After reading Rana Foroohar’s  disturbing book, “Makers and Takers,” I decided to review my own investment policy decisions to see if I might be able to identify some guidelines that would be useful to investors.  Foroohar concludes that investors would be wise to not seek professional advice and instead, put all their money in an ETF like the Vanguard S&P 500 (VOO ticker symbol).

Let’s begin with a critique of the research project that began February 2, 2015. Graph #1 shows where the market was at that time relative to August 17th 2016.

                                                     Graph 1

Graph 1 

The market, as measured by the S&P 500, was at an all time high (#2 in Graph 1).  Ms Faroohar would have had me invest the entire $100,000 in VOO.  My stated investment objective was to earn 8% compounded over the next 5 years using Portfolio Navigation theory developed at PRI.  Instead, I initiated the program with the DTR 6% portfolio with 40% in various iShare ETFs and 60% in short term fixed ETFs with a duration of less than 2 years.  Why?  I personally could not stomach putting $100,000 of my money in the market when it was at an all time high; but would I if it weren’t my money? In 2007 (see #1 in Graph 1) I was managing other people’s money in five trusts for FISERV Inc. and moved all five accounts to a minimum of 50% cash.

Many financial advisors have told me they would not dare hold that much cash for two reasons:  1. fear of being sued if the market went up, as happened in a case reported in Pensions and Investments magazine, and 2. Clients do not want to pay fees on cash held in their account.  Hmmm, would it be ethical for me to do one thing with my money and another with client’s money, or not hold cash because I’m not getting a fee for decreasing downside risk? When I correctly forecast the Brexit move and went 100% in cash (see #4 in graph 1 above) would I again be risking a law suit because the market subsequently went up 3%?  I cannot ignore the Where and Why described in her book, i.e., where we are (the top of an 8 year bull market)  and why it happened (buy backs and monetary policy).

Let’s take a closer look at the period of time since I began the Portfolio Navigation project.  Graph 2 shows how volatile this period has been.

                                                       Graph 2

Graph 2

Having 100% of one’s money in cash the day before Brexit might be considered dumb, given 20/20 hindsight, but having 100% in equities now is even dumber in my opinion.  What you don’t see is all the trades that took place as I was trying to manage this volatile period based on my 60 some years of experience in the investment business and the results of our research at PRI.  Graph 3 shows three pictures of uncertainty generated by PRI software.

                                                        Graph 3

2015 Distributions

As we move from 40% in equity (on the left) to 80% (on the right) the potential to exceed the Desired Target Return (DTR) relative to the downside risk goes from minus 10% to minus 60%.  I should take 60% more downside risk than upside potential for basically the same expected return of 9% and only 3% more upside potential?  No thank you Ms Foroorhar, because: I agree with your analysis and the risk-return trade off shown in Graph 3.

What did I learn?

  1. I would have been better off if I had just put all my money in the S&P 500 and played golf.  After too many trades I have ended up with only $2 more than I started with. However, it ain’t over ‘till it’s over.  This old soldier isn’t charging through a mine field for a 3% gain while risking a 20% loss.
  2. Neither bull markets nor people live forever. Don’t take stupid chances with your money or your life.
  3. I believe that Foroohar was correct about the need to use a longer planning horizon than 3 months. For people investing for retirement the planning horizon should be the time left until retirement.
  4. Foroohar is right, it is a complex problem that took her 700+ pages to describe. I disagree with her simple solution: put all your money in the S&P 500 and pray that Hillary will solve the gigantic problem Ms Foroohar describes.

I will continue to search for a better strategy when I resume this research project.

Posted in Uncategorized | Leave a comment

Another Piece of the Puzzle

Another book I recommend to understand what is going on in the financial markets is “Makers and Takers” by Foroohar. One reason, she says, the market keeps going up in spite of the financial mess we are in, is: “S&P 500 firms are now spending $1 billion a year buying back their shares in the open market—equal to more than 95% of their net earnings—rather than investing it producing goods and services that will benefit the entire economy.”

Thus, the Makers have become Takers who use their earnings to play financial games. Why, she asks, did Apple borrow $17 billion when it had $145 billion in bank accounts outside of the U.S.?  Because using the horde of cash they have abroad to buy back shares would require they pay taxes.  Foroohar says Apple acts more like a Wall Street banker (Taker) than a Maker; and that is why Bloomberg calls Apple the new PIMCO.

Posted in Uncategorized | Leave a comment

Much Ado About Nothing

After a two day decline following the Brexit scare the market has gone up and up from a previous high of 2129 on the S&P 500 to an all time high of 2165 for a total gain of….1.6909%. My forecast at that time was a possible 5% rise versus a possible 25% decline (see Hope for the Best posting).  The gain so far from the day before Brexit is 2.46%.  I’ll stick with that forecast.

Posted in Uncategorized | Leave a comment

The Logic Behind Buying Stocks Now

The Wall Street Journal today offers a clue as to why one should jump into the stock market now.

WSJ Wednesday,July 13, 2016 

In a flurry of other European debt sales, countries from Portugal to the U.K. were able to raise cheap finance on Wednesday, despite concerns about their economies and the global uncertainty spurred by Britain’s vote to leave the European Union

So if you are so worried about the global economies that you would buy German 10 year bonds with a negative interest rate…then buy stocks of corporations???  No thanks!  I think I will just sit here counting my cash.

Posted in Uncategorized | Leave a comment

Money Can Buy Happiness

The vast amount of money central banks pumped into the financial markets since the crash of 2008 brought happiness to anyone invested in the market…until 2016.  2007 also saw people getting rich in real estate and the stock market.  What was different between these two periods was the lack of economic growth since 2009.  This has been the most tepid economic recovery since the Eisenhower presidency.  A financial boom but not an economic boom.  2007 saw 3 peaks before a slow two year nose dive.  The last 6 months has seen 3 peaks.

Deja Vous II

The ETF that is way above the S&P 500 (blue fill) has a lot of the companies that Joshua Ramo touts in “Seventh Sense.”  Maybe he is right about the long term outlook.  But I wouldn’t touch them now.

Posted in Uncategorized | 2 Comments

What’s Next?


Anybody who thinks there is no problem,,,is part of the problem.  The old EU structure is in dire need of repairs, i.e.,recognizing the social, political and monetary problems and SOLVING them.  I would not give that anymore than a 25% chance.  Therefore,  I’m waiting for the next shoe to fall which could end with a much smaller and manageable EU.  When the dust clears there will be a great opportunity to invest, not speculate, in the companies identified in “Seventh Sense.”

I would very much like to know if anyone acted on my call to raise cash this last month? I have the feeling I am a voice crying in the wilderness.


Posted in Uncategorized | 2 Comments

Hope for the best; prepare for the worst

Yellen says the long term outlook for the economy is grim, interest rates will remain low and the WSJ says Europe will tank if Britain exits and doesn’t look good if it stays.  So, why is the S&P 500 up 7 points when it is within a whisker of its all time high?

  1. The market doesn’t always make sense
  2. The market is dominated by high speed traders and robots, not investors

When the best case scenario is a 5% gain and the worst case is a 25% loss…cash looks good to me.

Posted in Uncategorized | Leave a comment