Ideas That Have Shaped Our Lives

Sylvia Nasar, the author of "A Beautiful Mind" has written a history of the men, women and ideas that have shaped our economic world. 

I enjoyed this book for both its biographical profiles as well as its articulation of the economic ideas that have shaped the last 150 + years and still dominate our world today.

After reading this book, one may watch the talking heads on cable news, and observes the occupy Wall St protesters, and know that capitalism has struggled with very similar debates in the past. 

In the book one is remnded that prior to the 1850's the idea that the poor could be helped, that the economy could be "engineered", was an unthought of concept. Furthermore, we learn that capitalism has lifted many humans out of poverty and in the paraphrased words of Joseph Schumpeter: capitalism creates an economy where its not just the queen who can wear stockings, but also the working girl.  

Today we live in a richer world thanks to many of the ideas that Nasar explores. Lets hope that our current leaders and thinkers solve todays problems and continue to refine the system and not throw the baby out with the bath water.

Below is a fun little summary of the book:


http://www.youtube.com/watch?v=Io7Yuol8kd8

The Asylum, The Renegades Who Hijacked the World's Oil Market

The Asylum is the story of how the defunct Maine potato market morphed into the worlds oil market - the place that sets world oil prices. It is the history of how this came about and the men and women who play the game in a very dog eat dog culture.

I remember several years ago watching Fox's Bill O'Reilly yelling at oil industry representative John D'Agostino. O'Reilly was maintaining that there is  surely a secret organization that sets the price of oil. My thought then was that O'Reilly reads too many Ludlum novels. D'Agostino tried to educate Bill on energy markets and how prices are determined, but of course Bill knew better. This exchange is part of the prologue to Leah McGrath Goodman's book on the New York Mercantile Exchange (Nymex),  which then moves on to more completely explain what D'Agostino could not.

If you are at all curious about how the price of oil is determined and the personalities that inhabit this world, then this is a read that will educate and entertain you. Goodman has been reporting on the industry for years and knows her material.

Michael Angelucci has been certified as a CFP®, Certified Financial Planner™

Lockport, NY 10/31/2011- Michael C. Angelucci, CFP®, (President) of Angelucci Wealth Management, LLC in Lockport, NY has been authorized by the Certified Financial Planner Board of Standards (CFP Board) to use the certification marks CFP®, Certified Financial Planner™ and CFP (with flame design)® in accordance with CFP Board certification and renewal requirements. Mr. Angelucci specializes in retirement planning and investment management.

These marks identify those individuals who have met the rigorous experience and ethical requirements of the CFP Board, have successfully completed financial planning coursework and have passed the CFP® Certification Examination covering the following areas: the financial planning process, risk management, investments, tax planning and management, retirement and employee benefits, and estate planning. CFP® certificants also agree to meet ongoing continuing education requirements and to uphold CFP Board’s Code of Ethics and Professional Responsibility, Rules of Conduct and Financial Planning Practice Standards.

CFP Board is a nonprofit certification organization with a mission to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning. CFP Board owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete initial and ongoing certification requirements. CFP Board currently authorizes more than 61,000 individuals to use these marks in the United States. For more about CFP Board, visit www.CFP.net<http://www.CFP.net>.

For more about Michael and Angelucci Wealth Management visit: www.AWMfinancial.com<http://www.AWMfinancial.com>

Wisdom from: "The Myth of the Rational Market"

Investing wisdom from: The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox. This book is a history of the developments in academia and on Wall St that lead to the belief that market prices are accurate predictors of asset prices (stocks, bonds, real estate, oil, gold etc.).
History has shown that the financial models that depended on this premise failed badly.

But,  most investors,  (those investing in their 401K plans) have very little chance of deviating away from the idea that stock and bond prices are efficient - that the average investor has little chance of predicting stock/bond prices.  At the end of the book Fox writes:

"First, its hard to beat the market. If you have money to invest, the only sensible place to start is with the assumption that the market is smarter than you. You don't have to stop there. But if you do come up with an idea for beating the market, you need a model that explains why everybody else isn't already doing the same thing you are. ....
If you're picking somebody else to manage your money, the chances of finding a market-beating path are even harder. You're now paying a fee that cuts into your performance. Since retiring as CEO of Vanguard, Jack Bogle has published a series of studies on the determinants of mutual fund performance. The only measure that seems to have any predictive value is the management fee funds charge. The higher the fee the worse the subsequent performance. Cost is thus a good, all-purpose, starting point in picking a money manager - one likely, but not certain to lead one toward index funds. There are surely some high-cost money managers who more than earn their fees. Maybe you can find one. But you can't just do it on the basis of performance - you need to have some cogent explanation of why a particular manager can beat the market. Good Luck."

What the Heck is Going On?

What the heck is going on? Stocks are selling off. What is the market doing on sell off days?  A couple things are happening:.

1. Lets say that based on information known to you a few days ago, you owned an investment called the stock market and because of the risk in the market you demanded an 8% return. Therefore, if you owned $100 worth of the stock market you expect to earn $8/year from that stock market investment. This $8 is made up of profits in the form of dividends and growth in the price of the stock market.
Then information on the economy is reported. The new information says the economic future is not as bright as yesterday. That may mean that the expected profits of stocks will be less than expected, so the $8 you thought you may receive is now expected to be only $7.  If you want to sell your $100 worth of stock on the bad day, nobody will pay you $100 because the buyer wants an 8% return, and a $7 return on a $100 purchase is not an 8% return. In order to get that return, the buyer will only buy your stock for an amount less than $100, in fact they may only be willing to buy your stock for $87 ($7 earnings divided by $87 = 8% return).  Thus the market goes down on the bad news day.

2. The second thing that is happening, is people panic. They see the prices going down and they want to protect themselves so they start selling their investments and there may not be as many buyers as sellers on a bad day. Guess what happens then, the buyers demand a better deal from you and further drive down your price.

The crazy thing is that today or Monday or next month, nobody knows, the news could be good and this whole thing is reversed. The markets swing wildly over short periods because day to day buying and selling is based on the news of the day.

This is all bad if you need to sell your stock on the bad days or during bad periods.

But, over long periods of time we do know that news averages out and historically has been positive. That is why the market is higher today than it was 20+ years ago. Stocks have always been like a person with a yo-yo walking up a hill.

Its the2nd item above, the panic selling, that usually drives prices far below their actual future value. That is why buying during a sell off is generally positive over the long term. You are buying shares that are undervalued.

For those who are young and are buying stocks (mutual funds) on an weekly basis in your 401K then you are most likely buying when the market is low compared to where it will be when you retire. Because when the current bad news turns good then your investments will start paying more in the form of higher dividends and market growth.

Mutual Funds - Fees Matter. New Study from Vanguard

Although Vanguard promotes low cost mutual funds, their data is consistent with a 2011 Morningstar study and many other studies that have been done over the years. Bottom line: fees may be the best predictor of long term mutual fund performance. FYI:  1. alpha is the amount a mutual fund outperforms the market.          2. survivorship bias-some studies remove closed mutual funds

Probability of remaining in top-performing fund quartile: Holding periods of 1, 3, 5, and 10 years (1990 through 2010) Too often, investors view a fund's historical performance as the most accurate predictor of its future success. But Vanguard has found that more than any other quantifiable attribute that we examined, lower costs are associated with higher risk-adjusted returns. The figure below shows the probability that an actively managed mutual fund in the top-performing quartile would remain among the highest-alpha funds in subsequent 1-, 3-, 5-, and 10-year periods. The outcome was no better than would be expected from a random selection of funds and was sometimes worse. Notes: Each fund was evaluated relative to its customized benchmark using the Fama-French-Carhart expanded market model (Fama and French, Journal of Financial Economics 33:3-56, 1993; Carhart, Journal of Finance 52:57-82, 1997). Sources: Vanguard calculations, using data from Morningstar, Inc. Data exclude sector funds, real estate funds, and specialty funds such as bear-market funds. Outperformance of U.S. equity mutual funds by expense-ratio quartiles: 5, 10, 15, and 20 years ended December 31, 2010 Our research shows that a fund's expense ratio is a more powerful predictor of relative performance than other readily observable fund characteristics. On average, for every 1 percentage point increase in expenses, alpha declined by 0.78 percentage point. The second most powerful variable was portfolio turnover.1 For every 1 percentage point increase in portfolio turnover, alpha declined by 0.22 percentage point. In the figure below, actively managed funds that outperformed their relevant style indexes over the 5, 10, 15, and 20 years ended December 31, 2010, are grouped by cost quartile. Over the 20-year period, 49% of the funds in the lowest-cost quartile beat the benchmark while a mere 16% of funds in the highest-cost quartile did so. Similar patterns were apparent in shorter time periods. Since selecting active managers that consistently outperform their respective benchmarks is such a difficult task, focusing on low-cost index funds is a helpful and valuable quantitative measure. Notes: Data reflect percentage of U.S. equity mutual funds that outperformed their style benchmark for periods ended December 31, 2010. Data include only funds that survived the respective 5-, 10-, 15-, or 20-year periods. “U.S. equity mutual funds” refers to all funds, including those focused on a particular style or market capitalization such as large growth or small value. Sector funds, specialty funds such as bear-market funds, and real estate funds were excluded from the list. Sources: Vanguard calculations, using data from Morningstar, Inc., MSCI, and Standard & Poor’s. Style benchmarks represented by the following indexes: large blend—S&P 500 Index, 1/1/1990 through 11/30/2002, and MSCI US Prime Market 750 Index thereafter; large value—S&P 500 Value Index, 1/1/1990 through 11/30/2002, and MSCI US Prime Market 750 Index thereafter; large growth—S&P 500 Growth Index, 1/1/1990 through 11/30/2002, and MSCI US Prime Market Growth Index thereafter; mid blend—S&P MidCap 400 Index, 1/1/1990 through 11/30/2002, and MSCI US Mid Cap 450 Index thereafter; mid value—S&P MidCap 400 Value Index, 1/1/1990 through 11/30/2002, and MSCI US Mid Cap Value Index thereafter; mid growth—S&P MidCap 400 Growth Index, 1/1/1990 through 11/30/2002, and MSCI US Mid Cap Growth Index thereafter; small blend—S&P SmallCap 600 Index, 1/1/1990 through 11/30/2002, and MSCI US Small Cap 1750 Index thereafter; small value—S&P SmallCap 600 Value Index, 1/1/1990 through 11/30/2002, and MSCI US Small Cap Value Index thereafter; small growth—S&P SmallCap 600 Growth Index, 1/1/1990 through 11/30/2002, and MSCI US Small Cap Growth Index thereafter. Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 1 Turnover is a measure of a fund's trading activity. For this analysis, turnover was based on the lesser of the value of a fund's purchases or sales divided by average total net assets, as reported by Morningstar for the period specified.

REM, Pascals Wager and The Stock Market

"Its The End Of The World As We Know It, And I Feel Fine"
The classic REM tune has been resonating in my head over the last month.  I do feel fine. Well, fairly fine, and this is why:
As I have been discussing the recent market volatility, I have stated the idea that if the stock market crashes and never returns above current levels, or goes to zero, then that would mean our capitalist economy has collapsed and therefore our dollars and "safe" US Treasury securities would likely be worth nothing.  It would be the end of the world as we know it. 


So, like the French philosopher, Pascal, who wagered that one should believe in God, because to believe means eternal paradise and if God doesn't exist then nothing is lost, I am wagering on capital (stock) markets to continue to provide good risk adjusted returns. If they don't, it wont matter where I had my money stashed.  I am wagering on the stock market over the long term and I know that if I get out of stocks now I will  lock in my losses and likely miss the increase in prices that has always occurred with stocks after a correction. And, if it is the end of the world as we know it, then nothing is gained and all I will have is meaningless losses.


Therefore, I  feel fine. Either I will be ok or it wont really matter. I dont worry about the day to day stock market craziness. I know that will happen. I don't invest in stocks to make short term gains. I hold a well diversified portfolio, that as long as capitalism survives, should provide me with a nice risk adjusted return - I hope somewhere between 6% and 10% over the next 30 years. I have 60% of my retirement in the stock market. I am 45 years old,  I wont need that portion of my portfolio for 30 years and the stock market has always been the best investment over that length time.


If you continue to read through the lyrics below, you will read the last line: "its time I had some time alone"  By taking the leap of faith and developing a well diversified portfolio, rebalancing it and letting it ride you will capture a the long term returns of the global capital markets and you will have your time to be alone and not worry about the markets and whether to buy and sell or shift to a new sector. 
 As for me, I am going to hit send, turn off CNBC and go for a run and have time to myself.

"That's great, it starts with an earthquake, birds and snakes, an aeroplane -
Lenny Bruce is not afraid. Eye of a hurricane, listen to yourself churn -
world serves its own needs, regardless of your own needs. Feed it up a knock,
speed, grunt no, strength no. Ladder structure clatter with fear of height,
down height. Wire in a fire, represent the seven games in a government for
hire and a combat site. Left her, wasn't coming in a hurry with the furies
breathing down your neck. Team by team reporters baffled, trump, tethered
crop. Look at that low plane! Fine then. Uh oh, overflow, population,
common group, but it'll do. Save yourself, serve yourself. World serves its
own needs, listen to your heart bleed. Tell me with the rapture and the
reverent in the right - right. You vitriolic, patriotic, slam, fight, bright
light, feeling pretty psyched.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

Six o'clock - TV hour. Don't get caught in foreign tower. Slash and burn,
return, listen to yourself churn. Lock him in uniform and book burning,
blood letting. Every motive escalate. Automotive incinerate. Light a candle,
light a motive. Step down, step down. Watch a heel crush, crush. Uh oh,
this means no fear - cavalier. Renegade and steer clear! A tournament,
a tournament, a tournament of lies. Offer me solutions, offer me alternatives
and I decline.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

The other night I tripped a nice continental drift divide. Mount St. Edelite.
Leonard Bernstein. Leonid Breshnev, Lenny Bruce and Lester Bangs.
Birthday party, cheesecake, jelly bean, boom! You symbiotic, patriotic,
slam, but neck, right? Right.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine...fine...

(It's time I had some time alone)"