Advisors' Roundup - November 26, 2014 (Early Holiday Edition)

Here's what's on my mind this week (besides turkey & pumpkin pie):

Investors are getting smarter and mutual fund companies are getting poorer:
Investment News

Everybody Profits:
Compton Advisors: Profit Is Win-Win

And finally, charity season is upon us - remember these tips from the IRS




Have a safe and wonderful Thanksgiving everyone!

Small Business: Do Good, Not Feel Good

Two adjacent entries in a social media app I use highlighted a very good and a not so good reason to be a supporter of small business.

The first, from patrons in one of our better local restaurants, Spare No Rib, as they were dining, bemoaned the fact that only two tables were occupied and encouraged the neighborhood to eat there based on the quality of the food in order that they remain a going concern.

The other lauded the ambiance of the neighborhood and cited a loss in quality of life if neighbors took their business to the mall or Amazon. No specific business was mentioned nor any trade, service, or product. Just a vague 'we'll all be poorer if small businesses disappear' Rockwellian lament. 'Small businesses won't be here to buy from other small business or employ neighbors'.

Bull.

I'm very familiar with small businesses - I own one. Small businesses exist for the same reason large ones do - to provide value to their customers. They're not some Currier & Ives nostalgic prop from a bygone era there to bring atmosphere to the neighborhood and boost a livability index. If, like Spare No Rib, they provide quality and value, they should stay in business. If they don't, they should make room for businesses, large or small, that do.

(This Saturday is "Small Business Saturday", a pseudo-holiday like Black Friday, created by American Express in 2010. American Express is a big provider of credit to small business.)

Profit Is Win-Win

"Just as in physics, there were laws in the world of economics. The most basic was that when one person profited, another person did not." - "The Crown's Vengeance", Andrew Clawson.



Boy, you try to lighten up your reading for the weekend (I've not finished it yet, but pretty intriguing so far), but end up writing a blog post on the nature of economics.

The sentiments expressed in that opening quote could not be more wrong. I won't address the first sentence here today (if only economics were a predictable as physics!), it's the second that cannot stand unchallenged.

Despite being a popular theme in partisan rhetoric and entertainment, in the absence of fraud or coercion, the exact opposite is true. In every transaction, both parties profit. An example:

You buy my used 2007 PT Cruiser for $3,000. I have profited because I desire $3,000 cash more than the car. If I didn't, I would not sell it to you. Conversely, you value the car more than any other goods or services you can obtain for $3,000. If there was something else you valued more, you were free to go buy that with your cash. If each of us were not better off, if each of us did not profit from the transaction, there would be no transaction.

Well, you say, I've got to buy this car so I can get to work but I'd much rather spend that $3,000 on vacation in Destin next month. This is a crucial difference between wanting something and valuing something. As adults, we're free to choose between these two options and live with the consequences.  If you do truly value the vacation more (including the negative value of not being able to get to work because you don't have a car), you're free to book your trip, but again in that case there would be no transaction.

But, you say, I can't shop around for a better deal - I don't have time. In that case, you've already profited from the value of the free time you gained by not taking the time to prepare for the eventuality of needing to buy your next car. Anything extra you pay is for value you have already received.

What if it breaks down, or gets T-boned on the way home? Where's my profit then you ask. The agreed-upon price already takes into account the probability and negative value of adverse contingencies (or the cost to mitigate them). Trust me, if the average '07 Cruiser is selling for $3,000, I'm not selling mine at that price if I knew for a fact it would never breakdown.

Yes, you may want to spend that money on something else, you may get buyer's remorse, it may breakdown, you may find it cheaper elsewhere later, but at the moment a deal gets done both sides profit. Always. Multiply that millions of times over and see how wrong viewing economics as a zero-sum game really is.

Advisors' Roundup - November 21, 2014

Here's what on my radar this week:

It turns out predicting the economy is hard:
FiveThirtyEight.com

We've launched a new video channel on YouTube
Compton Advisors L.L.C.'s YouTube Channel is Up and Running

Hammering the point home: Quit Chasing Winners!
The Irrelevant Investor

Why would anyone buy a front-loaded mutual fund?
The Certifiable Planner

And finally . . .

Here's what low-cost mutual funds can do for you:
The Reformed Broker

Compton Advisors L.L.C.'s YouTube Channel is Up & Running

Here's our first video - Why Hire a Financial Advisor?


(Do I really sound like that?!)

Advisors' Roundup - November 14, 2014

Here's what's on my mind this week:

Returns the last few years have been great, but what does that mean for the future?
A Wealth of Common Sense

Most women are locking themselves into lower Social Security payouts.
InvestmentNews (Free Registration may be required to see full article)

I got to hear Ronan Ryan, star of Michael Lewis's Flash Boys, speak last week.
Are You Being Flashed?

Genworth recently announced a $345 million hit to earnings from poor Long-Term Care insurance results. Will most likely hasten the trend of LTC premium increases.
Kiplingler
Genworth Investor Relations

Are You Being Flashed?

Well, maybe not you personally.

Michael Lewis, author of Moneyball, The Blind Side, Liar's Poker, and The Big Short has a way of stirring up controversy. That's fine. That sells books. His latest, Flash Boys, is no exception. Lewis made the rounds this spring, most notably on 60 Minutes, telling anyone who'd listen the stock market is rigged by sharks known as High Frequency Traders (HFT).

Not so fast says Ronan Ryan, Chief Strategy Officer at IEX and the subject of Flash Boys.

Ryan, whose firm is dedicated to re-leveling the playing field (the playing field in this case being a number of servers in a data center), stood before a room full of Chartered Financial Analysts at the Sheraton in Clayton, MO last week and explained how predatory trading worked, how he was stopping it, and how it affected trades.

In a nutshell, all trading on all US exchanges and private, brokerage-owned exchanges called dark pools, is done by computers in four data centers in New Jersey. When you (or a mutual fund) puts in a stock trade, your broker's terminal enters an order at one of these exchanges. HFTs let their computers enter the trades for them - it's all algorithms, no mouse clicks. The HFTs have co-located in the same buildings as the exchange's computers (paying the exchanges for the privilege) and thus have a speed advantage.

When a large order comes in, usually the market is not big enough to handle the whole trade at one exchange. Here's where the HFTs come in. They see the partial order hit the nearest exchange (Weehawken in the case of orders coming from NYC) and jump in front of the rest of the order, raising the price of buys or depressing the price of sell orders.

The good news is, for the individual investor their orders are usually small enough to execute all at once so they are not being hurt. The bad news is, if you're investing through mutual funds (or pension funds, or an insurance contract) you probably are. So, in a win for David (sort of), it's only the Goliaths being hurt - unless you're riding on Goliath's back.

IEX has put in place measures to slow down the information flow for these HFTs and is attracting business from the Goliaths. They are the 6th largest exchange/dark pool (out of about 35), but still only captures 1% of trades.

Relaunch

The drawback to running a blog is that initially at least, you have a big Chicken or Egg dilemma: there's no point in putting out content if no one reads it, but no one is going to read a blog that doesn't put out new content. This is compounded in the financial services industry (yeah, I'm an industrialist) because you have to keep copies of everything you write for the regulators (because their view is that, technically, this is marketing).

But this blog has been languishing as a spot to simply post proposed trades as required by our Policies & Procedures and it's about time it started to earn its keep (the trade posts will stay though). At the very least, I'll repost links to helpful articles, but will add my own 2 cents where I think it will help. The information will lean less towards news headlines (Dow up 0.12 today!) - though I will throw out some headlines that are relevant to our projection models - and more towards emerging analysis and thoughtful pieces.

Our initial publishing schedule looks like we're going to have a links round-up on Fridays so you have some time over the weekend to read it, plus random shots of what, if anything, bubbles up during the week.

If this looks like Josh Brown's M.O. you're right, but as they say, the key to success is to find someone who's successful and do what they do. Josh's blog is wonderful and I urge you to follow him (http://thereformedbroker.com/). There will be some overlap, but I'll try to focus on what I think will be helpful and interesting to you. You'll also see a lot of info I'm gleaning from John Mauldin. Both these guys are insightful and prolific as all get out.

BUT WAIT THERE'S MORE!

When we get the bugs worked out, we'll be launching a YouTube channel to get some of the information out to a wider audience. No need to subscribe to that however as we'll embed those videos in blog posts here and, if you can wait until quarter-end, our Advisors' Outlook.

Finally, we'll be adding back our 'Holdings' page to our website so you can see what our Covered Persons (i.e. me) have in the way of family and trust holdings (issues only - not amounts). We'll be relaunching that after the first of the year.