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Friday, December 26, 2008
Diversification
I had not planned on adding to my blog until after the holidays but events of the past few days have caused
me to spend some time writing today. The person that has created my urgency to write is Bernie Madoff. I
am sure you have read news articles or seen TV coverage of Madoff's investment Ponzi scheme that is reported to be somewhere
in the range of $17B to $50B. A wide range of individuals, Jewish charities, investment banks, college endowment funds
and Fund-of-funds hedge funds are reported to have lost billions of dollars in Madoff's Ponzi scheme. The coup de
grace of this story was the suicide of a French investment manager earlier this week. The gentleman reportedly lost
his net worth and over a billion dollars of his investors money through his investments with Madoff.
I have
seen many interviews and read a number of news reports about people or organizations that lost their entire new worth
investing with Madoff. They bet it all on Madoff's investment strategy. A number of well know investment firms
lost money investing with Madoff. Fund-of-funds hedge funds failed to do sufficient due diligence on Madoff's firm
before investing billions of their clients funds. The irony of the situation is that a number of potential investors
fully checked out Madoff over the years and documented the fact that they thought he was a potential fraud, including notifications
to the SEC. If all of Madoff's investors had done their homework Madoff could never have created the multi-billion
dollar fraud that he was.
At some level I think we are supposed to sympathize with the folks that lost their
money investing with Madoff. The people and organizations that lost money appear to be generally solid people.
However, one has to ask the questions. What were you thinking when you gave Madoff ALL of your money? Why
didn't you really check this guy out? Why did you violate a fundamental principle of investing called DIVERSIFICATION?
The reality is that the most of the people investing with Madoff were fools that violated some of the most fundamental
principles of investing including making sure that you are fully diversified in your investment portfolio. Every top
flight investment adviser that I have ever read or listened to starts with the basic premise that no failure
of a single investment or investment category can be allowed to severely damage or wipe out your net worth.
The people that lost their money with Madoff put themselves in a position to lose it because of their own greed and stupidity.
This is a very harsh statement but it is true. At some level these people didn't do their investment homework and
paid the price.
Every time I talk to people about investing I recommend they read one of the excellent books on
basic investing by people like Suze Orman and Ric Edelman. Unfortunately, many people don't invest the time to learn
how to manage one of their most important aspects of their life, their net worth. Maybe the publicity regarding
the Madoff Ponzi scheme will help educate the general public on the value of diversifying one's assets.
See
you next year!
TPM
9:23 pm
Sunday, December 21, 2008
Ancient History
During the holiday season most of us get some down time from our normal routines to spend time with our families
and pursue areas of personal interest that that we don't normally think about. I would encourage everyone to invest some
time reading a book or material on line or watching the History Channel on TV to gain an appreciation
of some elements of the ancient history that define the religious aspects of our holiday season. Many
of us never studied religious history in any depth in our formal school days. If we participated in church based religious
study the information most of us received was biased by the dogma of the particular church that we attended.
It doesn't take a lot of effort to get a much improved historical perspective of the ancient history of the Middle East
and how that history impacts us today in our closely linked world. I think it is worth the effort to spend some time
learning and thinking about the world we live in well beyond the headlines of our newspapers, Internet news sites and lead
stories on TV news by studying some ancient history.
2008 is almost over and it will become part of our history
in just a few days. This past year is one for the record books. The US elected Barrack Obama to become the next
US President. We had a major bear market decline in global stock markets. Major financial companies have
gone from world leaders to worthless companies in months. Oil increased in price to $140 plus per barrel in
the summer and then collapsed to below $40 by year end. The US dollar has made extreme moves in relation to other
currencies in a few months and weeks. We recently discovered the US has been in recession for the past year
and the US government is desperately trying to keep the recession from turning into a depression.
Since our lives
are in the present and the immediate future we must react to our conditions and deal with it for our own self preservation.
At the same time we must understand that one year or even several years is a very short period of time in the context of major
changes that occur in world history. We must be able to put our current conditions in context of the major longer term trends
that are occurring. Understanding the past is critical to anticipating the future. History never repeats itself
precisely but there are many lessons to be learned and applied.
Have a happy holiday season! The Purple Muse
will return in 2009.
TPM
Saturday, December 13, 2008
The Big Three Problem
During the past couple of weeks the primary focus of the financial world has been the potential bankruptcy
of the big three US automakers, GM, Ford and Chrysler. The Congress has been trying to decide to if the US government
should loan (bailout) the big three with a cash loan with a value in the range of $14B to $50B and perhaps a lot
more. After the Senate blocked the most recent bailout bill the action passed to the Bush Administration to make the
decision to bailout the big three with TARP funding. As of the most recent news reports it appears the the TARP
will be used as a financial bridge for the big three to the Obama Administration and the new Congress. It appears that
our new more Democratic leaning government that is taking over in January may be more enthusiastic about bailing out the big
three then the current government.
I have a lot of mixed emotions about this issue. I fundamentally
hate the idea of the US government bailing out any commercial company for any reason. The markets should determine the
life or death of any commercial business. The analysts that have commented on this topic are split on the issue of the
bailout. If view of the the ongoing financial problems in the country one would think that most people would be favorable
towards a bailout but this is not the case. I think I understand why this is happening.
Virtually
every US adult over 30 years old has had a major problem with a big three made vehicle that cost them a lot of money to fix
or forced them to buy a new car faster than planned. Most of us remember when Ford meant Fix Or Repair Daily.
We remember when GM cars were lucky to make 50,000 miles without major repairs. We were also asked to pay premium dollars
to buy one of their vehicles. We also remember when Toyota and Honda and then Hyundai and other foreign manufacturers
came into the market with cars that solved our transportation needs at low cost and whose cars got better and better over
the years while Detroit's cars got less and less competitive. We also learned that the Asian manufacturers were
fully committed to building the best cars possible at an affordable price while Detroit was committed to optimizing
their profits at their customers expense with less than fully competitive products. Many of us like the fact that the
decades of poor management by the big three have taken them to the brink of bankruptcy. The arogant leadership
of the big three is going down and going down hard. The big three is getting what many of us believe they have deserved
for a long time. The foreign manufacturers have defeated the big three fair and square.
The
other element of the big three that many of us despise are the auto worker unions. The unions have held
up the big three for wages and benefits that are totally unjustified for the semiskilled labor that is the bulk of the labor
in an auto assembly plant. The total compensation package that the big three work force is receiving makes no competitive
sense. If the big three cut their labor costs they can reduce prices and have a chance to compete with a
generally superior foreign product.
On the other side of the argument are those that are trying the defend the
US manufacturing base, the auto industry suppliers, the auto dealers and the associated network of businesses dependent
on the big three. They feel the impact of the big three's collective failure is too large a hit on the
economy in its current fragile state. I have a lot of sympathy for this view. My problem is that the big
three deserve to be bankrupt because the combination of poor executive management and costs that are too high (driven by union
labor costs) have made the big three uncompetitive in most of their products lines. The big three have failed the ultimate
test of the market.
There is no scenario that makes sense where the big three are not restructured to a significant
degree. If the government wants to lend them the money to fully restructure in the overall economic environment we can
live with that decision. In return for the bailout we must end up with a much smaller big three that will
operate fewer assembly plants with much lower hourly labor costs in the very near future. In addition we expect
the big three to earn our business by offering consumers superior value for our money the next time we buy a car or truck.
If we don't get the value we want from the big three we will buy our cars and trucks from Toyota or Honda or other
automakers that know how to fully satisfy its customers.
Just a note to the government types that will be looking
after the federal loans. Don't think you know what kinds of cars the big three should build in the future.
The big three need to really understand what consumers want, not what US government policy makers think they should build.
TPM
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