You are Welcome “Here”

I’m hoping that the Executive Order issued by President Trump blocking the entry into the United States of people from seven predominantly Muslim countries has accomplished at least one thing.  Americans are now looking at maps to locate these countries, reading to learn something about the Muslim religion, and developing their own opinions rather than just parroting the views of celebrities and the media.  At least that is my hope.

Some believe the ban is Trump’s attempt to restrict freedom of religion.  (Which is ironic considering there is no freedom of religion in any of those seven countries.)  Others are angry simply because Trump issued the Order, not bothering to recognize that the list was initiated by President Obama.

Those who believe we should readily accept tens of thousands of refugees need to be careful what they are wishing for.  I am sure Angela Merkel is wishing she had pursued a more cautious approach to accepting refugees from these same countries.  Assimilating these refugees is going to be a huge challenge and we need to learn from the experience of others.

What is motivating these refugees to flee their countries is the daily hell in which they are living, and we have contributed to creating that hell with our misguided foreign policy over the last twenty-five years.  To many, we are “the enemy”.  Our two cultures could not be more different.  However this does not give us an excuse to turn our backs on these refugees.

The American people are the most generous people in the world when it comes to helping those in need and we have a moral obligation to help, but we must be careful that we do not create another problem while trying to solve this one.

Young male refugees, with no family, could create a significant risk if given easy entry into our country.  They may have lost friends or family and blame us.  Estimates of civilian casualties since we invaded Iraq in 2003 vary but even the most conservative estimates are in the hundreds of thousands.  You and I may not think of these refugees as our enemy, but what do they think of us?  Try empathizing with them.  They will arrive “here” with little or no education, no marketable skills, and no ability to speak English or Spanish.  They may have escaped the hell of war but life will not be easy.  It is my fear that we may end up creating a pool of “dream candidates” for  Jihadist Recruiters to radicalize.

Perhaps our intentions in the Middle East were good, but like all occupying forces throughout history, any goodwill created was lost long ago.  And now it’s not clear whom we should support in these civil wars.

Our current immigration procedures and policies fall well short of what we need to do if we truly want to help, but it is going to require more than a strict vetting procedure.  If we are serious about helping these refugees we need to establish a government program enabling Americans to sponsor these refugees and assist in their assimilation.  Surely out of a country of 325 million people we could find a 100 thousand individuals or families throughout this country willing to help.  If not there will be very little assimilation.    Simply giving them permission to legally live and work in the United States is not a solution.

So when we hold up a sign that says “You Are Welcome Here” we need to think of what “here” means to each of us.  Do we mean you are welcome “here in the United States”, “here in our own community”, “here in our neighborhood”, or “here in our spare bedrooms”.  It’s easy to hold up a sign expressing support for these refugees but we need a comprehensive plan of action and not just demonstrations and slogans.

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My Five Years in Saudi Arabia

As many of you know I spent my early 30’s working in Saudi Arabia for Adnan Khashoggi, arguably the richest man in the world at that time.  The late 70’s was an exciting time there as the Saudi used their new oil wealth to modernize their country and turned to the West to aid in this project.  Roads, airports, schools, hospitals, etc., you name it and it was being built.  Companies from Europe, the U.S., Japan, Korea, were all there to compete for these lucrative projects.

To do the manual labor, workers were brought in from poorer Muslim countries such as Yemen and Pakistan.  It was a win for all, or though it seemed so at the time.  (More on that later.)

Saudi Arabia was, and is, ruled by the House of Saud.  The culture was, and is, like nothing I had ever known, and apparently little has changed.  Women cannot drive or go anywhere without their husbands.  In public their clothing can only reveal their face.  Being Homosexual or Transgender is not acceptable and punishable by death.

If you wanted to work there, you had to accept their culture, and to be honest it never bothered me.  It was their country and I was a guest.  This was obviously much harder if you were a woman and there were many Western women there with their spouses.  I understood their plight but would always remind them that it was their country and their culture.  No one was forcing any of us to be there.

Many of my Muslim friends became Westernized and immigrated to the West or simply lived by one set of rules when in Saudi and another when visiting or working in the West.  “When in Rome, __________________________”!

I have always felt lucky to learn about and experience different cultures.  For the vast majority of Muslims, their religious based culture works well for them.  Too many Westerners believe that Muslims need to embrace reforms, which will make their culture more like ours.  It’s never going to happen because they believe we are the ones who need to reform.

Islam is not only a Religion; it is a Political System with very strict laws derived from the Koran.  Being concerned about the huge influx of Muslims refugees does not make one a racist.

In the past many Muslim immigrants came seeking a new life and embraced our culture.  But that is not the case today.  Muslim immigrants fleeing their war torn Country have no intention of assimilating and accepting our Western Culture.  To the contrary, they are demanding that we accept their Culture which, as I said earlier, is like nothing I had ever experienced.

“Democracy”, “Separation of Church and State”, Equal Rights”, these are all beliefs they will not embrace.  And, just as I learned to respect their Culture, in return, I expect the same acceptance and respect from Muslims for our Culture.

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Trump the “Independent”

Wow!  I never dreamed we could elect a President who was opposed by both major political parties.  I thought we would see a woman in the White House much sooner.   He took on the entire “political establishment”, and won.

Back in March I wrote about how low so much of the Media had stooped in their attempts to defeat Donald Trump.  (Read the post, entitled “The Hate Strategy”, because it is even more relevant now.)  The “political establishment” feels their power is slipping away and is using their propagandist in an attempt to convince us that this Trump presidency is going to be a disaster.

All the way up until Election Day we were told the Stock Market would crash if Trump won.  The Stock Market has always been the most reliable indicator of what lies ahead, far more accurate than all the “experts”.  It’s early, but the “market” is sending a strong message of optimism.

Now that they have lost, and their agenda is threatened, they are stepping up their game, and it is scary.  I hope it does not lead to violence but that seems to be the goal of the New York Times, USA Today, Bloomberg, CNN, MSNBC, etc.  It’s “deplorable!”  The propaganda machine of the Democratic Party failed, and I hope they will start to realize that they may not be as smart as they seem to think they are.  Not likely, but thanks to the Internet and Social Media, they do not have as much power as they once did.

Donald Trump may not be Politically Correct and many of his comments were hurtful.  But the Clintons are “Politically Corrupt” and their vast propaganda machine could not hide it all.  The Clintons, have only themselves to blame.  Unfortunately they let down so many people who believed in them.

Hillary would have had so many obligations to those who have funded her campaigns and created the Clinton’s tremendous wealth over the years.  Trump’s only obligations are to the voters who elected him.  I wish him well and hope he will use that freedom to accomplish great things.

And for those who think the Electoral College should be abolished, are they also hoping to dismantle the Senate?  We have a Federation of 50 states and it would have fallen apart long ago without each State having a voice.

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The Legend

Many of you know Bo as a star at DFA over the past 20 years but before that Bo became a football legend at the University of Washington.  Bo is being honored at the Husky game this weekend and this recognition is well deserved.  I just wanted to share this  article I dug up giving you a few highlights his storied career.

Bo Cornell was a hulking football player who ran over people, his fearless style allowing him to move easily from Roosevelt High School to theUniversity of Washington to the NFL.

He had a name suited for toughness, but only because his younger sister, Cindy, couldn’t pronounce Bob.

The Miami DolphinsBenny Malone, however, even had trouble spitting out Bo.

In 1974, Cornell was two games into an NFL position switch with the Buffalo Bills — from backup fullback to starting linebacker — when he chased after Malone on a running play moving away from him. When the Dolphins tailback finally turned up field, the pursuer delivered a massive blow.

“I hit him in the head and we both went down; he was out cold,” Cornell recalled. “He had to be carried off the field on a stretcher. I chipped a big chunk of tooth. I felt I should have been carried off, too.

A lineman told me that was the hardest hit he had ever seen in his life.”

Today, Cornell travels in a far less violent world. At 56, he’s a slighter man with a mild demeanor. He’s into finance, a regional director for California-based Dimensional Fund Advisors. An Issaquah resident, he’s been married to his high school sweetheart, Jeanie, for 33 years and has two grown children.

Cornell started playing football when he was 8, advancing to each level with the same players, among them Jim Currie, Rick Smith, Steve Grassley, Bob Vynne and the late Hugh Klofenstein. As Roosevelt seniors, these guys had become such a cohesive unit they won seven of eight games and captured the 1966 Metro League championship, beating Sealth 14-13 in the Thanksgiving Day title game.

Cornell was durable, lifting weights at a downtown gym up to six times a week, starting when he was 15. He got the tough yard whenever needed but was equally impressive in the open field. He returned a punt 66 yards for a touchdown against Lincoln. He scored from 79 yards out against Shorecrest. Recruiters everywhere sought him out.

The UW was not an automatic choice. Cornell pursued an Air Force Academy appointment, thinking he might become a pilot. Yet he was nearsighted and failed a two-day physical at McChord Air Force Base. He signed a national letter of intent with Stanford and placed it in a mailbox, only to have immediate second thoughts. His father retrieved it from a postal worker.

At the UW, Cornell played for two bad teams and one good one, but was consistent throughout. He scored 20 touchdowns and rushed for 1,250 yards in his career. When his team went 1-9 in 1969, he lost just three yards all season while running for 613 in a wishbone offense. Demonstrating his versatility, he caught 33 passes as a senior when the Huskies switched to a passing attack.

The pros wanted him. Cornell was the Cleveland Browns‘ second-round draft pick and spent two seasons as a special-teams player. The Bills traded for him and asked him to move from offense to defense in his second season in Buffalo, considered a radical move at the pro level.

“That was one of the things I was most proud of,” he said. “I had to learn everything on the run. I hadn’t played any defense since high school. To me, it was just football. I wanted to play. I knew I could do it.”

 

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The Bad News

The demise of Active Management has resulted in a brighter future for all investors (the good news), but the bad news is the continued business practice of paying commission to sales people creating an obvious conflict of interest. The incentives are structured to maximize revenue for Wall Street and those masquerading as advisors. I realize I am not telling you something you don’t already know.

I have written about this problem in the past. The system drove me out of the brokerage business after a very brief stay. That was almost 30 years ago, but last May I wrote and shared with you well documented evidence that nothing has changed. It’s part of the culture and too profitable for every one but the investor.

You should go back and review those two posts. I pointed out the banning of this practice in the U.K. and Australia while recognizing the difficulty of reforming the system here in the U.S. Wall Street simply has too much, well paid for, influence over our legislators.

What brought my attention back to this issue now are the current attempts to pass legislation that would create a fiduciary responsibility for Wall Street’s sales people to put their clients interest ahead of their own. (It would be simpler and more effective to simply ban commissions, but I’ll take what we can get for investors.)

Paul Ryan is the lead defender of commissioned based investment advice telling us that the government has no business telling brokers how to charge for their services. He claims 7 million middle class Americans will be unable to get appropriate investment advice. Sorry Paul, but thanks to the Internet, everyone has access to investment advice. This blog alone has more appropriate investment advice than you could ever get from a sales representative striving to maximize their own income. There are numerous articles regarding this subject you can access with Google. Brokers are claiming that most of them already put their clients interest ahead of their own. According to the research I referred to above, that is far from the truth.

So this is the bad news. It’s one more example of the control Wall Street has over our lawmakers. Paul Ryan receives a major portion of his campaign funds from Wall Street so he is simply acting in his own self-interest. I wish however, he could sit in (anonymously) on a couple of sales meetings at a local brokerage office in his own state of Wisconsin. He would then understand what Wall Street is doing to those he represents. He is supposed to be on their side and not a Wall Street lapdog.

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Good News-Bad News

Time for all you advisors and your clients to break out the champagne and celebrate. It has taken almost 30 years but it appears that many of the proponents of active management are “throwing in the towel” and searching for new sources of revenue. Thirty years ago, virtually every dollar invested in mutual funds, was managed by Wall Street firms claiming they could “beat the market”.  Management fees were high and in most cases you had to pay an 8% commission just to get started.

What follows, are direct quotes from Bloomberg Business Week dated June 27, 2016.

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“Top executives at some of the largest fund companies, including Larry Fink at BlackRock and Gregory Johnson at Franklin Resources, are warning that a reckoning is coming. The pain is focused on companies that emphasize active management, picking stocks and bonds in an effort to beat the market.”

“Over the past five years passive funds, attracted a net $1.7 trillion dollars in the U.S., while active funds saw a slight outflow. The active managers haven’t been able to show they deliver a performance edge for their higher fees. In the five years ended in December, only 39% of actively managed equity mutual funds beat their benchmark indexes, according to Morningstar.

“Fink, who runs the world’s largest money manager, said at a conference on May 31 that the shift into indexing will not only continue but will be massive.”

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I just wanted to share this with you advisors who have played no small role in bringing this about. You can truly say you’ve made a difference. It was not easy, especially in the beginning, but with the truth on our side, I knew we would win. We have, and I love it.

So what is the Bad News? The “bad news” is the persistence of commissioned driven investment advice and the obvious “conflict of interest”.  The “market” showed the failure of active management. A battle Wall Street knew it would eventually lose.

But hiring “salespeople” to provide investment advice is still a very profitable business strategy. It’s just too profitable to let “ethics” get in the way. It’s both sad and shameful. More next week……………..!

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“You Must Be Kidding”

Back in the early 70’s, I began my business career as an auditor with Arthur Andersen & Co. It was at times a bit boring, but I always felt a real sense of purpose knowing I was doing my part to keep publicly traded companies honest when reporting their financial results. The independent Financial Accounting Standards Board, or FASB, established the rules. The rules themselves were known as Generally Accepted Accounting Principles or GAAP. It was important for every publicly traded company to get an “Unqualified Opinion” from their independent audit firm when reporting their annual financial results. A “Qualified Opinion” would have a negative impact on the Company’s share price.

Our GAAP was considered the gold accounting standard for the world. After all, could any investor trust the management of publicly traded companies to be completely objective and honest when reporting their financial results?

Well apparently, the SEC doesn’t believe that independently audited Financial Statements in accordance with GAAP are all that important in today’s business world. According to a recent article in the New York Times, publicly traded companies are allowed to make up their own accounting rules when reporting their financial results. I’m not kidding. It’s true, as long as they also report results according to GAAP. Can you guess which results are reported to the press and to analysts making buy and sell recommendations to investors?

So how large is the difference between GAAP and MHWT (management’s hype and wishful thinking)? From 2014 to 2015 net income for companies in the S&P 500 was up 6.6% using the MHWT. Using GAAP, there was actually a decrease of 11%. Using their own accounting rules 30 companies managed to turn a loss into a profit.

Apparently there were regulations passed 15 years ago to restrict this creative accounting but the SEC shows no desire to enforce those regulations. I guess this is just one more bit of evidence that Wall Street has too much influence over our elected representatives.

 

Note: If you want to read the article the title is “Fantasy Math Is Helping Companies Spin Losses into Profits”. (New York Times, April 24, 2016)

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