EclecticLip

For the book club, a decision was made to ease into the new year (at the time, 2011 was a then-new year) with a book on finances.  If for no other reason that a lot of people get stressed about money ’round the time Christmas bills arrive, and stressed employees aren’t productive employees.

J.D. Roth’s Your Money: the missing manual was chosen, because it seemed humbler (and correspondingly less hyperbolic) than other personal-finance books on the shelves.  One highlight of the book was the discussion about the hedonic treadmill, which explains why — unless you start off in abject poverty — more money doesn’t tend to make you happier.  It was refreshing to see this covered in a personal finance book, given that the book’s reading demographic probably consists of people who think having more money will, indeed, make them happier.    Another was the suggestion to make budgets simple enough that they can be followed — this spoke to me, as my own budgeting efforts have usually failed because they were so ambitiously detailed, they got too cumbersome to track.

As always, if you enjoyed the summary, please consider supporting the author by purchasing a copy of the book. 

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Your Money - the missing manual

(originally written Jan 25)

I’m in training pretty much the whole week — which fact one of my horoscopes must’ve predicted.  I mean, there are so many of them floating out there, that one of them must’ve been right!

 

The past couple days covered FMEA, an engineering topic so obscure I’ll give the unabbreviated name (Failure Modes and Effects Analysis) and immediately move the story forward.  We were fortunate to have had a great teacher — a grizzled veteran of industry who tossed out great one-liners such as:

 

"an FMEA without action [items] is called Charmin — because if you print it on softer paper, THEN it has a function"

         (Charmin is a brand of what polite butlers would refer to as ‘bathroom tissue’)

 

"product development is a failure factory"

 

          ….as well as the sentence clause,

" — not that it ever happens here — "

 

delivered each time he described a wince-worthy product development process which had indeed, never happened here. 

 

He also described how a good FMEA meeting ideally comprises the design engineer, a reliability engineer, a facilitator, and a fourth engineer playing the role of "The Opposer".  (Or as they say in the Biblical Hebrew, "Satan".    )

 

 

It turns out this fellow was a co-op student at Ford when FMEA’s were brought there in the 1970’s, due to the tendency of the Ford Pinto to explode in rear-end collisions, as a $4-per-vehicle fix was deemed too expensive.  Though to be fair, that doesn’t account for inflation; according to an unverified internet source, such a fix would cost a whopping $20 today.  That totally changed your perspective, didn’t it? 

 

In crisis, Ford brought in experts from NASA — which had regrettably extensive experience with exploding products — who brought in this FMEA technique.  So, as our teacher wryly noted, FMEA’s are actually rocket science, ported over from the Space Program which invented them.  The very Space Program which employed a colleague on an unsuccessful Mars Lander.  (Not the one which missed the planet; the other one, which stopped phoning home.)

 

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Come to think of it, it’s turning out to be quite the lesson week for me.  At the weekend gold show — bereft of decent freebies, apart from some USB drives — the busiest company booth was from some no-name junior exploration company (read "investing lottery-ticket") which had set up a big-screen TV, broadcasting the big Packers-Bears NFL game.  During commercial breaks, the marketing rep would mute the screen and begin a spiel about how "today’s game is brought to you by XYZ Resources; we have millions in cash flow, hot properties, and you need to buy our stock" — though better-finessed than my paraphrase.  They even had a functioning popcorn-maker to feed the crowd.  Pure genius.  Pity his company has a snowball’s chance in hell.  

 

Then there was the fellow I bumped into, wearing a suit; made of brown corduroy.  See, lessons all around! 

(originally written Jan 17; posted Jan 23 as part of some backfill) 

Now that the Globe and Mail’s GlobeInvestor site has mutual fund performance data for calendar 2010, I decided to check in on ubiquitous business-channel commentator and investment guru Dennis Gartman’s performance this year.  As you may recall, his ETF (exchange traded fund — basically, a mutual fund that trades as a stock) did rather poorly last year.  Outperformed by 98.3% of mutual funds (!) in calendar 2009, I calculated his SAT-equivalent score to be 288.

This is based on the assumption that SAT scores follow a normal distribution, and are scored such that the median (50th percentile) scores 500, with each standard deviation representing 100 points.  As such, scoring in this system would look like:

• 99.8th percentile: 800    (top 0.2%)
• 98th percentile:    700    (top 2%)
• 84th percentile:    600    (top 16%)
• 50th percentile:    500
• 16th percentile:    400    (bottom 16%)
•   2nd percentile:   300    (bottom 2%)
•   0th percentile:    200    (bottom 0.2%)

The good news is that Dennis did much better than last year; indeed, his shareholders actually made money! 

The bad news is that his 3.8% return for shareholders put him in the 18th percentile.  That is, 82% of mutual funds beat him.  (9452 of the 11577 GlobeInvestor tracked.) 

As such, his SAT-equivalent score for 2010 is…  410.
 

At this time I should note that investments are a poor reflection of a person’s financial prowess — last I checked, Mr. Gartman convinces people to pay $400/month for his advice, despite his track record!  Clearly, he’s got amazing skills.  Or at least, chutzpah.  …can you imagine how much he’d charge if he actually outperformed the market? 

Further context:

- half of all mutual funds tracked by GlobeInvestor gained 8% or more in 2010 (SAT-equivalent of 500).

- the Toronto Stock Exchange Index gained 14.2%, which would’ve placed it among the top 16% of mutual funds (1810 / 11577).  This is consistent with the rule-of-thumb that only 20% of mutual funds beat the index in any given year.

- because his ETF started at $10 in 2009 and stood at about $9.33 at end-2010, Gartman’s investors lost about 7% in a two-year period during which the TSX index rose 46% (from 9234 to 13530; and that doesn’t include dividends).  So over the past two years, the Gartman portfolio has underperformed the index by 50%!  Though a pecuniary pundit of Mr. Gartman’s self-assurance would surely dismiss that as a temporary underperformance of “only” 50%. 

My brother forwarded me this article in the Financial Times recently.  Superficially about the fall of Rome and other civilizations, as chronicled by Joseph Tainter’s Collapse of Complex Societies, it links back to the fact that the complexity of the financial sector has increased far faster than the balance of the economy — the “real” economy.

The example of diminishing returns on increased complexity may also be observed in that the financial sector’s robustness in the recent past has relied on leverage, basically meaning that to make their money, they had to bet increasingly more. 

In this sense, complexity is a crippling strength — because it’s useful and produces great results at first, it continues to be turned to, even when the incremental benefits diminish and even dissipate away.  But because it once produced great results, there’s little impetus to try other ideas…

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As a preamble, let me note it’s not my normal manner to poke fun with a bayonet — this is a special little something I reserve for pompous commentators of such oracular conceit that they greet all others’ views with a dripping disdain. 

To be clear, I’m sure that — like George W. Bush — Dennis Gartman is a nice man.

I’m also confident that — like George W. Bush — Dennis Gartman is a victim of the Dunning-Kruger Effect, which causes the cripplingly incompetent to think they’ve got exceeding expertise.  (To be fair, Dunning-Kruger is epidemic in the financial sector; how many “expert” mutual fund managers actually beat the index?  There is no cure.)

Lastly, I’m certain that — like George W. Bush — Dennis Gartman still has enough fans that this qualifies as “pricking the powerful” as opposed to “kicking the downtrodden”.

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Another of my financial commentaries (”worth every penny you paid!”)…

Due to persistent economic stagnation, countries are trying to push their currencies lower.  (See the Der Spiegel article here.)  The reasoning is that if the currency is worth less, countries’ exports will be more competitive, and through greater exports they can recover economic health.  The problem is that everyone can’t do this at once — and right now everyone is trying to do this all at once.  Now, try as I might, I couldn’t make an elegant “currencies are worth less” / “currencies are worthless” pun, so I’ll just commemorate my valiant efforts with this here sentence. 

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(Originally written Aug 11; posted Sept 5) 

I’ve noted a few times that gold rises pretty much during the university year, and falls in the summer months.  Being the conscientious and only mildly obsessive-compulsive type, it irked me that I didn’t have (favourably-selected) data at my fingertips to back up my statements. 

Fortunately, an American mutual fund manager pulled the data together recently; more fortunately, I stumbled across his editorial piece; and most fortunately of all, when I write these things, it looks like I’m hard at work. 

One of the funny things about investments is that they tend to follow loose patterns — they’re just predictable enough that you think you can make enough money on them, and just unpredictable enough to prevent you from doing so. 

One of the better-known investment rules — and one which actually works — is “sell in May and go away“.  The lesser-known back-half “and stay away until St. Leger Day” (roughly equivalent to Hallowe’en) sadly, is shrouded in relative obscurity, not unlike the three other stanzas for O Canada.  …what?  You’ve never heard “O Canada! Where pines and maples grow”?  Tish, tish…     

The funniest part of the “sell in May”/”buy in November” rule is that… it actually works.  From the Wikipedia article, the phenomenon has held up in 36 of 37 countries, and has worked in Britain for the past three hundred years.  As Wikipedia drily notes,
 
      “According to the efficient-market hypothesis, this is impossible.”
 
…which pretty much tells you all you need to know about the efficient-market hypothesis!  One wonders if ancient encyclopedias concluded their discussion of Magellan’s circumnavigation of the world with “according to the flat earth hypothesis, this is impossible”.

Oh — and bear in mind that a three-hundred year trend might have an off-year that one November you decide to bet everything on “black” at stock-market roulette. 

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But back to gold.  As explained in the article, and annotated by some charts, gold’s typical rise from August to May is largely a function of demand: weddings in India, Christmas festivities in the West, and Chinese New Year.  (The author also mentions Ramadan, but Ramadan shifts back by about ten days every year.  As such, over time, it won’t mesh with the others, which stay put in one part of the calendar.)

During this time period, there’s usually a swoon around October and one around March.  These tend to be due to the fact that investor “chum” notice the uptick in August-Sept or Jan-Feb, put in some savings, causing temporarily overbought conditions… leaving conditions ripe for market sharks to feed. 

Recently finished Daemon and Freedom, Daniel Suarez’ two-part semi-dystopic vision of the future.  I say semi-dystopic because they weren’t all bad news.  Loved them both, for the fact that they informed of the capabilities of computational power today — in a seamless manner that didn’t slow the action of the story.  In this feat, they reminded me of Gore Vidal’s Creation, the master’s bracing tale spanning pretty much the entirety of 5th-century-BC Eurasia.  Which, come to think of it, might be deserving of a re-read, about now…

On the surface, Daemon is a story in the “machine turns on its creator” genre.  Like “2001″.  And “Frankenstein”.  And for that matter, the Bible.    Freedom builds on this to reveal a clash between two competing visions for the future.

More profoundly, the dyad explores how our social/societal structures may change in the coming decades, based on the interplay of our current crises and the capacities of new technology.  All wrapped up in a masterful storyline.  With fiction like that, who needs textbooks? 

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note: Suarez has also given a lecture at the Long Now Foundation, well worth the invested time.  It’s available here.  Most intriguing to me was the idea that in a short time, bots will begin to outnumber humans online.  We won’t be the dominant “species”. 

It seems somehow analogous to the apparent fact that mutual funds outnumber stocks, in the investment sector: the derivative species (bots, mutual funds) ultimately flourishing more than the original species it interacts with (humans, stocks).

(Originally written June 14.  Posted, with modest supplemental info, June 17.) 

For those who follow my investing adventures (or “monetary misadventures”, depending on how the year’s going    ) gold made it onto the front page of the New York Times this past weekend.  An example of the “magazine cover indicator“, this strongly suggests that it’s due for a plummetting pummelling.

I’d expect this for gold priced in Euros — its slope was nearing positive infinity with the various crises (see the blue line in the image below).  And in market arrangements, things which rise sharply in price — whether the Nikkei index circa 1990, Nasdaq circa 2000, or Shanghai circa 2008 — tend to fall back sharply when the upward momentum stops.  Gold in Euros (blue) dropped sharply after seeing soaring gains in ‘06 and ‘09 — and fell sharply after rising sharply against the US dollar in ‘06 and ‘08 (red).

With the magazine cover, it seems highly probable gold will be cheaper in a couple months’ time, regardless of what might happens in the next couple weeks, as the investing classes find other amuse-portfeuilles for their wallets.  (On account of other self-fulfilling indicators, summarized finely by the pseudonymous Jesse here, I figure its price is due for a modest surge in the very near term.)

Euro-wise, the news has been so bad out of Europe for so long, that the Euro seems likely to strengthen for the next little bit: everyone who wanted to sell, has already sold.  As such, the trading algorithms of government-moneyed investment-bank speculators (whose predecessors Adam Smith characterized as an “idle class”) are likely trading dollars for Euros using some of those very same complex instruments which necessitated their  bailouts.  Ah, few things match the hypnotic stupor of a flatlined learning curve — as long-suffering Leafs (and Canucks) fans will surely attest! 

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Thomas Stanley and William Danko’s bestseller The Millionaire Next Door was chosen as the sixth book club selection, as a light-hearted diversion from business topics.  Though not without possible selection bias, it was considered a good vehicle for learning about the wealthy — a demographic to which many young professionals aspire. 

As usual, if you consider the review useful, please consider supporting the authors by purchasing the book.

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The Millionaire Next Door - summary