Stopping By Woods on a Snowy Evening, Plus an Absurd Delight

It's been a joy having our son Drew home for the holidays. This was my first White Christmas since boyhood in Michigan. The show socked us in on Christmas Day, and it was glorious.

This week is a convenient one for moving our office because of the quiet time between the holidays. Unfortunately, the weather is not cooperating, so we might not be able to finish the job. No matter; we will be settled in soon enough.

In the meantime, I have a couple videos you might be interested in. I made the first one yesterday as the snow continued to fall around our home. The scene was so quiet and peaceful that it reminded my of Robert Frost's famous poem "Stopping by Woods on a Snowy Evening" (my dad's favorite). Thus inspired, I made the video below, complete with a poor recitation of said poem.

The second video is an excellent example of that 21st-century phenomenon known as the "viral video." You have probably heard this term; it refers to the occasional online video that, for some reason or other, catches on with Internet surfers.

This particular example was pointed out to me by Drew. It comes from Eastern Europe and was made in the 1970s. It shows a man singing a song with no lyrics. But that description in no way captures the strangely captivating combination of musical oddness, un-self-conscious humor, and otherworld absurdity that has led over 7 million people worldwide to view it. Try it; you may find yourself replaying it several times.

It's the last week of what has turned out to be a pretty darned good year. Be safe on New Year's Eve!


Video 1: Stopping by Woods on a Snowy Evening



Video 2: An Absurd Delight

A Christmas Wish, and a Depot Mystery

With Christmas just a few days away, this week's commentary will be brief.

If your family is anything like mine, you'll have several get-togethers with loved ones from far-flung locales. But each family is different, and the same holiday season that brings joy to some can bring angst and even pain to others. With that thought in mind, we would all do well to share a bit of ourselves with those who need some cheer this Christmas.

May your own Christmas be blessed and joyful, and may you share that joy with those around you. Have a great week and a very Merry Christmas.

-Andy

Depot Update Millard & Company will be moving into our new home (the restored Tryon train Depot) within the next couple of weeks. I wanted to share this photo with you before we start hauling furniture. Early on in the renovation process, during the demolition phase, Mike and his crew uncovered this bit of writing on an interior wall of the freight room. It is written in chalk and evidently covers a period on some ten months. In case you're having a hard time deciphering it, it reads, "Burgin Didn't Check Anything On Aug. 19 1925." Below that, it says, "ALSO ON Nov 17, 1925." Then to the right is written, "also on June 24, 1926." Isn't this a curious bit of scrawl? It seems to me to be a reference to checked baggage or freight, but why would the non-checking of baggage warrant being written on the very wall of the station? Could it be refer to an underperforming depot worker? If you can interpret these obscure hieroglyphics, please share your thoughts.

Something for Everybody to Hate.

I'd like to direct your attention to the article below. It gives a concise summary of the pending tax deal between President Obama and Congressional Republicans (the first vote occurred recently in the Senate). This is important because, if approved, it would affect everyone whopays taxes. If the definition of a compromise includes a provision for everybody involved to be unhappy, then this one is a classic case.

A COMPROMISE.

The President agrees to preserve the Bush-era tax cuts for all, surprising his party.

Many expected a deal - but not necessarily this one. 

Political and economic analysts widely believed that President Obama and Republican leaders would reach a compromise on the Bush-era tax cuts. Many felt a deal would be struck early in December. Yet few forecast how agreeable the President would be.

The Bush-era tax cuts would be extended for the wealthy. 

Under the bipartisan plan, the EGTRRA and JGTRRA tax cuts would be extended through 2012 for all taxpayers. At a White House press conference Tuesday, the President simply categorized it as "a good deal for the American people."^1,2

In the eyes of some Democrats, it is just a sellout. Sen. Mary Landrieu (D-LA) termed the deal "unconscionable." House Minority Leader Nancy Pelosi (D-CA) offered more or less the same view: "Republicans have held the middle class hostage for provisions that benefit only the wealthiest 3%, do not create jobs and add tens of billions of dollars to the deficit." Rep. Jim McDermott (D-WA) referred to the compromise as "the President's Gettysburg." (At least he didn't mention Waterloo.) Sen. Bernie Sanders (I-VT) called the deal "an absolute disaster and an insult to the vast majority of the American people" and said he would attempt a filibuster.^3,4

Tuesday, President Obama noted that he would fight to repealthese tax breaks in 2012, emphasizing that the preservation of the cuts will be temporary.² (Of course, the EGTRRA cuts were considered "temporary" nine years ago.)

The deal could give us the lowest estate taxes since 1931. 

The fine points of this bipartisan accord haven't been hammered out yet, but here is what we know about it so far. Under the agreement,

• The 10%, 15%, 25%, 28%, 33% and 35 % marginal tax rates created by EGTRRA in 2001 would be preserved through 2012.
• A one-year, 2% cut in payroll taxes would make up for the expiration of the Making Work Pay credit. The Obama administration says this move will cost $120 billion with no impact on Social Security.
• The estate tax would be set at 35% with a $5 million exemption.
• Long-term jobless benefits would be extended through the end of 2011, at a cost of about $56 billion according to the White House.
• Businesses would be able to expense 100% of their investments in 2011 (retroactive to September 2010).
• The present R&D tax credit and other business-incentive credits would be extended through 2012.

The non-partisan Congressional Research Service figures that maintaining the Bush-era tax cuts through 2012 would cost America $314.9 billion.^1,2

Essentially, a trade was made. 

President Obama allowed the EGTRRA and JGTRRA cuts to live on for the wealthy in exchange for some of what he wanted - an extension of unemployment insurance and a payroll tax reduction.

Will partisan sparring stop the deal in its tracks? 

The accord is less acceptable to Democrats than the recent House bill introduced by Rep. Sander Levin (D-MI) and the Middle Class Tax Cut Act of 2010 introduced by Sen. Max Baucus (D-MT), which was defeated on December 5. Some Congressional Democrats are regarding the agreement the way a child regards spinach: not very palatable, but somewhat acceptable. Others are ready to fight it tooth and nail.

Or will opposition soften?

At last week's meeting of the White House deficit commission, Honeywell CEO David Cote made a striking remark on the process of compromise: "We can't let the perfect be the enemy of the good."

Here in December, Congress might want to abide by his advice - especially after President Obama's remark that "a long political fight that carried over into next year might have been good politics, but it would be a bad deal for the economy and it would be a bad deal for the American people."²

Citations

1 - online.wsj.com/article/SB10001424052748703296604576005430598327972.html [12/7/10]

2 - bloomberg.com/news/2010-12-07/obama-says-tax-compromise-will-spare-middle-class-americans-rate-increase.html [12/7/10]

3 - seattletimes.nwsource.com/html/politicsnorthwest/2013616523_mcdermott.html [12/7/10]

4 - content.usatoday.com/communities/onpolitics/post/2010/12/obama-democrats-tax-cuts-reaction-/1[12/7/10]

5 - www.montoyaregistry.com/Financial-Market.aspx?financial-market=the-balancing-act-weathering-the-burden-of-sudden-wealth&category=22 [12/7/10]

Stepping From Behind the Curtain -- Voluntarily

Two friends sent me the same link to a very interesting article in the November 26 New York Times. It is entitled A Dying Banker's Last Instructions, and it describes Gordon Murray, a Wall Street veteran of Goldman Sachs, Lehman Brothers and Credit Suisse First Boston. Like most others in his circle, he spent his career in a futile attempt to beat the markets. It didn't work, of course: after retiring, he discovered a different, simpler -- and better -- way to invest.

A terminal case of brain cancer led him to co-author a book about how this better investing approach involves simply "investing in a collection of index or similar funds and dutifully rebalancing every so often."

Quoting again from the article: "The mere fact that Mr. Murray felt compelled to write it is itself a remarkable story of an almost willful ignorance of the futility of active money management - and how he finally stumbled upon a better way of investing. Mr. Murray now stands as one the highest-ranking Wall Street veterans to take back much of what he and his colleagues worked for during their careers."

Why am I pointing this out? (Cue up the self-horn-tooting music...) Because this is precisely the investing approach that we have been taking with our clients for over a decade. In fact, Mr. Murray's book sounds like it could be a virtual re-write of my own Low-Stress Investing, published in 2002.

So, see? I'm not just making this stuff up.

Have a great week, and remember to shop locally!

Choose Where to Buy Before Choosing What to Buy

Where do you do your Christmas shopping?

Most people don't give that question much thought, but I encourage you to do so. As a small business owner and president of the Carolina Foothills Chamber of Commerce, I know that where you shop can be as important as -- and even more important than -- the actual products you buy.

If you were to list the things that make our community vibrant and special, local businesses and business owners would have to be pretty high on the list. Those businesses can stay open only if they have customers, and you are the perfect customer.

I'm not suggesting that you have to buy everything locally; for one thing, there are things that can't be obtained from local providers. But I am suggesting that you think before you shop.

Think about the hidden costs of driving to the big box store for the "extra-low prices: gas, your time, the headaches of sitting in traffic, the empty feeling of knowing that your dollars are all going outside your community.

Then think about the benefits of shopping close to home: the personal interaction with people you know, the convenience, and the good feeling that comes from knowing that your shopping dollars are going to local folks who need them.

Have a great week -- and think local before you shop!

Thanksgiving Message From My Dad

Thanksgiving is my favorite holiday. It gives us a reason to count our blessings and to realize how numerous and deep those blessings are. It goes without saying that family is right at the top of most of our lists.

While visiting with my dad in his home on Sunday afternoon, the thought struck me to do a brief video with him. You can view the result by clicking on the image below. The sound is a bit soft, so you might want to turn your computer's volume up all the way:




Have a great week and a blessed Thanksgiving!

Okay Smarty-Pants, YOU Fix the Deficit

This week, I'd like to share with you an online tool that allows you to run a variety of scenarios which allow you -- yes, you -- to solve the federal budget deficit.

The tool is provided by The New York Times, and I found it to be extremely helpful in understanding the real-world decisions behind all the political rhetoric. The deficit is definitely solvable, as the tool will clearly show you. But it is going to be extremely painful. The question is: will our leaders be able to muster the political will to make it happen?

Click on the image below for a quick tour of this fascinating tool, then try it out for yourself. If you'd prefer to skip the video and go straight to the online tool and accompanying article, click here.

And have a wonderful week!


-Andy

So The Government's Coming After Your 401(k)? Gimme a Break.

I'm always amused by conspiracy theorists, but sometimes you just have to speak up when you hear something that's completely outside the realm of all reason. I hesitate to even mention it, but it's a good illustration of how far we have fallen from reasonable discourse.

You may have read that nothing good can come of making financial decisions on the basis of political ideology. That doesn't stop people from doing it, of course. Here's the latest:

Last week, a client told me that he had heard "Obama is going to start dipping into our 401(k) accounts to get money to pay off the deficit." As you might imagine, the client viewed such a scenario as highly unlikely, but since he had heard it from a financial services professional, he wanted to know if he should cash in his retirement plan and bury it in the yard. So I looked into it, and here's my take:

Hmm, how should I put it? How about this: Get real. It's not going to happen.

First of all, nobody within the government has suggested such an idea. Second, just how far do you think someone would get with this kind of  scheme? "Hey guys, I have an idea: let's take money from private retirement accounts to pay off the deficit! That should be pretty easy, don't you think?"

Let's say the administration tried it. There are a couple little organizations called Congress and the Supreme Court that might have a thing or two to say about it. Regardless of one's opinion of the Obama Administration, they're smart enough to know that attempting to take money from personal investment accounts would be political suicide. Please, gimme a break.

Okay, so now you know that the President of the United States is not going to steal your hard-earned retirement fund. Breathe a sigh of relief, and enjoy a great week!
-Andy

Special Day-After-Halloween Doomsday Edition

Welcome to a special Day-After-Halloween Doomsday edition of the update.

As you are no doubt aware, there are some people who believe the economy will get much, much worse before it gets better. In fact, some even believe in the collapse of economic prosperity as we know it. This week, we address two of the most widespread topics related to economic doom: the potential for a collapse in the dollar, and the supremacy of gold as a long-term investment.

Read one or both of the articles following this week's economic news for a reality check.

Don't forget to vote. And have a great week, will ya?

-Andy

How Healthy is the Dollar?

The strong dollar policy is long gone, but the greenback isn't in peril just yet.

A favorite doomsday scenario. Have you heard about the forthcoming collapse of the dollar? Well, if you turn on your computer, your radio and even your TV, you just may. With the Federal Reserve poised to increase the money supply, the commentary on this topic is heating up again.

The scenario has variations, but the basic outline goes like this: An unexpected political or economic event leaves the dollar so weak that all confidence in it is gone. Foreign nations sell Treasuries in a panic and the Fed becomes the buyer of last resort. Traders and individual investors dump dollars for whatever they can get. Interest rates leap. Next stop: hyperinflation. America's economy suddenly resembles that of Zimbabwe in 2007 or Germany in 1922.

So is there any validity to this scenario? Could the dollar collapse?

Let's just say that the odds are very long. While the Federal Reserve will likely ramp up quantitative easing in the near future, it is highly unlikely that the dollar will suddenly become too cheap.

Why it is unlikely to happen. Foreign countries don't want the dollar to collapse. Fundamentally, that is because some of the world's biggest manufacturing economies rely on a great customer for their exports - the United States of America.

China and Japan currently hold 41% of America's debt.¹ In the worthless dollar scenario, they are the key dominoes that fall. But what incentive do China and Japan have to sell dollars? Their economies are tied to U.S. consumer spending. Selling dollars would not benefit them - it would drive up the prices of their exports to America, it would wreck the economy of their best customer, and it would harm their own economies in turn.

The dollar is also the world's reserve currency; it has been so since the U.S. abandoned the gold standard during the Nixon administration. While the central banks of China and Russia have argued that it should be supplanted or replaced, no challenger has knocked it off its pedestal. In spring 2010, the International Monetary Fund concluded that the dollar still accounted for 61.5% of global foreign exchange reserves, with the euro coming in a very distant second at 27.2%.²

In a way, the dollar has "collapsed" - and America is still standing. The dollar is much weaker today than it was in the 1990s, or even in the early 2000s. Its value has gradually declined and may decline further despite recent surges. In mid-October, the U.S. Dollar Index had slipped about 7% since August, and was approaching an all-time low set back in April 2008.³  

America's debt was less than $3 trillion in 1990; it has doubled since, and the federal Office of Management and Budget thinks it will hit $15 trillion by 2015.¹ The federal government would certainly rather pay those debts back using a declining dollar.

Of course, analysts also talked about the pound collapsing and the euro collapsing earlier this year. All this talk - and expectations about what the Fed will do - sent many investors toward the precious metals market, where gold and silver futures hit new highs.

A little word about diversification. When you hear commentators talking about the oncoming collapse of the dollar, take it with a grain of salt. This much is true so far: a dollar decline has occurred, and the dollar could weaken further. So it might be worthwhile to consider diversifying your portfolio as a cautionary move.

Citations

1 - azcentral.com/news/articles/2010/09/19/20100919debt-of-us-grows-with-debate.html [9/19/10]

2 - businessweek.com/news/2010-06-30/dollar-share-of-global-reserves-declines-imf-says.html[6/30/10]

3 - bloomberg.com/news/2010-10-19/geithner-weak-dollar-policy-seen-as-path-to-recovery-in-contest-with-brics.html [10/19/10]

This article comes to us courtesy of Peter Montoya, Inc.

All that Glitters...

See if you can relate to this situation: the struggling U.S. economy experiences severe unemployment, and a falling dollar spooks investors.  The stock market seems to be in a protracted tailspin, and the situation in Afghanistan is increasingly alarming.  So you look for an alternative investment, and find... gold, which is generating impressive returns after a long dormant period.  In fact, the precious metal has been testing all-time highs, and there are plenty of newsletters, touts and analysts that see a lot more legs to the rally.

As familiar as this sounds, it's actually a pretty good description of the latter months of 1979 and early 1980, when the price of gold rose from $400 an ounce in November 1979 to $850 by the middle of next January.  Investors who poured in expecting lost more of the same were sorely disappointed; by the end of March 1980, gold was back to selling at less than $500 an ounce, leaving investors who bought at the peak holding a stunning 40% loss for the quarter.  Holding on didn't help; by the end of the stock market runup in early 2000, an ounce of gold was selling for under $300 an ounce on the spot markets.

Today, of course, you're hearing a similar refrain, as the shiny metal has tested all-time highs almost monthly, most recently leaping from a little over $1,150 an ounce in late July to its latest all-time high, just over $1,365 in the middle of October.  (The price has since fallen into the $1,340 range.)  Is it time to jump on this bandwagon and ride the gains up to (according to some bullish newsletters) $2,000 an ounce or higher?  Or is gold an overpriced investment ready to go bust?

One of the interesting problems with gold in your portfolio is how hard it is to get a handle on what its price SHOULD be.  You can't compare its price to its earnings, like a stock, because when you put gold in your safe deposit box, there ARE no earnings.  But there are ways to help decide whether the current price is being driven by fundamentals or yet another mania.

The first is to look at where the demand is coming from.  Back in January, when gold was still riding the crest of investor disillusion with the global economy, the Commodity Online web site interviewed Miguel Perez-Santalla, vice president of marketing at the German precious metals producer Heraeus Precious Metals Management.  Heraeus fabricates precious metals products for industrial use, but Perez-Santalla said that at such high prices (which have since gone higher), physical consumption of gold has fallen dramatically.  "The gold investment market is the main demand driving the price up," he said in the interview.  "Everything is being delivered on the Comex and to the London warehouses."

Loosely translated, that means that industrial users are waiting for the price to fall, and they will get their wish as soon as investors stop outbidding each other.

Another way of looking at the reasonableness of gold's prices is to look at the cost of extraction and refining--in other words, the cost per ounce of getting gold out of the ground and into the hands of jewelry makers, industry and investors.  This information is not always easy to find, but an article on the MineWeb web site back in April 2007 estimated that gold mining companies were spending $401 an ounce in overall costs.  More recently, in October of this year, an article suggested that today's extraction costs run between $500 and $600 an ounce--or a little less than half of what you would pay today on the spot market. 

Loosely translated, that means that investors are buying at far higher prices than it costs to produce an ounce of gold.  In fact, the disparity today at least challenges the record disparity back in early 1980.

Finally, you could look at supply and demand issues.  If there is a worldwide shortage of gold, or much more is being used than is being produced, then this would justify a dramatically rising price.  To get reasonable estimates of gold supply and demand fluctuations, you could go to the World Gold Council's web site, which notes that gold production over the past five years has been relatively stable: about 2,485 tons a year.  In general, new mines are replacing the depleting production of current ones, so there has been little significant expansion in global output.  It can take up to ten years to get a new mine started, which means that gold mining companies can't take instant advantage of today's higher prices.

However, the World Gold Council notes that as prices rise, the market begins to see more recycled or scrap gold--a category which includes people selling gold jewelry.  Between 2004 and 2008, recycled gold contributed 28% to annual supply flows; a chart says that this amounts to another 1,016 tons a year.  (The remaining supply flow comes from sales by central bankers, which may or may not continue in the future.)

Mine production and recycling together account for roughly 3,500 tons of gold coming into the marketplace each year.  How does that compare to demand?  According to the World Gold Council, jewelry demand--by far the largest market for gold--amounts to 2,436 tons a year.  Industry uses another 493 tons--for a total of just under 3,000 tons between the two.

Loosely translated, that means that more gold is coming onto the market than industry and the jewelry manufacturers appear to need.  There is no supply/demand imbalance, unless you count thousands of eager investors looking for more price runups or a hedge against inflation. 

And is gold a reliable hedge against inflation?  Since gold's peak in early 1980, the annual inflation rate dropped, but cumulative inflation increased--as gold was falling in value through the next two decades.  According to InflationData.com, gold's 1980 peak spot price reached $2,250 if it were measured in today's inflation-adjusted dollars, and it dropped to an inflation-adjusted $370 two decades later.  If gold had been an effective inflation hedge during that 20-year period, the price would have remained the same in inflation-adjusted terms.

The InflationData organization makes a good point: gold has been a lousy inflation hedge for long periods of time, but it does appear to be a pretty good "crisis hedge." That is, when people are frightened of events like the Soviet invasion of Afghanistan, as they were in 1979-1980, or when they are concerned about the global liquidity crisis and its economic hangover (as they have been for the past couple of years), gold takes off.  When the panic subsides, so too does the price of the precious metal. 

Of course, we can't predict whether the current fear of a double-dip recession or other nameless anxieties will continue to drive gold higher.  But history suggests that as soon as people start feeling more secure about the world situation, gold will suddenly leave its investors holding significant losses.

The question we have to wrestle with is: if we invest in gold, are we investing, or speculating?  If we're speculating, is the best time to do it at near-record high prices?

References:

Commodity Online interview with Perez-Santalla: http://www.commodityonline.com/news/Average-gold-production-cost-likely-to-be-$400-500-24530-3-1.html

MineWeb article on gold extraction costs in 2007:http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=112821&sn=Detail&pid=33

MineWeb article, October 2010: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=112821&sn=Detail&pid=33

World Gold Council supply/demand statistics:http://www.invest.gold.org/sites/en/why_gold/demand_and_supply/

InflationData.com analysis of gold as an inflation hedge:http://inflationdata.com/inflation/inflation_rate/gold_inflation.asp

Chart of gold price runup in 1979-80: http://www.bullnotbull.com/archive/gold1980.html

Review of events in 1979: http://www.upi.com/Audio/Year_in_Review/Events-of-1979/1979-Business-News/12311692377023-5/

Various charts of recent gold prices: http://www.kitco.com/charts/livegold.html

This article comes to us courtesy of Bob Veres.

We're All Irrational, But It's OK

My favorite speaker at last week's Financial Planning Association National Convention was Dan Ariely, Ph.D., professor at Duke University and author of two books, Predictably Irrational and The Upside of Irrationality.

Dr. Ariely was severely burned over most of his body a number of years ago, and as he endured the long months of hospitalized recovery, he began thinking about the nature of pain and how our minds handle it.

One of the first questions he considered, naturally enough, was the question of how quickly to remove bandages. The nurses who treated him thought it was best to yank off the bandage quickly: there was intense pain for the patient, but it was over quickly. It turns out, however, that when given a choice, the patient perceives less overall pain when the bandage is removed slowly: although the pain lasts longer, it is far less intense and therefore more bearable.

This was just the first of many examples Dr. Ariely gave into the nature of our thinking and how it affects everything we do and every decision we make. Just because we believe something to be true does not necessarily mean that it is true. This insight has tremendous implications in all areas of our lives, including our financial decisions.

Although I have just started Dr. Ariely's Predictably Irrational, based on his fascinating talk, I believe I can recommend both books highly. If you'd like to see video of a recent interview Dr. Ariely did for CBS Moneywatch.com, just click on the image below:



Ah, fall: my favorite time of year. Enjoy your week!

A Quick Hello From Denver

This week's post is coming to you from Denver, where I am attending the Financial Planning Association's annual national convention. Some of the best and brightest in our industry are sharing their insight in such subjects as financial planning, investments, and practice management, among others. The event is always enlightening and invigorating.

Here's just one example: Dr. Dan Ariely (pictured here), professor at Duke University and author of the new book The Upside of Irrationality, gave an outstanding and thought-provoking talk in the Saturday afternoon general session.



I hope to share more detailed information from the convention in a future update. In the meantime, have a great week!

-Andy

Road Trip to Lake Waccamaw

About this time every year, Juliet and I take the 90-minute drive to Charlotte for the Financial Planning Association of Charlotte's Symposium. The annual event is two days packed with educational content.

This year's symposium did not disappoint, and we added an extra day to the trip in order to keep a promise to a dear friend. If you care to see a brief video of the trip, click on the image below:

It's fall all of a sudden; have a great week!

What A Fiduciary Standard Could Mean To You

This week's blog is rather lengthy, but it's important, and I hope you find it interesting. Here goes:

You may have heard recent talk about a "fiduciary standard" for financial advisors. The new financial regulation package includes a provision for the Securities and Exchange Commission (SEC) to study the issue for a year. Then, after the study is complete, the SEC will set new rules regarding the fiduciary issue.

So what does this mean, and how does it potentially affect you and other consumers of financial advice? The short answer: It is very important, and it could have a very large impact on all advisors and their clients.

The business of investment advice is highly regulated, and one must be precise in the language and terms used. On the surface, the concept offiduciary duty is pretty simple. The word can be used as a noun or an adjective. It describes a very high duty to act in the best interest of another person-to put that person's best interest above your own or (in the case of financial dealings) your firm's.

My firm is a registered investment adviser. That simple sentence carries subtle but meaningful nuances. (1) Note the arcane spelling of "adviser;" the SEC stubbornly clings to that spelling, although they don't punish firms that spell it with an "o" like everybody else. (2) Aperson cannot be a registered investment adviser/advisor; the firm is the adviser-a person can get in real trouble for using the title to describe himself.

See what I mean about it being a highly regulated business?

Now, here's where the controversy occurs. You see, when it comes to financial consultants, there are two very distinct business models:

The first is the traditional broker: this person, as the name implies, is in the business of brokering transactions. He/she gets paid a commission for facilitating a trade or making a sale. Technically, this person is not even allowed to give financial advice: any advice he/she gives must be purely "incidental" to the sale or transaction. What exactly does that mean, you ask? It means that, strictly speaking, when a broker gives advice to a client, he/she is breaking the law. But everyone knows that brokers give advice all the time.

 The other business model is that of the registered investment advisor (RIA); that's what our firm is. (Notice that I specified the firm as the RIA.) The advisor gets paid a fee for advice and/or portfolio management, and nothing for conducting transactions.

The registered investment advisor firm is subject to a fiduciary duty. The broker is not. His/her duty is simply to be reasonably sure that whatever investment they sell is "suitable" for the client. That's a pretty vague standard, and not very reassuring once you fully understand it; hence the push to subject all financial professionals to the fiduciary standard.

Very few people are even aware that there is a difference between brokers and advisors. Most consumers assume that both are required to act in the client's best interest. So the SEC has been assigned to try to settle the issue.

The brokerage industry is fighting the potential new rules tooth and nail. They say it's impractical. For my part, I'm conflicted about it. While I strongly believe that there should be a uniformly high standard for all, I must admit that the current dichotomy gives me a marketing advantage. (You may notice a fiduciary slant in some of my print advertising.)

But really, I'd gladly give up that advantage if it meant better protection for all consumers. Doesn't it make sense that your "advisor" should always have your best interest at heart?

We'll see what happens. In the meantime, enjoy your week!

The Absurd Result of a Logical Assumption

During a conversation with a client last week, an interesting thought occurred to me. It's an observation that confirms the absurdities of the stock market. See what you think about it:

The stock market has a pretty good track record of presaging the direction of the economy. And the stock market is completely directed by human beings: men and women buy and sell the stocks that make up the market. So one might logically conclude that the people who make the market tick should be able to predict the market's direction.

But they can't. In study after study, the gurus with all the inside dope have been shown to be no better at predicting the markets' direction than a blind monkey with a dartboard. For some reason, this ironic fact strikes me as funny, frustrating, and reassuring all at the same time.

There's an important lesson here. While we naturally want to believe that there are people out there who can see where the markets are headed, there are no such people.

Clients occasionally will make a comment such as, "If any of your contacts sees that the market is headed for trouble, go ahead and get us out." Well, on any given day there are many such predictors of catastrophe. On the same given day, there are also predictors of unprecedented growth. We can't believe any of them, because none of them is correct often enough to be considered reliable.

Moral of the story: Trust the markets, but don't trust the people who run them

Have a great week!

Ben Franklin in Words and Pictures

This week, I'd like to share a book I read recently. It's not exactly the kind of book I usually read, and I didn't find it in a place one usually finds books. Click on the video link below to learn about it: 

Have a great week!

-Andy

A Serendipitous Encounter With And Early Mentor

With my early mentor, Susan Allred.

I had a delightfully serendipitous encounter on Saturday, and I'd like to share it with you.

It was Tryon's 125th anniversary celebration. The weather was perfect, and the streets were filled with locals enjoying one anothers' company and reminding themselves why they decided to come here (or stay here) in the first place.

The day included a parade (perhaps the best one Tryon has seen in many a year), booths hosted by local organizations, demonstrations and displays of historic events, and lots of visiting.

As I was walking up Trade Street, a pert little lady stopped me and said, "Excuse me. I'd like to introduce myself. I'm Susan Allred."

Wow! In a flash, it all came back: It's a lifetime ago, my first day as a brand-new teacher at W.P. Grier Junior High in Gastonia. I am assigned to teach remedial English to a very challenging group of ninth-graders. I'm twenty-four years old, have never taught a lesson, and don't have a clue as to what to do. What's more, because the principal thinks it would be good for me, the mess that is young Mr. Millard has been wedged into the well-ordered classroom of the formidable Miss Allred, a master teacher who tolerates no nonsense.

But, for some reason, she does tolerate me. She graciously allows me to conduct my clumsy lessons in her room during her two daily planning periods. She takes me under her small but powerful wing. She's wise, cheerful, supportive, nurturing, and calm: everything a wet-behind-the-ears newbie needs in a mentor and role model. She shows me what it means to be a professional educator.

And now, here she was twenty-nine years later, chatting with me on Trade Street. She's now Director of Education Recovery for Eastern Kentucky and living part time in Rutherfordton. She recognized me and re-introduced herself. As far as I can tell, she hasn't changed a bit.
That encounter, along with the entire glorious day, made me grateful for the many people and events that have contributed to my life. On this Labor Day week, when we pause to appreciate the hard work that makes our society tick, that seems like an appropriate thing for each of us to do.


Have a great week!

To Succeed, It Will Take A Whole New Mind

For the last several months, we have been exploring the economic and social changes of the early 21st century. You may recall my stating that those changes, unsettling as they are, may eventually lead to a better world.

Some readers take exception to that view, which they consider overly optimistic. But I firmly believe that nothing can reverse the course of history, so we might as well try to understand it and make the best of it.

One very helpful book in that endeavor is A Whole New Mind: Why Right-Brainers Will Rule the Future by Daniel F. Pink.

Pink says that, just as the Agricultural Age gave way to the Industrial Age, the current Information Age is, as we speak, giving way to the "Conceptual Age." This change is in large part due to the triple influences of Abundance (we're used to having virtually unlimited choices at our fingertips), Asia (the outsourcing of what Pink characterizes as "knowledge work"), and Automation (thousands of tasks once performed by humans can be performed better and cheaper by machines).

Those trends are combining to eliminate many jobs that were based on rational, analytical, and logical thinking skills -- thought processes controlled by the left side of the brain.

Pink postulates that, in order to succeed and prosper, American workers and entrepreneurs will need to master and incorporate the six right-brained senses of Design, Story, Symphony, Empathy, Play, and Meaning. These are all intuitive and emotional skills that, when combined with the still-important left-brained skills, will address the emerging needs of consumers (and in our case, clients) as we move steadily into the Conceptual Age.

More importantly, many of the tasks performed using those right-brained skills cannot be done by a computer or sent to a remote worker in India, because they involve human feeling and emotion combined with direct personal interaction.

This brief introduction only scratches the surface; there's a lot in this thought-provoking book to stimulate ideas and discussion. I find that many of the concepts and suggestions can apply to my work with clients, and I'm looking forward to incorporating them as we march forward into an uncertain future.

Enjoy the week!