Friday, September 12, 2014

Background on the inversion mania

From the Tax Analysts blog, which I believe is open to the public. Key takeaway:

Here is the ultimate irony in the story: Investment bankers hired by a foreign multinational confronting acquisition by a U.S. corporation alerted the administration, the politicians, and the country to the imperatives of “economic patriotism.”
It was all part of AstraZeneca's defense against a hostile takeover.

Wednesday, September 10, 2014

It's Not Easy Being Fiduciary

The NY Times reports on the plight of two Deutsche Bank private bankers who were forced out because they balked at pushing DP products – notably, a fund of funds. (Funds of funds answer the perceived demand for investment products that carry even higher annual expenses than regular hedge funds.)

According to this petition to the Supreme Court of the State of New York – we don't have DB's side of the story – the two found "staying fiduciary" was a losing battle.

As big banks try to grow bigger, sales tends to overwhelm service. One result: a marketing opportunity for smaller, fiduciary-minded institutions. 

Thursday, September 04, 2014

Perils of Going Public, Performed Way Off Broadway

"Trading Practices," a participatory production performed in an old building on New York's Governors Island, dramatizes the rise and fall of a family business. The NY Times finds the show "resourceful, whimsical and wearing."

Too bad the production had to open this summer, just after the upheaval at a New England supermarket chain demonstrated that truth trumps fiction. (Rumors that a top tunesmith-lyricist duo has started work on "Market Basket, The Musical," could not immediately be confirmed.)

Monday, September 01, 2014

1954: So Near And Yet . . .

Sixty years ago Container Corp. was running ads featuring contemporary artworks. Some still look pretty cool. This one, for instance, with a portrait of Teddy Roosevelt by Joseph Hirsch.


By contrast, this 1954 Bankers Trust ad shows every one of its 60 years. A married woman with business judgment? Tax savvy? Foresight? Financial literacy? How unthinkable!

Give BT a little credit, though. It was willing to settle for a co-executorship.


Thursday, August 28, 2014

Market Basket: Main Street Beats Wall Street

A multibillion-dollar company fires its CEO, replacing him with two outsiders clearly less qualified.

Reason? a bitter, seemingly endless family feud.

Result? Astonishing, a revolution, an upheaval that drew nationwide attention.

Market Basket's employees refused to work and took to the streets to demonstrate. Loyal shoppers boycotted the stores. Day after day and week after week, the company hemorrhaged millions.

Last night the revolt succeeded.  The fired CEO, Arthur T. Demoulas, is back on the job and will buy the 50.5% of the company that his side of the Demoulas family does not already own.

Arthur T. did a great job of building a debt-free company. Now we'll see if he can revive an indebted one.

The financial planning lesson
Back in Estate Planning 101, we learned the expected progression of a successful business: A small company grows, attracts outside capital and eventually goes public. Once the company's shares are publicly traded, family members who wish to liquidate their holdings can do so at a price set by the market. With luck, family members remaining active in the business retain a large enough minority interest to maintain effective control.

Maybe that's how it worked in the 20th century. These days, a company such as Market Basket could not long survive if its shares were publicly traded. Corporate raiders (sorry, "activist investors") would swoop in swiftly to maximize shareholder value.

A few businesses have managed to go public while maintaining family control, although Wall Street tends to resent the strategy. Why invest in, say, The New York Times Company, when shares available to the public have insignificant voting power compared to shares held by the family?

For the private investor, the answer may be that it's smart to own part of a company whose management is free to work toward long-term goals.  Mark Zuckerberg certainly values that freedom.

Related post: The Family Business Fight That Just Won't Stop

Wednesday, August 27, 2014

Good Advice From a 108-Year-Old Investor

Selling short helped Irving Kahn prosper in 1929. In the Thirties Benjamin Graham converted him to value investing.

 Here Kahn, age 108 and still investing, is interviewed by The Telegraph.

Tuesday, August 26, 2014

Is Investment Advice Too Expensive?

 After WWII, when the wealthier members of the Greatest Generation opened investment management accounts at a bank or trust, their annual expense was probably about 1.5% to 2% – half a percent as a management fee plus one percent or more in "full-service" brokerage commissions.

These days, investment management fees tend to be higher but, with luck, transaction costs are lower. Total annual running costs probably are about the same.

Could change be coming at last? Will relatively low-cost online services lead to a price war? As we suggested recently, not necessarily – at least not in the high-net-worth segment of the market. The sums multimillionaires pay for investment services don't seem so extravagant when you consider the cascade of fees they face when traveling.

This year, hotels will collect more than $2 billion from fees they tack on to their room rates. My favorite: a $25 fee for putting your own can of Coke to cool in the minibar.

By the time a high-net-worth investor returns home, he or she may see wealth management as a bargain.

Monday, August 25, 2014

What Does It Cost to Invest?

Someone has $100,000 to invest. What will it cost? Peter Dunn dares to tackle that complicated question here.

For more on investors' expenses, see An Emerging Price War.

Will the cost of investment advice actually decline? There's room for doubt. Like mental health therapists. investment therapists aren't selected on the basis of cost alone.

Saturday, August 23, 2014

A Plug For Revocable Trusts

Two morals may be drawn from this Wealth Matters column:

1. If you want to change your name, do it right. Otherwise your ability to exercise a power of attorney may be compromised.

2. Despite –and also because of – the popularity of durable powers of attorney, creating a revocable trust may be the more prudent way to go.

Thursday, August 21, 2014

Warren Buffett, Investment Marketer of the Year?

In his letter to shareholders last spring, Warren Buffett revealed that he had instructed his trustee to invest mostly in a very low cost S&P index fund. He recommended Vanguard's.

"in the five months that followed," the WSJ reports, "investors poured $5.5 billion into the Vanguard fund, or about three times more than during the same period the previous year."

Has indexing finally reached the tipping point and become the default way to invest?

Saturday, August 16, 2014

Better Wealth, Better Health

If you're willing to improve your financial future by contributing to a 401(k) plan, most likely you'll also take steps to improve your future health. See Your 401(k) is Healthy, So Maybe You Are, Too in the NY Times.

Michael Waraksa, a collage freak, put together this apt illustration for the Times story.

Monday, August 11, 2014

Private Bankers Are Not Fiduciaries

J.P. Morgan's investment specialists are held to fiduciary standards. Morgan's private bankers are not. Do private bankers push the bank's own funds when cheaper or better alternatives might be available? In recent months both the Office of the Comptroller of the Currency and the Securities and Exchange Commission have been investigating.

The WSJ story notes that Morgan's funds most often outperform their Lipper averages. And because the bank charges an extra 0.5% annually for holding outside funds, Private Bank clients may find Morgan's own funds less expensive.
See the SEC's page of advice for mutual fund investors here.

Thursday, August 07, 2014

Active Investing: The Happiness Quotient

On average, passive investing produces better returns than active investing. In a rational world, shouldn't active investors become extinct?

No. The economic benefits of active investing aren't limited to the net returns after fees, trading costs and taxes. While passive investing is as exciting as watching grass grow, picking stocks is interesting, challenging and sometimes even fun.

Thus, the benefits of active investing include the net return plus a happiness quotient.

A happiness quotient? The economic concept emerges in a cost-benefit analysis of smoking tobacco. Smoking's costs include increased risk of lung cancer and a shortened life expectancy. However, the estimated happiness benefit – the pleasure of smoking – offsets an estimated 70 percent of the cost. (Critics argue that the percentage is too high.)

In the context of investing, the economic value of the happiness quotient should be easier to compute. If hedge-fund investors settle for  an average return of 9 percent during a period when the S&P is returning 12 percent, the economic value of their happiness quotient must be at least 3 percent.

IRS targeting, by the numbers

NPR has reported on a tabulation by the House Ways and Means Committee staff of the excess scrutiny given to conservative groups by the IRS.  It's pretty damning.  The report is restricted to the "be on the lookout" identifiers that the IRS used.  Because the IRS had only one BOLO that might identify a liberal group ("progressive") the results might not be fully accurate. Liberal groups that avoided the term "progressive" in their names may or may not have been scrutinized closely, we have no information on that. However, 100% of the "progressive" groups sailed through, and no liberal groups complained.  In contrast, conservative groups were asked three times more questions, and fewer than half were approved.  Fifteen times more conservative groups were identified via the BOLOs than the liberal groups.

This affair has been referred to elsewhere as the "weaponization" of the IRS.  It is not a good development, and it's unfortunate that the IRS is stonewalling the investigation.

Monday, August 04, 2014

Cracking the Mystery of Modern Wealth

Say you're seriously rich, perhaps sublimely rich. Have you lost track of exactly what you own and what it's worth? Are you prepared to pay $50,000 or more to find out?

See Wealth Managers Enlist Spy Tools to Map Portfolios.

Note: when it comes to derivatives, private equity, venture capital, collectibles and other alternative assets, "exactly" can be a relative term.

Tuesday, July 29, 2014

Recommended Reading


How well do you understand financial talk? In this elite dialect . . .

"Credit" means debt

"Bail out" means putting money in

"Synergy" means sacking people

"Noncore assets" means garbage.

Monday, July 28, 2014

You're No Apple, You're a Bank

Happened on Heather Landy's last column for American Banker. Financial-services folks, she notes, seem fixated on emulating the success of Apple and Amazon.  That's not easy.
For example, while a focus on cross-selling makes perfectly good sense as a general business strategy, it doesn't hold up very well in an Apple business model context. Notice how when you visit an Apple store, nobody ever says, "Well, sir/ma'am, I see you have one of our phones. Have you considered trying one of our tablets?" There's no need to push products on us because we already know that we want them. We'll even line up around the block to get them. (Whereas a line around the block is never a good sign for a bank.)
Can banks develop a cross-buying culture? Can they give us new conveniences even more welcome than those smart credit cards the Europeans enjoy?

Can they create true wealth-management centers, units so innovative and quality-obsessed that customers clamor for the privilege of a referral?

We'll see.
Landy is leaving her post as editor in chief of American Banker Magazine to join Quartz as global news editor.

Friday, July 25, 2014

Repeal the Estate Tax, Again?

Republicans in the House may vote to eliminate the federal estate tax this fall, it says here. (Curiously, the bill would keep the gift tax.) Purpose: to position repeal as an issue with heft when the subject of serious tax reform finally comes up. 2017, maybe?

Who would benefit from repeal 2.0, other than techie billionaires and hedge fund managers? Farmers. 

"[W]e’ve seen farmers in Iowa or Illinois get $15,000 an acre for their farm," says Paul Neiffer, The Farm CPA. "If the farm is 1,000 acres, they are looking at owing taxes."

Thursday, July 24, 2014

From Ladies of Leisure to Women CEO’s

Sallie Krawcheck, in partnership with Pax World Management, is launching a fund to invest in enterprises with a better-than-average proportion of women in key positions.

What a difference half a century makes. Ladies of leisure like the ones depicted in these 1964 ads certainly didn't expect their daughters or granddaughters to be CEOs of major companies.


Wednesday, July 23, 2014

Philip Seymour Hoffman Didn't Want “Trust Fund Kids”

The actor rejected suggestions that he set aside funds for his children because he didn't want them to become spoiled brats.

He did want them exposed to art and culture, as suggested by an unusual instruction to the guardian of his eldest child:
“It is my strong desire [that] my son, Cooper Hoffman, be raised and reside in or near the borough of Manhattan [or] Chicago, Illinois, or San Francisco, California,” he said in the will.

Can Three-Second Trades Produce Long-Term Capital Gain?

With a ploy called "basket options," a hypertrading hedge fund claimed billions of dollars in tax savings. The Senate Permanent Subcommittee on Investigations seems impressed.

Thursday, July 17, 2014

What Do Women Want?

"I never met a SRI investor who wasn't a woman," said a broker quoted somewhere recently. An exaggeration, of course.

More generally, the question of how women approach investing remains perplexing, especially to men. We know that women, on average, tend to be more conservative than male investors. And because they don't believe they know it all, women investors tend to be more successful.

M. J. Dunleavey, remembered on this blog from her years with The New York Times, tries to offer clues to what women want in her WSJ column. For instance, women like to ask questions of their investment advisers, but they also feel under time constraints. Lots of questions but no time for answers?

Wall Street will continue to wrestle with the question of how to relate to women. Funny thing, though – none of the women trust officers, brokers and investment advisers I've met over the years ever felt it necessary to ask me what men want.

Tuesday, July 15, 2014

In Deluge of Funds, Investors Sink or Swim

No wonder people find investing bewildering. The mid-year report on mutual funds in The New York Times contains page after page after page – ten pages in all – of mutual fund listings. If printed in type big enough to read, the listings would have covered 12 or 15 pages.

For the would-be investor, this sea of funds must be a daunting sight.

Yet it used to be even scarier. After cresting above 8,000 before the Great Recession, the number of mutual funds has eased off. Jack Bogle estimates that 7 percent of equity mutual funds gave up the ghost each year from 2001 to 1012.

Even so, more than 7,000 mutual funds are still operating.

And that's not all. Joining the thousands of conventional load and no-load funds are about 1,600 exchange-traded products, primarily ETFs.

In part the deluge of funds is an optical illusion. Sizable segments of the mutual fund listings consist of house funds – products intended for customers of a bank, brokerage or insurance company. Other funds may be moribund relics of faded hopes or failed algorithms.

Likewise, most exchange traded funds (or "products," to use the umbrella term) are lucky to get their names in the paper. Of 1,600 funds, a mere 241 hold almost 90 percent of the assets.

Perhaps the deluge of funds indicates the need for investment advisers, although fund-picking is no easier than stock-picking.

Or perhaps the deluge is driving bewildered investors toward online services that offer simple portfolios of a few basic ETFs.

What do you think?

Tuesday, July 08, 2014

Happy 125th Birthday, WSJ!

The Wall Street Journal was first published July 8, 1889. The first issue reported the average daily price movement of twelve active stocks, the original Dow Jones Industrial Average. (Update: I wrote in haste; this predecessor average led to the first DJIA in 1896. Only one charter member of the Dow remains: GE.)

Monday, July 07, 2014

Chase Nest Egg Ads: the Cliche and the Exotica

Imagine you're a Mad Man in Sterling Cooper's early days, the 1950s. Your client needs photos of individuals engaged in off-duty pursuits that appeal to the moneyed class.

"Golf, of course," you say.

"Forget golf. Too obvious. Think of something that's not a cliché."

Most likely, that's why none of the Chase Manhattan nest egg ads we've shown you over the years has included a golf club.

By 1964 the ads were in their post-classic phase. Most every upscale pastime involving wind, water or wildlife had been portrayed. So we come to the last resort:


A more characteristic nest egg ad from 1964 was this, featuring a Charolais calf. Imports of this prized French breed had been banned since the 1940s for fear of hoof and mouth disease.


Triumph of the Target-Date Funds

You read it here, five summers ago: Because needs and intentions differ for people reaching retirement age, target-date funds may not find much of a market.

Ha! Needs and intentions do differ, but target-date funds are on a roll. These auto-managed portfolios already hold about 20 percent of 401(k) money, and they're attracting more than 40 percent of the new funds flowing into 401(k) plans.

Target funds will maintain their momentum, Barron's predicts (subscription required, but I accessed the article via a Google search).
Looking out five years, target-date funds may be the only investment that most Americans have in their 401(k) plans. That would be quite an achievement for a product that was barely known just a decade ago. 

Sunday, June 29, 2014

Supreme Court Gives Active Investing a Boost?

Companies that issue significant "misstatements" may claim "no harm, no foul" because the stock market isn't always efficient.

In reaching this conclusion, Jeff Sommer of The New York Times notes, the Supreme Court was influenced by Robert Shiller, Yale's Nobel Prize economist.
Investors may continue to rely on the efficient-markets hypothesis in forming class-action groups, and may assume that share prices reflect corporate misstatements. But corporate defendants may now try to prove in specific cases that there was no connection between their statements and price movements. 
Perhaps active investing, a pointless activity were the market truly efficient, isn't dead yet.

Saturday, June 28, 2014

Indexing 2.0: Smart Beta

On average, monkeys throwing darts at the stock listings could outperform most investment managers. Actually, Barron's notes, they can do even better. They can beat the S&P 500.

Reason: the monkeys are assumed to invest an equal number of dollars in each stock they hit upon, regardless of market capitalization. Equal weighting seems to produce better returns. 
[T]he S&P 500 Equal Weight index has returned 9.1% a year over the past 15 years, beating the S&P 500 cap-weighted index by a whopping 4.6 percentage points a year.
Inspired by the monkeys, so-called smart beta investing has produced an expanding list of quasi-index funds not weighted by market capitalization. The more sophisticated models sound a lot like automated stock picking.

Does smart beta investing have legs? Whether passing fad or significant trend, Paul Sullivan's renaming seems appropriate:
[A] better, if less marketable way to think about smart beta might be to call it “lazy alpha”….

Friday, June 27, 2014

Cornelius Freel’s Will

Why did C. E. Freel leave Long Island for Paris in 1892? Why did he leave his estate to an English bishop? We don't know. We only know this item appeared on the front page of the January 1, 1893 issue of the Brooklyn Daily Eagle.


Thursday, June 26, 2014

The Greatest Generation: Tax Division

Headlines such as IRS Official Sought Audit of GOP Senator suggest the potential of tax audits as a political weapon. It certainly isn't a new idea. In 1971 President Nixon tried to turn the IRS loose on his political enemies. When the IRS Commissioner, Randolph W. Thrower, refused, he was fired.

Thanks to those famous White House tapes, we know exactly the characteristics Nixon desired in Thrower's replacement:

“I want to be sure he is a ruthless son of a bitch, that he will do what he’s told, that every income-tax return I want to see I see, that he will go after our enemies and not go after our friends."

The man chosen, recommended by Attorney General John MItchell, was Johnnie M. Walters, a World War II Air Force navigator who had flown over 50 combat missions, then serving as assistant attorney general for tax policy.

Walters moment of truth arrived on September 11, 1972. John Dean handed him Nixon's "enemies list," with instructions to make the 200 names IRS targets. My boss, Dean told Walters, doesn't like somebody to say "no."

Walters did not obey and, like Thrower, he was fired. 

Johnnie Walters died this week at age 94. Read his New York Times obituary here.

Saturday, June 21, 2014

My Inheritance From the U.S. Treasury

From today's e-mail:


As usual, English is not the scammer's first language. The copyright symbols are a novel touch.

Speaking of attempts to defraud your obedient blogger and other elders, the New Hampshire legislature has just voted to criminalize elder financial abuse.

Sunday, June 15, 2014

1964: The Ladies Who Invest



Of all the ads The Merrill Anderson Company created for U.S. Trust, this message from half a century ago probably was the most off beat.

Does the headline strike you as sexist or condescending? Remember that Betty Friedan's The Feminine Mystique had appeared only a year earlier, in 1963.

U.S. Trust was entitled to boast about advertising to women back in 1864. At that time married women in New York State had been allowed to own and control property for less than 20 years. (More on the evolution of laws granting property rights to female U.S. citizens here.) Most likely, women during The Civil War were compelled to take on more responsibility for family wealth.
For all his copywriting skills, the founder of The Merrill Anderson Co. was not noted for his sense of humor. Wish I knew whose idea it was to sneak the dozing businessman into the illustration.