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? Astonishingly, 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

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.

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.

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.

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.

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?

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.

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.

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See the SEC's page of advice for mutual fund investors here.

Ah, the Joys of Alternative Investments!

Wine Dealer Sentenced to 10 Years for Defrauding Clients

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.

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.