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.

Monday, February 5, 2018

Don't Settle for an MBTA Clunker

Recent storms and frigid temperatures have caused predictable commuting problems on the MBTA. Frequent delays, breakdowns, and a few years ago a driverless train has commuters at wit’s end. We know the cause of these problems, decades of little investment in new equipment and preventative maintenance. It will take a while to fix American’s oldest subway and a lot more than a nickel shortfall made famous by the Kingston Trio’s “MTA” song. When it happens, though, Boston will be even more wicked pissa than it already is.
How about having a wicked pissa financial plan? Does it need preventative maintenance or a complete overhaul? Before your plan looks like a Red Line clunker, let’s consider some steps to get back on track.
1. Write your goals down - If you don’t know where you’re going, how are you going to get there? Charlie, made famous in the song at least knew where he was going, he just couldn’t afford the nickel fare. Writing goals down make more likely you’ll achieve them.
2.Collect Data First - When to retire, sell your home, or invest a nest egg are major life decisions, yet many people make those on an arbitrary basis. Consider all the relevant information, and then decide. Don’t cause a breakdown or delay by taking the “easy” route. There are no easy routes on the T or in life.
3.Board the train - You know you’re behind, and the fear of bad news causes inertia. That doesn’t make much sense because it only costs you valuable time. Kicking the can down the road is tantamount to just standing on the platform as the doors closed. The train is going to leave whether you like it or not.
4.Think long term - The long term appreciation of the stock market is fascinating but it will always be a bumpy ride. One thing you must not do is give into human’s innate recency bias. Remember all the market skeptics in 2008 insisting the market would never go up again? Oh boy, were they wrong. I bet some people were critical when Park Street Station opened in 1897, they might have said mass transit was a waste of the city’s resources. The T expanded to become the economic life blood of the city.
5.Talk to your spouse- I often wondered about the relationship between Charlie and his wife. Every day she would go down to Scollay Square Station, which is now defunct, and hand him a sandwich “as the train comes rumbling through.” Why didn’t she just hand him a nickel so he could get off the train? Maybe she liked him out of the house! Talk to your spouse now. If that doesn’t work get things moving on your own. Many couples keep their money separate, it’s ok.
6.Hire a qualified conductor - Many parts of financial planning are more complex than you realize. Maybe you don’t have an aptitude for financial concepts or maybe you understand some things. Don’t be insulted, the Wicked Smart Investor attended grad school with many bright people but finance wasn’t their strong suit. A qualified advisor can help you run “what if” scenarios and manage your emotions.

In the end, it is YOU who is responsible for putting yourself on the right track during the commute. Maybe it is the orange, red, blue, green or silver line. Commit to investing the time into planning and don’t worry about the costs.  It may be less costly than you think, certain less costly than MBTA overhaul.


Thursday, February 1, 2018

10 Reasons to Work with The Wicked Smart Investor

If you read my articles in the blog or the newspapers you may have considered calling me for a no- obligation consultation.  Here are some reasons why a consultation with me could be a wicked smart thing to do.

1.Your goals are the priority – All financial planning conversations begin with a discussion of your financial goals. Once we figure out where you want to go, we can fashion a plan on how to get you there.

2.Fiduciary Standard- By law, the Wicked Smart Investor has a fiduciary obligation to put your best interest ahead of his. The Wicked Smart Investor takes this commitment very seriously.

3.Transparency- I purposely write this blog in a folksy, understandable manner to take mystery out of investing. The more you understand, the more confidence you’ll have in your investing strategy. This builds confidence and helps you sleep at night.

4.Evidence based approach- Investment strategies are based solely on peer-reviewed, academic research. By avoiding the confusion created by the financial press, you can make informed decisions about what strategy is likely to work best for you. See "Employ the Wisdom of Cover Bands

5.Humbleness- No one can accurately predict the future, but this is the underlying assumption of actively managed mutual funds. The Wicked Smart Investor doesn’t try to pick the next winner, because attempting to consistently outsmart the market is often a futile endeavor. See "13 Gurus Prove a Prediction is not a Promise

6.Risk Management- In order for your money to grow, you must take risks. Yet, not all risks are created equal. The Wicked Smart Investor models your portfolio with an emphasis on compensated risk. See "So What Do You Call 'Em? Here's the Story of a Summertime Kerfuffle

7.Cost Management- The Wicked Smart Investor knows the less investment costs you incur, the higher the return shall be. The problem is, many investment costs are hidden and escape the average investor’s scrutiny. See "Make Mine a Treasure Chest

8.Discipline- Many investors do not enjoy the natural appreciation of investments because of emotional decisions. Fear and greed frequently cause investors to throw logic out the window resulting in lackluster returns. The Wicked Smart Investor provides the disciplined plan needed to keep you on track. See "The Worst Christmas Gift?

9.Fraud protection- The Wicked Smart Investor never take custody of your money. All client accounts are held at a third party custodian which provides safeguards against falling victim to a Bernie Madoff. See "How to Avoid the Next Bernie Madoff

10.Fee only- A fee only approach aligns my recommendations with your best interests, not the amount of commission I receive. I receive no commission, bonuses or other perks from mutual fund companies.

Tuesday, January 2, 2018

The Hazards of Stock Picking


If you could accurately predict a future number one song or the next hot stock it would be immensely profitable. You could invest early, watch the run up and maybe cash in for a hefty profit. But investing, like the music industry, is never easy. Trying to pick the next big stock is risky business.

Back in 1981, I successfully predicted a chart-topping song. Late one night, I fired up my black and white TV and tuned into WCVB’s “Five All Night Live All Night.” I was instantly transfixed by the punk rocker appearing on the screen. He had spiked blond hair, snakeskin pants and a thick English accent. If that wasn’t enough, the sneer on this rebellious hell-raising face would have caused the nuns at school to demand “Get that look off your face, before I slap it off.” Billy Idol was everything I wanted to be, but just couldn’t.

After the interview, he got up and sang a rousing rendition of Tommy James and the Shondells’ “Mony, Mony.” I was smitten. The next day I ran down to Quincy Records where Jimmy sold me the “Don’t Stop” LP. I took that home and played that song ad nauseum. I was convinced this awesome song was a certain number one hit.

I was somewhat correct. Despite a celebrated appearance on Solid Gold, Idol’s “Mony Mony” peaked at number 107 on the US charts. The song was doomed to be slapped with a permanent “bubbling under” status. I turned my attention to other Billy Idol songs: “White Wedding” and “Rebel Yell” which were much bigger hits. Then, in 1987, something peculiar happened. Idol released a live version of “Mony Mony” that bolted up the charts. In a strange coincidence it bumped Tiffany’s “I Think We’re Alone Now,” another Tommy James creation, out of the number one spot. Finally, my prediction was accurate.

Now, if I could only predict hot stocks as accurately I’d be a billionaire. I know my limitations though, I can’t accurately predict the future, and neither can anyone else.

Many investors still try and it’s usually at their own peril. Investors could develop an emotional attachment to a stock viewing an impressive interview with a CEO or seeing shoppers lined up for a company’s products. They become convinced the stock is a blockbuster and invest heavily while failing to diversify their portfolio. Most investment research advises against this strategy. JP Morgan published the results of a study “The Agony and the Ecstasy: The risk and reward of a concentrated stock position.”  The key findings are sobering. First, the study found that up to 40% of stocks have a catastrophic decline, falling 70% or more and never recovering. Yikes!  Next, the study found two thirds underperformed the Russell 3000 over their lifetime. Last, the study found that 75% of concentrated holders’ risk adjusted return would increase with diversification.

The Wicked Smart Investor feels these statistics speak for themselves and advises against stock picking but not everyone will heed my advice. Some investors feel they have better insight than anyone else or they will be just as lucky as Billy Idol. It is possible, but highly unlikely.

You may have more luck, and profits, investing in a songwriter like Tommy James than a heavily hyped stock. In addition to his own recordings, two covers of James’ songs went to number one. If you throw in Joan Jett and the Blackhearts’ number 7 “Crimson and Clover,” James could have spent the ’80’s cashing royalty checks. Maybe James was singing “Money, Money”


  1 J.P.Morgan Eye on The Market, Special Edition