Monthly Archives: October 2015

Ghost Story


lp-haunted-isles-leeds-invertimgThe ghosts of Proust are those brittle couture-clad creatures that haunt the salons of fine hotels where they sip ballet pink Champagne. Perpetually enrobed in an air of melancholy, they climb the spiral staircase to the sacred solitude of their tiny perfect rooms. Drawing the papal purple velvet curtains they turn away from the the noise and the ill-mannered hordes and take to their beds. What else is there to do? As their heavy eyelids close on yet another day, the ghost damask wallpaper shimmers like a spectre.

Oh, the horror of imperfection. If only everyone behaved well and all the flowers were arranged just so life would be so much sweeter. Those who expect perfection and cannot tolerate anything less, suffer.

Take French fashion designer Yves Saint-Laurent. As his lover and business partner Pierre Bergé once said, “Yves was born with a nervous breakdown.”  Saint-Laurent would often retreat to their chateau in Normandy to sketch new collections and to recover from the excesses of Parisian night life. One afternoon Saint-Laurent returned to the chateau and noticed that the housekeeper had placed a bouquet of flowers in the dining room. It pained him to see the uninspired arrangement. He took a pair of nail scissors and painstakingly snipped the tops off each stem, a hundred tiny decapitations. Then he took to his room for the rest of the day.

Just as it’s unrealistic to expect perfection from our housekeepers—and even our fashion designers, after all Saint-Laurent was a great designer but not always a good one—it’s equally juvenile to expect that markets will behave the way we wish them to. As the industry mantra goes: past performance does not predict future returns. Yet many investors mentally latch onto past success and expect history to repeat itself.

After the crash in 2008 it took several years for the markets to regain momentum after which they went on a tear. Investors regularly boasted of 15-percent and up returns. DIY investors felt like geniuses and portfolio managers behaved like kings of the universe. But the wheel turns…These days it’s unlikely our quarterly reports show anything like those stellar returns. Where did all those investing geniuses go, I wonder?

According to John Bogle, the famous value investor and founder of Vanguard, we’ll be facing a tough decade ahead. His math is simple but hard to refute.

He divides total return into investment return and speculative return. Investment return is approximately 2-percent. That is the average dividend yield on U.S. equities. Corporate earnings growth adds another 6-percent for an 8-percent return. Pretty good so far.

Speculative return is how the market values a company’s earnings growth (price/earnings). Right now the P/E ratio is 20 but the historical average is 15. A lower P/E means lower stock prices, unless earnings skyrocket. So, based on Bogle’s back-of-the-napkin calculations, that 8-percent investment return plus a negative speculative return of, say, 3-percent, leaves us with an average return of 5-percent before inflation and before portfolio management fees. Throw in a couple of ghosts-in-the-machine like hedge funds, high-frequency traders and massive short-trades and things can get pretty hairy, pretty fast. (Hello Valeant!)

To mix my holiday metaphors, to avoid a fright upon finding a lump of coal in your retirement stocking, consider factoring a lower real return, somewhere between 1-to-4-percent, into your nest-egg calculations. Many companies today are priced for perfection but they could hit a snag.Don’t let your fantasy of perfect get in the way of a perfectly nice arrangement. Save a bit more, (or spend a bit less), as insurance against a decade of fair-to-middling market returns.

But, darlings, whatever you do, never skimp on pink Champagne.

Ringo, Ringo

Chanel Comet Ring

Chanel Comet Ring

Dear Readers, you may have been wondering where I’ve gotten to. No new posts since the end of August? Come on girl!

Well there’s been this-and-that. Among other busyness, I got my certificate in Advanced Investment Strategies and, yes, it was as thrilling as it sounds.

The other night we saw Ringo Starr and his All-Star Band. Frankly, it could have gone either way but I gotta say, it was a rollicking good time. This man is enjoying himself so much you just have to clap along.

The former Beatle’s life is a good reminder to never underestimate  anyone, including oneself. By any measure his early life was shambolic.  A crummy Dad, poverty, severe ill health, illiteracy,  violence, lousy jobs, and a cold, damp, coal blighted climate with only two seasons: “July and Winter”. And yet, with a little luck and a lot of grit, Ringo crossed the wide chasm from have-not to mega-have.

Given his upbringing it should come as no surprise that Starr has some strong opinions about money and investing. As he told Forbes magazine, “…I always bought the house. I always felt good about that. I mean it took a long time till we made enough  money that I could buy a house. I have a business acquaintance who keeps saying “Cash is king,” and just because of where I come from, I like to have some cash. That’s all. Those are the two sort of rules I have.”

Starr’s a great drummer but what about his investing savvy? Anyone who’s come from a turbulent background will be drawn to the apparent security that owning land provides. As long as you can manage to keep the lights on, there’s no one to toss you and your belongings on the street. And, when all else fails, you can rent or sell it to put a few shillings in your pocket.

Some people consider real estate a kind of bond proxy in that it generates a predictable stream of income in the form of rents paid/saved. And, like a bond, its market value varies depending on interest rates, economic growth, and investor sentiment. But where a bond will mature and pay out its face value, a house never “matures”. You can keep it forever.

There are other differences as well. Like precious metals and other commodities, investing in real estate comes with many additional costs. Gold bars need to be transported, insured and stored, while real estate needs to be maintained and insured. It’s not portable and is heavily influenced by, not only the macro environment but also the micro, in other words, what is going on in the immediate neighborhood. Each gold bar is pretty much like the other, yet each property is unique with its own quirks.

Cash is Starr’s second investment pillar. But cash alone, e.g. stacks of bills hidden under the mattress or in a storage locker à la Walter White in Breaking Bad, is not really a smart move. For one thing, inflation erodes its value. The best way to think about cash is as a market hedge. If the stock market melts, those who have “kept their powder dry” can use it as an opportunity to buy depressed securities. It also provides a cushion during panics; you can live on your cash instead of being forced to sell assets to pay your living expenses. For this reason, in retirement, it’s good to have at least two years’ worth of basic expenses socked away in short-term GICs or actual cash.

Starr doesn’t mention other asset classes like equities, art, hedge funds, private equity etc. Cash and real estate alone are not a well-diversified portfolio for the average person, although if you have enough of each, you’re pretty much bullet proof. With a net worth north of $400 million, Starr’s well able to diversify.

Judging by his recent concert here his biggest assets are not the real estate holdings or the wads of cash—although they help. At 75, Starr is upbeat, funny, whippet-thin, fit, happily in love with his wife, surrounded by great talents and good friends, and is doing exactly what he wants to do whether it’s making music, painting, writing, acting or petting the dog.

Baby, he’s a rich man.

Peace & Love Ringo!