They merely want you to take a bet so they can take a small piece of the action (on billions of transactions of course) After all, if gambling or stock picking worked, they would be sitting at terminal or card table with you taking their own advice.

Finally, they have taken off their disguises and are entering the casino fray in earnest...

- Christopher

Whether Bonds or Touchdowns, They're Still a Gamble
Firm Engineers Vegas Wedding Between Wall Street and Sports Betting

M Resort

The betting area at M Resort was designed to look like a trading floor.

LAS VEGAS—Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.

Bond-trading specialist Cantor Fitzgerald in March took over the management of sports betting at the M Resort, a new 390-room hotel and casino on the Strip's southern edge.

Read the full article here....

I was reading the Journal this morning and while reading the article below, I had some thoughts. It's so fun to be able to look backward now at the 2008-9 crisis and see how various investment strategies performed. One such strategy is Warren Buffet-style active management where a "wizard" is chosen by the investor to use his powers of prognostication to "outwit" that dopey old market. The recent meltdown was a perfect chance for these wizards of active management and especially the king, Warren Buffett, to show his skills. The Journal takes a look at how he did starting at the beginning of 2008 through this week.

Unfortunately, they compare Berkshire Hathaway's performance to the Dow Jones Industrial Average which is an inappropriate benchmark. It's actually a bit unfair to Buffett in some ways. For example, he only took 62% of the market risk that an owner of the Dow took. Warren holds cash and bonds sometimes. Still, investors who simply held the Dow outperformed Warren by about 8% over this period.

A fairer comparison would be a broadly diversified passive portfolio that took about the same market risk such as DFA's Global 60/40 fund of funds mutual fund. (DGSIX) This passive (passive means no attempt is made to jump in and out of the market or individual stocks/bonds) mutual fund, which simply trusts the market to accurately price risk and adjust accordingly, trounced Mr. Buffet over this period by a total return of 18% while taking 60% market risk like Buffett. (The other 40% is in high quality bonds)

So why isn't the Journal writing about passive investment performance instead of this laggard? My guess is that it's pretty boring. Imagine the title:  "Market's Work Again, Investors Win." It's like saying there will be traffic in Los Angeles. Duh? This article is an interesting read because it's about a man's life. I think I'll trust markets and enjoy reading about Mr. Buffett's life separately.

-Christopher

Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do.

Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.

Read the full WSJ article "In Year of Investing Dangerously" »

-Christopher

Active Manager Survival

-Christopher

Finra fined Morgan Stanley $90K for unfair trading practices

I've never understood why people thought business was "greedy" or immoral in its pursuit of excellence. After all, business success just means that you've successfully solved some human problem. Money is the measure of your success but it isn't necessarily the end in and of itself. Mr. Mackey agrees and I admire his courage for actually speaking about it.

-Christopher

"I honestly don't know why the article became such a lightning rod," says John Mackey, CEO and founder 
of Whole Foods Market Inc., as he tries to explain the firestorm caused by his August op-ed on these pages opposing government-run health care. "I think a lot of people who got angry haven't read what I actually wrote. There was a lot of emotional reaction—fear and anger. I just wanted to get people to think about whether there was a better way to reform the system." 

Read the full WSJ article "The Conscience of a Capitalist" »

“Scott, I am sorry that I have not returned your calls over last year, but I was bewitched, again” Sleeping said, a little embarrassed.  “I am now back awake, and wanted to get an idea as to the value of my investments.”

To which Scott replied, “It is so great to hear from you, Sleeping.   We do not have the exact month end calculations yet, but it looks like your portfolio has gained about 3% in value while you were asleep.”

“Only 3%,” she replied, a little concerned.  “What happened since I have been asleep?”

“Not sure you are going to believe me, but here are the highlights,” said Scott. “As you may remember, before you went to sleep there was the beginning of some trouble around loans made to many homeowners, and there was talk of a recession.”

“Are we in a recession?” asked Sleeping

“We are in what many are calling the Great Recession,” said Scott.  “Many believe this is the worst US recession since the Great Depression.”

“Oh my!  And my portfolio is up!  Why didn’t the stock market crash?” she asked.

“Well, it did,” Scott had to admit, “but for you, it has already recovered.”

“So, tell me what happened.”

“It got really bad in September of ‘08,” Scott started.  “Both Fannie Mae and Freddie Mac were placed into government conservatorship.  Bank of America, with the prodding of the federal government, purchased Merrill Lynch to the tune of $50 billion.  Lehman Brothers filed for Chapter 11 bankruptcy.  The Fed lent $85 billion to AIG.  The Fed let Goldman Sachs and Morgan Stanley become bank holding companies so they can received federal bail out money.  Washington Mutual Bank closed and operations were taken over by JPMorgan Chase in a transaction facilitated by the FDIC.  The FDIC tried to help Citigroup acquire Wachovia by backing over $200 billion of potential bad loans.  Similar events were happening around the globe.  And that was only in September.”

Sleeping, now wide awake, proclaimed, “with the failure of Lehman Brothers and all the other banks having problems, you would think it was a repeat of the Great Depression!”

“The press certainly tried to talk everyone into it,” Scott replied, disgusted.  “From September 30, ‘08 to March 9, ‘09, the Dow lost more than 40% of its value.  As you could imagine, the press was having a field day.  They certainly love a crisis.  I have lost count of how many 'experts,' in February and March alone, were suggesting that this was just the beginning.”

“Since the bottom of the market on March 9, the Dow has gained 50%, and your portfolio was up over 70%.  Good thing you were asleep the last 12 months, as it was a period of great anxiety for many investors.”

“Sleeping for long periods of time can have its benefits, I guess,” she said with a chuckle. 

“Thanks for taking such great care of my portfolio, now I have to figure out who has been taking water from the mote.”

The moral of this story is that investing is a long-term process.  Good portfolios are designed to accomplish their goals over decades, not months.

The following link is to a 20 minute presentation that looks at the reasons why so many individuals have terrible investment experiences.

Behavioral Biases

Description: Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director of Dimensional Fund Advisers, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

The article says that golfers make fewer birdie putts than par putts (adjustments are made for distance and other factors) and at the professional level cost themselves millions in winnings. Apparently, the fear of a bogey is greater than the desire to get a birdie. So, even though both putts mean the same to the golfer's score, they embarrassment of the bogey (loss) is much more motivating than the pleasure of the birdie. (gain)

The authors also cite a study of blackjack players which documents that the greatest cause of sub-optimal play is not taking additional cards that you should. In other words, doing nothing in order to avoid loss was preferred to taking additional cards to win the hand.

I personally met with dozens of investors during the March period who, while aware of the opportunity in the market and for the need for change in their own portfolio, could not "pull the trigger". In their minds, no matter the state of their own portfolio, doing nothing was the preferred course of action.

I took it personally at the time that these folks couldn't move forward with my recommendations. Now that I've read this article though, I realize it had more to do with human nature than my communications skills.

-Christopher

The Lehman bankruptcy, which occurred a year ago today, was the nadir of a financial crisis brought on by excessive risk-taking throughout the investment industry.  Naturally, reigning in risky behavior has been in vogue since, and regulators are hard at work trying to do just that wherever possible. Sometimes, however, the problem is not too much risk, but too little. Indeed, research confirms that individuals are hard-wired to avoid certain risks at crucial times—even when, in so doing, they impose costly economic penalties on themselves.

Read the full Advisor Perspectives article "Investing Lessons from Golf and Blackjack Players" »

Now the Ivys will argue that their ten year average return was better than a traditional approach.  But, growing money is about compounding returns. Getting out of this hole, from a compound return perspective, is going to be difficult. I think a simple index fund approach would have a been a lot better and a whole lot less work.

-Christopher

Harvard, Yale Are Big Losers in 'The Game' of Investing

It's a tie in the Harvard-Yale investment game. Both schools were thrown for colossal losses.

The universities on Thursday said their endowments, higher education's two largest, each lost 30% of their value in the year ended June 30. Combined, the pair of investment pools shrank by a staggering $17.8 billion.

Read the full Wall Street Journal article "Harvard, Yale Are Big Losers in 'The Game" of Investing" »