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Investing

Destroying the Dow

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The Dow is ‘struggling toward 15,000.’ I don’t care, for many reasons, and you also should not care. You will be a smarter investor if you banish all knowledge of the Dow from your mind. Every time you see it, you get dumber.

Here’s a radical stance: the Dow could be construed as a form of ongoing terrorism, since (much like a bomb threat) it causes panic that need never be, and works to destabilize the economic underpinnings of society. It presents a widely accepted, grossly distorted picture of the market, and unfortunately, most of us are unwise enough to validate it.

I believe that the Dow Jones Industrial Average, commonly called the DJIA or just ‘the Dow,’ needs to be suppressed on the principle that free speech does not include the right to yell “fire!” in a crowded theater, nor make obscene phone calls, nor publicly advocate terrorist acts–if your free speech would cause unnecessary harm or panic, it can be prohibited. (It should also be suppressed because it’s stupid, even though policing the propagation of damaging stupidity has never worked. It would be a blow struck for brains.)

Two objections to this come readily to mind:

  1. “But it’s useful in some ways.”
  2. “You just can’t suppress free speech like that.”

1. No, in fact, it’s worse than useless, for it is misleading. It is based purely on share price (adjusted for splits since entry into the index), which is always an arbitrary number. Don’t believe me? Suppose a company goes public with $45 billion in market cap: $45/share for 1 billion shares. The company could just as easily have gone public at $90/share, issuing only 500 million shares.  Same market capitalization, double the Dow impact. That’s just ridiculous.

In terms of day-to-day movement, imagine that Dow component BS rises from $100 to $101, a very minor 1% change. Another Dow component, FY, rises from $10 to $11–an enormous 10% gain. Dow doesn’t care about how much market value was created or lost. Dow considers both movements to have the same impact.

And this gets even worse. The Dow serves mainly as a useful tool for the financial media to get us stirred up, increasing our consumption of…financial media! This is partly because it is a Big Number. Well, it was not always a big number, but we react just as we did when it was smaller. I was alive, adult (by age if not by maturity), and losing money (buying stupid investments with money I could not afford to lose) when the market wrapped around a tree in 1987. The Dow lost 508 points, a 22.6% decline for the day. That was nearly a quarter of its value. It closed at 1738.7. We’d all agree that over 20% is massive.

If you are paying attention, and picturing the headlines of the day, you can see that a 100-point shift in the 1987 Dow would still have been a large percentage change, and a loss of over 500 would be (and was) a catastrophic decline. I will now take a bullet for you: I will look at the current value of the Dow. As I compose this, it is at 14974. Suppose it had the ‘triple-digit decline’ of which the media are so eager to shriek: a drop of 100 points. That would be a decline of less than 1%; about 0.67%, a very normal daily shift, and nothing for any investor who thinks for him or herself to freak about. Okay, now suppose we had a loss of 500. It would be about 3.3%, certainly a big day, but something that happens now and then. I was reading financial media then, as I read them now. They react to ‘triple digit Dow’ nearly the same way. It is as if your doctor treated every mole on your body as melanoma until proven otherwise, even though most moles are just brown spots. You’d live in constant terror of a horrible death which most people would not actually suffer. You’d overreact. You’d probably have them all removed, traumatizing and scarring your entire body–for nothing. The only people who would benefit would be those helping to spread the panic.

Welcome to the market.

Of course, if our precious financial media focused purely on percentage change, we would be spared this problem. It will not, and why should it? Said media are in the business of getting you worked up, getting you to read and watch and not relax. Fear is their product. Why would they change their practices in the interest of market stability, to their own detriment? Care about society over self? Are you mad? This is Wall Street’s publicity arm. Don’t talk to it about anything but purest avarice that burns with a purple fire. Talking about them caring about anything above self and profit is like talking to Kim Jong Un about caring about freedom for North Koreans to criticize his regime.

2. Let’s break that down. Can you legally suppress it? You sure as hell can. We suppress or restrict free speech all the time, generally for good reasons, from the crowded-theater example to the fact that saying “Go to hell, judge, I don’t have to take your orders” will get you jailed for contempt of court. A person using free speech to disclose national security secrets will soon learn the limits of that free speech–and sensibly so.

But is it practical to suppress the Dow? On the grand scale, surely not. I mean, any fool with a spreadsheet can easily continue the Dow math, rename the index, and post it online. Prosecuting this in full would be impossible, especially since nothing is stopping some dude in Malaysia (for example) from calculating it and posting it on his blog, in defiance of US law–which is not in force in Malaysia, any more than Malaysian law could prohibit me from posting stuff that the Malaysian government might not like. Try and get the Malaysian government to get interested in investigating and extraditing him for something that isn’t even illegal in his country, and let me know how that works out for you.

Well, what could we suppress in practice? We could certainly prohibit major domestic media from publishing it, since they are the most visible. A few examples of reporters and executives thrown in jail would cause a lot of bleating, but you can bet Marketwatch (owner of the index rights) would can it, whining the whole time about the police state. This wouldn’t apply law uniformly, but we don’t do that anyway. Tons of people cheat on taxes; they don’t audit everyone, just the ones they believe cheated big time. Tons of people pirate intellectual property; the RIAA doesn’t sue everyone, just a few people to make the point. Tons of people speed on the freeway; they don’t all get a ticket, just enough to remind of consequences.

The most powerful argument against this, I believe, is the ‘you can’t legislate intelligence’ perspective. Let me make it myself: “So what you’re saying is that this should be banned because ignorant people tend to validate and react to it, thus doing dumb things, flogged onward by media who can benefit from that. Why complain? If you yourself are not ignorant, you have an advantage and should profit from it. Why should dumbness be protected from itself? Shut up and take their money, like I do!” The rejoinder is: “First of all, Dreamboat Aynnie, it’s not all about me or you. Second, the core problem is that the psychological impact of the Dow distorts reality for enough people, helped by our adored media, to create instability which in fact doesn’t exist. The overall harm to the national economy is serious, with potential for panic which need never be. The national interest is more important than yours and my ability to profit.”

I don’t much advocate attempts to nerf Darwinism in action; if you want to ride a motorcycle without a helmet, I’m okay with you risking having your brains bashed out. Here’s the problem: it is likely to leave you in Schiavo mode, slurping up enormous resources and starting a fight over whether to withdraw your feeding tube. Indirectly, I will be billed for your choice. If there were a way for me not to pay for your foolishness, I’d say go for it. In practice, there is not, and I resist paying that bill. Anti-tobacco advocates feel the same way, and one can hardly blame them. One of the most oppressive examples of this is the homeowners’ association, in which people say ‘you can’t do that because it will lower my property value.’ I hate HOAs. And yet…I do have the choice to live somewhere without an HOA. I don’t have much practical choice about not participating in the national economy. The principle may be similar, but the difference in scope matters. Some dumbnesses can be addressed with law, to some degree, and others can’t.

Here is what outlawing it would achieve: greater public awareness of how rotten the Dow is. Instead of passively acceding to the notion that the Dow is useful, the public would hear how worse it is than useless, and might at least begin caring less about it. Sure, the public should educate itself, just as motorcyclists should wear helmets. If this did not cause needless market instability, no action would be necessary–just as if all bomb threats were spurious and false, and we ignored them all, we wouldn’t need to prohibit them. Moot point. We don’t ignore them all, they are accurate just often enough to take them all seriously, and thus anyone making a bomb threat deserves all that the law can throw at him or her. In the same way, the ongoing random bomb threat that is the Dow needs suppression insofar as the law has power to do so, and to be considered as respectable and valuable to society as a bomb threat.

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Investing, Social comment

Most precious metal bugs don’t even believe their own philosophy

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It’s a beautiful day: silver and gold are burning. I believe that a reasonable price for silver is $12-15/oz, and that gold is reasonable at $600/oz. I don’t care what Mr. Market says; Mr. Market is an idiot. Don’t try and tell me how Mr. Market is wise, swift and sure, all hail Mr. Market. When some money market funds broke the buck, panicked investors fled to safe havens: to money market funds! That’s what an idiot Mr. Market is.

Would you like to know how to tell if a precious metal hoarder really believes his or her own philosophy? Most don’t believe theirs. Many bought piles of gold at $1800/oz and silver at $40/oz. The enormity of those prices tells me that the reason was not long-term profit, but fear of some Grand Calamity. I’ve had the same discussion with many of them, and I’ll share it with you.

PMB: *grumble grumble* “I don’t trust any banks or any government or any anything. It’s all going to hell. I’m going with gold and silver, it’s the only thing you can count on.” *mutter mutter about socialism*

Me (drawling a bit): “Okay. Mind if I ask you a question or two about your philosophy?”

“Okay, sure.”

“Cool. First off: are you still putting money in a 401K?”

“Well, of course! The job matches my contributions and I get a tax benefit!”

“Seriously. So you believe everything is going splat, but you still put money into this. You don’t even believe your own philosophy.”

Or, they may answer: “Hell, no! None of that is going to be around!”

Me: “Makes sense. I don’t have an issue with anyone’s philosophy as long as they believe it. So you are loading up on metals; fair enough. Without being specific, of course, can you tell me where the metal is, very generally?”

“Well, I bought it through Edward Jones.”

“Really. So you don’t even have possession of it?”

“Would you want all that in your house? Criminals are getting bolder every damn day! Anyone who isn’t afraid is an idiot!”

“Really. So in your apocalyptic scenario, with civil disorder and everything in collapse, you truly think you are going to be able to go down to your local Edward Jones office. And the pleasant receptionist is going to be at work, smiling, ‘Yes, Mr. Smith, right away, Mr. Smith.’ You do not even believe your own philosophy.”

Or, they might respond: “I got it at the metal trading place, and it’s in my safe deposit box.”

Me: “You’re serious? So let’s draw this all in a picture. It’s the day of the Great Collapse. You need your gold! And you imagine that you’re going to go down to your B of A branch and the smiling teller will gladly let you into the vault. What are you going to do when you find out that, under martial law, there’s a platoon of the regular Army guarding it with automatic rifles and fixed bayonets? ‘The bank is closed, sir. Please step back to the sidewalk.’ ‘But you don’t understand! I need my damn gold and silver!’ ‘Sir, this property is under martial law. I have authority to use deadly force. Now please step back to the sidewalk, or lay down on the ground with your hands clearly visible. I would rather not use that deadly force.’ You don’t even believe your philosophy.”

Or, they might respond: “Well, I’ve got it in a few locations, easily landmarked. All of them are within a day’s hike of each other, none are subject to being in the same nuclear blast, and none are endangered by significant natural disasters like floods.”

Me: “Okay. Sounds like you’ve thought this through. Just out of curiosity, what’d you buy?”

“Mostly 1-oz Krugerrands and 10-oz bars.”

“Seriously. So, how many cattle can you pasture at once in your yard?”

“What the hell do you mean by that?”

“Suppose we are on this post-apocalyptic barter economy and you want to use your metal to trade for stuff. How easy do you think it will be to make honest change using big gold to buy small amounts of food from farmers and ranchers? How fast do you think your stock of gold coins will evaporate at that rate? You really have not thought this through.”

Now and then I’ll meet someone who truly has thought it through. “I bought old US gold coins which were worn, selling close to melt, and a bunch of old US junk silver. Rolls and rolls of 1964 dimes, quarters, halves. Some wartime silver nickels. If things go to hell, I can barter and preserve my resources. If they don’t, what the hell; I can become a coin collector and hang onto some of the value.”

Me: “Okay. Then you’re doing the right thing for you. I hope it doesn’t all fall apart, but if it does, you’ve at least thought about what it’d mean. Good luck.”

Those are rare.

Investing, Social comment

Why I don’t believe in ethical investing

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Considering how I feel about many major corporations, it might be shocking to hear that I have zero compunction about profiting from their stock. None. Monsanto, Wal-Mart, AT&T, Toyota, whoever–I don’t care about their sins in this context.

Why? Because my reason for investing is to make money.

I believe that investing to bring about social change is just fine, if you think it through; however, then acknowledge to yourself that this abandons moneymaking as the primary purpose, and don’t complain when you take a bath because your eco-friendly investment rolled over and threw up again. Personally, I think you could do more to bring about social change by sending charitable contributions to well-investigated causes, but hey, it’s your money.

Mine will be invested for profit, and for no other purpose. That is the game as defined by the market, and the laudable goal as defined by our broad social consensus.  I did not design this game. Were it up to me, a whole lot of corporations would be running very scared, but it isn’t.

The individual investor in the marketplace, which is heavily rigged by the big guys, is like the new and friendless inmate in a major maximum security prison. He did not design the prison, with its gangs, variably-ethical guards, drugs and hazards, but it’s where he is. He can either spend a lot of time trying to effect ‘change’ against a tide like they get in the Bay of Fundy–and get nowhere–or he can figure out how to find some comfort, learn to do time. He may have to do things he’d never have considered on the outside, associate with the worst scum in society. He may have no choice. As with combat veterans, it’s not sensible to lecture him on morals if one hasn’t been there, felt what he felt, seen what he saw.

But how can you stand to own stock in Unislime (NASDAQ:UNSL), which treats its workers like Michael Vick treated dogs, pays them almost enough to buy one Taco Bell meal a day if they don’t pay rent, and last year gave the CEO a $4 trillion bonus while laying off the entire populations of five impoverished Appalachian cities? I won’t say that I feel moral joy owning UNSL shares, though it makes me economically joyous if it’s up 14% this year and coughed up a 3.5% dividend. (Once I sell it, it’s welcome to jump off a bridge, so I can buy it again real cheap.) Remember: there is no such thing as shares which are sold but not bought. I could dump UNSL, and someone else would own it. My selling would have the infinitesimal impact of driving the current share price down a tiny notch for a brief half-second, it is true, but the share price overall is based on market perceptions, the greatest percentage of which come from mutual and hedge fund managers. If a $12B mutual fund owns 5% of UNSL, and decides the stock has reached its target price, it will start selling and the stock will go down. Whether I own fifty shares of UNSL, or someone else does, will have no measurable effect on anything.

Haven’t you ever heard of shareholder activism? I have not only heard of it, I have engaged in it with some malicious glee. It works like this: every year, corporations hold shareholder meetings. Inevitably, some shareholder proposals make it onto the ballot for voting. Management invariably recommends a vote against all shareholder proposals and in favor of all its nominees, policy changes and so on. You can bet that if I get my UNSL shareholder ballot, and I see that a coalition of nuns has proposed something deeply idealistic and completely loopy, they have my vote just because that’s fun for me. I myself do not take shareholder activism seriously, because the only reason I own the stock is because I think it will make me money. Others feel differently, and consider it a powerful weapon. Good for them, but that is investing for social change. I’m investing for profit, and profit alone. Any satisfaction I get from doing something management won’t like is a minor bonus.

But you’re supporting Unislime by owning its stock! Your money is blood money! Eeeeeeeeeeeek! Icky! In order: not true, just sounds like it should be; yes, as is most of the money made in the market; stop screaming; no money is icky.

As mentioned before, someone’s going to own UNSL. Might be Unislime itself, using its cash reserves for a big stock buyback. My ownership or non-ownership is not itself support; that assertion is mindless and disintegrates under scrutiny. My ownership just means I own some phantom pieces of paper representing a little chunk of UNSL. Voting for Unislime’s paid Congresspeople–that is support. Did you stop to check on that before you marked your November ballot? Also, do you own a 401K? Does it own mutual fund shares? Do you check rigorously to see if any of your funds own UNSL? Do you even know how to find that out? If you have an employer-sponsored retirement account, you probably own UNSL shares indirectly, or stocks of even more odious corporations. Most of the large ones are so unscrupulous that ‘ethical investing’ would be problematic anyway, especially considering how much we do not know. Most of them would be out of bounds. CEOs are paid to increase shareholder value, not be ethical.

It’s much easier for a corporation to be ethical when it’s not publicly traded. A very good friend of mine works for such a firm in Portland. He tells me, and I believe him, that his company has very high ethics toward the communities in which it does business. Fantastic! I’d want to work for an outfit like that, and I’d love to own stock if it would make me money. But I can’t buy their stock, and unless I need teeth for my earthmoving equipment, I’m not in a position to steer them any business. I respect them and their business practices, and I hope they prosper handily, but they are not germane to my own investing.

So, it’s pretty hard to do any investing at all without profiting from the profit of a company who earned it by working to someone’s disadvantage. It is to the company’s advantage to sell goods and services at the highest possible profit, which usually means paying employees less, offering fewer benefits, and gouging consumers to the highest possible degree. Publicly traded companies answer to shareholders, and shareholders demand value. That’s just how the game works. And as before, if you buy mutual funds, unless you do a pretty thorough walkthrough of their portfolios, odds are you are building your Sun City sunset years nest egg on ‘icky’ blood money. You can face that with eyes open, or pretend it’s not so, or choose to invest for social change rather than financial gain. We all have to be comfortable with our financial plans. Mine are to make money, and devil take the hindmost.

This all sounds like a big rationalization to liberate you from ethical considerations. For starters, I don’t believe I’m obligated to ethical considerations in what is essentially a free-for-all where the biggest players just laugh at the concept of ‘ethical considerations.’ I’ve never seen evidence that my owning or not owning a stock affected the business outcome. My stance is that the vast majority of people invest for the same reasons I do, deep down, but that some are not self-honest about it. If you do not believe in owning certain types of shares, and you fail to review the portfolios of all the mutual funds you profit from, you aren’t self-honest about it. I prefer to apply my ethical considerations in areas where I feel I make a true difference: recycling, shopping local, supporting deserving causes. I have never had a charity interrogate me to ask whether my contribution was ‘blood money.’

I’m a Muslim. I invest only in funds that are consistent with Islamic principles. Some years, that’s turned out very well for you financially. I’m not a Muslim, and I considered buying a couple of the Amana funds myself–because I don’t care what the fund stands for, just whether or not it makes me money. There are plenty of funds whose charters are based around ethical notions, be they Islamic, Christian, environmental, fair trade, no sin stocks, no defense/guns, what have you. Sometimes you’ll do pretty well. But tell yourself the truth: You are investing with a social (religious) agenda that trumps the profit motive. If that’s how you must invest in order to feel okay about your money, as before, best of luck. I don’t think less of you for it, unless you get self-righteous with me without being self-honest.

This sounds so Randroid. Haven’t I heard you say more than once that you find her ridiculous? And you’ll hear it again. Here’s a logic trap I believe in avoiding: eschewing an idea because some jackass also happens to share or advocate it. I can’t say whether Ayn Rand would approve of my investing notions, but I’m not investing to annoy or please a dead priestess of avarice. I’m investing to make money. No matter what your idea or view is, on any topic, you can find a complete scoundrel who advocates the same. Stalin had a draft; if you support conscription, does that associate you with Stalin? Jefferson owned slaves; if you admire his Constitutional concepts, does that mean you advocate slavery? It’s silliness to think so.

This whole greedy attitude is what’s wrong with America. Be the change you want to see. Nobly motivated, but you’re spending too much time addressing the wrong person. I didn’t design this prison; the gangs and the hacks have all the power here, and I have to live in reality. How about instead asking your legislators to be said change, since they’re the prison guards turning a blind eye to real wrongdoing? As demonstrated before, what I do with my investment capital will effect no social change, because what shares I do not own, someone else will. I can make my way within reality, or let it crush me without even noticing or caring. If I do, of course, I have less ability to effect other change. Take a look at Bill Gates, who made most of his money providing uncreative bloatware while assimilating or destroying most of what was better (and nearly everything else was). Now he’s giving most of the icky money away. You can argue that all of his money is filthy, if you believe there is such a thing. You cannot successfully argue that he is misusing his gains. He’s using them so honorably that Warren Buffett is just going to send all his money (a great buttload) to Bill.

Furthermore, this greedy attitude is America. Has been since the first Europeans showed up. The modern nation’s vast wealth was created through grants and exploitation of free real estate by pushing aside, confining or killing its original owners, whose descendants still aren’t getting a fair shake. Much of the initial labor was provided by slaves or indentured servants, many of whom shared in none of the rewards during their lifetimes, and whose descendants likewise still aren’t getting a fair shake. You may like this truth or loathe it, but it is reality. Unless you own nothing in the United States, or are prepared to surrender all that you own here because its economic base was gained through injustice, you’re a participant at some remove. Greed, and taking from others, made it all possible. Either none of the money is icky, or it’s all been icked out for centuries.

I don’t believe in small feelgood gestures that do no good. If you want to do some good, get out there and do some. You don’t need money to do that, but if you invest purely for profit–even in UNSL and its ilk–you may obtain greater means to do that.

Plus, look on the bright side. How good will it feel to make a bunch of money off UNSL, then dump it, and wait and watch smugly as it tanks later on? Even the ethical investing crowd has to like that.

Investing

GESA Credit Union shows us the Stipper

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If you get the reference, then you at least once played BaFa-BaFa. The latter is a cultural awareness game that divides a group of trainees (in my case, dorm resident advisors) into two cultures. Both are briefed on their cultural norms, which they are expected to roleplay. In one culture, anyone who breaches the accepted social rules is shown a card called the Stipper, meant to convey disrespect. (In our game, the women naturally resented the sexism of that culture, and began to show all us males the Stipper.) If you think this sounds stupid, consider this: of those who played the game that day, one is very highly placed at Starbucks today. Another is a successful film producer, another a pediatrician, another a captain of police, and so on.

As thrifty people, Deb and I keep savings reserves in multiple banks. We had a low five-figure sum at GESA Credit Union for some six or seven years, a relationship that ended this morning. Like most savings accounts, it had low activity–simply the periodic pittances of interest. That was fine; its purpose was to act as a reserve, not earn money. A few days ago, we received a mailed notice containing this text:

Dear Member,

Our records indicate that there has been no activity in the above referenced account for a period of 24 months or more. Gesa Credit Union’s policy states that an account that has been inactive for a period of 24 months or more is considered dormant and subject to a dormant account fee of $5.00 per month for notification of the status of the account and for continued maintenance of the account at Gesa. Accordingly, if your account is still dormant on 08/31/12, we will begin to impose the $5.00 per month dormant account fee as required by our policy.

This fee will continue until you either initiate a transaction to re-activate the account, or until the account reaches a zero balance and is closed.

Sincerely,

Deposit Operations Department

Well, we’d hate to burden such a fine institution with our inactive money if they don’t like it. Business is business and we understand that; they have to do what they have to do for the firm. If they aren’t satisfied with having our money laying around, for them to lend out so people can buy Hondas and pay them interest, the last thing we’d ever want is for them to suffer. So, after closing the account, I gave the assistant branch manager a letter to forward to her CEO:

Ms. Christina Lethlean
President and CEO
GESA Credit Union

Re: mailed notice re account #4xxxxx

Dear Ms. Lethlean:

We have for some years maintained slightly over $10,000 in a money market account, plus just over $460 in a savings account, at GESA. This holding was a cash reserve, earning us minimal interest (but certainly funding some lending by GESA). We had no intention to touch it except in an emergency.

This week, we received a frigid notice in the mail from your Deposit Operations Department. It advised us that our account was dormant under GESA’s policy, having had no transactions for twenty-four months. If we did not initiate a transaction by 8/31/2012, the account would be charged a $5/month dormancy fee. To comply with GESA’s policy, we have withdrawn both balances and closed both accounts.

This transaction will avoid the $5 dormancy fee for August, and in fact for the next twenty-four months. Our household’s policy states: never reward a vendor for a policy or action so comically ridiculous that it has us laughing too hard to get suitably angry.

Thank you for your institution’s service to us over the years. We wish the best of success to you and GESA in the future.

Sincerely,

J. K. & D.M. Kelley

The assistant branch manager’s explanation was that this was not GESA’s fault, but the state’s. You see, if accounts go ‘dormant’ for a certain period, the credit union is required to package up the money and send it to the state treasury. I didn’t bother answering her with the obvious: if that is so, the logical action is to send a notice advising of this and blaming it all on the state. The illogical action is to threaten a $10K depositor with a $5 monthly fee if s/he doesn’t come in and perform a transaction. She warned me that it would be this way at any institution. I didn’t bother arguing with her about that, either, because it really doesn’t matter. If it is, we’ll see how it’s handled when the time comes, and if it’s handled stupidly, we’ll leave. If it’s handled intelligently, we’ll stay, as we would have stayed had this situation been handled with the intellect of at least a fern.

Of course, I neglected to mention to anyone that it was going onto the blog.

I too have a Stipper.

==Ps., 17 August 2012==

Credit where credit is due. Ms. Lethlean picked up the phone and gave me a call herself. She told me that this sort of ‘culture’ had been a problem at GESA in the past, and that she had worked to change it, and was disappointed to find that it still had pockets of resistance. I didn’t inquire about specifics, but my own guess is that the culture was one of ‘stupid policy.’ From speaking with her, I believe she was more than mildly annoyed at whomever authored that letter, and that someone had a bad day over it. It turns out that there doesn’t even need to be a transaction, just some sign of motion, respiration or at least a pulse from the consumer. I didn’t take our money back to GESA, but we had a cordial conversation and I’m satisfied that someone had her bell rung over this, so I won’t rule them out in the future.

Investing

Selling at Alibris: why it’s pointless

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One suspects that most people who flop selling at Alibris didn’t do their homework, or had unrealistic expectations. I can give you a better reason why.

The whole thing is geared to make money only for them.  You are far, far better off just taking the books to your used bookstore for credit, or to your library, or just recycling them.  Seriously.  Unless they are rare, that is.

Alibris has two tiers of sellers.  For the one, you pay $20 to get started, so you are already in the hole.  For the other, you pay a monthly fee, so you are already in the hole on a monthly basis.  Let’s walk through selling a typical hardback book in Fine condition.

Your shipping costs are:  $2.80 for media mail, $1.50 for the bubble mailer, net $4.30.  You will get paid $4.00 for shipping.  So far you are down ($0.30).  Okay, but you should take that into account with your pricing, right? Go ahead. You will also pay Alibris $2.25 (cleverly split up in the description of their pricing scheme so you won’t add the $1.00 and $1.25 together) for the privilege, plus $0.50 as a commission, net loss there ($2.75).  So your total costs are ($3.05). This accounts for every factor here except the price tag you put on the book.

There are 100 of the same book in Good condition listed for $1.00, and some in Very Good and Fine.  If you sell for that you will lose ($2.05).  Suppose it’s in Fine condition and you say, well, I have to get $3.05 for it.  If it sells for that, you break even, but Alibris gets its $2.75. You can’t win.  Price it higher than that, and you wasted your time listing it–no one’s going to pay more for it.  Price it lower and you may well sell it, losing money.  The one constant with every such transaction is that Alibris makes money and you can not.

Notice we didn’t even discuss the actual cost of the book.  It is, you know, an item of merchandise that once had a cost? Clearly, you will never get back a fraction of that; this is accepted.  However, the above model considers the book to have zero cost value. Assign it some form of basic cost of goods sold, even a pittance of 10% of original price, and you’re even further in the toilet.

Okay, but some books are surely worth more? Yes.  A few.  A very few.  For that same reason, they won’t sell very often.  Plus, the higher the price, the pickier the buyer, for which I don’t blame them.  There is a good chance of a return, which puts you in the hole, or a nasty comment that damages your seller rating.  You could miss some flaw on the book when describing it, though you tried your best. If the book has that much value, why not put it on eBay and really see how much you can get for it?

Their seller service is friendly and responsive enough. Well they should be, considering that you’re handing them pure profit and doing all the work. If you come over to my house and perform work at a net cost to you, from which only I profit, I promise you, I’ll treat you very courteously.

The other two major competitors are Amazon and Abebooks. Why not them? Not only is there less money to be made at Amazon, they themselves will directly undercut you. They’ll give people free shipping and charge them $3.99.  You will only get $3.99 shipping reimbursement plus a minimum price of $0.01 for the book. You can’t win. Abebooks has a monthly fee, I think $20, which it would take a lot of books sold to cover.

The model is useless. You can’t make any money. You donate your labor to a for-profit entity.

I’m just going to start taking them to Adventures Underground for store credit, a box at a time. I’ve shut down my operation at Alibris.  Two hundred thirty books, all described with careful honesty and listed with great pains taken to assure a representative image and the right edition, probably forty hours of effort, all for nothing but profit for Alibris.

Live and learn.

Investing

Screw this. The conventional mutual fund model is broken.

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It pains me to say that.  I used to work for Rainier Investment Management, a good company with smart managers that ran (and still run) several relatively successful mutual funds.  They treated me well; I still have friends there, and I hope they prosper as a firm and as individuals.  I learned so much there–and ironically, learned why conventional mutual funds are a broken model.  At the time (mid-1990s), they were not.  Now they are as outdated as the idea of scanning a newspaper for stock prices, phoning a broker to get a current quote, and paying him 7% to buy a stock.

But at this point, I can’t recommend anyone invest money in conventional mutual funds unless there is no adequate alternative (as in most 401ks).  They have three big problems:  the creation/destruction of shares, the way they are transacted, and the fee locusts that eat away the money.  And that’s the no-load funds.  If there is a load (a massive commission paid to the manager for the privilege of becoming his or her customer), add a fourth big problem.  If your broker charges a transaction fee of any size, add a fifth.

Before we get into that, for benefit of anyone who’s not sure, let’s detail how a conventional mutual fund works.  I was present for the founding of four of them, so I understand how this happens.  A money management firm files all the necessary paperwork to open a mutual fund, gets assigned a 5-letter ticker ending in X, invests some seed capital, hires an agenting bank to custody the money/shares, and writes up a prospectus.  Included in this are the investment guidelines, which are what keep the manager from just buying whatever the hell s/he wants.  Typical guidelines sound like:  the Fund will invest no less than 80% of its assets in U.S. equities (that would be stocks)  with capitalization levels below $1 billion (that would be small cap stocks, i.e., little companies).  The fund may hold up to 10% of its assets in cash equivalents (that would be money market mutual funds, essentially the savings accounts of the investing world) at the manager’s discretion. Okay, fine.

All well and good…so you go to buy it.  You place an order (in dollars, not shares) during the market day.  A couple hours after market close, the fund reports its Net Asset Value (that’s the price per share) for that day, and your purchase executes, with amount of shares calculated to three decimal places.  Those shares were created on the fly, just for you.  Had you redeemed (sold), shares would have been destroyed.  Tomorrow morning at 6:30 AM PT (9:30 AM ET), your manager will start thinking about how to invest the new money you sent him (so to speak).  You’ll share in the fund’s gains, losses and fees.  What’s wrong with fees? Everyone’s got to make a little money, right?

Let us say that everyone’s got to earn a little money.  It is stupid to pay someone a fee to underperform (do worse than) the overall market, the performance of which can be purchased using an index fund.  The idea of hiring a pro, right, is that s/he knows stuff you do not, does major research, digs deep, knows the right questions to ask, has a finger on the market pulse? Then how come a majority of them do worse than the market indices they compare to, a majority of the time? With all respect to the pro’s hard work, what the hell benefit is the investor getting?

It makes sense here to explain the alternative, the index fund.  It may be conventional (which suffers from all the flaws of all conventional mutual funds, but suffers them with lower fees) or exchange-traded (hereafter called an ETF, mechanics different from conventional funds, explained later).  Its basic idea is that the manager just buys the securities in a given index.  Doesn’t take much brains, as the manager has zero discretion.  S/he must maintain the fund in as perfect a mirror of the given index as possible.  If you own the fund, your performance will be the performance of that index less relatively small, more reasonable fees than actively managed funds.

The only reason to pick conventional funds over index funds is the belief that the manager will beat the market on a consistent basis.  Most do not.  Most get beat by the market, accentuated by the fees.  This adds value…how?

In fact, it subtracts value–and you pay for that service.  Well, if I want to do worse than the market, I don’t need professional help for that.  If I want my investments screwed up, I’m capable of that all by myself.  Now that I’ve explained the model and how it functions, let’s detail why it is broken.

1) Creation/destruction of shares.  Sounds simple enough, right? Not so much.  Suppose the market is going great guns.  Everything the manager bought is fairly expensive right now.  Because the market is going great guns, investors’ money pours in.  The manager’s guidelines require him or her to buy–but there’s nothing out there that’s a good deal.  S/he must buy at the inflated prices.  Okay, now the market is eating flaming death, or the fund had a bad quarter.  Investors head for the exits.  They must be paid, meaning the manager must raise cash for redemptions.  But there’s nothing s/he really wants to sell right now! There is no choice.  The manager must sell a security s/he did not want to unload, probably because this is a terrible time to sell, locking in a large loss.  Both of those dynamics damage performance.  It’s bad enough with stocks; it’s worse with bonds, which is why conventional bond funds are such a dumb investment.  Bonds are mostly not traded on markets, but are sold from broker inventories.  One can’t just buy a bond index, as the bonds in it are not always available.  This is why bond funds can go up and down in price:  after their issue, bonds will trade at premiums or discounts to their original par.  So for a bond fund, you get the potential for losing money of a stock fund, but you don’t get the high upside of stocks.  Seriously? Who wants this?

2) The way they are transacted.  If you buy a stock or bond, you buy at a market price.  You can issue trading instructions.  If your trade conditions are met, bang, you bought it–same is true for selling.  If you buy a conventional mutual fund, you issue the order when the market is open, and after it closes, you find out the price you paid.  In what world is this even remotely acceptable? I have some books for sale.  If you place an order during the business day, I’ll fill it this evening, but I don’t yet know the price you’ll pay.  I’ll know that later.  Would you buy books that way? Then why will you buy thousands of dollars worth of mutual funds this way? Do you hate your money and want rid of it? If so, send it to me.  I won’t charge you any fees and I will pay your postage and/or wire fees with a friendly smile.

3) The fee locusts that eat your money.  The fees are not inconsequential.  How it works:  the fund pays out money, including (most significantly) to the manager for his or her professional expertise.  Okay, fine.  Typical management fees for actively managed stock funds amount to about 1-3% of the total money in the fund.  You pay that, though you do not see it occur.  Worse:  you pay that even when the manager underperforms the market.  Dead serious.  You often pay them to lose you money.  Is there a one of us who cannot lose his own money without help, for free? If you want a free money-losing service, the offer above stands.  I’ll take it off your hands and I swear not only never to charge you a fee, but to cover all costs.  Hang on; there are also 12b-1 fees, ranging from 0.25% to 1%, that go to pay people for marketing the fund.  I’m pretty sure, for example, that’s how Fidelity gets paid for its no-transaction-fee funds.  These, too, you pay whether the fund wins or loses.  How does it add value to you? It doesn’t.  It’s just a way to get you to pay the freight for marketing and distribution of someone else’s goods.  You are the customer, not the manufacturer.  Why are you paying your vendor to market his product to you? Isn’t that rightly his expense?

4) Sales loads.  Typically 5.75%, a one-time fee assessed when one buys (front-end load) or sells (back-end load).  Often called a ‘sales charge.’  The very term is insulting to one’s intellect and commercial sense.  You have to pay them a massive fee for the privilege of having them charge you further hefty fees to underperform the market? In order to make up for the crater this fee will put in your returns, the manager must outperform for years at a time.  Odds are heavily against that.  So, let me get this straight.  You’re willing to buy something this disadvantageous? I have a better idea.  Buy an index fund, and send me any portion of the 5.75% you feel fair and right.  I will cover all fees and expenses for this process, and I’ll never charge you any further fees for it.  Why do load funds even exist? That’s so that full-commission brokers, who sell the illusion that they are acting in their clients’ best interests and who get paid every time they trade securities, can get paid to put the client in mutual funds (which will not generate ongoing commissions for the broker, being typically buy-and-hold investments).  Full-commission brokers are as obsolete as sales loads, conventional mutual funds and learning the stock results from a newspaper.

5) Broker transaction fees.  These vary from discount brokerage to discount brokerage, so let’s talk about how Fidelity does it.  At Fidelity, I pay $7.95 to trade stocks up to some large amount of shares.  Some conventional mutual funds have no transaction fees (I assume because the fund managers agreed to slip Fidelity some 12b-1 fees).  Here is an excellent article about this.  Others have a $75 transaction fee.  If I buy $7500 worth of stock, I pay about 0.1% in commission.  If I buy $7500 worth of mutual fund shares, I pay 1% in commission (let’s call this what it is, shall we?). Every nickel of commission that you pay is a loss to you.  One always pays something, but in the gods’ names, why pay more for no benefit? Ah, but say you really want into that fund.  Do you want it badly enough to lose this much money immediately, so that a professional manager can then pay him or herself a handsome annual fee to do a worse job than an index fund? Because on balance, that is what is going to occur.

Think of your finances as a human body.  The conventional mutual fund model is a series of leeches, slowly but surely drinking the body’s nutrients.  In return for what? On balance, on average, in return for lowering the body’s health. What is the benefit? A sexy name? An illusion of security? Sorry, but to me it just looks like being covered with leeches.

If a single person asks, I will author a follow-up article about why ETFs and CEFs (closed-end funds) are so far superior.

Investing

Being greedy when others are fearful

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One of my life philosophies is that if very successful and smart people say things, one should pay careful attention.  This blog, for example, resulted from just such a situation.

I look at the markets today and I see and smell fear.  Never mind that much of the fear is generated by skewed, distortionary indices like the Dow; never mind that the media deliberately worsen it by anthropomorphizing and exaggerating the market.*  Never mind that it’s all based on taking advantage of a fundamentally innumerate public’s emotions.  I can’t change any of that.  I can, however, profit from it.

(*Think I’m exaggerating, myself? Riddle me this, Robin.  When I first started losing money buying stocks because I thought I was smarter than other people, in 1987, the useless, worthless, despised Dow was around 2000.  A 100-point triple-digit loss would be 5% at least–a really bad market day by nearly any measure.  Fast forward to our modern day of Dow 10000+.  A triple-digit loss of 100 today is 1%–essentially the expected daily fluctuation.  And yet today, even today, a triple-digit day (by itself a meaningless threshold anyway, just a number) gets big reactions, reactions like it used to get in the early 1990s.  Why?  This is stupid. If you get taken in by it, or even influenced by it, you harm yourself. And when the media characterizes the market as ‘struggling to hold gains’, you surely can see how stupid that is. The market does not care what it did five minutes ago. It does not struggle. It is not a person. The way the media present this offends me on editorial, mathematical, and intellectual levels. They twist perception to create volatility and interest.)

Anyway.  My own philosophy on investing is fairly simple:  patient and ruthless.  I don’t use investing as a social responsibility tool.  I would buy Wal-Mart in a heartbeat if I thought I could make good money.  Owning their stock does not help them because the initial offering is already subscribed; if you sell it, someone else will own it.  Plus, if you want to use it as a social responsibility tool, buy up a ton of shares and then vote them against the board of directors, and start shareholder movements that annoy management. That actually affects them.

So when I see a big selloff after a week or two of selloff, I’m not nervous.  I never look at the market without asking myself what I would do if this were the day–the day it plunged 20% followed by another 10% tomorrow.  Having seen that in life, when I see the markets go south, I start doing like Buffett says:  others are fearful, so be greedy.  I am bargain hunting.  I want to buy solid income investments at bargain prices, gaining high yields.  Why do I like income? Very, very simple.  I don’t have to worry about when to sell the investment.  I just collect my money and thank them.  The important thing is to buy so cheaply that your own yield is ridiculously higher than what most people will get.

Waiting, watching and checking cash balances.  C’mere, high yields.  I won’t hurt ya.  We’ll be friends for a long time.  I won’t freak out and sell you in a panic like most people.  It’ll be great for both of us.  Stability, steadiness, profit.