“Where Have All The Flowers Gone”

For those of you too young to remember, this is the title of a song written in 1955 by Pete Seeger and made popular by the “Kingston Trio” and “Peter, Paul, and Mary” in the 60’s.  The question raised several times in the lyrics is: “When will they ever learn?”  (If you are not familiar with the song, I suggest you go to You-Tube and watch the music video.)

Why is all this relevant?  After all, this is not the 60’s.  But in some ways the situation in the Middle East today is not all that different than it was in Southeast Asia in the 60’s. (You know the history.)  We had to stop the plague of Communism before it could spread all the way south to Australia enslaving millions along the way.  It was called the “domino theory” whereby one nation after another would fall. They had to be stopped!

Now here is where I see similarities between the 60’s in Vietnam and the Middle East today.  In Vietnam it became obvious that most Vietnamese did not want us there.  The North Vietnamese wanted to reunify their country and the Viet Cong in South Vietnam wanted the Americans out.  Realizing just how much we were despised we came up with a program to “win the hearts and minds” of the Vietnamese.  Advisors known as the “Green Berets” were trained to work with the Vietnamese and to give them the ability to defeat the communist.  Billions (in todays dollars) were spent training the South Vietnamese and equipping them with the best weapons and lots of air support.  Yet almost 10 years later we beat a hasty retreat from Vietnam as the Viet Cong closed in on the capital, Saigon.  57,000 Americans lost their lives and many more were maimed for life.  In addition, several hundred thousand Vietnamese died.

Are you starting to see any similarities?  I took part in only one “joint operation” with the South Vietnamese and it was very evident that they did not have the same level of motivation as the enemy, why would they.  Their political leaders and the U.S. were asking them to fight against Vietnamese. And worse yet, what if they lost and the Viet Cong won.  Well that is exactly what happened and they paid the price after the Americans left.

Now to the Middle East 50 years later–after 10 years of training and spending billions to build an effective Iraqi Army they seem to be totally incapable of accomplishing anything against ISIS (a group that would make Hitler proud).  Our current Chairman of the Joint Chiefs claimed this past week, that the Iraqi army may need American advisors on the ground “to be all they can be!”  I wish he had been old to enough to experience how that strategy worked out in Vietnam.  He might have a different opinion.

So—“will we ever learn?”  There is no American solution to the problems in the Muslim world.  That is a very sad fact but it is still the truth.   And the sooner we acknowledge the truth and change our strategy, the better off we will be.

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Robert Shiller: “Yes You Can Time the Market”

I have spent the last 25 years of my life teaching investors to stay disciplined and those who have listened have had a very successful investment experience. But the belief in “market timing” just won’t go away.

Last month, in the Wall Street Journal, there was an article with the above title.  It began with a lot of evidence regarding the failure of market timing and the success experienced by those investors using a long-term “buy and hold” strategy.

The article then went on to claim that there may in fact be a “model” that can enable investors to beat a “buy and hold” strategy.  Most “market timers,” “chartist,” etc. have very little credibility with investors because their failure to time the market successfully is well documented.  They begin with a model that tells them when to get in and out of the market.  (Something every investor would love to know.)  They fit their model to the past performance of the market to show how well an investor would have done, had they followed the model in the past.  But the problem is this; the past is not the future when it comes to investing.

It’s a dynamic world we live in and the pace of change is increasing rapidly.  To look at past market moves and various accounting ratios etc. to predict the future moves in the market is risky, if not dangerous.  History does not always repeat itself.

The Wall Street Journal article was of course talking about Robert Shiller’s “market timing” model.  Just last week, Shiller wrote a piece for the New York times stating how dangerous the market is today according to his model.

Shiller has a lot more credibility than most market timers because he recently won a Nobel Prize in economics and he teaches finance a Yale University.  In my opinion, that is what makes him dangerous.  Investors may believe they have found the “Lebron James of Investing” and follow his advice.

I am always skeptical when someone claims to be able to do something no one else has been able to do.  Especially when it comes to investing.  I then ask a simple question.  If Shiller’s “market timing” model works, why isn’t he a very wealthy man?  Maybe we should call this the “Jim Cramer Test.”

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The “E Booyah Virus!”

You are no doubt aware of the outbreak of the deadly Ebola Virus in Africa that has claimed the lives of over 1,000 victims and the mere presence of this Virus is causing untold economic hardship for those being quarantined to contain the Virus.  It is truly a tragedy for all concerned and we should remember them in our prayers.

The Virus I want to warn you about, I call the “E Booyah Virus.”  It’s a financial virus that has the potential to cause serious damage to your “financial health.”  In case you don’t recognize the name of this Virus, it is the infectious investment advice spewed by Jim Cramer on CNBC, in his newsletter, his investment guides and his daily emails to investors called “Daily Booyah!”

If you “Google” him, you will find that many others have looked at his advice, tracked the returns, and demonstrated that the only one, making money consistently, is Jim.  And I think that’s “Bull Yah!”  You don’t need to track all his recommendations year by year to prove that it is “Bull Yah,” you only need to look at Cramer’s own claims of success.

For the 14 years ending in 1991, he ran a hedge fund claiming an average annual return of 24% (while taking home $10 million a year as compensation.)  Let’s assume that being a smart guy, thinking about his future, he saved 10% of his compensation each year.  (That’s $1 million a year earning 24% a year.)  Fourteen years later (1991), he would have had a nest egg of over $80 million.

Now let’s assume that beginning in 1991 he consumed (spent) all future earnings from CNBC, investment guides etc. etc. Why? He already had a nest egg of $80 million set aside. He boast about his great hedge fund returns so lets assume he has been earning an average of 24% annually (the number he uses to advertise his stock picking skill) on his “nest egg.”  His “nest egg” should be worth well over a billion dollars. But Jim claims that his net worth is between $50-$100 million. The numbers just “don’t add up.”  Looks to me like he has suffered some big time losses along the way. He would have been a lot better off investing his “nest egg” in an S&P 500 index fund which would have given him a net worth in excess of $300 million.

Vaccinating yourself from the “E Booyah Virus” is easy.   Diversify, using passively managed, low cost, index type portfolios and stay disciplined. You will then be immune to the Virus.

Note 1:  Jim will sell you a copy of his current portfolio for $199.95

Note 2:  If you want to follow, I plan to start “tweeting” @wheelerwrites

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When Did We Lose Our Moral Compass?

I would love to have feedback on the words I am about to write. Our country has never had totally pure motives when dealing with other countries or even our own citizens. However, I have always been able to rationalize our actions by telling myself, at least our “code of morality” is no worse than that of any other country, but I am starting to have serious doubts and it’s very troubling.

You are no doubt familiar with the drone attack, ordered by President Obama, to take out Anwar al-Awlaki in Yemen. Al-Awlaki was an American citizen who had moved to Yemen and was advocating terrorist attacks on the U.S. and U.S. citizens. Being a threat to America, his voice was silenced once and for all with the drone attack.

When this attack was reported in the news, the debate began over whether or not the President had the Constitutional authority to order the execution of a U.S. citizen without any “due process” as required by law. That debate continues but it is likely that nothing will come of it. I am not a lawyer and feel unqualified to question the legality of the President’s action against a self-described enemy of this country. But debating the legality of this attack is missing a bigger issue regarding what our government did in Yemen.

Al-Awlaki’s 16 year-old son, an American citizen, who had moved from Denver to Yemen to live with his cousins was targeted two weeks later and killed along with four of his relatives while having dinner 250 miles away. Why? Roger Gibbs, former White House Press Secretary, suggested the boy would not have been murdered if he had a more responsible father.

For me, this is not a “constitutional issue” but a “moral issue.” Evidently the President expressed regret about what happened to the son, but no one is being held accountable. You might think that as the world’s only super power we would have the opportunity to show not just our military might, but to also show moral leadership. Unfortunately we seem to be headed in the opposite direction.

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“Fire Drill”

It’s times like this that make being an investor, and an Investment Advisor, so much fun, especially for those who “stayed the course” when the “Chicken Littles” of the world were running for cover. The pain of 2008/2009 is a fading memory, if not already forgotten, but therein lies the seeds of a problem, a false sense of security going forward.

Those of you who remained disciplined and continued to invest in 2008 and 2009 are the real heros. You advisors earned your fees many times over and you investors have reaped a huge reward that makes your financial future a lot brighter. Those who did not, well, you paid the price and hopefully you have learned a valuable lesson.

In the past, when speaking with advisors, I would encourage them to periodically have a conversation with their clients about the unpredictability of the market. I always called it the “investors fire drill.” We all experienced fire drills at school as children and at work as adults. The purpose, of course, was to learn what to do in the event of a real fire. It wasn’t for an expected fire but was intended to teach us how to survive and avoid serious injury if, by chance, there was a fire.

The market provides lots of material for this conversation and a serious “walk down memory lane” can be very useful. Ask clients to recall their emotions when the market was headed down with no end in sight. Calculate the lost economic value they may have sufferred with no discipline. And prepare them for the “this time it’s different” feelings they will experience if the market does head south. Point out to younger investors the long term benefit of contuing to invest when equity prices are lower. Give them examples of the cost of sitting on the sidelines when prices decline.

This “talk” with investors should in no way be considered a forecast, just as a fire drill is not a forecast of a coming fire. But having this talk today is so much better than having it when the market is off 30%. And if we have another 2008/2009 market you can immediately refer back to the “talk” you had with your clients and how they were going to deal with all their negative emotions.

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General Mattis-“It’s Fun to Shoot People”

A buddy of mine recently sent me a link a to story regarding Marine General James Mattis who, during a speaking engagement back in 2005, claimed it was fun to shoot people and fun being shot at (and missed). I had never seen the story and my buddy was inquiring as to whether or not I had ever met this “bad ass” Marine during my time in the Corps. The answer was no. I served from 1967-1970 and General Mattis joined the Corps in 1972.

I don’t recall ever enjoying being shot at, watching my colleagues die or seeing them maimed for life. Though I felt no guilt about the killing of NVA soldiers, their death was not something to be celebrated.

The General’s comments made it seem as if combat is like a big bar brawl, calling himself a “brawler”. To me this sounded like the boast of a man who had never seen combat up close and personal. So I went to Wikipedia to review his career.

He joined the Corps too late to see combat in Vietnam and by the time of the Gulf War he was already a Senior Officer. And, as anyone who has ever served in the Marine Corps will tell you, senior officers rarely get shot at or actually kill anyone. It’s the field officers, (Captains and Lieutenants) and the enlisted men (from the Gunnery Sergeant on down) who do the actual fighting.

I will always be proud of my service as a Marine and the views of men like James Mattis are not representative of the brave Marines I served with in Vietnam. I wonder what his views would be if he had actually experienced lethal combat.

But thinking about his time of service, it occurred to me that those Marines who had served in Vietnam (and survived) were retired by now. It is doubtful that today’s senior officers in the Marine Corps, just by historical circumstance, have ever seen combat “up close and personal”.

This observation is in no way intended to question their leadership ability, intelligence or courage. I would like to believe, that unlike General Mattis, they understand that combat is not a game (and it is certainly not fun.) Instead it is a duty that requires sacrifice and courage in the service of our country.

The Marines with whom I served had more courage than most people could ever imagine and many of them made the ultimate sacrifice. In my opinion, General Mattis demonstrated nothing but disrespect for them, their wives, mothers and children, who had to greet a Marine at the door delivering the news about their sacrifice.

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The Growing Wealth Gap

Income inequality and the gap between rich and poor are going to be “hot topics” as we move toward the mid-term elections in November and the discussion will become even more heated in 2016 when we elect our next president.  I believe these are serious issues and we need to find solutions.  Unfortunately, most of the proposed solutions we hear are geared to advance political careers with little thought given to the overall impact on our economy.

But before I speak about solutions I would like to point out what has caused a huge increase in the wealth gap over the past 5 years.  The rich, at their end of the spectrum, have investment capital.  The poor, at the other end, have very little if any investment capital.  With the Stock Market (as measured by the S&P 500) up over 125% during this period, it is obvious why the wealth gap grew dramatically.  However, during the prior 2 years the Market lost 50% of its value, and of course this narrowed the wealth gap.  (A market crash that narrows the wealth gap is not a solution to the problem.)

Capitalism will always favor those who have capital to invest, and unless we come up with a solution that encourages or even demands participation in the capitalist system, the wealth gap will only continue to grow.  I also believe that far too many politicians who claim to be advocates for the poor have an ulterior motive.  They benefit from having a constituency that is dependent on the government for their subsistence and that will always vote to keep them in office.

So how do we go about dramatically increasing participation in the capitalist system, with all the inherent benefits, currently enjoyed by those who have the means to participate?

Believe it or not, government can provide the answer.  Here’s how.  Every employer and employee (roughly 93% of the working age population) would be required to contribute to an investment account run by the government.  This capital would be invested in broadly based, low or no cost, passive index type market portfolios.  Employees would not have control over the investment decisions eliminating all the “emotional” mistakes that have severely damaged many retirement plans.

Wall Street would be against such a program because it would take away their ability to earn fees on what would be a very large pool of capital.  (But perhaps those on Wall Street, who believe they can “beat the market,” would be allowed to participate if they guaranteed that any underperformance would be made up out of their own capital.)   Something tells me there would be few, if any, money managers who would accept such a condition.

The amounts contributed, the allocation to equities relative to participant age etc. etc., would have to be determined but I believe that would not be very difficult.  Basically it would be a program that “enfranchises” most workers, allowing them to participate and benefit from our capitalist system.

A simple idea but it has to be a better way to go than simply redistributing income and/or wealth.

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