A Lady With Problems?

Sometimes facts aren't easy to grasp:

• Gloria C. Mackenzie formerly of Maine now of Jacksonsonville Florida
• 84 years old in mid 2013
• mid 2013 wins $278 million after taxes lottery

So, you're thinking "great" she rides off into the sunset and enjoys the latter years of her life? Not so fast. Fast forward to today.

Her son, who has a power of attorney, hired an "advisor"/radio personality who apparently put her into cash equivalents and charged her $2.0 million/year. Her son is trying to get half of her winnings saying he helped in some round about way to pay for the ticket.

By the way, she won because a couple allowed her to move ahead of them in line when the ticket was purchased.

Anyways now at the age of 90 she has brought a lawsuit against her son Scott and the advisor on the grounds they violated their fiduciary responsibility.

This case is interesting from a couple of different angles but for us it is mainly in the asset allocation and whether it is appropriate. Because it is so much and because she is so elderly she should very probably have some exposure, at least 30%, to equities simply because the investment horizon goes beyond her to someone or some entity considerably younger. In fact, I would have pushed pretty hard for at least 50% equities. 

Secondly, she should have pinned down the advisor on his fee. Obviously, $2.0 million for a portfolio of cash equivalents is egregious. 

If you are interested in following developments just Google "Gloria C. Mackenzie".

Putter Around On Your Broker Site

Choosing a discount broker is not difficult today. There are several good ones out there and there are unbiased evaluations of them that prospective customers can exploit. Here is one at

NerdWallet .

Sometimes I counsel people who are looking for a broker and I suggest Schwab but point out that there are others that are also good such as Fidelity, TD Ameritrade, Vanguard etc.

I also suggest that if they are really on the fence they can open an account with the minimum and then do a couple of transactions to see if it is a good fit.

But beyond this it is also useful for just about every investor to putter around on their brokerage account. So many times I hear "I didn't know they had this". Many times investors are paying for information in other places that is available for free on their brokerage site.

With this in mind I thought it would be useful to go over some of the things I look at on Schwab and elsewhere when I consider a stock. To be clear I am basically an index fund guy but I do invest in individual stocks from time-to-time and I also have a dividend portfolio where I research individual companies.

So, suppose I'm interested in Home Depot (HD). I go to the Schwab page and put HD in the quote box:

Under "Symbol" click on "HD", This opens a lot of information.

I started formally in the investment business in 1980. The challenge then was to get information. I started with a dial up phone each morning calling several brokers (Lehman Brothers, Goldman Sachs, Merrill Lynch etc.) to get T-bill rates. T-bill rates for crying out loud!

Today the challenge for the investor is to figure out what information they want to look at. Behavioral finance teaches us that there can actually be too much information causing investors to throw their hands up and just walk away. Winnowing it down is a challenge.

So as I look at this page I look at eps earnings date first because i don't want to get surprised by a volatile movement because of the announcement:

Next I scroll down and look at the right hand side where you find opinions of various researchers and Schwab's rating:

This of course is just a smattering of the data on the page. Again, it is a challenge to pick and choose what to look at. For example, I'm not a huge fan of ratings but if Schwab's rating is "D" or "F" I'll do a bit more digging to find out why.

I'll admit also that I am a fan of Ned Davis so I'll typically take a look at their report ,for which you see there is a link.

I next go to Yahoo Finance put HD in the quote box and scroll down the right hand side:

This gives a nice view of the all important earnings versus earnings estimates going back a year. In other words, does the company tend to perform better than expected.

All of this takes longer to explain than to do and is easily carried out to compare two stocks. For example, you may want to compare HD with LOW.

So the bottom line is to putter around on your site to see what is available.

Full disclosure: I am not affiliated with Schwab and I own HD.

Warren Buffet's Advice

In the last post I presented Warren Buffet's often repeated advice to the average investor to invest in low cost index funds. He simplifies and recommends an index fund tracking the S&P 500.

This got me to recalling a recent post on LinkedIn about an Uber Driver who got advice from his passengers. He asks his passengers for the one message in life that they would suggest and then he asks them to write it down for him. He then says he plans to publish the "life suggestions" in a book.

Well, as you might imagine this got a terrific response with many people stating they couldn't wait to read the book! Many responders thought this a novel idea.

To be clear I am all for sharing life living advice especially from those with the experience  of decades manuevering  the pitfalls of the free market capitalistic  hyper-charged consumer driven U.S. economy.

Circling back it is interesting to recall Buffet's advice. After all, this is the advice from the premier investor of our age and has embedded in it the key to a successful retirement for the last 25 to 35 years of our life! You would think that every high school in the country would present this as worthy of consideration for young people. Good luck finding it in a single economics curriculum.

But, given Buffet's investment prowess, why wouldn't better advice be to invest in his company? Well, let's take a look at his record:

                                   YTD     1-yr     5-yr     10-yr     15-yr     20yr
Berkshire Hathaway   4.1%    7.9%   10.8%  13.7%    8.5%    7.7%
S&P500                     17.5%   13.1%  11.7%  15.3%    8.7%    5.9%
(reported in Barron's  from Bloomberg, 4/29/2019, p.16)

As shown he has underperformed from 15 years on in,  weighed down by the tremendous size of Berkshire Hathaway and the significant cash position he holds.

So, to me the bottom line is this: few know as well as Buffett how difficult it is for the average investor to beat the market. His advice to stick with a low cost index fund is worth heeding. That's what I would tell the Uber driver.

Retirement Planning

Just finished the short book,

  How to Retire With Enough Money by Teresa Ghilarducci.

Ms. Ghilarducci is a heavyweight in the world of retirement planning and the overall concern with the looming retirement crisis in the U.S.

So I was surprised to come away disappointed. The book is mainly directed towards promoting her plan which is basically a hybrid of Social Security - take money out of paychecks and have required employer contributions  all invested by professional money managers.

She admits she is no fan of 401(k)s and IRAs. This in spite of some examples in her book whereby they have done well for investors.

My beef is that like so many other instances a government solution is offered in lieu of people taking personal responsibility. Here's the nitty gritty: we expect to reach our mid 60s some day and we know (unless we've been living under a proverbial rock) that Social Security alone will not provide a sufficient income for a comfortable retirement.

So, we can go over some arithmetic in the crazy exercise of trying to pin down how much needs to be saved to reach a so-called magic number.

Forget that. Know that you need to save and the more you save the happier your 65 year old self will be with you. So, look at your 401(k). If it has low cost index funds and especially low cost retirement date funds you're done. Have 10% deducted from your paycheck into these funds.

If you don't have a 401(k) you're not toast like so many commentators suggest. You can open up an IRA and contribute up to $6,000/year. Where? I like Schwab but there are many other places as well such as Vanguard, Fidelity etc. All offer low cost funds that you can invest in yourself or they may offer low cost products whereby they handle all the investing. You just set it up so that a deduction is made from your paycheck on a regular basis.

But don't just take it from me. Here's what Warren Buffett recently said "All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently".

So again, this isn't rocket science. And, admittedly, there are some nuances. For example, legally there are some differences between IRAs and 401(k) regarding creditor rights. If you aren't paying alimony payments, are a reckless driver or get in fist fights with your next door neighbor you might want to avoid the IRA.  Ms. Ghilarducci emphasizes this in her book.

I know that a lot of what I have covered glosses over some points that most people may not know, For example, if you open up an IRA with a broker you need to know what a ticker symbol is, how to calculate how many shares you can buy etc. All of this is trivial. I offer one hour sessions at $160 that covers all the basics but you can cover other advisors as well that will do this with you,

Try to Avoid "Tilt"

Poker players know about "tilt". Taken from pinball terminology it refers to losing good poker technique following a "bad beat". Every poker player has been bluffed by a pair of tens when they held a pair of kings. This can play havoc with one's emotions and can lead to stupid (this is the appropriate word) bets. The cure is to get up, walk around, take some deep breaths and know that emotionally your brain wants to fight back.

Well, the same thing happens in the investment world. To be clear I'm not a fan of most investors buying individual stocks but if you want to do it that's ok. I suggest that individuals mostly use low cost index funds and with 10% at most invest in individual stocks.

Still, if you invest in individual stocks so be it.

So, suppose you bought Boeing on 2/22/19 at $424.05. By  2/28 it is at $439.95 and you are high fiving yourself and (big mistake) bragging to your friends. After all you've got a layup with a reasonable p/e, a wide moat (worldwide duopoly with Airbus), and a nice dividend. Your brain is congratulating you on being a genius.

Then the 737 mess. By 3/12 the stock is at $375.41.  Your brain now has all kinds of scenarios including you living under a bridge. You might look at your other stocks and imagine worst case scenarios. This is TILT !!!!!!!!!!!!!!!!!

Knowing that this happens is in itself valuable and can help you calm down. Think back to 2008 and know that many investors blew out their entire portfolios and never got back in. You've read the horror stories.

The other thing that I suggest is to limit yourself to 5% of total assets in any particular stock and 10% to any industry. This is where the value of diversification really comes into play.

Equity Indexed Annuities (EIA))

Here is an excellent,

short piece on Equity Indexed Annuities 

 written by Robert Huebscher and presented  on Advisor Perspectives.

Equity Indexed Annuities seem to offer the best of all worlds: equity returns with no down side risk.

In the article Huebscher shows how these vehicles are misrepresented by insurance salesman. Alas, once again there is no such thing as a free lunch!

Impact of Expense Ratios

Jane Bryant Quinn in AARP Bulletin, April 2019, p. 33 states the following:

Assuming that a $10,000 investment you made in a zero-fee fund grew an average of 6 percent annually, you'd end up with roughly $32,070 after 20 years. The same fund with a 1.1 percent annual fee (also called an expense ratio) would net you only about $25,710, or $6,360 less.

The average stock mutual fund in 2017 charged 1.1%.  $25,710 versus $32,070 is a 20% hit. As a matter of perspective retirees target 4% as a drawdown rate in retirement.

Alphabeticity Bias

In a

recent research paper 

it was reported that the alphabetical listing of Fund choices affects the selections 401 (k) participants choose.

An example was provided in 401K Specialist magazine ( issue 2, page 7) listing 13 Funds alphabetically. They stated that renaming the 11th Fund listed from "Royce Pennsylvania Mutual" to "American Royce Pennsylvania Mutual" and thereby moving it 10 slots higher on the list would generate approximately 20% greater participation all else equal.