Fiddling while Rome is burning

You're probably asking yourself how in the world could John Thain spend $1.2 million redecorating his office while the firm is going down in flames all around him? According to CNBC, Thain paid "$837,000 and his purchases included $87,000 for area rugs, $25,000 for a pedestal table and $68,000 for a 19th century credenza"
Mr. Thain is in good company. Michael Smith, the interior designer who Thain used, has also been hired by First Lady Michelle Obama to redecorate the White House.

When I heard about this story, I thought that it sounded very 1987 and that Darien Taylor, the Darryl Hannah character from Wall Street, was his designer.

Again, just like with the Madoff scandal, I am happy that things like this are coming to light, but not because I think that it will usher in a new era in corporate governance. Wasn't Sarbanes-Oxley supposed to do that? Hell, wasn't the creation of the SEC in 1934 supposed to do that? It's just yet another sign that we're working our way slowly through the muck.

Inauguration Day!

What will Obama mean for my stocks? I don't know. I won't even venture a guess. That's been done already by more than enough people, including Jim Cramer.

I'm taking a few moments to think about the new business landscape that we have. Citigroup has finally thrown in the towel on the financial supermarket concept. Jim Jubak in his latest article opines that Bank of America is heading down that same road. What about JPMorgan Chase? CEO Jamie Dimon cut his teeth and Citigroup as Sandy Weil's right hand man. It doesn't appear that he's given up his former mentor's quest. Are he and Lewis engaged in reckless empire-building? Time will tell.

I would not be a buyer of common stock in Citigroup or Bank of America until the government signals that that the common won't be wiped out.

What is risk?

Other than value, can you think of a more misapplied word in investing? Risk is either maligned or worshipped, not unlike volatility, depending on whether it worked out for you or not.

I've heard a lot of definitions for what risk is. The most common measure, beta, is really a measure of volatility vis a vis the market as whole. That seems lacking. Is VaR sufficient? It should go without saying that the ratings of brokerage firms and ratings agencies aren't worth much, but people still manage billions of dollars based on these complicated fictions.

Joe Nocera recently wrote a piece for The New York Times Sunday magazine about risk. It's a good, thought-provoking, well-reported piece, but it didn't help me invest my money better(I must admit that such a lofty goal probably wasn't Mr. Nocera's point).

My point is that risk is a highly personal topic, no matter how you quantify it. I know that it's easy to look to your mutual fund manager or financial advisor to handle risk management, but don't abdicate this important role. You might not like the job they do.

10 New Year's Investing Resolutions

New Year's is a good time to take stock of your portfolio. If you can do 2 or 3 of things in the new year, than you'll be a much better investor than you were last year.


1. Don't buy a stock just because it's suggested in a magazine or on a blog.

2. Practice asset allocation; rebalance your poftfolio every quarter.

3. Turn off CNBC.

4. Pay attention to spreads, commissions, and account fees.

5. Meet with a financial planner.

6. Examine every holding in your portfolio and make sure that it meets with your larger investment goals.

7. Examine the performance of your mutual funds; consider switching to low-cost index-funds and/or ETFs.

8. File your brokerage statements from past years.

9. Learn a new stock valuation metric.

10. Stick to your investment plan.

Buy Moody's

This is not a call based on the fact that the stock is cheap(it is) or that it operates in what is basically an duopoly with S & P. It's not about the 0.76 PEG ratio or the grotesque short ratio that will trigger a pop once everyone covers. No, this is about us, as investors, and our very short memories. Right now, all we can talk about in reference to the ratins agencies is their massive failure, their conflicts of interests. I'm sure books will be written about them, just as analysts were burned at the stake after the Internet bubble burst. I think that people will forget these facts within a year. Businesses will continue to look for Moody's despite the fact that they dropped the ball and enabled the catastrophe that has been the last year. There will be calls to change their models and new players will emerge in the space, but in the end Moody's will remain one of the big boys.

More bad news is good news

I know it's hard to believe that sad saga of Bernie Madoff is a sign of good things to come, but it is. Fraud goes part and parcel with the bursting of any bubble and the hedge fund industry had definitely entered bubble territory. Years ago, Jim Rogers said in an interview "we have 25 000 or 30 000 hedge funds around the world. We don't have that many smart 29 year-olds in the world." Hedge funds are not a different asset class. If you believe that anyone can post positive or market-beating returns every year, regardless of market conditions, you aren't a sophisticated investor. You're either naive, stupid, or greedy.

Don't for one minute think that this is the end, though Madoff might go down as the poster boy of this era of financial tomfoolery/skulduggery. We've only begun to look for malfeasance. Think for a moment about everyone that was getting rich this decade. So far the real estate and financial realms have been carpet bombed, but what about the private equity guys? Are you telling me that there isn't one major fraudster out there amongst the Web 2.0 set? The resource industry is rife with slippery snake oil salesmen. I'm sure the alternative energy biz will produce a Madoff or two.

We just haven't had a perp walk yet.

I digress. These revelations, while painful, embarrassing, and criminal, are an important signal that excesses are being rung out of the system. We're starting to get our act together. Healing requires puss, bruising, scarring, and pain. We should want to hear as many of these stories as possible, get them priced into the market, so that we can move on.

The death of buy and hold? Bah, humbug!

Many would-be Cassandras, CNBC included, have been beating their breasts about this topic. Fast Money's Jeff Macke has pronounced the long-term investor dead. Is this true? If not, why would smart guys like Jeff Macke say things like that? Let's think about it.

The market's down a lot.
Many industries are on the verge of bankruptcy.
Some companies are at decades low valuations. The government is printing dollars at a record pace.
The rules of the game seem to be changing on a daily basis.

It looks really bleak doesn't it?

That's why this is the best time to be a long-term investor. You're probably not going to see such pessimism about the global financial system for many years. While I still think the S & P 500 is not historically cheap, there are several large cap companies that are on sale. I'm loading up on GE, GS, JNJ, KO, and other big names.

It doesn't matter if you're in the value or growth camp, there are enormous bargains out there. It's almost like money lying in the street if you're patient. In 5-10 years, some of these companies will have failed, but many more will have recovered and making money hand over fist.

I plan on being first in line when they start handing out the cash.

This is not to say that we've hit a bottom. I don't know. I'm buying now regardless. My local Linens N' Things is having a closeout sale. Every week the deals get better, but there's less of the good stuff. Don't ignore 50% off stocks because you think that next week, stocks will be 75%. They might be, but probably not the good ones.