Do Bankers Earn Too Much?

Do bankers make too much money?

They may if they earn commissions and options of hundreds of millions a year. But who is to say what is too much? Some politician or bureaucrat with favors to hand out for votes?

Do baseball players earn too much money? They certainly do, if they earn up to $30 million a year for playing a kid’s game. And which many sandlot amateurs do for nothing, but just a little less efficiently. The real difference in their ball-hitting capability is not learned the hard way but in their luck of having eyes to see the ball.

Do gymnasts deserve more than they earn? They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear.

From my personal experience with all three practices, it is difficult to see how bureaucrats and politicians in Washington are so ready to damn bankers for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

And ballplayers are indirectly being financed by bailout funds of their bosses’ subsidized ballparks.

The Diminished Outlook For Common Stock

This is a follow-up to my previous report on the bleak common stock future.

There is a possible solution to the quandary of a poor future common stock market. It concerns the use of the corporate bond market and proper implementation of duration, to suit the investor’s personal horizon.

I have broadly commented on the subject. But be sure you invest in a low-cost bond mutual fund where interest earned is automatically reinvested in shares of the same fund each month.

Corporate bonds can help overcome inflation and the dearth of income and potentially limited growth from stocks. Estimated earnings can well be at least 6% on a net, net, net basis, PROVIDED, strategy is wisely used. ( See the Earl J. Weinreb NewsHole® comments.)

Common Stock’s Future

I find a major disconnect among investors about what they expect to earn from their securities portfolio over the next ten, twenty and more years, after tax and inflation.

Admittedly, that is a tough prediction because investors must take income taxes and inflation into account, along with projected securities’ yield and market returns. That isn’t simple.

In one survey, the net/net/net predicted return by a number of experts over the next fifty years, estimated returns ranged only between 2% and 3% annually.

That is unusual and shocking. Investors’ experience from the past would have had expectations to be close to about 6%.

In fact, many securities markets observers believe that potential, along with taxation and inflation bites, will impair future market returns. ( See the Earl J. Weinreb NewsHole® comments.)

Picking Stocks Like an Owner?

I have found and investigated over 1,600 investment strategies. There are many an investor can use, in which he can imagine they would be his own business.

The investor can take the same attitude as any owner would. The strategy can revolve around what he wants the company to accomplish. Everyday prices and values never enter business consideration while the business is on a growth path.

Short-term, quick-buyers and sellers often are trading company names. They really have no clue about what the business is. Most of the financial reports they see are little more than hearsay and gossip from Wall Street pundits looking over each others’ shoulders.

Always remember, the clunker stock the short-termer is selling is probably considered a diamond-in-the-rough by the buyer. ( See the Earl J. Weinreb NewsHole® comments.)

Stock Market Psychology

Market psychology is always a serious factor that dictates the lack of discipline in investors. Most take what profits they see on the way up, and run; no matter what their original strategy or purpose was for buying that security. So the odds of achieving huge winnings are always steep.

And besides, it is almost impossible for an outside observer to properly evaluate management. Analysts who make it their profession cannot evaluate managers wisely or adeptly from the outside. Why believe the public can?

Therefore, I have found the odds of this sweepstakes are too steep in the long run. I suggest investing in low-cost index funds as your best bet. ( See the Earl J. Weinreb NewsHole® comments.)

Picking Stock Winners?

It is harder to pick stock winners than you may think from reading financial media.

Everyone believes they can, but after all the effort, how many do they really find?

You hear about big winners but how many of those are available? How many are recognizable early on? It’s always easy to find those who did, after the fact.

Moreover, when you look at these relatively small numbers, you find that they had their periods of ups and downs. The profit numbers look excellent only after years of market wear and tear. How many investors had the stomach and discipline to buy those stocks at their lows and hold on to them to their highs?

None of the successful securities had gone up in a straight line. Most hit bad cycles when most of the original holders lost faith, deserted ship and sold. ( See the Earl J. Weinreb NewsHole® comments.)

Disciplined Strategic Investing

A simple explanation, easily followed, lets individuals know how to be better investors.

I have found from experience that the average investor does well by avoiding trading extremes. That’s possible by sticking to a disciplined, favorite strategy and then forgetting daily market prices.

You don’t need constant financial news, unless your investment strategy calls for it, Relatively few strategies do. ( See the Earl J. Weinreb NewsHole® comments.)

Using Wall Street Wisely

There has been too much Wall Street bashing from left-leaning politicians.

I have myself directed some criticism at Wall Street who may have contributed to actions that helped foment financial panic.

But I always have made this distinction about Wall Street: It’s both an investment and also a constant-trading medium. Both are essential. But trading aspects can go to extremes. When extreme actions occur, there can be potential danger. It is thus essential that the public understand how Wall Street operates.

In that regard, you must always remain disciplined in your use of investment strategy. ( See the Earl J. Weinreb NewsHole® comments.)

Investing Moods and Sentiments

Moods are relatively long-lasting emotions. Sentiments are shorter-term.

They both can affect how stock market cycles react and can precipitate booms and busts.

That’s because cycles can easily grow into the fully grown varieties. It’s the way minor bear markets start and deeper recessions fester. Given enough impetus and human error, financial meltdowns will eventually occur, as I have outlined in my previous reports.

It’s the reason why astute, wise politicians seeking to prevent a deep recession, never make it a practice to single out industry as scapegoats when they want the economy to recover and produce jobs.

Mark-to-Market and Financial Meltdowns. Part 3

The Mark-to-Market accounting procedure on which I commented in my recent blogs and financial meltdown that occurred as a result caused global damage.

This created havoc among all other small and large investors with pension and institutional funds, who look to the long-term and are not interested in daily or even weekly pricing. All true investors got run over by this mark-to-market onslaught.

I have always felt that there are two kinds of investors; traders who need daily quotes which can be unrealistic. And long-term investors who get misled and potentially hurt, if they act on those abhorrent, volatile short-term quotes.

The financial meltdown was certainly an error by government-appointee “experts” thinking too short-term and subject, therefore, to panic–driven decisions.

Mark-to-Market and Financial Meltdowns. Part 2

I mentioned in an earlier blog how bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine.

There were defenders on Wall Street for this sham. Some insisted that rules were rules to be defended in emergencies as if they were cast in stone. After all, the rules became a boon for Wall Street short sellers and the avalanche of constant traders that make up the financial community, The folks to which the media give far too much attention.

Ever-lower values were thereby being created for securities with little or no true market with which to establish real market values. And it produced volatility that makes for tremendous trading profits among short-term traders who predominate the financial community.

Mark-to-Market and Financial Meltdowns

U. S. financial breakdowns usually have to do with governmental “experts” in the past reacting to problems in a panic mode. I’m referring to the Great Depression and our current Great Recession.

The current rescuers had come from the financial community, attuned only to the short term, and thus could not see how caution and avoiding panic would overcome problems. Nor did they truly envision the danger of acting in haste.

Example: The value of collateralized debt obligations, CDOs. or their derivatives, were “marked-to-market,” under so-called fair value accounting. The latter is part of the Generally Accepted Accounting Principles (GAAP) rule in place since the 1990s.

But that rule could have and should have been suspended for the emergency. CDOs were not some other product that accountants usually measure on balance sheets.

As a result, bank and investment company net worth figures were daily being devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine. The rescuers were blinded by their own personal and business backgrounds.

The Dodd-Frank Update

You have heard how complicated, arcane deals undermined global finances? Because those “greedy” bankers, intent on “obscene” profit-making schemes used them to the detriment of all.

After lengthy investigations were made, and our politicians in Washington completed their pious, populist speeches. The media duly contributed their remarks.

And then Congress made its conclusions. The result? Perhaps some insights were finally gained on how derivatives really work and their purpose. The upshot of all the nattering? Draconian regulation in the form of Dodd-Frank.

This piece of legislation is still a work in progress so the unintended consequences are slowly but surely unfolding day by day.

Keep in touch. I comment on them as they periodically occur.

ETFs and Trading Profits

ETFs are different than mutual funds, in that they are traded on exchanges. Mostly they are indexes that are not managed by advisers.

From time to time, their securities may be lent for purposes of short selling, It’s a source of added income. The stock lending profits of such ETF funds can be substantial.

Do earnings go back to shareholders of the ETF, or to its managers? In some funds, almost all go to the shareholders, while as little as half may be returned to other holders.

You should check your ETF investments, to see how your managers treat these earnings.

Federal Reserve Independence is Gone

Central banks were set up for independent banking functions, on the premise it’s best for a country to keep its financial system from political influences.

Politicians have always had a tendency to produce financial and economic pressure to change any banking independence during stressful economic times.

How are major central banks doing with regard to their current national financial crises?

The Bank of England has been relatively independent but rather involved with its government bond market. The Bank of Japan has been somewhat independent since 1998 but it often has been politically directed.

Congress, which always loosely supervised the Fed now wants audits and more disclosure, which would exert pressure. However, the Dodd-Frank Act now has the Fed go more deeply into the American economy than it had before, and the present Fed Chairrnan, Ben Bernanke, has had a tendency to lean more to administration policy.

Human Investing Behavior

Research on human investment behavior indicates how personal psychology has lots to do with the way securities markets operate.

I have mentioned in the past my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one that I have found to be better than any other. What makes for investment success is strict discipline of strategy use.

Psychology controls discipline.

Furthermore, discipline can be mastered, with proper personalized control over those psychological hazards.

I would suggest investors look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage. ( See the Earl J. Weinreb NewsHole® comments.

Derivatives Are Not The Villains

Remember the hullabaloo about securities derivatives, such as interest rate swaps and credit default swaps? And their connection with subprime mortgages and collateralized debt obligations? With their role in the financial meltdown?

The left rails against derivatives. That CDS (credit default swaps) caused the financial meltdown in the mortgage market. But there was a much larger market in interest rate swaps, and there was no problem with fixed income assets.

And there was an even larger market in foreign exchange swaps, than in CDS, and there was no problem in the currency markets.

So derivatives were not the main cause of the financial meltdown. AIG lost $39 B on derivatives but also $24 B on mortgages with no derivatives. The counter-parties on derivatives were paid off 100 cents on the dollar.

The problem was the housing market.

After all, government excesses, such as poor monetary policy, produced economic problems, not bankers who become bystanders by necessity and happenstance.

Those Nasty Bankers?

Listening to comments and opinions of those from all walks of life, most folks know little about finance and banking.

I place politicians on the left at the top of my list, among this group of financially ignorant. I insist, If they knew more about finance, they would not be intellectually on the left.

So, it is entirely understandable that bashing bankers is always fashionable, especially during economic recessions. Finding scapegoats is handy. It makes up for any guilt politicians have in helping foment our economic distress.

The Depressed Japanese Economy

The Japanese Nikkei Stock Average is about one quarter of its value at the end of 1989; it’s still sharply well off that peak.

We know about Hitachi and Nissin Foods corporate growth but the Japanese economy has been flat and practically dormant for over the past twenty years. This has been the case despite huge Japanese government spending, Japanese public debt is now over 200% of GDP.

Unfortunately, it does not appear their economy will recover anytime soon.

The problem for the U.S. is that the Obama administration has been on a wild tear to “stimulate” the American economy, much the same way the Japanese attempted two decades ago, to spend their way to prosperity. Which they have failed to do.

Note: The Japanese do not have a global reserve currency to protect as the U.S. does.

Buying Bonds When Inflation Looms

I would strongly advise everyone to be fully aware of what the principle of duration is and how it works when investing in bonds. Very few media pundits write on the practical use of bond duration and its adaptation TO inflation, rather than avoidance OF inflation.

Much of the practical value of media portfolio advice, particularly as it applies to bonds, is, unfortunately, used merely to fill up space and not to truly enlighten. ( See the Earl J. Weinreb NewsHole® comments.

Questionable Media Portfolio Advice

Media portfolio advice is often a farce.

Giving advice on investment portfolios without regard to a client’s age, family condition, and needs, is ridiculous. Everyone has a different investing time horizon and current and future income needs. Those factors affect the choice and percentages of securities

And where bonds are chosen, the “duration” of the bonds and the practicality of low-cost fund automatic reinvestment of their earnings, are paramount. ( See the Earl J. Weinreb NewsHole® comments.

Credit Card Debt Reduction

When you hear a credit card balance reduction ad, two facts will probably never be mentioned, and will mislead you about that credit reduction purpose.

One; you pay income tax on any amount of debt you reduce. Therefore, cutting that balance is not as simple as it may appear. Reduce your balance by $4,000 and it’s as if you had a taxable gain.

Two; you hurt your credit standing by resorting to credit reduction. This may eventually cost you.

And, how many who have so much credit card debt, they have to resort to drastic measures, are actually permanently getting out of debt? You can be sure their spending habits will be getting them into the same situation again in a few years.

12b-1 Mutual Fund Marketing Fees

The 12b-1 mutual fund fees are sill around. These were originally permitted by the SEC to allow mutual funds to market their product to new investors, so are actually a sales load that adds up over the years. Fortunately, most funds no longer use them.

The 12b-1 charges originally were used to pay fees for the distribution of funds by brokers. But they still persist, even when brokers are not involved.

My suggestion: Avoid any mutual funds that charge them. Those fees become significant deductions from your accumulated holding values over the years.

High Frequency Trading

Among costs, added to the "expense ratios" of mutual fund investors, is the bid-ask spread. A wide spread means the fund must pay significantly more to acquire a stock than it could sell it for.

High- frequency trading has reduced this cost by narrowing the spread. Generally, wide spreads are seen as inefficiency, with buyers and sellers having difficulty agreeing on a price that accurately reflects what is known about a stock. Narrow spreads mean the market is working better.

Another transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce this "market-impact" cost by making it easier to break big trades into many little ones while still conducting them very quickly,

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%.

Therefore, high-frequency trading isn’t always the villain the financial media purports it to be.

Credit Card Balance Transfers

When you make too many credit card transfers it appears you may be applying for fresh credit each time. That hurts your credit card score.

Therefore, when you get offers from credit card companies to transfer your current outstanding balance to another card account because of lower charges, think it over carefully.

You may be hurting your credit score, should you take the bait.

Overseas Investing as Currency Transaction

Investing overseas is not only for investment diversification; the benefits of growth opportunities are to be gained globally.

Currency moves are always involved. Will the dollar be getting stronger or weaker? If the dollar gets weaker, such investments become more valuable as translated currency will then work in favor of the U.S. investor.

However, should the dollar get stronger, the reverse will become true. The investments become less valuable, when translated into dollars.

Maxing Out a Credit Card

It may sometimes be necessary to take down the maximum amount of credit your card permits, but it does not help your credit score.

Do so only in an emergency. It’s nice to know that your credit permits you spending liberties, but don’t let that take you to extreme spending binges.

Of course, if you don’t use your card at all, or only occasionally, you may be dropped or the maximum available credit line may be reduced. Credit card companies are getting more sensitive these days about account activity. So, use credit cards intelligently.

More Securities and Exchange Commission Futility

Securities and Exchange Commission has now ruled, if your company’s common stock is worth more than $75 million dollars, shareholders are allowed to vote once every three years on whether they like or dislike top management pay scales. But the company does not have to act on the voting results.

With all the problems the SEC has to face today, this has to be what they deem a big, worthwhile endeavor, worth their regulatory efforts.

Question: how many stockholders care? Few.

And is this a valid buy and sell strategy for investors to follow? No.