Ponzi finance, government style!

My wife is beginning to dread it when I talk about the economy (perhaps I'm being over-generous in saying "beginning"...).  This past week, I even dragged my dear sister down into the muck.  Now, poor reader, it's your turn.

Government finances are looking more and more scary to me.  I was reminded of this recently when recalling much of what I read about housing finance in 2003-2005 (yes, I was that early...and no, I didn't make any money betting against it...).

In particular, I remembered the intellectual framework of one Hyman Minsky, a great economist most people have never heard about.  His "Financial Instability Hypothesis" was frequently quoted with respect to subprime home loans.

In general, he said there are three types of lending, one following the other.  As lenders proceed from one financial crisis to the next, they walk farther and farther out on the risk limb until they fall off.  Then, they start all over again.  Silly, isn't it?

The first type of lending he called "hedge finance."  This is lending where the bank expects to be repaid both interest and principal.  Seems infinitely prudent, huh?  It is.  But, when it works well for some time, financiers move out the risk limb.

Next comes what Minsky called "speculative finance."  This is where the lender expects to be paid interest, but not all the principal.  Does that sound imprudent to you?  It may, but it's quite common.  If you've ever paid 20% interest on a loan or credit card, you've participated in speculative finance.  Banks charge that high interest rate because they don't expect you (or someone else offered the same loan) to fully repay the principal.  The high interest rate allows them to still make money even without full principal payment.  This is very profitable business in good times, which leads lenders farther out the limb.

The final phase is called "Ponzi finance."  This is where the lender expects neither full interest nor principal payment.  It only works as long as asset prices are rising, as was the case with the housing market, or as long as a "greater fool" can be found to buy the loan from the lender, also the case with housing.  This is the phase that ends in tears.

Which, brings me back to government debt.  A long time ago, the developed economies of the world went from hedge financing to speculative financing.  They did this when they decided never to repay their debts, but simply to roll them over (which means using a new loan to pay off the old one) each time they come due.

Because governments don't die like people do, they can--in theory--keep rolling their debts over forever.  In practice, every government dies and every single one has defaulted at some point.  If they haven't, yet, it's only a matter of time.  If you don't believe me, see the excellent work of Niall Ferguson, and Carmen Reinhart and Kenneth Rogoff.

Just like home loans progressed from speculative to Ponzi finance, I believe government debt is walking out the same limb, too.  This struck me most profoundly this week because of two data points.

The first was when I read that U.S. mutual fund investors were putting 6 times as much money into bond funds as they were putting into stock funds.  At the same time, any poll you read will tell you that the very same investors openly acknowledge that U.S. debt levels are a major problem and that they are skeptical the debt can be repaid.  If people are investing in debt they think is bad, they are not expecting principal and interest--they are expecting a greater fool to buy their bonds at a higher price!  That, my friends, is Ponzi finance.

The second data point comes from very smart, professional investors who support the deflation premise.  Most such investors openly acknowledge that U.S. debt problems are almost insurmountable, but that they are investing in U.S. debt because they believe deflation will happen and that they can make money as U.S. debt prices rise (in deflationary times, people seek the same safe havens, like U.S. debt, thus driving up the price).  Such investors aren't saying they expect to hold that debt long term--they doubt that interest and principal will be repaid!  They are overtly expecting to offload such "investments" on other dumb investors.  Ponzi finance!

Like the housing market, this is likely to end in tears.  The problem is getting the timing right (as it was with the housing market).  With so many buying government debt they openly acknowledge is dodgy--at best--everyone will be looking for greater fools to sell to at the same time, and the race to the exits is likely to be ugly.

Although my wife hates to hear me say it, it's getting scary out there.  We can still pull back from the precipice, but time is running out.  Our elected officials may suddenly become prudent (not in any democracy I know of).  We may experience a growth boom that saves the day--until the next crisis.  But, at some point over the next 5 to 10 years, we are going to live through the transition from Ponzi finance back to hedge finance, and that's just plain scary. 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Short term pain, long term happiness

With my daughter turning three in August, I know we'll soon have a conversation or two about honesty. 

It's a complicated subject, so I expect this conversation to occur off and on over the next...say...75 years (I plan to live to 115).

Most people think honesty is about lying or not lying, and therefore not very complicated.  I disagree.  I think honesty is about facing the facts.  If you frame honesty in such a way, you can live a moral life, and achieve and sustain happiness (which is what I think morality is all about).

You can lie and be moral.  For example, if I'm served liver and Brussels sprout casserole I can tactifully lie by thanking the server.  I'm not denying the fact that I hate liver and Brussels sprouts, but the thanks is polite.  That white lie is not incompatible with honesty.

If the Nazis come to my door and ask where I'm hiding the Jews, I can't say, "first door on the left," and be moral.  Once again, the lie does not deny the facts, it simply acknowledges that I have no moral obligation to be truthful with monsters (actually, being truthful will definitely bring unhappiness).

It's my stand that you have to be honest, to face the facts, in order to be happy.  But, happiness is not equal to instant gratification.  Sometimes, being honest with oneself or others is short term painful.

For example, think about making a mistake on the job and telling your boss.  Your boss is unlikely to be happy, but you have to face the the facts and let your boss know because she has the right to know.  If your boss is any good, she will reward that honesty over time even if she isn't happy with the mistake.

In fact, I would go so far as to say that many (most?) moral things, like honesty, are short term painful in order to reach long term happiness.

I exercise 5 days a week.  I work out hard enough that it's mildly painful.  But, the rewards pay for the effort.

I work hard to find investments.  I spent hours, day, months doing research on each investment idea.  This is rarely a fully pleasant experience.  And yet, I know it will work in the long run.  That's why I do it.

Buying investments that will do better than average almost always includes short term pain.  The reason why it will do better than average is because something is wrong.  Most people will think you're nuts for investing there--that's why it's cheap!

Over the long run, too, buying such short term pain provides long term happiness.

Do you think my three year old will understand why honesty or investing can bring short term pain and long term happiness?  No, me neither. 

But, over time she will, and then she'll be long term happy, too.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Why I don't work in a big city

A question I regularly get from clients, prospects, family and friends is: "if you're so good at what you do, why don't you work in a big city like New York, Boston, Chicago or San Francisco like all other investment managers worth their salt?"

It's a great question, and highlights what most people think: a) people who are good at what they do need to go to the biggest stage to do it, b) those who don't go to that stage probably aren't as good as they say.

Fair point.  No truly great baseball player plays pick-up games on weekends.  No virtuoso pianist only plays in her basement. 

Investing, however, is different.  With investing, all you have to do to compete against the best is buy or sell securities directly.  Each time you buy, you may be buying from the best; when you sell, you may be selling to the best.  You never know who is on other side of your trade, but the best are all participating in the same markets.

So, it's not necessary to go do New York, London or Hong Kong to compete with the best.  All you have to do is decide to buy securities directly.  I do. 

The reason why I'm not in a big city can be summed up in one word: independence.

To be a great baseball player, you have to compete against the best.  To become a virtuoso pianist, you have to play against the best.  Direct competition makes each individual better.

Investing, however, requires independence.  Groupthink is the source of poor performance.  So are marketing departments. 

If you're pressured to sell products because you work on commission, you're not independent and unlikely to beat the market.  If you're boss is pressuring you to post good quarterly results to increase assets under management, you'll lack the independence required to out-perform.

If you're surrounded by people who represent the market, it's very hard to resist being affected by their thinking.  If you meet and talk daily with people who disagree with you and think you should follow the herd, you're almost certain to be worn down and comply. 

Or, as Benjamin Graham, Warren Buffett's mentor, put it in the Intelligent Investor, "To enjoy a reasonable chance of continued better than average results, the investor must follow policies which are (1) inherently sound and promising, and (2) are not popular in Wall Street."

Sound and promising means long term oriented.  Marketing departments hate that because short term results are what sell. Not popular on Wall Street means contrarian.  But, that's difficult when you're amidst the Wall Street herd day in and day out.

I believe I have and will beat the market over the long term because I've kept my independence.  Being in Colorado Springs and without a marketing department breathing down my neck is an asset, not a liability. 

Keep in mind that Warren Buffett spent his first 10 years operating out of the sun room in his Omaha home.  He, too, saw the benefit of independence.  Perhaps he was on to something.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Raging debate.

The investing world has divided itself into two camps: those fearing inflation and those fearing deflation. A debate is raging about what we'll face going forward and the appropriate way to invest under each scenario.

This debate is not between dummies. I'm not referring to the talking heads on TV or the perma-bulls of Wall Street who perpetually advise buying stocks NOW! Nor am a talking about the perma-bears and gold bugs that advise canned food and fall-out shelters.

I'm talking about the smart investors who saw the 2000 tech bubble and the 2008 housing bubble popping years in advance. They made money when almost everyone else lost it.

They were in complete agreement back in 2000 and 2008, but now they aren't. Now, they hold diametrically opposed views about the economy and where to invest.

If we face deflation, you should hold cash and buy high quality fixed income instruments. If we face inflation, you should buy commodities and stocks that will thrive in a rising price environment.

They are in total disagreement about which one we face and are ripping each other to shreds in articles and interviews. I've never seen such strong disagreement between the smartest in the field.

The outcome really matters. If you invest in cash and bonds and inflation occurs, you'll get killed; if you invest in commodities and stocks and deflation occurs, you'll get killed. This is no mere academic debate. This will impact the lives of millions of investors.

Like many, I don't know how this story ends. It's my opinion we'll experience deflation until bad debt is squeezed from the system and then inflation from there. The problem is getting the timing right of when we go from deflation to inflation (and correctly guessing ahead of the herd when the crowd will recognize that shift).

And, to further confuse things, the outcome depends more on the decisions of government officials than economic analysis. If they print lots of money, we'll get inflation. If they don't, we'll have deflation. We're in an uncomfortable position.

I don't think it's possible to get the timing right, so I'm not trying. Instead, I want to own instruments that can do well in either inflation or deflation. For me, that's investing in businesses with pricing power and competitive advantages that can cut costs in deflation or raise prices in inflation.

I prefer businesses with cash on hand and that pay a meaningful dividend. That's the same as owning cash and a fixed income instrument, but it has the benefit of adapting to inflationary conditions in ways that cash and bonds can't.

I'm also favoring strong management teams that own a significant chunk of the business and are focused on building shareholder wealth. A smart management team can adapt and exploit a changing environment in ways that cash, fixed income, canned goods and commodities can't.

In other words, I'm looking for the best of both worlds. I don't want to guess whether we'll experience inflation or deflation or when one or the other will kick in. Instead, I'm investing for either environment.

Such investments are likely to feel short term pain if either strong inflation or deflation occurs. But, in the long run they will survive and grow in ways the other alternatives can't.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Rolling over?

The S&P 500 is down 16.2% since April 23. Commentators all over are trying to peer into their crystal balls to figure out if the market is tanking, or just taking a breather before resuming its climb.

Data point in both directions.

The Chinese stock market is down much more than U.S. markets, but state manipulation makes that data point suspect.

Railroad figures continue to look good. They haven't recovered summer 2008 highs, but they've been steadily heading in that direction.

Commodity prices have pulled back but haven't broken down to levels that would suggest all hope is lost. Copper is below $3, but has paused around that level. Oil prices are over $70, just where Saudi Arabia wants it (suggesting demand is still strong). U.S. natural gas prices have been climbing since late February and are hitting new highs. Asian steel prices have declined since March, but have leveled off above prices of last summer. Dry bulk shipping prices have tanked, but that could be as much due to on-coming supply of ships as lower demand.

The Economic Cycle Research Institute's (ECRI) Weekly Leading Index has declined to the point of many past recessions, but hasn't crossed the threshold or time period to make recession certain.

Weekly unemployment claims are below 500,000, but not below the significant 400,000 level that frequently signals the sustained end of recessions.

What's an investor to do in such situations?

First, remain calm. No one predicts recessions with precision, except in hindsight.

Second, stick to your discipline. If some of your investments look cheap, buy more. If others look expensive, sell some or all. Don't try to time the market, evaluate prices relative to potential returns and buy when returns look good. You won't catch the bottom, but no one but the lucky do anyway.

Third, plan to react to up or down side. It's handy to have a plan instead of reacting emotionally. Feelings are an investor's worst enemy. Decide what you'd do if prices took off (probably selling) and what you'd do if prices decline (probably buying), and then have the courage of your conviction when the time comes. Don't change your plans based on how you feel, but on what you rationally think.

Investing is a game where cooler minds prevail. Don't get emotional and don't abandon your soberly made plans. In the long run, the next few months will probably look like an unmemorable blip on the computer screen. Invest wisely and you won't care.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Renminbi redux.

The Chinese finally decided to let their currency, the renminbi (or yuan), "float" against the U.S. dollar. (For background, please see my prior post: Renminbi revaluation). I put the word float in quotes because it will be highly controlled and not a float in the free market sense.

Political leaders the world over, but especially in the U.S., have been pushing for this revaluation for some time. I doubt it will generate the outcome such leaders hope for. My expectation is higher interest rates and commodity prices in the long run that will eventually make our problems here and abroad worse instead of better.

An interesting question to ask, then, is: why did the Chinese finally do what everyone wanted them to do?

The most obvious answer, and the one that will satisfy most political leaders, is that China bowed to U.S. or international pressure. I doubt that's the case. Right now the rest of the world depends on China as much as or more so than the other way around.

Another suggestion, mostly from political thinkers, is that China is assuming its position on the world stage and having an independent currency is part of that. Although more feasible than caving to pressure, I think this argument misses the mark, too. I believe China desires a prominent position in the world, but I don't think it would sacrifice a piece of its low cost edge in order to get it.

No, I think the real reason behind revaluation is inflation in China.

In fighting financial problems over the last decade, the U.S. Federal Reserve has printed a lot of dollars. That printing has led to higher prices, especially for food and the key inputs to production (copper, iron ore, oil, etc.).

This impacts first world countries much less than third world countries. The first world spends somewhere around 20% of their income on such things as food. The third world, including China, however, spends much closer to 60%.

When the price of an apple doubles and it's less than 20% of your income, you complain a bit, but it doesn't cause a significant problem.

When the price of food doubles and it's 60% of your income, you riot in the streets.

That's the situation I think China is facing. They'd like to keep their currency on par with the dollar to maintain their low cost competitive advantage (with significant margin to spare), but not at the expense of having inflation cripple its poorest people.

I believe China's goal is to grow to first world standards of living without causing a revolution. That's a very delicate goal to achieve, especially with centralized planning and in the short time period they want to achieve it.

They won't get there if their economy slows too much, or if they have high inflation.

I don't think China is caving to pressure from the west or seeking the prestige of an independent currency. I believe they are walking a tight rope, and inflationary threats were making them lean way too far in one direction.

Revaluation, for them, is a practical economic matter, not purely a political one.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Look east, young man...

In trying to read the economic Tarot cards, most are focused on the U.S. and Europe.

At first glance, this is quite understandable. The European economy is the largest in the world, followed closely by the U.S. But, that's not where the action is.

Indeed, the world economy increasingly turns on the axis of #3: China.

If you want to know where things are going, look east.

I say this for two reasons: 1) markets have been increasingly led by action in China, and 2) fundamental economic reality is being driven most by China.

When the economies and stock markets of the world turned positive in 2008 and 2009, it happened first in China.

All other markets are reacting to what happens in China, too. When China hints they may let the renmimbi appreciate, markets shout "how high?" When China hints its trying to subdue real estate speculation, markets shutter the world over.

The simple fact of the matter is markets are reacting increasingly to news from China.

You may think of markets as being speculatively fueled, but a look at underlying economic reality provides a basis for these flighty reactions.

China is the world's third largest economy, passing Japan within the last two years.

The Chinese economy is--by far--the fastest growing large economy.

China became the world's largest export economy, passing the former #1, Germany, just last year.

Demand from China is driving the markets for the most basic inputs to production. Watch the price of shipping, iron ore, copper, steel, oil, or almost anything else, and you'll most likely find news from China caused prices to jump or dive.

China has become the manufacturer to the world. You can't consume what hasn't been produced, so China is holding the economic cards, now. If you don't believe it, watch Chinese workers striking Honda or demanding hiring wages from purchasers like Apple and Hewlett Packard. This wasn't happening a year ago because China didn't hold the cards. They do right now.

Finally, China's economy is the only large economy whose government isn't in a fiscal straight jacket. The U.S., Europe and Japan are all hand-cuffed by borrowing and spending too much. China's government is almost certainly making uneconomic investments, but they have the ability to invest whereas the other large economies' governments are out of ammunition (or soon will be).

If you want to know where things are going economically, look east.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Tipping Point?

The next crisis we face may be much worse than the housing crisis. It's what I've talked about in the space before: sovereign subprime or too much government debt.

This may seem like a problem facing far-off Greece or Hungary, but it's bigger and more problematic in the developed economies. Here, I'm talking about the big economies we typically associate with stability: Japan, Germany, France, Britain and the United States.

The issue is that such developed economies have borrowed too much money, like subprime borrowers, to live high on the hog today. This borrowing is going and has gone to generous social programs, defense, and, most insidiously, growing interest payments.

When the burden of paying debt, both interest and principal payments, get too high relative to incoming money (taxes) or an economy's size (GDP), you get to a tipping point where there's no where to go but down.

This problem is exacerbated by two additional issues: who did you borrow from and when do you owe them principal.

If you borrow from your own citizens, you're in a better situation than when you borrow from foreigners, especially when those foreigners aren't your best friend (hello, China).

If you borrow the money short instead of long term, you face the same problem as paying off a credit card versus a home loan--no credit card will give you wiggle room while you get your financial house in order.

Japan and Britain borrowed mostly from their own citizens. The U.S. borrowed mostly from Japan and China. Japan and Britain predominantly borrowed long term, the U.S. borrowed short term and must roll over most of its debt over the next several years.

The U.S. has an advantage over Japan, Britain, France and Germany, though: our economy grows faster and so does our population (both organically and from immigration). This gives us some wiggle room they don't have.

Back to the tipping point issue. When interest payments get too high relative to economic production or tax revenues, those who lent you money want a higher interest rate. Guess what a higher interest rate does to those interest payments? Yep, higher and higher.

You can see why there's a tipping point--once you reach a certain threshold, people start to doubt you can pay and want higher interest payments (or won't lend you money), which creates a vicious cycle.

The developed economies of the world are entering that vicious cycle over the coming years. We stand on a knife's edge and can chose, now, to stay on the good side or go to the dark side. And, we don't have much time to chose.

If you tip to the dark side, what do you have to do? Theoretically, you can grow your way out of trouble, lower your interest payments, get bailed out by someone else, cut spending and jack up taxes, print money (inflation) to pay back loans, or default (also known as restructuring, repudiation, rescheduling, etc.).

The U.S. has been growing its way out of trouble for over 200 years. Unfortunately, when government spending grows to a certain percentage of the economy, your growth rate slows dramatically. We're reaching that point, so we need to allow a lot of immigration, cut government spending, and reduce taxes to increase growth. I'm guessing the chance of any of those three happening is as great as finding a snowball near the sun's core.

Is there any way we could lower the interest rate on our debt? You'll have to ask Japan and China on that one, but don't count on it.

Is it possible that any country in the world is capable of bailing out the U.S.? Please see snowball reference above.

Can we cut our spending and raise additional taxes? We could, but in a populist environment like we're in, that will probably work as well as it has in Greece (please see riot footage as reference).

Can we inflate? This is the most likely outcome, and it won't be a lot of fun for those who lent us money or for those on a fixed income here in the U.S.--and, by the way, that's a lot of people!

Can we default? Like inflation, we can do it, but it won't be pretty and will likely be a disaster for many.

Standing on the knife's edge and looking at those six options, I would chose to knuckle down now, so we don't have to go down the path of the six. I'm not optimistic that will happen in a democracy, so I'm planning on inflation.

So should you.

(I think we'll still experience slight inflation/deflation over the next couple of years, but the turning point is hard to predict because our lenders will get to chose the timing).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Judging expertise--the right way!

I was simply dumbfounded.

I was having breakfast with a good friend, recently, when she explained the good qualities of her financial advisor. Specifically, she referred to her advisor's a) ever-present volunteer activities in the community and b) diligent hobby fly-fishing on every possible occasion.

First, let me highlight that my friend is no dummy. She's one of those people that is fiercely dedicated to her job, an expert in all the important areas of her work, and possesses a mind-numbing amount of information about her interests. This is one smart cookie.

Second, I have nothing against volunteer activities or fly-fishing, or long walks on the beach for that matter.

Third, I'm not an unbiased observer. I am, after all, an investment advisor myself.

With all that, why on earth would you judge your financial advisor based on their presence in the community or their various hobbies!

When I look for a doctor, I don't care if she sings in a barbershop quartet, or if she likes to play bridge. All I care is if she is an expert in her medical specialty. I want to know she reads the latest journals and works diligently to improve her results over time.

When a fireman comes to pull my unconscious body from my burning house, I don't care if he enjoys flower-arranging or Internet chat rooms, I just care if he can carry me down a flight of stairs and then put out the fire with minimum property damage. I want to know that he can squat 300 pounds and studies fire damage to figure out how best to put them out in the future.

And, when I look for an expert in investments, I don't give a hoot if they volunteer and fly-fish, all I care is that they are expert at what they do.

Personally, I want that doctor, fireman and financial advisor to be a neurotic, obsessive/compulsive individual so dedicated to their field that they seldom have time for much else.

So why was my friend so excited that her financial advisor was always volunteering and trying to fly-fish? I don't get it.

Doesn't she realized that when her advisor is doing something other than being an expert in their field, she's the one losing. Doesn't she realize that every hour volunteering or fly-fishing is another hour when the advisor's competition is finding ways to get better returns, better plan for her future, or broaden their knowledge?

There's a right and a wrong way to judge expertise. You don't judge it based on ancillary interests or good intentions in the community. You judge it based on best practices, proper education, diligent improvement, and long run results.

And one more thing while I'm on my rant: when your advisor regularly calls you to suggest you make changes to your portfolio, and he's compensated based on commissions, he's not calling to help, he's generating sales so he has more time to fly-fish while your portfolio is floundering.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Skill vs. Probability.

Lucky, or good? This question gets asked a lot, but few realize how important it is.

Having just finished Michael Mauboussin's book, Think Twice, I couldn't help but reconsider this question across a range of areas.

It turns out to be crucial in sports, business, politics, investing, and even parenting!

The basic issue is that the outcomes we see are one part skill, and one part probability, (i.e. luck). Where we get wrapped around the axle is when we assume that bad luck means bad skill, or, more frequently, that good luck means good skill.

Sports seems like the most obvious example. People assume hot and cold streaks are due to controllable skill, when they're much more likely due to good and bad luck. A 60% free throw basketball shooter has a 7.8% chance of making 5 in a row; a 40% shooter has a 1% chance of 5 in a row. But, that doesn't mean that on any given night the 40% shooter won't shoot better than the 60% shooter. Sorry, that's just probability.

A better example is the Sports Illustrated jinx. Teams or athletes tend to do worse after they appear on the cover of Sports Illustrated. Luck or skill? They were probably on the cover because they had skill and a streak of good luck. The did worse afterward because they had skill and a streak of bad luck. Fans will probably claim otherwise, but it's more likely a change in luck than skill.

The same phenomenon occurs in business. Companies and managers that appear on the front of Business Week, Forbes and Fortune tend to under-perform afterward (both their stock and underlying performance metrics). Were they on the cover because they were terribly skillful, or because they had skill and were a bit luckier than average? This doesn't bode well for Apple, Google or Hewlett Packard that have graced a lot of magazine covers recently.

You can see the same thing in a business's underlying performance. If a company is shooting the lights on in sales and profits, it's part luck and part skill. A company with terrible performance may be terrible, but it's also likely to be partly bad luck. The statistics show that performance tends to regress to the mean over time--the good get worse and the bad get better.

Politics and entertainment are also good examples. Was Bush purely to blame for 9/11 and hurricane Katrina, or was he unlucky? Likely, he was both unlucky and unskillful, but he's frequently blamed as if it were all bad skill. Same for Obama. Was he unlucky or unskillful to have the housing market meltdown and a giant oil spill in the Gulf of Mexico on his watch? People aren't very objective in judging politicians and the degree to which luck plays a part, especially when they go into situations with political prejudices.

I've found luck and skill even play a part in parenting. If you're saying "DUH!?" right now, I agree with you. When my almost 3 year old daughter is sick or teething (which I consider luck, not skill on my part), things go worse. This means tantrums galore! When she isn't sick or teething, things go a lot better. She occasionally even listens to me! My skill is the same (or at least relatively stable), but my results are different because luck plays a part.

No where is this more obvious in my life than with investing. Luck plays a major part in investing because the outcomes are due to so many complex factors. Predicting economic outcomes, weather patterns, competitive dynamics, etc. makes investing a terribly difficult area to separate skill from luck. And yet, both good and bad luck are there along with skill.

That's why its so important to look at a managers long term record. If he or she does well over the long run but hasn't done well recently, bad luck is probably playing a part and good luck will eventually come back. On the flip side, a good record doesn't necessarily mean skill and good luck, it could just be good luck. This burns investors more than anything else in the investing world, and it counts when looking at investing managers as much as specific investments (Apple, anyone?).

Skill or statistics? Lucky or good. You be the judge. But, don't fool yourself that both good and bad luck aren't playing a roll. They most certainly are.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Fat lady singing?; Paris.

With the recent market pull-back of over 10%, it's a good time to ask if the bull market that began in March 2009 is over.

First off, I don't know, and neither does anyone else. I, like so many others, am speculating on what may happen, not forecasting what will happen. Forecasting short term market direction is foolish. Or, as Warren Buffett put it, "The fact that people will be full of greed, fear and folly is predictable. The sequence is not predictable."

Given those caveats, I don't think this market pull-back is the end of this bull market. I have several reasons for this opinion.

1) The governments of the world are still flooding the system with money at zero percent interest rates. It's unlikely markets will tank with so much easy money available.

2) The governments of the world are still back-stopping every economic problem. Market crashes rarely happen when everyone has just experienced one, or when governments are working so hard to prevent them. Eventually, governments will run out of ammunition, but they haven't, yet.

3) Lots of economic numbers look good. Granted, commodities like copper and oil have pulled back, but manufacturing data looks strong and railroad shipments are staging a real recovery. These figures may turn down, but for now they are signaling a real recovery.

4) Retail investors were just starting to join the party. I've commented before that the general public tends to be a contrarian indicator--do the opposite of what they are doing. Retail investors were just starting to pull money from bond funds and put them into equity funds. I believe they will end up much more fully invested before things really roll over.

I must admit, I was prepared for the downturn. I had bought volatility for both my clients and myself and have mostly cashed out (I invested in a security that goes up when the market goes down). Now, I'm getting reinvested in the same blue chip companies I've been recommending for quite some time.

Markets may continue to head down for a bit, and it's nice to have some hedges against that, but I don't think the fat lady is singing (yet). It's a good time to invest in quality companies at cheaper prices.

In the long run, governments will run out of ammunition. When that happens, markets will probably head down by more than 10%. In my opinion, that's still a couple of years away, but I could be wrong and it could be starting now. Either way, I'm prepared.

On a separate note, my wife and I just got back from a week in Paris, and we had a blast. The food there was simply unbelievable. In fact, my wife and I had the best meal of our lives at a little restaurant called chez l' Ami Jean (Rue Cler area). Outstanding!

I also found the people of Paris to be incredibly friendly and helpful. It was almost impossible to look at a map and try to figure out where you were without someone stopping to offer help. We tried our French on them, and they were happy to oblige while still being able to speak English when necessary (their English was always better than our French).

Paris is the world's leading vacation destination, so my recommendation is hardly unique, but I'd highly recommend it to anyone thinking about world travel.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

"The Fault, Dear Brutus..."

I read a stunning Morningstar article the other day. Ken Heebner's CGM Focus Fund returned an outstanding 17.84% annualized return over the last 10 years. While the market as a whole went down, CGM Focus would have multiplied your money by 5.2 times. Wow!

That's assuming, of course, that you bought the fund and held on during all the ups and downs of both the market and the CGM Focus Fund. The return that Heebner's actual investors received (as calculated my Morningstar)? Negative 16.82% annualized!

You might look at those numbers incredulously and wonder how on earth the fund could provide 17.84% returns while investors lost 16.82% annualized.

It relates to the title of this blog. As Shakespeare put it in Julius Caesar, "The fault, dear Brutus, is not in our stars, But in ourselves." The reason investors get lousy returns is not due to fate, but because they shoot themselves in the foot.

How can a fund go up 17.84% annualized, but investors get -16.82% returns? Investors chase volatile performance. They buy after a fund had done well, only to find it top and roll over. After it tanks, they give up and sell, only to find it race back up again. Rinse and repeat.

Research clearly shows investors are their own worst enemy. Instead of formulating a plan and sticking to it through bumpy markets, they try to game the system. That's why Dalbar studies have consistently shown investors get 1/4 of the return of the mutual funds they invest in--they chase performance!

It's not just individual investors who do this, professionals chase performance, too. Jeremy Grantham of GMO talks about how he lost 60%--60%!!!--of his clients during the late 1990's and early 2000. His clients were abandoning him because he "didn't get" the dot-com boom. Grantham's disciplined investment approach, of course, turned out to be right, and he provided brilliant returns for those clients who stuck around.

This lesson is counter-intuitive to most people, but vitally important to investment success. Markets move in fits and starts. Trying to time the market is a fool's errand. The people who succeed over the long run stick to a disciplined and proven approach. Judging investment records by short term performance, even 3 to 5 years, isn't enough. If a disciplined approach doesn't look like it's working, stay the course or--even better--put more money to work in it. Focus on the long term, even when it's extremely hard to do, or hire someone who can do that for you.

Or, as Warren Buffett puts it, "be greedy when others are fearful and fearful when others are greedy."

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is Greek Tragedy Contagious?

I've written several blogs touching on Greece's problems over the last 5 months (please see: Sovereign Subprime, Bonds and Cash Just Aren't That Safe, Going Greek, Return of the Bond Market Vigilantes). But, as one of my long time readers noted, given recent events, it's time for an update.

First, a review. Greece's fiscal deficit is hitting double digits. When deficits get this large, countries find it difficult to issue debt and keep their currency from sliding in value. Greece, however, is in a unique position as a member of the European Union (EU) that also utilizes the euro as its currency. Greece's fiscal and debt problems are not just their own, but an issue for the entire EU. This means more fiscally responsible countries like Germany and France are feeling compelled to bail out Greece. If they don't, their economies will suffer, too, and the political/economic experiment that is the EU will go into the dustbin of history (as have all other pseudo-unions of this sort).

As I've remarked elsewhere, Greece's tragic movie is coming to theaters near you, because Greece's issues are and will be repeated the world over. This includes western Europe's sick brothers: Portugal, Italy, Ireland, and Spain; several eastern European countries; several South American countries; and will soon feature such first world countries as the United Kingdom, Japan, and the United States.

If this sounds like hyperbole to you, I don't blame you. But, let me explain.

Greece's problems are not a product of bad luck or bad timing, but are self-imposed. Like Bernie Madoff's Ponzi scheme, Greece's government promised benefits it couldn't possibly pay out. Greece's economy is saddled with a huge public sector that has overly generous pay, benefits and pensions. Now that Greece needs to trim back those benefits to get its fiscal house in order, public sector employees are taking to the streets in violent protest. This is shutting down its economy. This may be hard to believe for Americans, but Greece's Air Force protested by not coming to work this week! When the defense sector goes on strike, things are out of hand.

How can Greece solve its problems? It must cut public spending and grow the economy. Only then can it pay back its debt burden. This is no more complex than a family running up too much credit card debt--the solution is to spend less, make more money, and pay off debts. But, Greece's family is refusing to cut spending while its public sector is preventing growth. Not a pretty picture.

Greece is not alone in having made such unfulfillable promises. Close on its heels are Portugal and Spain. What made news this week was what debt markets noted months ago: the credit worthiness of Greece, Spain and Portugal is degrading--the rating agencies snapped out of their stupor and finally downgraded Spain, Portugal and Greece. In fact, Greece was cut all the way to junk.

So now Greek tragedy is spreading to the weaker brothers of Europe. Who is next in line? Italy and Ireland, and then eastern Europe, and so on. The problem is that this could feed on itself. If the EU, primarily Germany and France, don't nip this in the bud, the problem will grow over most of Europe. What turns this into a negative feedback loop is that when credit ratings are cut and interest rates soar, it becomes more difficult to cut spending and grow your way out of the problem.

How does this impact the U.K., Japan and the U.S.? All three have made promises they can't keep; all three hope to grow beyond their obligations instead of cutting benefits; all three assume they can grow by selling products to places like Europe, China, etc. All three face Greece's problems, but at an earlier stage. If they don't reduce cut spending or grow strongly enough, they will before long find themselves in their own Greek tragedy.

If you don't think the U.S. (or the U.K., or Japan) has such a problem with its public sector, check again. Our states and municipalities have made enormous promises to public sector employees--promises that almost any actuarial accountant will tell you are unfulfillable. How do you think teachers, policemen, fire-fighters, motor vehicle administrators, etc. will react when we say we need to cut their pay, benefits and pensions? Perhaps not with violent street protests, but certainly not with simple resignation.

Greece's overwhelming problems will not visit us tomorrow, but they will come over time. Even if Greece's problems are solved, which will probably cost the EU (and International Monetary Fund (IMF)) 180 billion euros over the next 3 years, the EU still has to deal with Portugal, Spain, Italy and Ireland. How many hundreds of billions of euros before France and Germany are pulled down, too?

Greece's problems are turning into Spain and Portugal's problems, which are turning into France and Germany's problems, which will eventually hurt the U.K., Japan and U.S.

With all that, what are the investing implications?

1) Buying sovereign bonds or holding cash is more dangerous than it may seem. If you must hold bonds, hold corporate or inflation protected bonds. If you must hold cash, gold is the way to go.

2) The world economy is likely to continue growing despite these issues. Fiscal stimulus from Europe, Japan, the U.S. and China will not run out until later this year, and until that happens, sovereign subprime will be a side issue. But, markets are likely to be more volatile than they have been over the last year, so owning something that does well in more volatile markets will probably be beneficial.

3) For the long run, buy blue chip, franchise companies and lowest cost commodity producers. Great companies have pricing power and not much debt, so they will be able to grab market share, grow, and adapt to changing times. When longer term sovereign issues raise their head more significantly, interest rates will spike, currencies will tank, and commodities will thrive. Owning lowest cost producers will be very profitable.

4) The timing on these issues coming to a head will be almost impossible to get right. If Germany decides to be nationalistic and kicks Greece out of the EU, markets will react right away. If the EU bails out Greece, then Portugal, then Spain, then Italy, etc. this could drag out over a long time. If you can read minds and know how sovereign powers will react, you can get the timing right; for the rest of us mortals, trying to time the markets will prove to be a fool's errand.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Unexciting expectations.

The stock market is a puzzle to most people. It zigs when everyone expects it to zag. It goes up on a bad unemployment report one day, then down when a report shows the economy is booming the next. It can leave us frustrated and angry on such occasions.

Although I agree it's a mystery in the short term, it's much less of a puzzle over the long term. At any point in time, it's possible to provide a reasonable range of returns for the next 5 or 10 years. The market doesn't end at a precise point over that time frame, but it does follow a logical path.

The market's underlying logic is based on fundamentals. They include: 1) profits, 2) growth, 3) dividends and 4) how much people are willing to pay for those three. The first 3 are straightforward; the third is erratic over the short run, but tends to revert to the mean over the long haul.

No crystal ball needed. No eye of newt, or rat tail. Just an understanding of the underlying logic and the discipline to realize that's where things will head over time.

What does my "crystal ball" show for market returns over the next 5 to 10 years? A pretty unexciting picture. Over the next 5 years, I expect returns of -4% to 11%, with an average tendency of 3%. See, unexciting. Over the next 10 years, it looks like 2% to 10% annualized returns with an average of 6%. Assuming inflation in the 3% range, that leaves 0% to 3% real, annualized returns over the next 5 to 10 years. Probably a lot less than most people are expecting or planning.

The path to that range and those averages is likely to be much more "exciting." If anything was learned over the last 2 1/2 years, it's that a boring long term path may prove terrifyingly exciting over the short run.

The market peaked in October 2007, plunged 57%, then climbed 79% to today. That's a 23% decline from fall 2007, and an annualized loss of 10% a year. Our path going forward may prove similarly breath-taking.

How do you avoid such "excitement"? Don't invest in the stock market. But, beware that inflation and defaults may make cash and bonds just as terrifying.

Is there any way to do better? Yes, but it means being more selective than buying "the market." Over almost any time period, some stocks do well. Finding them isn't an easy task, but it can be done. Wal-Mart and Johnson & Johnson, which I held for clients and myself during the downturn, did quite well.

This doesn't eliminate risk, or volatility. That's just part of life (and especially investing). But, better long term returns are possible. They're unlikely to shoot out the lights, but they can put you in a much better position when the next real bull market begins.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The iPad is good--no GREAT!--for cable and phone companies.

I don't own an Apple iPad, but I do own an iPod Touch, so I can well imagine how great the Apple iPad will be.

However, I strongly disagree with those who believe it's the death-dell for cable and phone companies (full disclosure: I own Comcast and Verizon stock both for clients and myself). In fact, I believe the iPad, and other devices like it, will be a huge boon to phone and cable companies. Now, let me explain why.

First off, let me be clear: the iPhone, iPad and iPod Touch are revolutionary. If you've used any of these, you know what I'm talking about. Whether you use it to surf the net, play games, download apps, whatever, it's amazing.

But, something new and amazing doesn't necessarily mean the end of everything else. I don't believe I'll be eating dinner off an iPad in 5 years because plates will become obsolete (any more than I believed the Internet would change everything--EVERYTHING--10 years ago during the dot-com bubble).

Innovations are hard to predict, and their impact on other things is even more difficult to forecast. So, let's all just take a deep breath...

Back to the subject at hand: I've read many articles over the past 5 years saying that cable and phone companies will go the way of the dodo because of Internet and wireless advances. Will cable and phone companies be impacted? You betcha! Will they become obsolete over night? No way. Is it possible they may adapt to this new landscape and thrive? Indeed, it is possible, maybe even likely.

I even read one article where the author claimed 50% of all video would be watched on phones. Perhaps that author knows something I don't, but I'm having a hard time imagining a family watching a movie on a phone, or even the amazing iPad. I could be wrong...

The other problem I have with the "all land-lines are dead" vision of the future can be summed up in two words: reliable bandwidth. Does anyone really believe that wireless cell phones are currently capable of handling high-bandwidth video? Did dropped calls suddenly disappear and I didn't get the memo? Will people really watch streaming video, like live sports, over such an unreliable service? At some point in time, yes, but not yet.

Let's keep in mind, the phone company carrying iPhone can hardly handle people downloading apps and making phone calls, and somehow that same network is going to handle live sports videos? I'll believe it when I see it. And, if I do, I doubt it will be within the next 3 years.

The iPad brilliantly illustrates my point. So far, it doesn't work through cell phone coverage (although it will very soon). What does it work through? WiFi, or short range wireless. Which is connected to what? Oh, that's right, a phone or cable line.

The secret to successful wireless technology is to get it on a land-line as soon as possible. Why? Because wireless is no where near as reliable and secure, nor does it have the same 2 way bandwidth, as wireline. And, guess what, that won't change any time soon.

So, if you want to watch movies and live sports and downloads apps and whatnot, you'll be doing it over a big fat land-line pipe. Guess who will provide that pipe? Phone and cable companies.

The usual reasoning I see from here is that cable and phone companies make their money with land-lines by selling us a bunch of channels we don't want or need. Wrong.

Phone and cable companies have to pay an arm and a leg to buy content to put on their networks, and the margins they make on that business are much smaller than the margins they make bringing high bandwidth Internet access to your home or office.

When every home has 3 iPads, 4 wireless computers, movies sent to the TV over the Internet, etc., people will want higher bandwidth than 1.5 Mbps (Mega bits per second). They'll want huge bandwidth. And, cable and phone companies will be happy to provide 50 Mbps, 100 Mbps, 1,000 Mbps! But, for a price. If people really want all that bandwidth, they'll be happy to pay for it.

If the phone and cable companies were smart, they'd be more focused on bringing the highest bandwidth possible to the home and reducing their business expenses to the bone. That's what they're doing.

They know they can make more money with an all digital, high bandwidth network. They know that paying an arm and leg for content doesn't make sense in the long run. They also know that many, if not most, of their customers will take several years to adapt to this new reality. They see the future, and probably better than I do.

The iPad is great for cable and phone companies because they can make more money selling customers high bandwidth Internet, and the best way to get there is to have millions of consumers realize they need more...More...MORE bandwidth to do what they want with their shiny new iPads.

I say, the more the merrier! Buy tons of iPads, use them to do everything you want over the net. But, realize, too, that you'll be doing it all over a fat land-line, and that cable and phone companies will be bringing that to you.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Renminbi revaluation.

Be careful what you wish for, you just might get it.

The U.S. Congress has been trying to get the Chinese to allow their currency, the renminbi (or yuan), to appreciate versus the U.S. dollar. Timothy Geithner, our Treasury Secretary, rushed off to the far east to broker such a deal a couple of days ago.

Whereas most see this as a wonderful beginning, I believe it will end in tears.

Chinese currency is called renminbi. The word means "people's currency" (in direct contradiction of those who believe China has anything to do with capitalism). It's more commonly and historically called the yuan (which means round, after the shape of coins).

The Chinese peg their currency to the dollar. This means they buy and sell dollars and yuan to keep the 2 currencies marching in lockstep. The yuan was pegged to the dollar from 1997-2005 at 8.27 yuan to the dollar. It was allowed to float somewhat freely ("managed peg") from 2005 to 2008, where it appreciated (in a very controlled manner) from 8.27 to 6.83 (fewer yuan to dollars means the yuan is going up in value). That managed peg lasted until the crisis of 2008, when it was put back on a fixed peg at 6.83 yuan to the dollar, and remains there still.

The Chinese are not mean-spirited in pegging their currency. They partially do it to maintain their trading relationship to the U.S. It's easier to conduct trade, both for people in the U.S. and China, when you know what the exchange rate will be. They also peg their currency because they are a controlled economy. In other words, they don't have the mechanisms to let their economy manage itself because it's not a free market.

Many think this gives China an unfair advantage (sarcastic comment: just like it gives Alabama an unfair advantage over Michigan to have the dollar in Alabama the same as the dollar in Michigan). Such folks believe we must force China to remove its peg so we can compete more "fairly" (unless, of course, the people in Congress think they are losing, then they don't want it to be fair).

I don't believe forcing China to revalue its currency will be all good news.

It will be good for U.S. companies who compete with China. If Chinese and U.S. companies are competing for the same business, China has an advantage by manipulating its currency. But, China does not compete with the U.S. for high-end manufacturing, they compete with the U.S. at the low end, mostly. So, it will benefit low-end manufacturing in the U.S.

But, this will be bad for U.S. consumers. Letting the yuan appreciate will make all those Chinese goods we buy cost more (and we buy a LOT of Chinese goods). It also means China will have a more valuable currency to compete with U.S. dollars in buying goods all over the globe. In other words, it will lead to higher prices for commodities, goods, probably everything.

A small minority of U.S. businesses, with buddies in the Congress, will benefit at the expense of the vast majority of U.S. consumers and higher-end U.S. businesses. Isn't that nice.

The fallout will not be pretty, to be frank. It's bad for bonds because it means higher interest rates. And, those higher rates will hit U.S. consumers, U.S. businesses, and, of course, the biggest debtor of all: the U.S. government.

It will be good for commodity investments. It will be good for U.S. businesses in competition with Chinese businesses. That seems like more downside than upside to me.

To top it off, it won't solve the U.S.'s fiscal problems--it will make them worse. Higher interest rates and inflation will not reduce the U.S.'s debt, or reduce our burden of future social programs. Nor will it help employment. For every new job in low end manufacturing, we'll lose 2 or more elsewhere. It will lead to larger public finance problems, and sooner.

The U.S.'s problem is that it spends too much and it pays with debt. That's not China's fault. We need to save more, spend less, and make products that others want. We won't beat China with low-end manufacturing, but we can at the high-end. But, a depreciating dollar relative to an appreciating yuan won't help that.

No, getting the Chinese to allow the yuan to appreciate will not help the U.S., it will help China. Is that what we really want?

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Self-imposed retirement delusion.

The American dream is financial independence, but we aren't saving or planning enough for retirement. Everybody knows this, but we aren't doing enough about it. Frankly, the gulf between what people know and what they're doing has progressed beyond "inadequate planning," it's outright delusional.

How much do you need? Around 20 times your annual spending needs. That will allow you to withdraw 5% a year and still handle the bumps and bruises that markets will inevitably serve over time. Conservatively, I use 22 times my desired retirement spending needs, and that doesn't include income from any source other than savings.

If you have a pension or fixed annuity, you can subtract that from your annual needs to do the calculation. If you're older than 50, you can probably plan to receive the social security benefits you've been promised. If you're 40 to 50, be ready to give those benefits a significant haircut. If you're below 40, like me, don't count on it (by the way, the more you save, the less likely you'll be to get it).

Assuming the average John and Jane Doe need around $40,000 a year to live on, they'll need $800,000 to retire. Americans aren't even on a glide-path to reach that point--they're on a different planet.

According to the Employee Benefit Research Institute's 2010 survey, 54% of those currently working have less than $25,000 in savings and 88% have less than $250,000. Those already retired are even worse off: 56% with less than $25,000 and 88% less than $250,000.

It's not just a matter of not having saved enough, it's a matter of even having thought about it. Both retirees and workers are confident they have or will have enough to retire. And, this is from a group where only 46% have even tried to calculate how much they'll need! Delusional.

How do workers and retirees expect to get by? That's where the survey gets scary. 66% of workers expect to keep working past 65. The percent of actual retirees that work past 65? 39%. In other words, people expect to keep working past 65, but don't--not because they don't want or need to, but because they can't. Why? Because they get fired, can't find work, or, most frequently, have health issues that make working impossible.

A startling 70% of those currently working expect to continue working in retirement to pay the bills. The percent of retirees who actually manage to do this: 33%.

The average worker expects his retirement income to come from working in retirement and a pension (even though the vast majority admit they don't have pensions and won't because few companies offer them). Where do actual retirees get most of their retirement income? Social security.

So, most people are planning to keep working, but the data clearly shows that won't happen for most. And, most expect to get a pension even though they don't have one and have no clear path for getting one. The reality is that most retirees rely on social security, but only 30% of people working and 52% of those currently retired expect social security to be available. This fantasy will turn to farce, but it's won't be funny.

The stock market--by itself--won't bail us out, either. Trend-line growth of 6% plus a 2% dividend yield means we should expect only 8% returns (which includes 3% inflation). But, most people won't even get those returns because they'll pay too much in fees and then they'll chase performance (selling what "didn't work" to buy what's recently "been working"). The reality is that most people will get returns that simply match inflation.

What's the real solution? Save more, save more, save more (which conversely means: spend less, spend less, spend less). I'm 39 and have 20% of the savings I'll need in 26 years (assuming 65 retirement, whether I like it or not!). Assuming I can get market returns (even though I've beat the market by 5% on average, annually over the last 14 years), I'll need to save 10% of my annual income to get there. I'm saving 20%. In other words, I'm not planning to get there with just enough if everything goes right, I'm assuming things won't go right and building a margin of safety into my plan.

It's time to drop the delusion and act. That action means saving more, spending less, investing wisely, and planning to have more than needed. The benefits are more than simply having peace of mind, it'll be food on the table and a roof over your head when you're too old to fix past mistakes.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.