different type of recommendation.

JASON ZWEIG: This is different for every viewer, Consuelo, which is why I can’t suggest, give a single specific investment. One of the main lessons to come out of the past couple years is don’t be the egg in your own basket. And way too many Americans overinvested in the industry they worked in.

CONSUELO MACK; Right.

JASON ZWEIG: Only to find suddenly they no longer had a job, that their retirement plan had been destroyed. And that they had no other investments to hedge against that risk. So it’s very important for people to make sure they don’t double invest. Your job is already an investment in the industry in which you work. You don’t want to then pile even more money on top of that. Very important not to double invest in your own industry.

CONSUELO MACK: So you recommend actually to invest index funds in sectors other than your profession?

JASON ZWEIG: That’s a very good way to start to address that problem.

CONSUELO MACK: Thank you both so much. You two truly are financial thought leaders, and you have both written some excellent books, and I will mention the most recent books- so Charley Ellis, The Elements of Investing, with Burt Malkiel, which is a terrific basic book for any age. As you know, I’ve given it to my son. And Jason Zweig, The Little Book of Safe Money, which especially in today’s market, is really so helpful to all of us. Thank you both very much for being with us on WealthTrack.
Well, at the conclusion of every WealthTrack, we try to give you one suggestion to help you build and protect your wealth over the long term as well. This week’s Action Point is based on a frustration expressed to me many times on WealthTrack by some excellent investors including last week’s guest Wally Weitz. It is that individual investors consistently underperform the very funds they invest in. I call it “the underperformance trap.” So this week’s Action Point is: avoid the underperformance trap.
Morningstar has tracked the total return of mutual funds versus what investors in those funds have received over the past ten years. On average, investors underperform the funds they invest in because they move in and out of the funds instead of sticking with them, but it turns out the more volatile the fund is, the worse the underperformance gap. But don’t blame the funds. It is investors’ behavior in them that is the problem.
Case in point, the best-performing fund of the last decade was Ken Heebner’s CGM Focus fund, which delivered better than 18% annualized returns. However, the average CGM Focus shareholder- are you ready for this- lost 11% annually over the same ten-year period. How did that happen? Well, according to Morningstar, investors poured money into CGM Focus after the fund skyrocketed 80% in 2007, only to ride it down 48% in 2008, at which point they bailed out. So the problem: individuals chase performance. They buy funds that have done extremely well, buy high, and sell funds that have underperformed, sell low.
So how do you avoid the underperformance trap? Charley Ellis would say just buy an index fund and forget about it, but I’m going to say something different. Choose your funds carefully based on management, culture, long-term track records and your ability to stomach volatility, which Jason was just talking about. If you cannot take wide performance swings, choose more stable funds. Don’t chase performance. Don’t bail out in down years. Even the best mutual funds have several of them every decade. Reinvest your dividends to take advantage of the power of compounding. And don’t try to market time. Well, we want you to beat the underperformance trap.
Next week we are going to talk to the head of one fund family where shareholders don’t underperform. We have a WealthTrack exclusive, a one-on-one interview with third-generation value investor Chris Davis, a next generation Great Investor I think. If you would like to see an extended version of some of the Great Investor interviews we have done recently, we have launched a new feature on our website, wealthtrack.com. It’s called WealthTrack Extra, and it offers exclusive, never-before-seen material with investment stars such as Morningstar’s Fund Manager of the Decade, Bruce Berkowitz and finalist Steven Romick. In the meantime, thank you so much for visiting with us. And make the week ahead a profitable and a productive one.

Tags: Aftermath, Bruce Berkowitz, Columnist, Consuelo Mack, Financial Crisis, Gold, Home Values, Implosion, Investment Class, Jason Zweig, Nutshell, Oil Sands, Personal Finance, Portfolio Consultant, Regrets, Risk Tolerance, Robert Rodriguez, Stocks And Bonds, Stocks Bonds, Thought Leaders, Unthinkable, Valium, Wealthtrack
Posted in Energy & Natural Resources, Markets, US Stocks | Comments Off

Rogers vs. Roubini – Inflation vs. Deflation

Tuesday, November 10th, 2009

Bloomberg’s William Pesek discusses the ongoing debate between inflationists represented by Jim Rogers’ views, and deflationists represented  by Nouriel Roubini.

It’s a, well, golden opportunity.

Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that’s “utter nonsense.” As these well-known market personalities duke it out, they’re doing us a favor by highlighting a critical debate: Which is the bigger threat — inflation or deflation?

…

The risk is that policy makers go overboard looking for exit strategies. That, in a nutshell, is Roubini’s shtick and it’s hard to refute the views of the New York University professor. Yes, inflation must be contained, but so must the forces of deflation in the short run.

Read the whole article here.

Tags: Bloomberg, Critical Debate, Duke, Economist Nouriel Roubini, ETF, Exit Strategies, Gold, Golden Opportunity, inflation, Investor, Jim Rogers, New York University, Nutshell, Ounce, Personalities, risk, Shtick, Utter Nonsense, William Pesek, York University Professor
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Sprott: “We prefer to invest in real things”

Saturday, July 25th, 2009

Eric Sprott has penned his latest newsletter,”It’s the Real Economy, Stupid,” a lucid look at the real economy versus the market’s optimistic pricing in of positive sentiment. Sprott says the market is ignoring the facts:

It begins with:

We are now in the early stages of a depression. The economic indicators we follow to track real economic activity are all signaling a slowdown of massive proportions. You wouldn’t know it reading the mainstream papers of course – they all focus on the relative decline in the slowdown’s intensity. Reading about the slowdown ‘slowing down’ is not the same as growth however, and does not warrant excitement in our opinion.

Our title this month paraphrases one of Bill Clinton’s presidential campaign messages from 1992. As one of the three key themes in Clinton’s campaign, “The economy, stupid” was printed on a sign in his headquarters in Little Rock to help campaign workers stay on message. This month we’re keeping it simple by focusing on the real economy and its implications for the stock market.

And ends with:

In our view, the only thing propping this market up is investor sentiment. Earnings have not improved. Keep it simple, stupid – investing is and has always been about the real economy, and this market is ignoring the hard data. You can invest in sentiment if you want to, but as we have said before, we prefer to invest in real things.

In a nutshell, the emperor has no clothes. Click here or on the image below to download complete newsletter.

Tags: Bill Clinton, Campaign Messages, Campaign Workers, Depression, Earnings, Economic Activity, Economic Indicators, Economy, Emperor Has No Clothes, Eric Sprott, Excitement, Intensity, Investor Sentiment, Massive Proportions, Nutshell, Paraphrases, Presidential Campaign, Relative Decline, Slowdown, Stock Market
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