Monday, October 1, 2018

Tangible Property and a Macabre Legacy

We spend a lifetime accumulating possessions, but many of us don’t plan for the transfer of prized items after we pass. This could cause a lot of family turmoil after your death, however, drafting a proper will can assure your treasures will smoothly go to the recipient of your choice.

As Halloween is approaching, let’s consider the famous, albeit gruesome, case of James Allen. In the 1800’s this goon robbed people on Boston highways. Spending most of his time collecting other people’s possessions on horseback, he dubbed himself the Highwayman.  Reportedly, thieves on horseback had more social status than thieves on foot. Who kept that social register? Anyway, the Highwayman spent a lot of time in jail. Once he was released, he went right back to his old tricks.

One day, this ruffian finally met his match. When attempting to rob John Fenno of Springfield, the Highwayman was quite surprised when Fenno refused to hand over his wallet, and Fenno clocked the Highwayman upside the head instead. The two men fell to the ground and wrestled each other. The Highwayman  pulled out a gun and fired at Fenno’s midsection. A buckle on Fenno’s suspender  deflected the bullet and he continued pummeling the Highwayman. Despite Fenno’s Killer Kowalski like grappling moves, the Highwayman managed to escape. Apprehended by authorities a couple of days later, the Highwayman returned to Charlestown State Prison. As my grandfather would say “The mills of the Gods grind exceedingly slow, but they grind exceedingly fine.”

The Highwayman immediately fell ill in the slammer. He decided to dictate a self- titled memoir of his criminal activity to his jailer, who had the book published, and posthumously created a special edition created for a brave man he deeply respected, John Fenno . This book was bound in the author’s own skin which was treated to resemble gray deer skin. Gross!   An old Halloween song comes to mind “Have you seen the ghost of John, all white bones with the flesh all gone.” I could be wrong, but I’m guessing that no one was really clamoring for such a bequest and the transfer to Fenno went smoothly. 

If you do not have a will with a tangible property memorandum, it is almost guaranteed that the transfer of your personal treasures will NOT go smoothly. In fact, it is likely that the absence of clear instruction will cause some conflict within your family. Things could also get ugly and family members may stop speaking to each other.

Let’s consider this example.  The Wicked Smart Investor has scrimshaw made with real ivory. It was my grandfather’s, and it was purchased when items made from whale’s teeth were not taboo.  The small piece would not be extremely valuable on the open market, but it certainly has a lot of sentimental value as my grandfather is pictured wearing the tie tack to my parents’ wedding. It is probably one of the few luxury items he had. I have 8 nephews that might be interested in it, and who’s to say only men are interesting in this? So, I put this in the tangible memorandum in my will and my instructions are legally binding. You would probably give your family the shirt, not the skin, off your back. Give them another gift, a few hours of you time and draft a proper will.

As far as the skin-covered book goes, Fenno’s  daughter later donated the book to the Boston Athenaeum , a private library at 101/2 Beacon Street.  It’s still there if you want to see it. But if you want to see my tie tack, you’ll have to invite me to a special occasion.

Wednesday, September 5, 2018

Caroling through the Crash

It was an autumn afternoon of dueling keyboards and voices at Ma’s house.  She was on the piano practicing her Christmas carols; I was upstairs on the PC tracking the stock market decline. At the time, September 29, 2008 was the largest point drop ever in the Dow Jones Industrial average.  While Wall Street was screaming bloody murder, she was hitting the high notes on songs like “O Come Emmanuel.” In fact, it seemed the higher the note she sang, the more the market dropped. At the closing bell, the Dow lost 778.68 points or 6.98% of its value.      

This bloodbath was only the latest chapter in the financial turmoil of 2008. There was widespread talk of another Great Depression, which incidentally was the time that Ma joined her first choir at Saint Gregory’s Church in Dorchester. As she grew up so poor, it was one of the few leisure activities available to her. Ma never felt poor though. The way she explains it is, “We were down on our luck but we did not know it because so was everyone else.” Actually, she speaks about the Depression with great fondness. Her family and friends did not have much, but they had each other and a lot of happy times scraping by.

The Depression also taught her that families need to talk about finances often and plan for challenging times. It’s fruitless to think that good times will last forever and self-defeatist to think you’re not strong enough to weather bad times.  Ma makes financial planning a priority in her life.

When the final number settled that ominous day, the Dow closed at 10,365.45 representing a 26.8% drop from its October 9, 2007 record high of 14,164.53. I walked downstairs to tell Ma the news, and as I interrupted during her favorite carol “O Holy Night” she was a little annoyed with me. I told her the news and her response would surprise many investors, but not me. For after surviving the Depression, the nuns at school, World War II, the aftermath of the Cocoanut Grove fire,  rationing, sexism at Boston College, nursing school, belittling surgeons, belligerent patients, the Red Scare, a presidential assassination, the social upheaval of the 60s, being widowed with 13 children under 18, the Oil Embargo, jello salads,  13 teenagers, double digit inflation, my autistic brother's tantrums, bell bottoms, the curse of the Bambino, arguments with an organized crime enforcer, 80s hair bands,  endless tuition bills, social security cuts, nursing shortages, the Big Dig, 20 years of  working the night shift, the horrors of 9/11 and Brigham’s closing she never considers a stock market crash the end of the world. Ma just grinned at me and said “As my father would say ‘I guess this is the year we go to the poor house. If everyone is poor, no one is poor.” Unfazed and with a bit more gusto, she belted out the next verse “Truly He taught us to love one another…”

Ma did not lose a cent from the 2008 crash. Instead of panicking and selling at a loss, she rode out the bad times. Almost 5 years later to the day, the Dow closed at 15,129.67 on September 30, 2013. That represents a gain of almost 46% since September 29, 2008. At press time, August 7, 2018 the Dow closed at 25,589.92 representing an approximate gain of 246% over that horrific close almost 10 years ago.

Be like Ma, stop procrastinating and get your financial planning done. One day, maybe even very soon, you’ll be happy you did.


Tuesday, July 24, 2018

Forget the Mental Gymnastics, Just Start Saving!

In the beginning, the thought of achieving a long-term goal can be quite intimidating. Frequently, we’re so overwhelmed that we may overcomplicate the start of the process. This holds true if your goal is to win a coveted sports competition or plan for your retirement. Keeping things simple in the beginning is a great strategy, as you can always add more resources later.                    

Let’s do a back flip in time and visit 1976 Braintree, Massachusetts. The olde towne was the embarrassment of riches that Bicentennial year.  Along with its revolutionary history, a kid from Middle Street had the whole nation shedding tears of prideful joy. His name is Peter Kormann, a wicked pissah gymnast who won a bronze medal in the summer Olympics. He was the first U.S. Olympian to medal against the Soviets, an astounding achievement.

It all started in such a humble fashion. At the age of 11, he started training in Dave Ellis’ back yard on Adams Street. There was no fancy equipment or glitzy gymnasium, just a skilled coach and an eager student. Early on, Peter displayed a natural talent for tumbling and working the high bars. Of course, there were setbacks along the way, but Peter came up with simple, practical solutions. When the pommel horse broke, Peter rigged a fix with tools from Warren’s Hardware. If his energy ran low, he carb-loaded on fresh potato chips from Hunt’s. Lacking natural flexibility Peter took to jogging neighborhood streets in a wetsuit then stretching afterward. Passing motorists gave this would be Jacques Cousteau puzzled looks but Peter was unfazed. He was making progress and nothing was stopping him.

The next stop was Braintree High where Peter had access to more coaches and better equipment in the Hollis Gymnasium. Building on the fundamentals learned from Dave, Peter continued to shine. His family home was soon bursting with awards, trophies and accolades. A gymnastics scholarship to Southern Connecticut University followed and that set him on the final trajectory that vaulted him on to the Olympic podium.

While the nation rejoiced, Braintree celebrated its favorite son.  Peter became the Tom Brady of Braintree before the GOAT quarterback was even born. The Wicked Smart Investor and his Hollis Elementary School classmates felt privileged to use the same gym as Peter. And it all started in an Adams Street backyard.     

A sizable retirement nest egg can start with humble beginnings too. While many of today’s youngsters starting out in the workforce are burdened with student debt and astronomical housing costs, they simply have to start saving money. A decent start would be saving a small amount each paycheck in your company 401k or an IRA. Don’t overcomplicate things; invest in a low cost, broadly diversified mutual fund consisting of mostly common stocks. Sticking to this strategy can reap a substantial amount before you know it. When you reach roughly $50,000 to $100,000, it makes sense to seek professional investment advice. But for now, just start saving and experience the magic of compounding growth.

Peter’s backyard routine has a great legacy. After the Olympics, he became the head gymnastics coach at Ohio State and now owns Yellow Jackets Gym in Middleton. His picture still graces the wall at Braintree High and he continues to inspire local gymnasts.  Luke Smigliani, an ’18 Hanover High graduate with plenty of Braintree DNA, worked with Peter to improve his rings routine. This coaching was fruitful; Luke won a scholarship to Ohio State.

Remember, the longest journey starts with the first step. Start saving!

Saturday, June 2, 2018

Protecting Investors is a Very Tall Order

“The best laid plans of mice and men often go awry,” is a paraphrased stanza of the Robert Burns poem “To a Mouse.”  It’s a timeless warning that no matter how well a project is planned, something may still go wrong. One local example of this quandary is the almost disastrous construction of the Hancock Tower. In the financial world, it could apply to the Department of Labor’s ill-fated fiduciary standard for brokers that provide recommendations for retirement accounts.

Let’s consider the construction of the 60 story building originally named for its main tenant, the John Hancock Insurance Company. Big problems emerged early on in its construction. In 1972, the heavy glass windows started to fall off the building during high winds. For the safety of pedestrians, the sidewalks around the construction site were closed. As a temporary fix, the builders installed plywood in the empty window frames. Smart Aleck locals dubbed the construction catastrophe the “Plywood Palace.”  I’m sure this was not in the architect’s plans!

I bet the leaders of the DOL can relate after suffering a crippling setback regarding its well-intended fiduciary rule.   For those of you unfamiliar with legal mumbo jumbo, in the investing world a fiduciary is entrusted with managing money for the benefit of another.  A fiduciary has a legal obligation to put the clients’ interest ahead of their own. That sound greats, but the regulation is quite lengthy and highly controversial. Also, the Fifth Circuit Court of Appeals ruled the DOL overstepped its bounds and now the regulation has an uncertain future.

That’s too bad because it could have aided investors in this common scenario, rolling over their 401(k)s into an IRA. Traditionally, if the investor was working with a representative from a broker-dealer the broker was held to the suitability standard. The broker or consultant only had to recommend investments that were suitable at the time of the investment. But we all know this life can be a bumpy ride and our financial situations far from stagnant.  Thus, ongoing oversight of investments makes sense. Under a fiduciary standard, the broker would have to continually monitor the investments and act in the client’s best interests. Another benefit of the rule would be that that representative must provide transparency regarding the cost of advice and investment products offered. In many ways the regulation was just as beautiful as the Hancock Tower!

If the DOL fiduciary rule is completely struck down, all is not lost. Investors can find advisors held to a fiduciary standard that are an Investment Advisory Representative (IAR) and work at a Registered Investment Advisory (RIA) firm.  Since an IAR is defined as a fiduciary, the eventual fate of the DOL fiduciary rule is inconsequential to their clients.

The Securities and Exchange Commission has proposed an alternative investment advice rule that could be more comprehensive than the DOL fiduciary rule, but it is not intended as a uniform fiduciary standard for brokers and investment advisors. Brokers might be held to a “Best Interest” standard, but exceptions would be allowed.  The Wicked Smart Investor strongly encourages investors to work with advisors that are fiduciaries that will continually monitor their investments.
There is good news regarding the Hancock Tower as well. The windows were finally fixed and the architect, Henry N. Cobb won a prestigious award from the American Institute of Architects. Now a Boston icon, the building also provides great reflections of the other architectural gems in the area. Of course, the Smart Aleck’s are still around.  Technically, the building is now 200 Clarendon Street, but Bostonians love tradition. I’ll keep calling it the Hancock.

Tuesday, May 1, 2018

A Gift of the Gipper is Gone

“This can’t be real,” Aunt Betty thought as the presidential motorcade passed her on Gallivan Boulevard. She was making her way to Purity Supreme to buy some bargain priced pork chops on that January, 1983 afternoon. When the limousine stopped at the Eire Pub, pork chops were the last thing on her mind. Ronald Reagan, a man she was absolutely ga-ga about, was visiting Adams Corner. She practically flew down there.
It all started when Betty saw the movie Dark Victory starring a feisty actress from Lowell, Bette Davis.  Ronald Reagan only had a small part; but cupid’s arrow whooshed out of the screen and struck Aunt Betty. For weeks, all she babbled about is how handsome Reagan was. Things reached a boiling point when she saw Reagan on Boston Common during World War II. He was leading a war bonds rally alongside his first wife, Academy Award winner Jane Wyman. While her wedding day and the birth of her children were the happiest days of her life, that day was certainly in the top ten for Aunt Betty.
Now don’t anyone tell her, but Reagan did not come to Dorchester to visit Aunt Betty.  His visit was part of a meticulously orchestrated strategy to gain support for his Republican agenda in heavily Democratic Massachusetts. A moribund economy with double digit inflation had working people understandably frustrated and Reagan was willing to take some chances to win them over.
Alas, downing a pint at the “Gentlemen’s Prestige Bar” was a huge success, maybe because Reagan had some manly street cred. He famously played George Gipp, a Notre Dame football player, in the film Knute Rockne. This role earned Reagan the nickname “The Gipper.” Also, in one of the darkest hours of US history, Reagan survived an assassination attempt partly due his impressive physique. He even managed to look every bit the movie star as he was shoved in the limousine with a bullet wound to his chest. He was tough as nails but charming at the same time.
Reagan famously channeled both qualities to work with political adversary, but personal friend, House Speaker Tip O’Neil. One of his biggest victories was the passage of the Tax Reform Act of ‘86. An overhaul of the monstrous tax code, one of its chief tenets was the reduction of income tax rates and the elimination of some itemized deductions. One eliminated deduction was consumer interest. Taxpayers could no longer deduct the interest on a loan to buy a fancy sports car. What would we do during a midlife crisis? Reagan sympathized with us and gave us a gift. We could still take out a home equity loan, use the proceeds to buy the sports car, and deduct that interest.
Unfortunately, the tax reducing work-around has been eliminated under the Trump administration’s tax bill. Earlier this year, the IRS issued guidance stating that “interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.” The Wicked Smart Investor hates to be the bearer of bad news, but it just got harder to use your home equity to fuel conspicuous consumption. Carefully consider the impact of the new tax law when shopping for luxuries.
Aunt Betty’s 90th birthday is approaching and she asked for no gifts. I’m relieved I don’t have to take out a home equity line of credit to buy her precious jewels. I will, however, spring for some DVD’s of Reagan’s movies and some mouthwatering pork chops.

Monday, April 2, 2018

Financial Fear Mongering

A pleasant surprise greets you as you enter Kristin’s in Braintree Square. “Nosie Nellie,” the biggest busy-body in town, is sitting in the corner and beckons you to join her. So, you gingerly anticipate a scrumptious meal of banana French toast spiced with Nellie’s gossipy tidbits.
Nellie is a well-known local character. A descendant of Boston’s colonial-era town criers, Nellie has a long history of conducting surveillance on townspeople. In kindergarten her parents caught her peeking in neighbors’ windows. Soon after she learned to use the stove, she was steaming open envelopes. In the 8th grade she won the science fair with a wiretap device fashioned out of old coffee cans and a transistor radio. Her legend is always growing. Folks now swear her eyeglass prescription is binoculars. If there is information to be had, Nellie has it.
This particular morning I encountered Nellie, she did not disappoint. Once her tea arrives, Nellie starts with a torrent of exaggerated tales. This one was using coupons at the supermarket, she must be going bankrupt. That one was spotted speaking to a dashing middle aged CPA, she must be having an affair. The other one told an inappropriate joke in front of Reverend Smith, and made a scene at the church picnic. Nellie continues with warnings of crime sprees, tax increases, and communicable diseases. Nellie is an alarmist who makes mountains out of mole hills. She needs to be that way; no one wants to listen to humdrum scuttlebutt.
Nellie is not the only one overdramatizing events. The financial press is guilty of amplifying relatively small stuff. With numerous media outlets competing for our attention, financial reporters frequently use fear to get our attention.
Let’s consider some Wall Street Journal coverage of the recent stock market volatility. On February 5th, 2018 the Dow Jones Industrial Average closed down 1,175.21 points which seems like a big number, but the point drop represented only 4.6% of the index. The next day, bold-faced type read “Stock Plunge Erases 2018 Gains” and the “Dow Industrials fall over 1,100 in biggest drop ever; overseas indexes sink.” The article was printed on February 6, 2018, which is a long way to go before it closes down for the year. In the body of the article, journalist Akane Otani describes a growing sense of anxiety and borderline panic-type selling. To a short term investor, this is very scary. Many investors have a long term and yet can still be rattled by alarmist headlines.
The Wicked Smart Investor despises such headlines because they distract investors from focusing on their long term goals. If you don’t need the money for twenty years, what happened on February 5, 2018 doesn’t matter. The market did enter a 10% correction territory this year, but that is to be expected periodically. My advice is work with your advisor and take the reports of the financial press with a grain of salt. The newspapers must sell papers and advertising space in order to survive. This mission does not include helping your financial planning.
It would be great if you could find out what seasoned financial reporters are really saying after a 5% market drop. Imagine if you could catch them saying “Yeah, I know today’s 5% drop should not matter to the long term investor, but I have to think up some frightening headlines so they read my story.” That would expose the tactics of the press and maybe reduce our anxiety. Wait a minute, maybe we could catch them with Nosie Nellie’s help. Supposedly she has a highly sophisticated communication system in her basement with technology even the CIA envies. 

Thursday, March 1, 2018

Get Some of the Skinny on Dividends

When the North End’s Skinny House went on the market earlier this year I jumped at the chance to take a look. I’ve always wanted to live in a historical house, but I quickly learned that the house wasn’t everything it is cracked up to be. Stock investors need to apply that theory to dividend paying stocks:  Just because a company pays a dividend, it does not mean it’s the best investment for you.

Let’s talk about the Skinny House first. According to folklore, around 1880 two brothers inherited a plot of land from their father. One brother built a huge house occupying most of the land, leaving a tiny sliver for his brother who was overseas at war. When the soldier brother returned, he was furious and built the skinny house to block his brother’s views of the waterfront and the sunrise. Family fights can get real nasty, but maybe the small house wasn’t considered so small back then.  Today, the house is completely updated and situated in one of the city’s coolest neighborhoods.

On the day of the open house, I quickly learned the charming house wasn’t for me. I’m 6’3 and the house has low ceilings. I barely fit my size 48 shoulders up the staircases. Also, the realtor warned me that looky-lou tourists take pictures outside at all hours of the day. As a local celebrity, that’s quite a stumbling block. I imagined pictures of me, the pre-coffee Wicked Smart Investor sporting an unyielding bed head splashed across the tabloids. I’d lose my charm quickly.  The last straw against the skinny house is that I could not do anything to enlarge anything; there was simply no place to grow.

Houses aren’t the only thing that lack growth opportunities; frequently, mature stocks can have the same problem. One sign of lackluster growth prospects could be paying out dividends. Let’s be careful here, companies pay out dividends for a variety of reasons. I am only speaking to one scenario. As dividends are a portion of profits that are paid to shareholders, a high dividend percentage could be a sign that the company has little room to grow by reinvesting in itself. Management makes the calculation that shareholders may have better investment opportunities elsewhere and decides to distribute earnings.  So, if you prefer to make returns by investing in fast growth companies, a dividend could be a sign that the stock is not for you.

Let’s take a look at some companies paying dividends in 2017: Apple, Microsoft, Exxon Mobil, Wells Fargo. Some consider Apple and Microsoft to be growth stocks but there is plenty of debate. There is more consensus on Microsoft and Wells Fargo that these are not growth stocks.

Companies not paying dividends in 2017 include Amazon, Facebook, Tesla, and Google. All of these firms are widely considered to be growth stocks. Again, there could always be exceptions.

In the larger picture, dividend paying stocks do have a place as part of a broadly diversified portfolio. Long term investors will likely enjoy both the substantial appreciation of fast growing companies as well as the dividends paid by lower risk companies. Diversifying your holdings further with bonds, international stocks and other holding reduce risks. Again, since companies pay dividends for a variety of reasons, don’t try to read too much into the payout tea leaves. Work with your advisor to define your goals and select investments that match the goals.

The Skinny House was eventually sold for $900,000. It was a rare opportunity to score a house on the Freedom Trail. I’ll just have to keep looking.