Burrito Battle: Taco Bell vs. Chipotle (MSN Money)

Burrito battle: Taco Bell vs. Chipotle
The success of upscale offerings from a celebrity chef has Taco Bell eating into the upstart's business. That's showing up in stock prices as once-hot Chipotle faces tough times.
by Michael Brush, MSN Money|12/4/2012 6:45 PM ET

To most people, burritos are just a tasty lunch treat.

But to a couple of lunchtime giants, burritos are the weapon of choice in a fierce fast-food battle.

The battle broke out last summer when Taco Bell, a division of Yum Brands (YUM +0.28%, news), rolled out its new Cantina Bell menu.

Developed by celebrity chef Lorena Garcia, of Bravo's Top Chef Masters fame, the Cantina menu features a premium burrito with black beans, cilantro rice and marinated chicken or beef for under $5, plus new sides like corn salsa. (Search for details on Cantina Bell menus on Bing.)

Based on recent company numbers, Taco Bell clearly scored a win with these upscale offerings. And it's no wonder. They are an unabashed imitation of the extremely popular offerings of Chipotle Mexican Grill (CMG +0.65%, news), known for upscale burritos packed with fresh ingredients and hormone-free meat.

Yum Brands executives have no problem admitting they borrowed a key insight from Chipotle -- that customers will pay more for better quality, fast-casual Mexican food. "That's what Taco Bell can deliver, and at two-thirds the price of our fast-casual competitors," CEO David Novak said on a recent earnings call.

Now, this victory is probably not the only reason Yum's stock is up 5% since July 1, despite a drop last week, while Chipotle shares -- once hotter than jalapeños -- have fallen some 30%. But in the fiercely competitive world of fast food, consumer buzz is critical. And Taco Bell has it right now.

Chipotle's problem: A 'resurgent' Taco Bell
Many analysts -- and Chipotle itself -- maintain Taco Bell's new burritos are no threat to Chipotle, because their customers are so different. The customers who buy Chipotle's burritos, at $7 or so each, typically make more money. They appreciate Chipotle's ambience and careful sourcing of fresh ingredients, as a lifestyle choice.

Theoretically, at least, this is supposed to prevent them from crossing over to Taco Bell, with its more downscale, run-for-the-border, midnight-munchie reputation. There's also a been there, done that issue with Taco Bell, which can trace its history to 1946 (it went public in 1970); Chipotle got started in 1993 and is still fresh to many people, as it's still rolling out lots stores each year to new regions."We don't see Taco Bell as being a threat at all," Chipotle spokesman Chris Arnold told The Wall Street Journal in early October. "There's a lot more to what we do than grilled chicken and corn salsa, and we believe customers see the difference."

But legendary hedge fund manager David Einhorn disagrees. Einhorn, of course, is well known for highly successful negative bets against Green Mountain Coffee Roasters (GMCR -0.99%, news) and Lehman Brothers before each tanked. At a New York City investor conference on Oct. 2, the Greenlight Capital hedge fund manager laid out his case against Chipotle, which he's had negative bets against this year.

The bottom line: A "resurgent" Taco Bell endangers once-hot Chipotle.

Einhorn says a survey his hedge fund conducted found that Chipotle and Taco Bell customers actually don't see much difference between the two chains. And his survey found that 75% of Chipotle customers go to Taco Bell. "Taco Bell has started to eat Chipotle's lunch," he said at the conference. "Less long exposure to Chipotle stock is a good idea."

Though fast-food experts -- and Chipotle -- dismissed Einhorn at the time, his case suddenly seemed to make a lot more sense on Oct. 19, when Chipotle announced a slowdown in sales that tanked its stock.

On the earnings call, Chipotle managers denied the slowdown had anything to do with Taco Bell.

"There was a lot of noise during the quarter about somebody taking market share away from us," said co-CEO Montgomery Moran. "We're not seeing any kind of loss whatsoever in our transactions moving from us to any other competitor."

But I think Chipotle and the analysts may be wrong, and that Einhorn is on to something. Here's why.

Driving diners loco
First, Chipotle's explanation that a weak economy caused its sales slowdown doesn't ring true, since the economy was weak a year ago when Chipotle growth was going gangbusters.

But more important, consider some interesting results from a survey of fast-food diners conducted by Goldman Sachs in late September -- almost three months after Taco Bell's new Cantina Bell burritos were launched.

The survey found that Chipotle's "brand equity" score among consumers fell sharply to 65.8 from 70.4. Meanwhile, Taco Bell's score rose to 64.8 from 62.1.

Two other insights stand out. One is that Chipotle's score fell "meaningfully" across all demographics. This seems to confirm Einhorn's findings that well-heeled customers who are supposedly loyal to Chipotle may have no problem defecting.

Second, Taco Bell is clearly on a roll in coming out with innovative dishes that customers love. Its brand-equity score was a lowly 58 a year ago. (All fast-food joints score in a range of 53 to 71.)

Taco Bell came out with a big hit in March -- it's Doritos Locos Tacos, which have shells made of Nacho Cheese Doritos. The chain sold an astonishing 100 million of these tacos in the first 10 weeks. And now the new Cantina Bell menu is obviously a hit. Taco Bell sales at stores open more than a year grew by 7% in the third quarter. In contrast, Chipotle's growth was 4.8%.

None of this proves Chipotle customers have turned to Taco Bell. But the ratings changes in the Goldman Sachs survey coincide with a sharp decline in growth at Chipotle and an increase in growth at Taco Bell, suggesting that something like this is going on.

Plus Goldman Sachs says Taco Bell's growth was driven by an increase in traffic, and not just increased spending and visits by regulars. "Taco Bell is now attracting more new customers than either Chipotle or Qdoba, its primary Mexican peers," concluded Goldman Sachs analyst Michael Kelter. The number of people saying they've eaten at Taco Bell rose sharply this year, while it declined at Chipotle, the survey found.

Taco Bell's 2012 success is part of a larger trend. Over the past five years, Taco Bell customer satisfaction has jumped sharply, according to American Customer Satisfaction Index surveys. "Their improvement over the last five years is the biggest in the industry," says ACSI director David VanAmburg. "It's pretty impressive."

Chipotle's burrito bummer
None of this is good news for Chipotle, which faces a rough outlook for two reasons:

* The Goldman Sachs survey found that restaurants are at the top of the list of things consumers are cutting out, and that when they do eat out, price is the one of the main factors in deciding where to go. This plays into the Taco Bell strategy of offering Chipotle-quality Mexican food, but at a lower price
* Emboldened by its success, Taco Bell is not done taking shots at Chipotle with upscale Mexican. Chef Garcia is developing new burritos, a roasted tomato and garlic salsa and new steak offerings, as well as continued work as spokeswoman for the chain.

Yummy sales
Garcia's success so far has been much-needed good news for Yum Brands. True, Taco Bells make up only about a third of the U.S. fast food joints run by Yum, which also operates Pizza Hut and KFC. And U.S. sales account for only 26% of operating earnings at Yum Brands, which has a big presence around the world, especially in China.

But Taco Bell's success matters because it moves the needle.

Indeed, given the surprising China slowdown that Yum just announced, the Taco Bell burrito wars are now more important than ever for the company. On Nov. 29, Yum surprised investors by saying China sales will contract 4% in the fourth quarter, compared with 21% growth a year ago. The stock fell from above $74 a share to below $68. Yum now expects to report 6% same-store sales growth in China for this year. Thus Taco Bell's 7% growth in the third quarter was not only better than growth at Pizza Hut (6%) and KFC (4%), but it's also doing better than China, once considered the sweet spot for the company.

The key investing takeaways
Once the dust settles in the current burrito battle, it will be clear that both companies still have solid potential.

Chipotle remains a great fast-food concept, with plenty of room to open new stores. It plans to open 165 to 180 restaurants next year, on a base of about 1,300.

"If you have a concept that has proven out and you can just keep opening stores with a rate of return that is reliable, that is a very compelling growth story," says Sarah Henry, an analyst for Manulife Asset Management. Chipotle has also hinted it may take a shot back at Taco Bell by introducing drive-through stores, long a favored Taco Bell format. Plus Chipotle is expanding its approach, with its ShopHouse Southeast Asian Kitchen fast-food restaurants. In short, Chipotle stock may well lose more ground as the ongoing burrito wars play out. So you'll probably be able to buy it lower. But Chipotle is not out of the game.

At Yum, the sharp downturn in China is more of a mystery. But my guess is that as China's economic growth shores up, Yum will be OK. It too has plenty of room to grow by opening new stores in China.

"We very much like the China story," says Di Zhou, an equity research analyst for the Thornburg Value Fund (TVAFX -0.41%, news). One reason is that China has a population of 1.34 billion. "That is many mouths to feed." She says Yum has done a good job of adding local fare, such as soy milk, Chinese porridge and doughnuts, to its standard KFC chicken offerings.

Zhou also believes Yum will continue to benefit from China's growing middle class and ongoing urbanization. Morgan Stanley estimates that consumer spending in China will triple within a decade, which has got to be good news for Yum.

As investors wait for China growth to kick in again, Taco Bell's success in the U.S. burrito battle will continue to help support earnings, and Yum stock.

Fast-food stocks at slow-food prices
Neither of these stocks, however, will be hits with value investors looking for relatively low prices, even considering the recent stock declines.

Chipotle trades for 25 times its forward 12-month earnings. This gives it a price/earnings-to-growth ratio of 1.4. Developed by investing icon Peter Lynch, the PEG ratio adjusts a company's valuation for its growth rate. Generally, a PEG ratio above 1.5 makes a growth company look pretty fairly valued.

Yum Brands trades for 18.1 times forward earnings, and an even richer PEG ratio of 1.58.

In contrast, McDonald's (MCD -0.15%, news) trades for 10 times forward earnings and a PEG ratio of about 1.

These fairly rich valuations don't mean these stocks can't do well. They should, because of the bullish expansion potential. But Chipotle still may go lower because of the ongoing burrito battle, while Yum gets back on track and moves higher.

At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column. 

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.

CNNFN: Jack Bogle, Vanguard's $2.2 Trillion Man

Jack Bogle: Vanguard's $2.2 trillion man
There are many steps to managing your money wisely. A good way to start: a visit with the father of indexing, Vanguard's Jack Bogle.
By Andy Serwer, managing editor

FORTUNE -- What if your life's work could be measured by one simple number, and what if that number was 2.2 trillion? As in dollars. I walked into an upscale Midtown Manhattan restaurant looking for such a man. He was easy to spot. Not because he was oozing wealth from every pore and surrounded by an entourage -- but because he wasn't. Over there in the corner, he's the older fellow in a plain suit and a boring tie who looks a tad uncomfortable in a place that serves up Spanish Octopus a la Plancha, with sofrito, cocoa beans, marble potatoes, and serrano ham. (He would have a hamburger -- hold the pickled ramp dressing.)

John C. "Jack" Bogle, 83, didn't build Vanguard into one of the biggest companies in the world by sitting around eating fancy Spanish octopus. He's all about keeping things simple. And he's a fighter, a cantankerous iconoclast, and more than a bit of a zealot. He officially retired in '99 and hasn't been in the best of health for a while, but he still believes adamantly that conservative, low-cost index funds are the best way -- nay, the only way -- to invest. And now so, too, do millions of Vanguard customers around the world. They've invested $2.2 trillion in the house that Jack built from scratch 37 years ago.

This is the third time I've written about Vanguard in my career at Fortune. The first was in 1991, when the company had around $80 billion under management; then again in 2001, when it had $540 billion; and now, after it has quadrupled in size over the past 11 years. (I know, I'm a year behind schedule.) In that time Vanguard has quietly become one of the greatest business success stories of our time. And over the decades I've come to realize a thing or two about the company -- namely, that it is truly unique and seemingly inexorable. Vanguard has grown in every kind of market as enlightened investors beat a path to its door.

In case you don't know, here's how Vanguard works: The company sells low-cost mutual funds (primarily index funds) and ETFs directly to investors, thereby bypassing brokers and their markups and marketing fees. The most important distinction, though, is that Vanguard is able to operate with the lowest margins in the business because, like a mutual insurance company, it is owned by its customers. (In Vanguard's case: investors in its funds.) Of course Vanguard pays its managers and executives. But instead of paying out profits to an owner or shareholders, the company's gains are instead realized by lowering costs. Got it? Meaning Bogle has built Vanguard into a global behemoth and yet not become fabulously wealthy. Which is a big reason no one else has seen fit to create another Vanguard. To do so, you'd have to be a true believer. And not many people are.

Bogle has met me to talk about his new book, The Clash of the Cultures: Investment vs. Speculation, in which he eviscerates most investing practices and much of what happens on Wall Street. "I don't pay attention to what others say. I say what I think," he tells me, while warily eyeing my Fall Roasted Root Vegetable Salad with petite lettuce, goat cheese, duck confit, figs, apple, and carrot vinaigrette. "I don't know how to do otherwise." (I think he wants to say something about my salad, but Jack does have some limits.)

The fundamental principles that Jack has always emphasized, and still does -- getting diversified market exposure, not giving your profits away in fees -- are the building blocks of success for the average investor. There is a lot of sophisticated advice in this year's Investor's Guide. And all of it -- stock picks from elite managers, market insight from seasoned pros, tips on buying real estate in your IRA -- can help give you a boost. But that doesn't mean we should ever lose sight of the basic, commonsense approach that works for Vanguard.

As I help Jack hail a cab to take him to Penn Station (no Town Cars or limos for him) to catch his train back to Philadelphia, I realize that when you boil it down, his success is a result of the power of independent thinking. Jack has consistently gone his own way and made up his own mind. It's an important point to remember when considering how to invest. Very few of us have the same ability as Jack. We need help and advice. But you should always ask yourself, What do I really think about, say, Apple's stock (AAPL) or a particular bond fund? Does investing my money there make sense to me? You may not build quite what Jack has, but thinking a bit more like him is sure to help you succeed.

This story is from the December 24, 2012 issue of Fortune.

CNNFN: Bond Investors, Beware!

Bond Investors, Beware
By Kim Clark @Money December 3, 2012: 6:03 AM ET
(Money Magazine) -- As Chief Investment Officer of Vanguard, George U. "Gus" Sauter, 58, is responsible for a staggering amount of fund investors' money -- some $1.9 trillion.

More important, he's saved a lot of investors' money. Almost 60% of Vanguard's assets are in passively managed index funds, so Sauter's biggest job has been to pare costs so shareholders keep more of their return. (It may not be glamorous, but it has paid off in performance.)

Along the way, Sauter guided the company into a booming market for exchange-traded funds, the portfolios that can be traded like stocks.

His perch as top investor at the country's largest fund manager has also given him a sharp view of the big picture. And part of that picture today is that bond investors -- who added $27 billion to Vanguard funds alone so far this year -- may be in for a bumpy ride.

Sauter retires from Vanguard at the end of the year. He spoke with MONEY senior writer Kim Clark; their conversation has been edited.

In the past five years, we've had a crisis on Wall Street, wild volatility, and outflows from equity funds. Are investors losing faith?

We're worried about that. But we do not think the markets are broken. I can't recall too many periods in my 25 years here where we didn't experience volatility. The market was down 21% on Oct. 19, 1987. And then the Asian contagion in the fall of '97, the Russian debt crisis, the tech bubble bursting.

Now we've got European debt, and we've got the fiscal cliff. Still, that does not convince us at all that you won't get normal returns going forward.

Why? Seems like there's a lot of economic danger ahead.

It turns out equity returns are not related to economic growth. The best predictor of future returns over the long term -- over, let's say, a five-or 10-year horizon -- tends to be current valuations. The market is priced at about 13 times [expected] earnings, and that is a little bit cheaper than normal.

What about bonds?

The best predictor of bond returns is the yield to maturity of the 10-year bond. The 10-year Treasury is at less than 2%, so returns would probably be 2%, maybe 3%. Historically bonds have returned about 6%. It's difficult to see how we could get that.

You've seen big inflows into your bond funds. Are you concerned investors are overdoing it?

Yeah. We're trying to educate clients to be aware of the risks. A rise in rates will negatively impact their principal. At the same time, we do believe that even with lower expected returns, bonds play an important part in the portfolio: diversification. You want to have that anchor.

Vanguard founder Jack Bogle has criticized overuse of exchange-traded funds. You've created dozens of them.

We think that ETFs are just a different way to distribute an index fund. You can invest in our Total Stock Market Index fund (VTI) either through the conventional share class or you can invest in the ETF.

It comes down to investor choice. Jack is concerned that people become market timers with ETFs. We have some research that is contrary to his view. Our ETF investors [in broad-based funds] do not have substantially different time horizons than our conventional shareholders.

I think Bogle's concern is about all the ETFs that focus on just a narrow slice of the market. Aren't those likely to be used by market timers?

I certainly share the concern with the proliferation of ETFs in the marketplace. We have data that show that with narrowly defined investments, investors are not invested in them on the way up. They pile in at the top and then ride them on the way down.

But you created funds for sectors like energy and health care.

We have funds for broad sectors, but we don't have industry funds or single-country funds. There's a level where you have to call it quits.

I was telling somebody I was going to interview the guy in charge of the big index funds, and he asked, "How can that be a full-time job?"

You want to see the number of people we have? [Laughs.] Indexes change more often than you might imagine. There's a lot of trading involved. On a given day, we'll do 5,000, maybe 10,000 trades.
Your last hurrah has been to change the indexes tracked by many Vanguard funds, including Total Stock Market. What exactly did you do and why?

We changed index providers. Index licensing fees have been a very rapidly growing component of costs, and we found a way to reduce that by switching. It will save hundreds of millions of dollars [for our clients] over time.

How does it change the funds?

For example, the index provider we will use for international funds classifies South Korea as a developed market, whereas the current index considers it an emerging market. Every person I know who knows anything about South Korea says it's a developed country. As a result, our developed markets index funds will now include South Korean stocks.

Are there any changes with the funds that follow U.S. stocks?

The Center for Research in Security Prices, which created the new U.S. indexes, have a process they call "packeting." Say a stock is transitioning from being a small- cap stock to midcap. Normally, Vanguard Small Cap Index would have to sell the stock, and then Mid-Cap Index would have to buy it.

With packeting, only half of the weight moves into that new classification. In the next quarter, if the stock remains above that band, only then does the remainder move. When you're at the border, you don't want to flip-flop back and forth. This cuts turnover by about 25%, and that means lower transaction costs.

Last question: Why retire so young?

As they say, it's the miles, not the years. And I wanted to have time to do other things.

The Full Motley: "In Prez We Trust" 4Q, 2012

Now that the elections are over, we citizens are once again freed from incessant exposure to the biggest waste of financial resources.  Whether that ranking is accurate or not is secondary to the fact that the Presidential campaigns is a celebration of ignorance in America.  The majority of statistics thrown about against an incumbent President (like Barack Obama was this year) are either inaccurate or (far more often) irrelevant, and the most commonly referenced ones are that of the Dow Jones Industrial Average (known throughout the media as "the stock market").

All too often observers indicate what the markets have done during a President's tenure as a reflection of the President's effectiveness.  Nothing could be further from the truth.  Market trends are rarely reflective of the President; the President's role is reactive to market trends.  Notwithstanding, the markets popped up more than 2% on Election Day, only to retreat the same 2% the next day.  Lucky for me, I sold out of the remainder of my STAR Fund earnings as I had been planning to do all year.  Let's see if the markets close higher at any point in the remaining in the year than they were on Election Day.

Maybe due to Election Day or maybe due to only being one month into my new job, I forgot to rebalance my portfolio on Friday, November 9, 2012, but my actual target date is November 10th, so I have a rebalance in place for Monday, November 12, 2012, so I am considering that date just as good as Friday's date.  Especially considering the amount moving is only 0.37% of my portfolio balance (not 37%, not 3.7%, but less than one-half of one percent of my account balance).

I won't trot out the spreadsheet that I usually have of how much moved since so little did.  Maybe February 2013 will have more significant moves.  Probably not.  Without adding money to my retirement account leaves minimal affect to my portfolio, hence the reason professionals recommend rebalancing annually, not quarterly.

Job Safari: Most Dangerous Game

It's well-known that Americans today are earning less than their parents did.  This number is not even adjusted for inflation (although reports boasting the opposite truth disclose that it is leveled by two-worker households and/or working more hours, so while Gross earnings before taxes is higher, they still earn less hourly).  Were Americans overpaid in the '50s and '60s or is the Land of Opportunity drying up?  I think the answers are "both, yet neither."  These aren't mutually exclusive, and "Land of Opportunity" is a misnomer as it originally referred to the opportunity to start your own business and be successful.

Regardless, the American economy is nowhere as strong as it once was.  Whether that is the result of a globalizing economy or our national class disparity is a matter of some conjecture, but most experiences are that college is not worth the investment of time or money, and many job hunting methods have become so structured and scientific that they are almost worthless.

The advances in technology come rapidly.  Consider what that means to a four-year degree.  If you started a degree four years ago, then how much of that information is valid by the end of the program?  Then double it for eight-year degrees.  Granted, professional degrees (especially in the medical field) require continuing education to keep practitioners informed of these advances, but if it took more than four years to complete the Bachelor's Degree, then that point is a serious issue.

Fortunately, most employers do not give weight to those considerations as they have been conditioned to only look for the fact that an applicant is a college graduate.  The year matters less, even though there may be more relevance to the year than most other considerations.  The bigger flaw exists in the methods of job hunting promoted these days.

As I have noted frequently, I left my job in April 2011 to start a Paralegal Studies Program at Phoenix College.  I completed that program in August 2012, and then I spent most of the next two months hunting for a job.  Although the job openings were numerous, the actual opportunities were minimal.

The way I figured, CareerBuilder.com and Monster.com generate at least 200 applicants for every position (people "in-the-know" may scoff at that number as ridiculously low), and hiring managers probably read 50 of those resumes, then interview five people for each job opening.  These websites are a glorified lottery, except you can tilt your chances by reusing keywords and overstating qualifications.

I borrowed "New Job, New You" from the local library, and the author referenced her own preference towards writing fiction so often that any critical mind could decipher the text to mean "I'm just releasing this book for the money."  It was devoid of any genuine insight and the examples I read of successful job transitions (almost unanimously from public sectors to a private sector) were only useful to the people following identical paths.  I think the book's target market was the actual people featured in the text, and of course, their friends & family.

My study partner texted me today, "it's a sad day when job placement companies cannot even find work."

Fortunately, I am a lucky one!  I spent over six weeks sending out at least one application per day, and in that time, I only heard back from one employer (mainly because I forgot to attach my resume, but my cover letter sounded interesting enough that she wanted to know more).  My results were both frustrating and depressing.  A concerned friend asked me whether I thought I was being too hard on myself considering the current economy and that I was moving into a new career with no professional network to leverage.  I defiantly said that I would push harder than expect less.

After turning my resume into a job placement company, I bolted across the street to Half Price Books to see what they had available.  I realized that spending money was not something I could afford, but I did read a book by someone calling herself "The Job Whisperer."  In lieu of purchasing her book, I decided to rent it from the library.  Albeit, not before checking their DVD section and finding a Montreal Canadiens DVD set. It was priced at $25, but I decided that spending money was not something I could afford.  But that DVD set certainly made a nice incentive!

The next day, I went to the library to check out that book, and I saw a computer set up specifically for job hunting.  I inquired about it ("if something seems too good to be true, it usually is") and the rep told me that they had recently hired a job search specialist, and she set up the computer and loaded it with helpful programs.  This specialist also hosted seminars and she was available for individual meetings.  I figured that I could still do things myself, and anything the job search specialist had to offer could be found in books, but then, there was also the simplicity of it, so I requested her number and, a few days later (of no requests for interviews), I contacted her to schedule an appointment.  If for no other reason than to ensure that my email would actually *receive* messages.

By that time, I had quantified my bullet points and related them to the paralegal requirements to show that they were transferable skills.  Unfortunately, the job search specialist's first comment when we sat down was that my resume did not reflect a paralegal's resume one iota!  She said the transferable skills are there, but they were too obliquely embedded in unrelated jobs.  She introduced me to the Functional Resume.  Contrariwise to a traditional resume, the Functional resume was a newfangled approach that focused on the skills required from the job application.  In place of my job history, I needed to list the required skills with tasks I had done displaying those skills in the bullet points, and prospective employers would see exactly what they're looking for.

Rewriting my resume was the last thing I wanted to do, next to staying unemployed, so I did it.  There was a company where I wanted to work that posted a job opening in August, but I never heard back from them.  Then, they posted another job opening this last week of September and I wanted to reapply, but I didn't want to resend the same resume.  If for no other reason, I created my Functional Resume for this job and I sent my application on Sunday.

More resumes were sent, but I heard nothing back on Monday and nothing back on Tuesday.  Or so I thought.  As it turned out, there was a message left for me on my voicemail on Tuesday afternoon, but I had been so wrapped up in submitting more resumes online and researching other ideas that I missed the call.  It was from the company that I had not heard from the previous month.  They were calling me in for a job interview, so I returned their call first thing Wednesday morning.  Later that night, I heard back from another place where I had sent my resume on Wednesday morning (because the job posting was nearly identical to one I had replied to the day before, except this one sweetened the deal because the company practiced in civil litigation and family law in addition to bankruptcy).

I landed two interviews in the first week of switching to a Functional Resume.  Was it the switch, or was it just these employers?  Obviously we will never know, but I choose to credit the Functional Resume myself.  If you read independently about Functional Resumes, there are a lot of criticisms about how they feel suspicious to employers.

Lots of a ideas on job hunting exist, from resumes to interview skills, but there's only one truism in all of it..... DO NOT BUY ANY OF IT!

To clarify, I literally mean "purchase" when I said "buy."  Do not pay for a resume seminar.  Do not pay for mock interviews with a self-proclaimed expert.  Do not even buy books on the subject.  The reason why not is that the information is already online.  All of it!  Also, visit the local library like I did for books and check its event calendar, because they may be running seminars on job hunting.

In job hunting, there's a why-not for every how-to.  Sadly, both are usually correct.  There is no science behind job hunting.  There is no sure-fire success.  There is only persistence, and trying harder instead of expecting less.




Recommended reading:

• The New Job Search: Break All The Rules. Get Connected. And Get Hired Faster For The Money You're Worth. (Molly Wendell)
• A Foot In The Door: Networking Your Way Into The Hidden Job Market! (Katherine Hansen)
• The Job Search Solution: The Ultimate System For Finding A Great Job Now! (Tony Beshara)

"I Ate The Marshmallow"

Recently my girlfriend told me, "I ate the marshmallow," seemingly off-subject during a discussion of self-discipline, before explaining that it was a popular reference to a 1960s psychological experiment.  She was surprised that I had not heard of it.  After I did a little research on the subject, I was quite surprised as well.  It was right down my alley!

The experiment was hosted by Walter Mischel who set out to gauge will power and self-control by sequestering several children under the age of six (one at a time), and then providing him or her with one marshmallow and a challenge that he would be back in 15 minutes, and if the child had not eaten the marshmallow, then the child would receive an additional marshmallow.

The results were that most children (70%) ate the marshmallow before the 15 minutes expired; most caved within the first three minutes.  Years later, though, Mischel noted a correlation between school performance and the individual results from the preschool experiment.  Those children who displayed self-control were getting higher grades and performing better on the SAT by upward of 210 points.  Inspired by the oblique benefits from this old experiment, Mischel and company resumed tracking many of the participants into their late-30s.

"What we're really measuring with the marshmallows isn't will power or self-control," Mischel said. "It's much more important than that.  This task forces kids to find a way to make the situation work for them.  They want the second marshmallow, but how can they get it? We can't control the world, but we can control how we think about it."

For most of us, especially for those who are notably impatient, saving and investing would be a lot like these children eating marshmallows.  As soon as I read through the experiment, I immediately compared it to investing myself because of its focus on delayed gratification through increased self-control.  In reality, each of the children equally wanted as many marshmallows as he/she could get, but not all of them were willing to pay the same price.

In this case, the cost was valued in time and many people overlook time as a currency.  Truly, calling time a currency would be a misnomer, but it certainly is a fair way of viewing it.  Re-envision the experiment to run several hours, and every 15 minutes, the number of marshmallows present would double.  Each child would still start with one marshmallow, and after 15 minutes, the more patient children would have two.  If those children waited another 15 minutes without eating one or both marshmallows, then they would get two more.  If they ate one, then they would still have the remainder doubled every 15 minutes.

In theory, the most patient (and arguably, greedy) children would eventually have enough marshmallows that he/she could begin to eat comfortably without it affecting their accumulation.  This comparison is a lot like the time value of money.  I think one turn-off to investing is the presentation.  It is too honesty and too money-hungry.  It uses graphs based on past performance usually, so telling a new graduate that he/she should wait another 40 years to have a cushy nest-egg on which to retire is counter-intuitive.  Sure, everyone wants a nice retirement, but sacrificing over the next 40 years will make a rather dull 60-year-old without very many fun life experiences.

In reality, there is a point where enough should be enough (this excludes the greedy).  Not necessarily enough for a lifetime, but enough for that current point in life.  If a tightwad feverishly sacrificed to accumulate vast amounts of wealth by his/her mid-30s, then it would be hard to imagine having a happy life up until that point.  But if those could-be "tightwads" loosened their purse strings along the way, then they would enjoy the best of both worlds.  They would have both enough in the bank and plenty to spend, like a child with a dozen marshmallows would have plenty to eat.

At that point, there is a paradigm shift in the term "self-control."  With little, "self-control" automatically means controlling yourself by refraining from various actions to result in a better life down the line.  With enough, "self-control" starts to mean that you have control over more things yourself.  You don't have to work a horrible job, because you have enough financial stability to take greater risks and to find a better job.  You don't have to miss big events because your latest paycheck has not posted.  You have a better sense of choice because you have more power to choose.

At work, my youngest co-worker told me to "feed the pig," referencing American Institute of Certified Public Accountants (AICPA) mascot Benjamin Bankes.  In 2006, there was a recognized push to encourage people to start saving more.  A website was created (www.feedthepig.org) and commercials started airing, and I guess it was moderately successful, especially if my 20-year-old colleague is now open-minded to saving enough to discuss it intelligently.

Unfortunately, I see a glaring error between their message and their goal, which is that people who don't save have a different interpretation of money than those who save.  At a certain point, it is like they are speaking two different languages.  When people who don't save hear about how to building up a lot of money, I'm not sure they understand what the indirect benefits of having a lot of money are.  In fact, I'm fairly certain "having a lot of money" to people who don't save simply means "being able to purchase a lot."  If that's the case, then I understand the lull in savers.

I wonder what would happen if their message went from "save to build up a lot of money" to "save to seize more control over your life."  Would that increase the desired savings lacking among our population?  Or would the lure of that self-sustained freedom still be overpowered by instant gratification?

Personally, I think life's too short for instant gratification.




Read more about Walter Mischel and the results of his marshmallow experiment at http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer#ixzz248Bs2pkh

The Full Motley: 3Q, 2012

I heard an interesting experiment about marshmallows and self-control, and how it links to success, but I will save my thoughts on that for next month.  Today, I re-balanced my 401(k) amidst a strong market climb.  If you disregard the notable exceptions of 2000 and 2008, then most election years have seen gains in the market.  From the market activity we have seen hitherto this year, 2012 is unlikely to join 2000 and 2008 as a notable exception.

If anything, this year has been extra normal.  My movement for this quarter reflects that point nicely.

Vanguard Explorer Fund 24% / -1% / 25%
Vanguard High-Yield Corporate Fund 5% / x /  5%
Vanguard Total Stock Market Fund 25% /  x  / 25%
Vanguard PRIMECAP Fund 26% / +1% / 25%
Vanguard Total Bond Market Fund 10% /  x  / 10%
Vanguard Total Int'l Stock Fund  10% /  x  / 10%

Although only 1% of movement was actually required (my actively-managed PRIMECAP fund made up what my aggressive Explorer fund has been lacking), I really pulled from four funds slightly above their target and put it into two funds: the aforementioned Explorer fund and the Total Bond Market Fund.

Obviously, there has not been too much movement in the major markets, which is a good sign, especially in contrast to all the "gloomers & doomers" (as Mo Anari calls them) expecting the bond market to retreat sharply into a freefall (as Mo Ansari himself is predicting).  Not that I argue with that mentality; since December 2010, I have been expecting the bond market to retreat as well.  Ditto for the precious metals, which as a whole have seen a far worse annual return (arguably) than almost any bond fund, especially these past 12 months.

Regardless, this quarterly update is a strong indicator that my quarterly re-balancing is not essential to successfully self-managing a financial portfolio.  Most experts advise an annual re-balance is sufficient, and a quick review of the nominal movements made in my past several quarterly updates, it is easy to support that logic.  But, finance is my hobby so I personally enjoy re-balancing more frequently.  The professionals managing mutual funds re-balance every single day, so it is my self-serving belief that re-balancing quarterly will not harm my portfolio.

I noticed Walter Updegrave responded to a question last month on Money.CNN.com from a 25-year-old investor concerned about making a poor decision that could cost hundreds of thousands of dollars by retirement.  I especially like the reply, citing a few key principles "like keeping it simple, holding the line on costs, diversifying broadly, and ignoring the jabber pundits who advocate buying & selling, any flubs you make aren't likely to wreak mortal damage."  He also noted that "even though many (professionals) like to make investing seem complicated(,) it's really not all that difficult."

Having started my retirement investing on the day I turned 25 myself, I understand exactly what he means.  Perfection will not be achieved in investing any sooner than it will be achieved in any other endeavor, but for all the complexity above the basics, it is only necessary to understand that basics.  I usually support concepts supporting "less is more," and investment knowledge may fit that mentality nicely.  Understanding investments fully will not always generate success.  And the difference in returns between people who simply understand the basics to those who have a solid understanding behind more of the complexities is a strong argument against investing in the time to understand the markets better.

When I first started in finance, someone at my first job told the story about a client asking an adviser for the next hot stock tip, and the professional replied, "even if I told you, you wouldn't know what to do with it."  I think I was the only one in the room to understand what that meant: knowing what you don't know is safer than only partly learning things.

After the basics, your personal finances can be as complex or as simple as you want to make them.