Variable Annuity Salespeople: Just Because You’re Paranoid Doesn’t Mean I’m Not Out To Get You

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Variable Annuity = Shit Sandwich

A funny email note went out yesterday from the National Tax-Deferred Savings Association (NTSA) about my article on the terrible retirement product teachers generally get, from an organization funded by the people selling those terrible products. By their note I gather they support the selling of shit-sandwich annuities to retirees, stuffing unsophisticated people’s retirement accounts with high cost, illiquid, low return, garbage.

Anyway, in a newsletter to their constituents, the NTSA wants you to know there’s something fishy about the timing of my column:

“An article titled, “Texas Teachers Get Poor Retirement Advice and Worse Options,” ran in the Houston Chronicle over the weekend. Its timing is probably not coincidental.”

I honestly have no idea what the ‘coincidental timing’ they are referring to is. But I know that if you have something you’re doing that seems kind of wrong, truth-telling at any time can seem threatening.

I write what I want, when I want to. Unlike the NTSA, I’m not selling anything terrible, or anything at all. By their paranoid response, I gather they are.

 

 

Please see related post in the San Antonio Express News and Houston Chronicle

And the post on Variable Annuities = Shit Sandwich

 

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Book Review: Where Are The Customers’ Yachts by Fred Schwed

Sometimes I procrastinate reading something really important to the point that I want to kick myself. Over the years I’ve seen Where Are The Customer’s Yachts? By Fred Schwed listed on numerous ‘Best Of’ lists of financial books, but only now got around to it in 2016? Ugh, no excuse for me.

But don’t think of this as a financial book.

This is one of the best pieces of comedic writing I’ve ever read. Seriously.

Schwed’s voice at points reminds me of A.A.Milne, in that he begins with a banal-sounding truism, and then veers off – in the second part of his sentence – into an unexpected absurdity, unveiling a deeper truth. It’s not unlike my favorite faux-philosopher Jack Handey’s style, except Schwed’s actually somewhat useful, rather than just plain bonkers.

I say useful because we all need clever ways to defend ourselves against myths of Wall Street and its fawning handlers within the Financial Infotainment Industrial Complex. Schwed satirically punctures our deeply-held myths in a totally goofy way.

He published this in 1940, following his experience on Wall Street in the 1920s and 1930s, but you know what? Yes, you do know what. Plus ca change plus c’est la meme chose.[1]

The title, if you didn’t know, refers to an apocryphal story of a newbie visiting lower Manhattan who is shown all the bankers’ and brokers’ impressive yachts. Long before #FeelTheBern and Occupy Wall Street, Schwed’s retelling of the joke tapped into our suspicions about the inflated compensation of the financial industry.

 

So, read this for the hilarity, but understand that the sly truths slipped in there might just help us as well.

On market predictions

Schwed nails the point that Wall Street’s and the Financial Infotainment Industrial Complex’s predictions aren’t worth more than a printed almanac describing the weather over the next 365 days.[2]

I received a link from a friend genuinely concerned about this headline in the beginning of 2016: “Sell Everything! 2016 Will Be a Cataclysmic year, warns RBS”. It’s hard to explain just how useless these types of predictions really are, unless you’ve been inside the beast and can see these prophesies for what they are. Schwed has some hilarious stuff on this topic.

On Short-Selling

Back in the midst of the 2008 crisis short-selling became unpatriotic and in some limited cases (like naked-shorts) illegal. Popular aversion to short-selling clearly has a long history, as Schwed describes the early 20th Century views and blows up the mythology there as well.

On Options Trading

Schwed describes, tongue firmly in cheek, the possible mechanisms and joys of options trading. Helpfully, he follows that up with a few explanations of how puts and calls and straddles work, although mostly he describes the funny patter of options traders attempting to attract customers. If you’ve ever dealt with options traders (I have!) its pretty funny, and true.

We read useful other thoughts, couched in humorous self-deprecation. The author directly addresses why Schwed – by 1940 a former stock-broker and dabbler in stocks himself – isn’t wealthier.

In his own words:

“…[M]y tendency has been to buy stocks, all a-tremble as I do so. Then when they show a profit I sell them, exultantly. (But never within six months, of course. I’m no anarchist.) It seems to me at these moments that I have achieved life’s loveliest guerdon[3] – making some money without doing any work. Then a long time later it turns out that I should have just bought them, and thereafter I should have just sat on them like a fat, stupid peasant. A peasant, however, who is rich beyond his limited dreams of avarice.”

See, that’s what I’ve been trying to say all along.

That, and also, read his book.
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Please see related posts:

All Bankers Anonymous Book Reviews In One Place

Never Sell! From Disney to Churchill

Mutual Funds v ETF

Talking One’s Book – Mistrust ‘The Experts’

 

[1] Important note: I have no idea what that means. As my close personal friend Steve Martin says, the French have a different word for practically everything.

[2] Every year a favorite restaurant-owner in my neighborhood hands out an annual paper calendar printed with exactly that: The upcoming weather for the next year, throughout the various regions of the United States. Every time I tear off the page of a new month, I take the time to read that months’ weather. For some reason the subtle humor of the The Liberty Bar calendar never gets old for me.

[3] I learned a word today!

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Behavior Matters, Not Markets

From a personal finance perspective, markets don’t matter in the least. Behavior matters.

Imagine if financial media reported every day on what actually affects whether you get richer or poorer over your lifetime? Wouldn’t that be awesome?

I mean, don’t get me wrong. My imaginary show, “Nightly Financial Behavior, with Mike Taylor” would be a really weird program.

behavior_matters_most

On Retirement

“Thank you everybody for turning in to my show. Ok, now let’s hear from our correspondent Bob in Des Moines about a stunning catastrophic loss today – foregone matches on 401Ks!”

“Thanks Mike. That’s right, we’re hearing tonight that millions of people in Des Moines – as well as across the country – have put their retirement at risk by not checking that little box on the HR form at work to automatically withhold their paycheck. They’re missing out on employer-matching funds – one of the few examples of ‘free lunch’ in the known universe.”

“Well, that’s really terrible news Bob. I know I speak for all of America when I say we’ll pray for them and their families tonight.”

On Asset Allocation

“But that’s not all, Mike. We’re just getting late breaking news this evening that tens of millions of people under age sixty are choosing bonds, annuities and money markets in their retirement accounts because it makes them feel ‘safe’ from ‘risk.’”

“That’s horrible Bob. Has nobody explained to them that this is the riskiest thing they could do? That’s like elder abuse against themselves, and somebody should call the authorities to stop this tragedy right now. Their money has no chance of growing that way. By not understanding the true meaning of ‘risk,’ they might run out of money later on – a much worse outcome than a bit of market volatility from stocks.”

On Overspending

Now let’s go over to our San Francisco correspondent Carmen: what’s the latest you’re hearing on household surpluses?”

“Not good, Mike. Throughout the day today we’ve seen irrational spending behavior in the overwhelming majority of households nationwide. I even did it today, and so did you, by the way. We’ve got a rampant case of excessive purchasing, followed by scattered reports of “spending, in order to save money,” through ‘bargain shopping’ and ‘holiday sales.’”

“But that’s not all Mike. More and more doctors report an epidemic of partial to total blindness when it comes to matching household spending with household income.

“We’ve put in a call to area hospitals to explain this epidemic, and the Centers for Disease Control (CDC) are working around the clock on the blindness cure. We’ll keep you informed if we hear anything.”

“Thanks Carmen. Now over to our correspondent Elizabeth for the nightly Wall Street update.”

On Costs

“That’s right Mike. I’m standing on the streets here in downtown New York, and as we’ve reported every day for the past 15 years, the sound of laughing hyenas continues unabated from inside the offices of the largest banks and brokerages.

Every once in a while the giggling dies down, and then a voice says ‘…And they still never think to ask us the cost of our products. Hahaha! Buying our stuff and then – snort, guffaw – being too embarrassed to ask what we charge them. I can’t stop laughing, it’s just, oh gosh, our customers are so darn adorable.’

And then out here on the street we can hear more loud, uncontrolled laughing by everybody in the building. That’s about it from Wall Street today.”

“Sounds like at least something is going well for some people. It’s important to have good news as part of our nightly broadcast. Thanks Elizabeth for sharing that joy with our viewers. That wraps up our show tonight. Don’t forget to tune in tomorrow for an update on what matters in personal finance for Exactly. The Same. Story.”

Naturally, my show’s Nielson ratings would hit zero by the end of the first week. I’d like to think my Mom would still watch, but that’s about it.

None of these things

Many topics would never appear on my show.

For example, we would never, ever, talk about the Dow Jones Industrial Average movement today, or that the NASDAQ Index slipped by one point three percent in light volume trading.

No uninformed talking-head would claim that worries about Chinese devaluation, Greek debt negotiations, or the release of last month’s Federal Reserve meeting minutes explained the market’s drop today. Total irrelevancy.

The celebrity CEO’s outlook on his industry – whose pay and stock options unjustifiably call attention to his words – would not get an invitation to the studio.

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The Onion’s classic “Blue Line Jumps” story is truth through satire.

As for the peripatetic ups and downs of blue lines and black arrows, the random-number generator of data points, the minute-by-minute spins on the market’s roulette wheel, you would not hear any of that.

You simply wouldn’t ever hear about “the market” and “the economy,” because these are really just made-up figments of our media’s imagination. Trust me that they really do not matter when it comes to whether you get richer or poorer over the long run.

“How’s the market doing?” I sometimes get asked.

“I don’t know: how’s your behavior doing?” I want to reply.

I am just socially-aware enough to mumble something slightly more acceptable.

But my question back would be the right one.

What matters is not what the economy does, or what the market does, but what you do.

 

A version of this post appeared in the San Antonio Express News.

 

Please see related post:

Book Review: Behavioral Investment Counseling by Nick Murray

 

 

 

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Pundits Talking Their Book

One of clearest, most knowledgeable, and most readable pundits on financial markets is a guy named Bill Gross. Gross, known in financial circles as the “The Bond King” and the founder of mutual fund giant PIMCO, writes an entertaining monthly letter with musings on his life, asset prices and value, and the future direction of financial markets.

Despite the nice things I just wrote about Gross, you should never, ever, take his advice when it comes to investing. Ever. The man’s monthly newsletters are the most egregious example of what’s known in finance as “Talking your book.”

“Talking your book” means telling other people how they should trade based on what would benefit your own financial portfolio and positions.
In Gross’ case, every single newsletter he’s written for the past twenty years concludes with an exhortation or justification to buy bonds. Which is pretty coincidental, considering he built the world’s largest bond fund.

Great salesman. Not a great predictor of the future
Great salesman. Not a great predictor of the future

As a salesman, he’s phenomenal.
As a reliable ‘expert’ on financial markets whose advice should be acted upon? He’s a total catastrophe.

Ordinary course of business
Back in my Wall Street days, people talked their book as a matter of course. It was literally my job to explain to clients why the bonds held on my firm’s books were the ones they should buy, or why clients should position themselves with securities the same way we were positioned. That way, I attempted to create demand for the things my firm already owned so we could sell them. Or conversely, if necessary, talking our book allowed us to turn our risks into their risks. Much of Wall Street works this way.

My clients were extremely sophisticated investors and traders, and I don’t feel bad about this at all. They generally talked their books back to me in the hope I would have the same effect on my firm’s investment decisions. We all got very good at recognizing who was talking their book, and, overall all’s fair in love and war and bond sales. Not a big deal.

After I left Wall Street though, I noticed not everybody knew that nearly all finance experts talk their book, nearly all the time.

Knowing this can help in other situations as well.

South Texas
A friend of mine works in the oil and gas industry, delivering trainloads of sand across the country to fracking sites in South Texas. For the past six months, everybody in the fracking industry – from the drillers to the truckers to the hoteliers to the logistics companies – has been cutting back, idling workers and equipment, hoping to ride out the decline in oil prices.

My friend’s company delivers a fraction of the volume of sand that they used to deliver, a year ago.

He described to me how everybody in his world spends a lot of time obsessing over the future price of “the barrel,” which generally means the commodity price of WTI, which stands for West Texas Intermediate Crude. If WTI (aka ‘the barrel’) recovers six to twelve months from now they know all will be well for them and the industry survivors will reap huge profits. If “the barrel” stays low longer than that, however, many companies and people will be wiped out.

In that environment, with everybody’s business so exposed like that, few people can speak objectively about the “the barrel.” Everybody is left ‘talking their book.’

My friend says everybody’s got a theory about when and how prices will soon rise. Maybe geopolitical trouble with Iran will heat up again, hopefully? Maybe the Saudis will stop flooding the market with their crude to punish non-OPEC producers? A particularly hot summer is sure to boost energy demand and sop up the excess supply in the market, right? I mean, surely the new storage tank capacity in Oklahoma will allow us to ride out this oil glut, no? Maybe the US Government will stop dumping oil into the market to punish the Russians for their Ukraine aggression? (That last one is apparently a widely held theory to explain the drop in oil prices, which I find absurd.)

Every expert speaking on a panel to the oil and gas industry, or to a journalist covering the industry, has a theory on when prices will rise. Please give us some good news, the oil and gas industry folks all seem to be saying to each other.

Here’s the problem, though. They are all talking their book. Their views are not to be trusted at all.

Either consciously or unconsciously, people talking their book are particularly unreliable experts on the future of financial markets.

Experts in finance “talking their book” may simply be clever salesmen, like Bond King Bill Gross. Or they may be anxious and exposed to markets, like the entire oil and gas industry in South Texas.

People talking their book generally only mention out loud the data that support their position. The counter view of the market, “the other side of the trade,” generally goes wholly unmentioned.

Here’s some advice you can use. You should always assume that any industry expert you see on television, in print, or online is talking their book. They didn’t go on TV to give you all sides of the story, but rather the data that supports their book of business.

How can you find people in finance who are not talking their book?

uncertainty

Look for the ones who admit to uncertainty. Seek out the experts who tell you what they don’t know, what cannot be predicted, and how opaque the future really is.
When they present data to support both sides of the market – why bonds may be good or bad, or why WTI could go up or down depending on a complex interaction between a series of unknowable, contingent, events – now you may be listening to someone not talking his book. Now you may be hearing from a real expert.

Keep looking for this.

 

A version of this appeared in the San Antonio Express News.

 

 

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Book Review: Words and Money by Andre Schiffrin


Somewhere on my Top 5 thematic topics on Bankers Anonymous is a hard-core media critique – which I refer to in kinda-joking-kinda-not joking shorthand as the “Financial Infotainment Industrial Complex.”

When I read the Wall Street Journal or listen to financial news on the radio I find myself talking back – usually although not always silently – to the journalists, complaining about the coverage.  The more I know about the financial topic, the more I complain.

My complaints tend toward several common themes:

  1. The coverage relies on a specific anecdote, or a journalist reporting that ‘some people feel that’, without any big-picture or data-rich context around that anecdote or that ‘some people feel’ story.
  2. The expert opinions come from people with a vested (financial) interest.  On Wall Street this is known as ‘talking your book,’ in which a trader consistently offers a view of the world to others that most supports his trading position. I am never surprised to learn that someone in the insurance industry, for example, can speak eloquently about the benefits of an insurance product.
  3. Negative stories about financial and economic news dominate positive stories 10 to 1, leaving the unsophisticated individual investor constantly battered by (mostly) unwarranted fears that in a purely rational sense should have zero affect on their personal financial attitudes and actions.
  4. The topic du jour usually has absolutely zero relevance to a rational individual investor as well as to the vast majority of institutional investors.  Gold! Bitcoin! Twitter IPO! Herbalife!
  5. Simplistic, moralistic, cartoonish coverage by journalists of different roles in the economy.  (Banker = Greedy.  Home loan borrower = victim and moral paragon.  Small Business = Plucky.  Big Business = Soulless.)

Typically I complain silently to myself, shake a metaphorical fist at the newspaper or radio, and then I occasionally vent my frustrations by typing out a Bankers Anonymous post blasting the Financial Infotainment Industrial Complex. That can sometimes calm my nerves.

I have not tended to dwell on the profit-motive of media companies themselves and the swiftly-shifting economics of media companies.

I usually do not get upset about the profit-seeking of media companies because

a) I’m a red-blooded American capitalist (Amurica! Heck Yeah!) so I don’t want to begrudge any designated for-profit company’s attempt at wealth creation; and

b) I don’t know any better

I usually do not get upset about the swiftly shifting economics of media companies because

a) I don’t get a paycheck from any media companies, and

b) I have an optimistic (possibly simplistic) view that what we are in the process of losing in traditional print and analog forms we are more than gaining through the newly unleashed forces of digital media.

André Schiffrin, the author of Words and Money, has spent a lifetime firmly in the traditional print media camp as a publisher (Pantheon Books), founder of a publisher (New Press), and author. He is also a Frenchman in America. And he is deeply concerned about these latter problems that I haven’t considered much – the for-profit model that appears to be serving us badly, and the shifting economics of the media business.  His book has given me food for thought.

A few of his bigger ideas, which I’m still mulling over, deserve attention.

How much profit is appropriate for book publishers?

I learned from Schiffrin that up until the last decade or two, the publishing industry worldwide generally contented itself with a very modest profit margin, on the order of 2-3% profit per year. Picture here the independent gentleman publisher, concerned with the ideas as much as the business. With the recent consolidation of global media conglomerates, however, stodgy book publishing became the low-profit step-child of higher-growth, higher-profit media ventures like television, cable, and newspapers.

Media executives and media investors – seeking to maximize their own opportunities – shoe-horned low-profit book publishing into the demands of higher-profit companies.  The result, according to Schiffrin, is a highly risk-averse publishing climate, in which independent publishers wither and die, and only blockbuster authors and titles get promoted.

In addition, as Schiffrin describes it, book-publishing houses got the Bain Capital treatment: buy the company, add a ton of debt financing, fire the expensive and experienced talent, extract maximum financial value – and then sell.  In the widget-production business, we can (sort-of) objectively admire this move to greater efficiency, but in the book-publishing business, even a capitalist like me can see that the world of ideas is hollowed out and made poorer by this kind of profit-first approach.

At a Barnes and Noble big box store you can see that the offerings reflect the priorities of for-profit book publishing, rather than the priorities of a thoughtful reader. Schiffrin cites numerous statistics from the US and Europe about the increasingly endangered species known as the independent bookstore.

Is book publishing and book selling different from widget-making?

In the context of ideas and culture, I’d say yes.

I don’t have enough knowledge of that world to have any solutions, but Schiffrin makes a compelling case about the problem.

Schiffrin’s solutions come from Europe, in which a combination of governmental and non-governmental (University, or non-profit) institutions fill in the gaps and keep independent book publishing alive, essentially through non-market subsidies.

Movies as an important cultural media, deserving of protection

This seems strange to say, but I never consider the movie industry as a serious part of the cultural ecosystem of my country, but I realized from this book that my American bias has blinded me somewhat. I always think of Hollywood as a purely profit-driven mega-business, so I forget that movies meaningfully contribute to the culture.

I mean, Transformers and X-men, right? I never give it much thought.

Schiffrin, who hails from the European context, does give it a lot of thought. He cites the Norwegian film industry, French Cinema, or the Korean film industry as successful examples of government-subsidized media with a big contribution to make to the cultural milieu.

Why don’t I think of movies a serious cultural contributor? Schiffrin’s book has helped me see now that it’s because independent movies are nearly impossible to find in this country.  Independent movie theaters are even rarer than independent bookstores, and movie chains simply will not leave money on the table to show limited-audience or challenging films.

Unless you’re a serious movie nerd living in Cambridge, MA you can’t find independent films in the US.

Did you know Norwegian theatres are 90% municipally owned, and that allows them to maintain a substantial outlet for Norwegian films?

I know some clever reader will point out that all sort of independent films from the US could probably be downloaded if I looked into it.

Two problems with that response:

  1. I’m not a movie nerd, so I would not know where to start.
  2. Watching a movie in a theater is not the same as streaming it on my laptop.
  3. I would prefer a shared cultural experience, brought about by an independent theater owner with a vision, rather than me engaging in a deep-dive into a singular, unshared project.

I wonder what our world would be like if independent film production and screening actually happened in the US.

Changing economics and functions of digital media

I am less concerned about this than Schiffrin, again possibly because of my ignorance. He suggests a variety of non-market subsidies for journalism, such as foundation support or government support for the cost of producing news. Like most of Schiffrin’s ideas, I have a hard time imagining that catching on broadly, at least in the US context.

I am reminded of Warren Buffet’s prediction a few years ago that newspaper ownership would become appropriate only for philanthropists, seeking out a combination of prestige and good will, but certainly not profits. Even as newspapers have struggled to remain profitable, Buffett himself acquired many newspapers last year as investment propositions, not philanthropy.

Meanwhile, digital news aggregation sites such as Drudge Report, Gawker, Huffington Post and Business Insider offer a new model for news consumption, if not for producing original journalism, as previously understood.
I’ve enjoyed Henry Blodget’s periodic updates on The New York Times’ struggle –to adapt to the changes underway in the shift from print to digital. As a proxy for the business challenges, as well as the cultural shifts at stake, the Times both explains and illustrates the debate for me

Schiffrin’s Words and Money does not explain everything that’s wrong with book publishing, the soullessness of Hollywood, or the impending death of journalism.  His outlook is possibly too distrusting of profit-seeking by media companies, and possibly too hopeful for the meliorating influence of government subsidies for my taste.

On the other hand, when we wonder why independent bookstores die, newspapers slash reporting budgets, and big-budget movies provide as much food for thought as a marshmallow – he’s got a point. The completely free market in these areas leads to some grim results.  Follow the money.

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