Saturday, February 28, 2015

Warren Buffett‘s Bad Investments

In his letter to Berkshire Hathaway shareholders, Warren Buffett looks back on his investment mistakes. Some bad moves occurred early on. Others he committed when he was old enough to know better. His purchase of Dexter Shoe, for instance. By the 1990s, most New Englanders could have told him the area's shoe industry was in hospice care.

Perhaps that misjudgment related to his earlier faith in New England's vanishing textile industry, which first moved south, then overseas. But without that faith, the name Berkshire Hathaway never would had gotten a second wind.

Here, from 1964, is an ad from the "old" Berkshire Hathaway.

Friday, February 27, 2015

They Lived Long and Prospered

Leonard Nimoy as Mr. Spock voiced the words: "Live long and prosper." He will be missed.

So will Irving Kahn, who lived those words.

Wall Street's oldest active professional investor, Kahn made his first stock trade in the summer of 1929 and became a disciple of Benjamin Graham. Until last fall he was still reporting for work three days a week at his midtown office. Kahn died at age 109.

Related post: Good Advice From a 108-Year-Old Investor.

Thursday, February 26, 2015

Wealth Management for the Deluxe Lifestyle

Jim Gust called my attention to the premiere issue of the redesigned New York Times Magazine, thick with ads. Four million dollar condos. Watches with unmentionable prices. And a surprising number of marketing messages from wealth managers catering to the upper crust.

BNY Mellon boasts of a 97% client retention rate. First Republic spotlights one of its entrepreneur banking customers. Bessemer Trust expresses willingness to manage new wealth alongside old wealth. Glenmede, despite having dropped "Trust" from its logo, features its status as a privately-held trust company.

For readers of the magazine who are not yet really rich, Fidelity, Fisher, Schwab and Merrill Edge also offer wealth-management help.

Back in Mad Men days, nobody would have expected to see those ads in the Sunday Times magazine. A quick look at the comparable magazine section for February, 1965 reveals that ads for women's fashion and home furnishings dominated. Men were offered stereo record players.

Ads for investment services and products? Back then they were found in the Sunday business pages. Mutual funds were a hot topic, as shown at right.

One reason for the migration of investment ads to the magazine section of the Sunday NY Times was the need to reach women. Equally important, wealth managers to the truly wealthy wanted to burnish their upper-crust image: "We manage family fortunes for the sort of people who own multimillion-dollar condos and buy expensive watches without looking at the price tag."

Neither of those motivations is new.  As we've shown you from time to time, back in the 1960s Chase Manhattan and U.S. Trust regularly advertised in The New Yorker. On that magazine's pages their messages mingled with ads from purveyors of women's fashions and suppliers of all manner of upscale merchandise. And, of course, Chase ads could run in full color.

Here's a nest egg ad from the winter of 1964-65, portraying a clock collector. Does he seem a bit stolid for the Swinging Sixties?

Thursday, February 12, 2015

Monday, February 09, 2015

In Defense of Investment Advisers

After collecting their one percent annual fee, most investment advisers are doomed to underperform the market. More likely than not, an amateur investor could do better – just invest in index funds, sit back, be patient and get richer.

Investment advisers, not to mention brokers, appear redundant. – useless or worse. William Berstein sees them as a threat to financial health and happiness:
As an investor, you must recognize the monsters that populate the financial industry. *** … most “finance professionals” don’t even realize that they’re moral cripples, since in order to function they’ve had to tell themselves a story about how they’re really helping their customers.
Some critics are less polite.

Polite or not, the critics ignore a key reality: Most people cannot invest sensibly on their own. At best, perhaps a third are willing and able to put their money into a few diversified, low-cost funds and stay the course.

Others need somebody to hold their hands and discourage them from buying high, selling low. Some are reluctant investors. In begone times they would have been contented savers, putting their money into 3.5-percent savings accounts and 6-percent CDs. Nowadays they must seek investment help or grow poorer.

In short, most people with money to invest still need advisers. What’s different is the adviser’s mission. Instead of tilting with windmills and seeking to beat the market, the adviser’s aim should be to produce better results for the investor than the investor would achieve on his or her own.

And that goal should be often achievable;. The bar is set surprisingly low. From 1994 through 2013, the S&P 500 produced an annualized return of 9 percent. The average stock fund investor earned 5 percent.

Some estimates suggest the gap in returns is even greater after accounting for all fees and other expenses.

Does a 20 percent increase in investment performance sound worthwhile? By controlling expenses with ETFs and limiting fruitless trading, an adviser could achieve that impressive improvement merely by increasing the investor’s annualized return from 5 percent to 6 percent.  A low-cost, exceptionally patient adviser might achieve 7 percent – a 40 percent improvement!

Helping clients beat the average investor rather than beat the market doesn’t sound glamorous. It won’t earn advisers enough to acquire a beach house in Malibu. But it is doable.

Like politics, investing is the art of the possible.

Sunday, February 08, 2015

Nigeria Forever!

From today's email. Or so I conjecture.
I hereby would want to bring to you the good news about your long awaiting fund, The Federal Ministry of Finance, Nigeria, and the Banking industry here in Nigeria in-conjecture with Central Bank Of Nigeria held meeting in Abuja regarding all foreign payment.

Saturday, February 07, 2015

Tips For Donors and Charities

Paul Sullivan's Wealth Matters column reveals an unusual corner of philanthropy: helping companies with ill-gotten gains give away their tainted funds.

Lesson for donors: Giving money away usefully can be hard work. Wealthy individuals who fund a new dorm for their alma mater or a new wing for the local hospital have it easy. Donors who have to come up with their own ideas do not. Giving away money effectively, Steve Jobs believed, was more difficult than making it.

Lesson for charitable recipients: Donors expect feedback. Most charities who received portions of the ill-gotten gains failed to report on how they used the money. The minority who did won additional grants.

Friday, February 06, 2015

Paul Gauguin, From Wealth Manager to Destitute Artist

At age 23, Paul Gauguin started a successful career as a Parisian stockbroker. He fell in with the arty set, including Pissarro and Degas.

If Gauguin didn't invent the midlife crisis, surely he perfected it. In his late 30's he abandoned his job, his family and middle-class life to become an artist. Economically, it was downhill all the way. Only after Gauguin's death in 1903, sick and destitute in Tahiti, did his paintings become prized.

Fast forward to 2015. One of Gauguin's works, painted during his first stay in Tahiti, just changed hands at a price higher than any other painting is known to have fetched: nearly $300 million!

What do you suppose the wealth manager turned artist would have made of that news?
This Gauguin sold for a record price of almost $300 million.

Thursday, February 05, 2015

About those tax "cost" estimates

A client recently had a question about the current issue of Estate Planning Report:

I’m not sure what the dollar amounts mean in the second paragraph??  Tax cost the first year is $239 million and the ten-year cost is only $384 million.
These are the numbers that the Joint Committee on Taxation submitted as the lost revenue for allowing the tax-free rollover of funds from an IRA to a charity.   Here’s my source. You may recall that in December Congress reinstated the tax-free charitable rollover for a single year, and it has now expired again. They scored it as losing $239 million in the first year and from $12 to $19 million every year after that.  It’s line A8 of the table.

JCT does not explain their methodology or assumptions for specific line items. Frankly, the numbers make no sense to me.  I take it that they assumed the restoration was for one year only, that the charitable rollover would be repealed for years 2 – 10, so the later years cost far less. But then why don’t they cost zero?  How do they lose $19 million in year 10 for donations made in year 1?

But even worse, let’s unpack the numbers a bit to see what they mean.  By definition, the donations are coming from those over 70 1/2 and can’t exceed $100,000.  For the sake of round numbers, let’s assume that their tax rate is 23.9%.  To lose $239 million in one year, you have to assume that $1 billion would have otherwise been included in the income of these retirees, presumably as required minimum distributions.  To get to that number you need to have 10,000 retirees each make a maximum $100,000 charitable rollover contribution—that seems absurdly high to me.  Alternatively, 100,000 taxpayers could donate $10,000 each, but that still seems equally unlikely.  I doubt that there are that many IRAs large enough to sustain such large donations, especially just in the last two weeks of the tax year when such rollovers were allowed. Remember, only those over age 70 1/2 are even eligible.  Presumably only those with IRAs worth $1 million or more would consider such a large donation, and GAO reported there are only about 600,000 IRAs that large in the country.

But still worse than that, they also must have assumed that the affected seniors would not have exercised their right to simply take the RMD, give it to charity, and claim the deduction in the usual way!  That seems like the most unlikely assumption of all.  That’s why I concluded the paragraph with the notion that the JCT seems to be assuming that charitable gifts won’t be made at all in the absence of this provision.

Am I missing something?

Wednesday, January 28, 2015

So, does Obama read this blog?

Soon after the post below went up, the administration reversed course on taxing 529 plans.

They didn't admit it was a stupid, tone-deaf idea, but rather said they wanted to avoid "distracting" from the rest of proposals. Right.

Tuesday, January 27, 2015

Where's the outrage?

I've been surprised at the passive response to the President's proposal to push 529 plans back into the taxable arena. IBD offers a mild pushback here. I haven't been able to find the fine print on this proposal, but most of the coverage suggests that taxation of earnings would be limited to new contributions only.

That would be a bookkeeping nightmare, wouldn't it?

Somehow, "progressives" are always shocked to discover that, after they push marginal tax rates ever higher, the "rich" get a disproportionate benefit from tax breaks such as 529 plans. I guess that's because math is hard.  But that was the essence of the rationale for this proposal.

Given the catastrophe of student loan debt, isn't it folly to attack the one path that is successfully accumulating capital for higher education?  The effect of the Obama proposal would be to freeze contributions to 529s, so existing accumulations would be drawn down over a generation. Except that some sources suggest that some plans could fall below critical mass long before that time.

Sunday, January 18, 2015

Can President Obama Revive BypassTrusts?

For many a year, the most common trust used in estate tax planning has been the bypass or credit-shelter trust. The goal is to shield assets from tax at the later death of one's spouse. But there's a significant price: loss of stepped-up basis. When you shelter appreciated assets from estate tax, you expose the appreciation to capital gains tax when the assets are sold.

Now President Obama proposes to abolish stepped-up basis. Assets passed directly from parent to child would be subject to the same tax on capital gain as assets sheltered in trust. Curiously, he describes the provision as a trust fund loophole

Seems more like a trust fund plus.

Could bypass trusts make a comeback?  Possibly. Do you believe that a Republican Congress would abolish stepped-up basis?

Thursday, January 15, 2015

How a $150-Million Trust Fund Went Missiing

Wall Street had a terrible year in 1973. Franklin Resources, run by Charles B. Johnson, had gone public two years earlier;  now it was struggling with a major acquisition and running at a loss.

Franklin's underwriter obtained a $100 million loan for Johnson from Anthony Miele, Jr. As a thank you for the help, Johnson gave Miele 4,000 shares of Franklin Resources, then worth about $4 a share. Miele put the shares in a trust for his son, Anthony Miele III.

In 1974 the elder Miele died of a heart attack at age 39. The trust's Franklin Resource shares were voted that year, according to bank records. After that the story, as told by William D. Cohan in the NY Times,  gets murky.

For years the younger Miele knew nothing about the trust. Eventually the shares were deemed abandoned, and Franklin Resources rejected Bank of New York's offer to track down the trust beneficiary. In 2012, a business partner of "the Al Capone of New Jersey" reportedly "signed something" on behalf of Miele.

Anthony Miele III is fighting to reclaim his inheritance, now worth about $150 million, including unpaid dividends.

Update: Antoine Gara's Forbes column offers additional details of the murky story. Not only did the 4,000 shares go missing, Miele Jr.'s $100-million loan was not repaid.

Wednesday, January 07, 2015

Down With Donor-Advised Funds?

They're like charitable foundations for the millionaires next door. Fidelity launched the first donor-advised fund in 1991. The idea proved remarkably popular, prompting other companies to offer DAFs. Today the funds of Fidelity, Schwab and Vanguard rank among the top-ten recipients of tax-deductible dollars.

And there's the rub. With more philanthropic dollars flowing into DAFs, fundraiser Alan Cantor charges, actual charities are losing out:
"Giving USA" reports that charitable giving from individuals in recent decades has consistently hovered at around 2 percent of disposable personal income. While overall giving to charity as a percentage of income has remained flat, dollars flowing to DAFs doubled from 2009 to 2012 (reaching $13.7- billion), according to the National Philanthropic Trust’s 2013 Donor-Advised Fund Report, and the percentage of charitable giving going to donor-advised funds also doubled (to 5.7 percent of the $240.6- billion of all giving from individuals, as reported by "Giving USA"). It’s largely a zero-sum game: Money going into DAFs is essentially subtracted from other charitable giving.
Jesse Eisinger at DealBook echoes that criticism, noting proposals that would require donor-advised funds to distribute their assets quickly, within five or seven years.

Such a rule would doom DAFs to oblivion. Clearly, many donors like the idea of building mini charitable foundations, funds that can serve as philanthropic training wheels for the next generation. Vanguard pitches the possibilities here.

Whether DAFs, like dynasty trusts in a number of states, should be allowed to last forever is another matter. If family trusts become limited to a term of ninety years, shouldn't DAFs be limited, too?

Charitable foundations have to distribute a portion of their assets each year. DAFs at present do not. Is that difference likely to last?

Tuesday, January 06, 2015

Ask Not For Whom the Bell Tolls

Increasingly, investors see actively managed funds as a sinking ship, according to this WSJ report:
[T]he passive/active divide kept getting wider in 2014. Investors took a net $91.46 billion out of actively managed U.S.-stock funds and invested a net $63.52 billion in passive U.S. funds—preferring low-cost index funds to the skills of stock pickers—according to estimates through November from Morningstar Inc. 
Their lack of faith in managers is understandable. According to preliminary data from Morningstar, 88% of managers of large-cap growth funds underperformed the S&P 500 index in 2014.

Saturday, January 03, 2015

Perfectly Placed Wealth Management Commercial

BNY Mellon's Joe Montana commercial, introduced last summer, fit in beautifully during today's NFL coverage.

On BNY Mellon's web site, the scripted commercial is billed as a "candid interview." Huh?

Monday, December 29, 2014

“Wealfie” or “Wealthie”?

Look! Me in the Ferrari I got for Christmas!

Look! Me with Sissie in her Yale dorm!

Look! Me in our private jet!

Conspicuous consumption is, well, conspicuous in much of the self portraiture known as the selfie. What should we call these social-climbing graphics? Wealthies or wealfies?

Earliest known example of the genre: Look! Me with Bernie Madoff! (Just kidding, I hope.)

Dave Barry: The IRS Finally Reforms!

From Dave Barry's Review of the Year in The Washington Post:
In Washington scandal news, the Internal Revenue Service, responding to a subpoena, tells congressional investigators that it cannot produce 28 months of Lois Lerner’s e-mails because the hard drive they were stored on failed, and the hard drive was thrown away, and the backup tapes were erased, and no printed copies were saved — contrary to the IRS’s own record-keeping policy, which was eaten by the IRS’s dog. “It was just one crazy thing after another,” states the IRS, “and it got us to thinking: All these years we’ve been subjecting taxpayers to everything short of rectal probes if they can’t produce EVERY SINGLE DOCUMENT WE WANT, and here we lose YEARS’ worth of official records! So from now on, if taxpayers tell us they lost something, or just plain forgot to make a tax payment, we’ll be like, ‘Hey, whatever! Stuff happens!’ Because who are we to judge?”

Monday, December 22, 2014

Wealth Inequality Illustrated

Don't remember what periodical's web site this screen grab came from. Wouldn't be polite to identify the source if I did. The contrast is striking: wealth survey rubs shoulders with homeless advocate.

As Beatrice Kaufman* said, “I’ve been poor and I’ve been rich. Rich is better!”

*Although the saying is associated with Sophie Tucker, the first recorded usage was by the wife of playwright George S. Kaufman.

Wednesday, December 17, 2014

Art in Lieu of Taxes: a Slide Show

This masterpiece by the Venetian Francesco Guardi,
 accepted in lieu of inheritance tax, now hangs in the Ashmolean.
From the estate of artist Lucien Freud,
this work by Frank Auerbach was worth 
£16.2 million in payment of tax.

Winston Churchill's paintings aren't the only ones to be used as a money substitute when paying UK death tax.

As this Telegraph slide show illustrates, many masterworks – and some not so masterly – have helped Brits and their estates meet outsize tax bills.

Could the UK "in lieu of" system work for the IRS? Would it be more workable of contemporary works of volatile or uncertain value were excluded?

Monday, December 15, 2014

Investable Assets Are National, People are Regional

Oldtimers remember when television was expected to homogenize the nation. (The oldtimers' parents had thought radio would do the trick.) Regional accents, customs and preferences were supposed to disappear, blending into a coast-to-coast "Americanism."

In reality, of course, regional differences are alive and well. Elizabeth Currid-Halkett of USC shows the significant variations in conspicuous consumption in this NY Times op ed.

For marketers of wealth management, the striking aspirational differences in  cities across the country deserve attention.

For instance, a New Yorker making a sales call in Minneapolis should not expect
his prospective client to be impressed with his Rolex. And a Dallas wealth manager wooing a Bostonian should not suggest that sending the kids to private school is a waste of money.

Saturday, December 13, 2014

James Brown's Disrespected Will

James Brown performing in Hamburg, Germany, February 1973.
This idea that you can just completely disregard the testator’s wishes is fine if we are going to live in a country where people don’t have a right to say what happens with their assets when they die.

– Virginia Meeks Shuman, Charleston School of Law

When the children and grandchildren don't like the terms of a will, things can get messy. The James Brown mess, The New York Times reports, is super sized. South Carolina seized his estate and wrote Brown a new will. The South Carolina Supreme Court overruled. Now what?

Friday, December 12, 2014

Prince William's Ancestor (an American) Detested British Nobility

William and Kate, that charming young couple, created quite a stir with their visit to this country. Americans love British royalty.

Well, not all Americans. When William and Kate married, we told the story of Frank Work, who would have hated having a prospective king of England as a great-great-great grandson. See The Royal Wedding's American Connection.

Saturday, December 06, 2014

How to Succeed at Investing Without Really Trying

How many articles offering basic advice to investors in stocks have been written over the last few decades? Thousands, for sure. Millions, maybe? Certainly Merrill Anderson's editors have contributed their share in our newsletters.

So how do you create yet another article on the subject and make it fresh and readable? Not easy. Morgan Housel does a notably good job in his Wall Street Journal($) column, 16 Rules for Investors to Live by.

I like Rule 1:
1. All past market crashes are viewed as opportunities, but all future market crashes are viewed as risks. 
If you can recognize the silliness in this, you are on your way to becoming a better long-term investor.
If you don't have access to the WSJ online, browse Housel's columns for The Motley Fool here. He's won the Best in Business award from the Society of American Business Editors and Writers twice.

Could the content on your web site and in your handouts benefit from sounding less pretentious, more like Housel?

Are Perpetual Trusts Unconstitutional?

Scene: divorce court.

Husband's lawyer: In the interests of a swift settlement, my client wants to be more than fair. He's willing to give his wife half his net worth of one billion.

Wife's lawyer: Not so fast. What about his other billion, the one he put into that out-of-state perpetual trust?

Judge: Interesting point. Since our state doesn't recognize forever trusts, I'm including the value of the trust in his net worth. That brings his total wealth to two billion. How does "One billion for her, one for him" sound to you?
Paul Sullivan devotes this week's Wealth Matters column to perpetual trusts. According to Robert H. Sitkoff, a professor at Harvard Law School, some may prove vulnerable to angry spouses or greedy descendants.

Tuesday, December 02, 2014

An amateur executor.

Maurice Sendak named as the executor of his estate a woman who had worked with him and taken care of his home for several decades.  He created a foundation which owns his royalties, and named the same woman, Lynn Caponera, as its president.  Ms. Caponera began working for Mr. Sendak at age 19, has no other work experience, and did not go to college.  However, she does have an intimate knowledge of his property, which includes rare books, and his life's work.

A controversy has broken out with the Rosenbach Museum and Library in Philadelphia, which had expected to be the permanent home of Sendak's papers.  Ms. Caponera instead plans to add a museum to Sendak's home, and open the grounds to the public.  Lawsuits are in progress.

Shades of Albert Barnes, who tried in vain to keep his eclectic art collection in his home and out of the museums of Philadelphia.  See "The Art of the Steal"  for the story of the 60-year effort to break the terms of his will, ultimately successful.

The comments to the NYTimes article are generally more sympathetic to Caponera than the article is.  The commentors have a charmingly naive belief that the terms of the will should be controlling, and they identify with Caponera's decades of loyalty.  Fortunately, Caponera has a committee to help back up her decisions.  But shouldn't Sendak also have named a corporate executor?

Monday, December 01, 2014

$116,273 Christmas Present

Illustration by Xavier Romero-Frias, via Wikimedia Commons
PNC has once again checked out the prices of gifts mentioned in "The Twelve Days of Christmas." This year, if you purchased each gift (one partridge, two turtle doves, etc.) each time it was mentioned in the song, you would have spent a total of $116,273.

Despite the Fed's effort to stoke inflation, that's only a 1.4 percent increase over last year.

Wednesday, November 26, 2014

Ready For a Santa Rally?

For investors in world stock markets, research reveals, "December has been, on average, around four times more profitable than the average month…. "

According to the table published by The Telegraph, the phenomenon is most pronounced in Japan. Alas, it's least evident in the U.S.

Monday, November 24, 2014

Rockefeller Family Office Is on the Move

The View from 30 Rock
Photo by 
AndrĂ© Lage Freitas via Wikimedia Commons
When I was a kid, occasionally my father would mention he'd dropped off a bookbinding job or picked up a check at the Rockefeller family's office. Wow! Who knew a family could have its own office?

The Rockefellers' office dates back to 1882. In 1933 it moved into the newly built 30 Rock. Now the family has found a better rental in an adjoining Rockefeller Center building. The New York Times marks the pending move with this salute to Room 5600. (The "room" once encompassed three high floors in what my father knew as the RCA building.)

The investment-management arm of the office, Rockefeller & Co, was spun off some years ago and now seeks business from outside the family. You'll find it at 10 Rock.

Friday, November 21, 2014

“The richest old generation we’ve ever seen”

By the time Depression Babies finished school, they had become The Silent Generation. They were relatively small in number, and that fact turned out to be their good fortune. In the post-WWII boom the supply of entry level jobs exceeded demand. Though housing prices seemed to be going through the roof (a house worth $8,000 in 1945 was selling for two or three times as much by 1960) homes proved to be a great investment. 

The result, according to Bloomberg Businessweek:  Generation Rich.

Bunny Mellon’s Awesome “Alternative Investments”

Sotheby's went all out to market the sales of Bunny Mellon's art, jewelry and home furnishings. The effort has paid off.

Mrs. Mellon's art sold for $158.7 million, well above estimate. Last evening the sale of her jewelry and other interesting objects began. Prices often exceeded estimates by two or three times.

An apple-tree brooch crafted for her by Verdura was estimated at around $3,000. It sold for $26,250.

Said to be even bluer than the Hope Diamond, her magnificent blue diamond pendent sold for more than twice its estimate, fetching $32,645,000. (Prices include buyers premium.)

Bunny Mellon, an heiress twice over, surely had a good eye for
valuable objects. But I bet she never bought for investment. The old advice about profiting from art and collectibles – buy and hold what you like – still applies.

Monday, November 17, 2014

What If Everyone Knew Your Net Worth?

You might be less inclined  to buy a Bentley,  and you might increase your saving and investing. The same applies for your wealth management clients.

Read Carl Richards column, which includes this napkin sketch:

Wednesday, November 12, 2014

Less Banking, More Wealth Management?

Fitch, the rating agency, has seen the future of U.S. banking. It's wealth management.
Wealth management, including advisor-based guidance and asset management, provides recurring sources of income and requires less capital usage than traditional bank loan products.  Wealth management services can strengthen and make stickier relationships with good customers, which tend to provide additional deposit funding, as well as opportunities for cross-selling a bank's core products, such as mortgage lending.