Category Archives: Finance

Social Insecurity

Should one plan for what one hopes for or plan for what one fears?

I have reached retirement age.  This is my year to mull over the “right” time (if there is one) to sign up for the Social Security benefits I accrued (and paid for with my taxes, if I may remind Mr. Trump and Mr. Ryan) during my working lifetime.

If I were destined to enjoy a shorter-than-average lifespan or a debilitating old age, then it would make sense to start my Social Security payback right now, while I have the capacity to enjoy the income.  On the other hand, if it were my destiny to live to a ripe age without much health drama, then delaying the payback of my Social Security benefits would make my later years and old-age care more secure.

So, should I take the money now or later?  You will find plenty of advice on this topic from self-described financial experts on the internet, but here is my take.

I glance out my living room window, at 6:02 pm on an early fall evening, and I see a vista of pale blues and peach clouds and it is amazing.  I just want to keep looking.  I hope to look out there, at these colors, from this room, with my spouse, for a long time.

This is the message our skies send me:  I am lucky that I have a choice to make.  In the game of life, I already won the toss.  I am fortunate that I can even think about deferring my payback to the second half of my life rather than electing to receive.  Mine is one of those first-world decisions that is about optimization, not survival.  I am not dealing with social insecurity — for that, I thank my lucky stars in those peach-and-blue skies.

In the grand scheme, my now-or-later choice matters only at the margins of probability.  Many people have much larger stakes in this decision and I am unqualified to advise them. To serve their needs, I would like to see financial professionals stop chasing after me and instead offer Social Security advice to soon-to-be retirees for free, no strings attached, no names taken, no promotional lunches or dinners involved.  Why should those who are most in need of financial guidance be the least likely to be offered it?

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This is a two-section post on recent goings-on in the investment world, just to warn those of you who are not interested in such things.  It is accompanied by my usual disclaimer that I have no formal training in finance and investing other than my half-year stint as a financial-planning student way back when.  That said, my personal experience and my modest successes and mistakes in investing might be worthy of your consideration.

The so-called Trump Rally

I’m sure you have heard on the news how the election of Donald J. Trump touched off this  really incredible stock market rally, with stocks up about 11 percent since November 9.  The pundits say it reflects the confidence that American corporations will benefit from his pro-growth policies and so will spend more on capital, hire more workers and increase their earnings.  But I contend that it is not that much of a rally in the first place, and the last thing that most companies want to do is hire more U.S. workers.  Tax cuts, they like.

But about that rally.  I refer you to the sidebar of this page (for full-screen users) where you will find The Trend — this is an app I programmed a few years ago that compares the S&P 500 stock index to the expected value of that index, based on its price history since 1950.  My app shows that the S&P 500 index is, as of this writing, about 3.5% above its long-term trend.  Not 7% (a typical year’s worth of U.S. stock market gains) or 10% or 20%, but 3.5%.  So Trump seems to have made large corporations 3.5%, or six months, more confident in their futures than they otherwise should be.  At least that’s how I read it.

The current rally has given some investors — excuse me, speculators — reason to celebrate in the short-term.  But these traders will be seeking to cash in their profits from the rally, maybe before the end of the quarter, probably by May, using some adverse bit of news as an excuse.  When the selling begins, the rally will fade and perhaps reverse.  None of the pundits will refer to this as the Trump Dump — they will call it profit-taking.  Some traders will manage to get out the minute prices begin to fall, others won’t time it so well.  But all the big firms we loved to hate back in 2008 will make money, whichever way prices move, even if the rest of us slog along.  That’s what makes Wall Street different from Main Street.

By the way, the S&P 500 ETF (exchange traded fund) increased in value by 166% during the eight years that President Obama was in office, an average annual rise of 13% a year.  Granted, the market started off at an abysmally low level due to the financial crisis that Obama inherited, but still, it is noteworthy that the financial pundits refused to refer to eight years of rising stock prices as the Obama Rally.  Why is this?  Because most of them buy into the Republican fantasy that Democrats are bad for business, and they’re sure as hell not going to change their tune now.

[Update: I am not the only “Trump Rally” skeptic.  Two days after I published this post, Barry Ritholtz of Bloomberg News presented even better evidence that the current rally has little or nothing to do with Trump; in fact, the U.S. stock market has actually lagged global markets since his election.]

The Biggest Loser

I implied at the outset that I have made some investing mistakes.  Yes, it took me time to learn what investing is about and become confident in my ability to manage our savings.  Like many others, I started out by reading popular financial publications like Money and Barron’s and listening to radio shows like Bob Brinker’s Money Talk.  For several years, I even subscribed to Brinker’s monthly newsletter, which presented his take on the market and his recommendations for various mutual funds.

I have to give Brinker credit for one thing: he convinced me that stock brokers (or sharks as he called them) did not have my best interests at heart and that people like me could do fine without them.  That message resonated with me, and in the main I think he was right.

But I ventured into managing our savings like someone who has just been taught to swim and then heads for the diving boards.  The first mistake I made was chasing returns, the habit of selling mutual funds that didn’t do so well the previous year, and buying funds that had done better — a habit encouraged, ironically, by the monthly updating of mutual fund ratings in money magazines, not to mention the tweaks that Brinker would make in his newsletter portfolios.

Aside: If you published a financial newsletter, wouldn’t you feel almost obligated to tweak your recommendations once in a while, if only to justify your existence?  You wouldn’t want to adjust it very often, because subscribers might suspect you have no convictions… but neither would you want to sit on your recommendations very long, because then your subscribers might think you are unresponsive to market conditions.  So if I wrote a financial newsletter, I would make adjustments, say, three times a year.  That’s about the right balance between conviction and unresponsiveness, don’t you think?  If you agree, what does that say about financial advice and how it is marketed?

So with my swimming-pool confidence, I bought some stocks in the mid-2000s, like YUM (Kentucky Fried Chicken) and SRZ (Sunrise Senior Living) — then I sold them and made some money (see chart below) and I thought I was hot stuff.  I also bought eventual losers like CHKE (Cherokee) and NUTR (Nutraceuticals) because both companies offered low price-to-earnings ratios in an era of expensive stocks, and I was lured by the scent of a bargain.  This taught me that the home-grown investor never knows enough about most companies to justify investing in them.  Besides, no one — home-grown or otherwise — can ever predict the future.

yumThe bottom line is that it is easy to buy and sell stocks and make money when the market is rising, as it did between 2003 and 2007 (by about 50 percent).  But buying and selling in rising markets can give one a false sense of competence that is sure to serve one ill later, when markets go down, as they inevitably will.

arkasha-stevenson-miami-heraldbruce berkowitz

Bruce Berkowitz
Photo by Arkasha Stevenson, Miami Herald

This is just what befell Bruce Berkowitz (shown here in his adopted state of Florida), manager and investment adviser for the Fairholme Fund.  Fairholme was one of the funds Bob Brinker recommended in the late 200os.  Based on its record, its professed value-oriented philosophy and Brinker’s say-so, I invested some of our savings in Fairholme Fund (FAIRX) in early 2010.  I thought I was diversifying, which is what the investment pros are always promoting.

But here’s the rub.  The managers who (along with Berkowitz) chalked up Fairholme’s impressive returns in the mid-2000s decided to leave the fund and start their own venture.  Berkowitz seemed to become unhinged.  He used the fund to make big bets (with emphasis on bets) on companies like Sears, AIG, St. Joe (a Florida land development company whose chairman is Berkowitz) and mortgage brokers Freddie Mac/Fannie Mae.  In 2011, Barron’s quoted a Wall-Streeter about Berkowitz: “The way he’s making money… is not how the 10-year track record was created.”

I didn’t like what I was seeing.  I decided to sell our shares of Fairholme in 2012 — this was no longer the fund I thought I had invested in.  Here is what happened to Fairholme Fund (FAIRX, blue line in chart below) in the years since the financial crisis, compared to how stocks in the S&P 500 (green line) performed:

Fairholme Fund Performance since March 2009 (Morningstar)

All this time, Fairholme has doggedly hung onto its investment in Sears.  Berkowitz must have a thing about going down with the ship — at least we didn’t go down with him.

In October 2014, The Miami Herald reported that Bruce Berkowitz was worth about a half-billion dollars, but that was before His Great Fall.  I hope (well, not all that much) that Bruce is enjoying life among the palm fronds, thumbing through his millions while his shareholders lose their shirts.  His fund’s poor showing has certainly not kept him from touting his financial fantasy on Fairholme’s website:  “When the crowd stampedes left, we advance right — with courage of conviction.  In short, we ignore the crowd.”  Not to mention reality.

I no longer own any individual stocks.  I am no smarter or more well-informed than the traders on Wall Street, so what business do I have buying or selling stock?  Answer: None. Today, almost all our retirement savings are in passively-managed indexed mutual funds.  I rebalance them twice a year, using the gains in the better-performing funds to buy shares in the lesser-performing funds.  Financial planners have their place, but you don’t need a financial planner to do this relatively simple task.

I wish you luck in your financial ventures, as long as you don’t venture too far.  Steer clear of other people’s financial fantasies, stay tethered to reality, and you too can confidently manage your retirement savings.

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This is the year.  Until now, I have put off addressing various physical issues that paid me a short visit and then decided to stay.  So I am in the midst of scheduling an array of visits, tests and procedures for restless legs, varicose veins, a colonoscopy and a minor surgery.  In the spring, I check in with my physician about blood pressure; in the fall, I have my one-year followup with the dermatologist.

That is in addition to my quarterly retinal scans and yearly injections of 2 mg of Eylea™, a drug that costs me $3000 a dose.  This works out to be $42,524,250 an ounce, just a trifle more than the $41,965,424 annual compensation of Leonard S. Schleifer, M.D., founder and CEO of Regeneron, the outfit that makes Eylea.  Schleifer is the highest-paid biopharma executive in the U.S.  He is now a billionaire and I (eye) helped put him there.

Money Shot - Image by CHCollins (2016)I have a hunch that Leonard S. Schleifer, M.D., doesn’t think much about his health insurance deductible when he needs medical care.  But I do.  The way our system is designed (and I use that term loosely), it pays to defer care until there is enough to do in one calendar year to satisfy one’s annual deductible and out-of-pocket maximum.  Many people don’t have the luxury of timing their medical needs — and those people wind up paying more.

I selected a high-deductible, high out-of-pocket ($10,000 maximum) policy, which is still available thanks to President Obama’s famous line: “If you like your health care plan, you can keep it.”  It’s not so much that I like my plan, but it makes the most financial sense.  I did the math: for any given amount of medical care I might need in 2016, I would pay the least in premiums and total out-of-pocket costs with the highest-deductible plan.  It is just the way policies are priced.  The sooner you want an insurance company to start sharing your costs, the more you will pay in monthly premiums — but you are unlikely to make up the difference in terms of overall benefits.

The problem with health insurance in the U.S. is that all plans create perverse incentives, depending on the deductible and out-of-pocket figures.  For example, an insured person has no incentive, once the out-of-pocket maximum is reached, to limit his demand for health care for the rest of the calendar year.  In fact, one who is close to his out-of-pocket limit has an incentive to accelerate care so that its marginal cost is shared by the insurer.  On the other hand, high deductibles force people to decide between seeking care and doing without, which puts the burden on the individual as to how much his or her quality of life is worth.  This is unfair.  One’s health and life expectancy should not be subject to how deeply the notion of frugality has been ingrained into you.

It may be impossible to devise a health care system that cannot be gamed by consumers, physicians, hospitals or drug companies.  But our goal as a nation should be to implement a system that delivers the greatest health benefit in the most efficient way.  To be efficient, we must tackle fraud, abuse and predatory pricing in all corners of the health care system, and end this nation’s simple-minded fixation on throttling consumer demand by way of the insurance industry.

Who, after all, wants to be sick?  Who wants to go to the doctor?  You don’t, and I don’t.  In the long run, insurer-based disincentives to seeking health care (such as deductibles) have a perverse outcome of their own: by making health care seem precious and desirable, they counter our natural reluctance to even enter the health care system — and they all but invite cynicism and gaming behaviors.

I would not be surprised if Medicare Part E (for Everyone) would reduce the demand for health care, once our citizens were assured that good, affordable care would be available to anyone when it is needed.  In the meantime, we play these games.

• • • •

Insurance companies are run by smart people.  They know that some of their subscribers will lump medical procedures into the same calendar year so that the insurer pays a larger share of the cost.  What they don’t know is whether I plan to do it.  They’ll soon find out:  this is my year of living deductibly.

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