I was listening to a radio program by Bill Tatro on Money Radio 1510 at the end of last year, and he shifted his financial analysis into a psychological commentary on the set of people who had unrealistic monetary expectations. He noted a number of his clients have a mental block about living below their means. He said that they live under the guise that the next big raise was right around the corner or that their debt would work itself out. The concept of living on $25,000/year was impossible for these clients that he described as "having a $75,000 lifestyle on a $50,000 income." He said that these people suffer from a "have-to" curse, e.g. they have to drive a new car, they have to get the latest technology gadget, and they have to eat out more often than not. It made me realize that the most troubling gap in our country is not between "the haves and have-nots," but rather those who have and those who have-to.
Speaking from personal experience, I have to live below my means. Quitting my job to start a new career was extremely stressful, even though I had enough to live on. Originally, I built up a substantial amount of savings to live on, but even then, I was not psychologically prepared to watch it deplete so quickly. I got a part-time job in retail. Once I graduated school and got a job, I started living at that income level. It wasn't comfortable, in fact, it was very stressful as those closest to me knew. It felt as though I was spending almost everything that I earned (in reality, I made money during these 2 1/2 years of a reduced income, thanks to the exceptional market conditions in 2013). But I had scaled back my spending to the point that I was no longer pulling money from savings after I got my first full-time job, although my annual income was under $25K. Living that way left me unsatisfied. It was not the lifestyle to which I was accustomed.
Later in the show, Bill Tatro wondered aloud whether people were still familiar with the financial cliche "money doesn't grow on trees." Immediately, I thought of an episode of Keeping Up With The Kardashians, a show that I criticize more often than I watch, where Kendall Jenner asked her father for money, and he fed her that saying. She flippantly replied, "yes it does. Money is paper, and paper is made from trees." It was cute for 16-year-old Kendall to say, but I groaned instantly out of pity for knowing too many grown adults who feel the same way. They are the same people who have-to be "keeping up with the Kardashians," because I guess the Joneses aren't impressing anyone these days.
Financial advisers often speculate where their message is getting lost. The AICPA created a solid campaign around Benjamin Bankes, reminding people to "feed the pig," i.e. their piggy bank, and providing numerous examples of how to cut expenses. I believe the message is heard, but it is actively ignored by the have-tos in favor of the lingering effects from the message-less Occupy movement.
In short, I believe there is a certain resonating fear of income among my peer groups. When I was in high school, there were budding concerns of the youngest generation appearing to embrace (and to celebrate) failures while having an unspoken fear of success. It came to define the generation socially, especially those under the influence of the grunge music that dominated airwaves in the early 90s. Why ever try if there's nothing wrong with being a loser? The attainable goal of building productive members of society took a backseat to teaching every child to hold on to dreams.
On March 27, 2008, John Mayer posted a deeply thoughtful blog that he wrote "to shed a little light on why we're all in the same boat, no matter the shape of the life we lead: because every one of us were told since birth that we were special. We were spoken to by name through a television. We were promised we could be anything that we wanted to be, if only we believed it and then, faster than we saw coming, we were set loose into the world to shake hands with the millions of other people who were told the exact same thing."
The expectation of living a life to rival fantasy was abruptly halted by universal realities that our world failed to prepare us for because it was too busy pampering everyone equally. Last month, Oxfam released a report that 50% of the world's poorest people have the same combined wealth as the richest 85 individuals in the world. That same week, Pope Francis challenged the world's richest "to ensure humanity is served by wealth and not ruled by it."
Unfortunately, all the media coverage vilifying the rich continues to coddle an underachieving generation and seemingly to smoke screen individuals from aspiring towards a better life. Money cannot buy happiness, but life is a lot better without the endless stress cycle of not having enough money day-in and day-out. The only way to get ahead, though, is a matter of effort and determination. I hope to expand on that thought later. For now, I will just conclude that the have-tos find it easier to dream the life than live the dream.
Monday, February 24, 2014
Monday, February 17, 2014
myRA or the hiRA?
"Let's do more to help Americans save for retirement. Today, most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s. That's why (...) I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA." -- President Barack Obama, January 28, 2014 (SOTU)
Personally I have mixed thoughts about the myRA, which is apparently a more positive stance than the vocal majority out of the financial industry. The pros/cons of myRA are quite transparent.
On paper, the myRA program just makes great sense to me. The White House released the first Fact Sheet on the accounts this week. The most obvious point of contention from the financial industry is the forced investments into Treasury securities, but I have no issue with that restriction. It prevents myRA investments from higher risk equities as to not discourage novice investors by starting off on the wrong foot, e.g. buying at the peak of the market, or by fostering more distrust where participants could have less in their myRA after putting money into it.
The problem is that most dissenters from the investment industry cannot turn off their own minds and view things from the mindset of a non-investor. Professionals know what is best to prepare for retirement, because they know how the business works, but the problem is that large percent of the population who do not know how investments work or, even worse, where to start. This investment is exclusively for their benefit.
Fortunately, I am in a rare situation where I spent 10 years in the financial industry, and then spent the past three years under-employed while I tried to start a new career in the legal field. Having a couple jobs making less than the proposed minimum wage during that time enables me to appreciate things like this myRA proposal differently. I did not have access to a 401(k) in my past two jobs. In my case, I opted to hold off on retirement contributions because I was still pulling money out of my investments for living expenses, but my experience was a temporary situation with a visible end in sight. If this opportunity existed, I most likely would have put $5 (or more, knowing me) to this type of retirement account just to continue active contributions to my retirement.
Obviously, I could have set money aside each paycheck to contribute into my Roth IRA once the accumulated balance reached the minimum additional investment amounts, but the reality is that I did not think to do so because it was not a visible option. Therein lies the problem: saving for retirement, outside of employer retirement plans, must be a priority. Conversely, myRA investing should capture participation rates that exceed individual retirement plans and inch closer to the participation rates that employer retirement plans have.
My initial concern on the myRA project is how it seems the more popular myRAs are, the more expensive the program will become. Won't the accounting of these millions of myRAs at balances under $100 be a tremendous expense? There is a valid reason why the finance industry has set minimum initial investment amounts. Unless they are waiving the accounting requirements to give them an advantage over what the financial industry can offer, I do not understand why the reporting expenses would be lower for a myRA than for the current IRA options.
That said, the pros and cons of any situation are not mutually exclusive, but considering them separately is necessary to move toward a conclusion. And just like investing, personal emotion holds the least amount of weight. The dissent from investment professionals is valid, but they should consider those concerns on par with clients who delay investing because of their own personal emotion; in each case, it is best to think of personal opinions as an obstacle and not a valid reason for dismissal.
Personally I have mixed thoughts about the myRA, which is apparently a more positive stance than the vocal majority out of the financial industry. The pros/cons of myRA are quite transparent.
On paper, the myRA program just makes great sense to me. The White House released the first Fact Sheet on the accounts this week. The most obvious point of contention from the financial industry is the forced investments into Treasury securities, but I have no issue with that restriction. It prevents myRA investments from higher risk equities as to not discourage novice investors by starting off on the wrong foot, e.g. buying at the peak of the market, or by fostering more distrust where participants could have less in their myRA after putting money into it.
The problem is that most dissenters from the investment industry cannot turn off their own minds and view things from the mindset of a non-investor. Professionals know what is best to prepare for retirement, because they know how the business works, but the problem is that large percent of the population who do not know how investments work or, even worse, where to start. This investment is exclusively for their benefit.
Fortunately, I am in a rare situation where I spent 10 years in the financial industry, and then spent the past three years under-employed while I tried to start a new career in the legal field. Having a couple jobs making less than the proposed minimum wage during that time enables me to appreciate things like this myRA proposal differently. I did not have access to a 401(k) in my past two jobs. In my case, I opted to hold off on retirement contributions because I was still pulling money out of my investments for living expenses, but my experience was a temporary situation with a visible end in sight. If this opportunity existed, I most likely would have put $5 (or more, knowing me) to this type of retirement account just to continue active contributions to my retirement.
Obviously, I could have set money aside each paycheck to contribute into my Roth IRA once the accumulated balance reached the minimum additional investment amounts, but the reality is that I did not think to do so because it was not a visible option. Therein lies the problem: saving for retirement, outside of employer retirement plans, must be a priority. Conversely, myRA investing should capture participation rates that exceed individual retirement plans and inch closer to the participation rates that employer retirement plans have.
My initial concern on the myRA project is how it seems the more popular myRAs are, the more expensive the program will become. Won't the accounting of these millions of myRAs at balances under $100 be a tremendous expense? There is a valid reason why the finance industry has set minimum initial investment amounts. Unless they are waiving the accounting requirements to give them an advantage over what the financial industry can offer, I do not understand why the reporting expenses would be lower for a myRA than for the current IRA options.
That said, the pros and cons of any situation are not mutually exclusive, but considering them separately is necessary to move toward a conclusion. And just like investing, personal emotion holds the least amount of weight. The dissent from investment professionals is valid, but they should consider those concerns on par with clients who delay investing because of their own personal emotion; in each case, it is best to think of personal opinions as an obstacle and not a valid reason for dismissal.
For additional information available on the proposed myRA program, please visit http://www.whitehouse.gov/blog/2014/02/11/myra-helping-millions-americans-save-retirement
Monday, February 10, 2014
The Full Motley: 1Q, 2014
It is hard to believe that we are almost halfway through the first quarter of 2014. Because, personally, it feels as though we should be further along than that! Regardless, there have been a couple years in which the first quarter of the year has been so strong that there was not a day in the remaining 9 months that was lower than where the year started. Obviously, this is not one of those years!
Market fluctuations are part of the game. The market does not always rise and never falls anymore than people do expect to always be happy and never be sad. The point, much like life, is to expect things will be better in multiple years to come based on the choices we make now. Few people are expecting the market to be up 10% by the end of the year (like I predicted it would be in my annual preview) but if the market falls 10%-15% in the first half of the year, then it would have another six full months to gain another 25% when the bears hibernate. That is not to insure a strong probability, but merely assessing possibility.
Overall, my account is down from where it started this year, as expected, but I was intrigued to see which fund had been performing best so far this quarter (which is to say, it had lost the least). It turned out to be my actively managed large cap fund. None of the moves to rebalance equaled 1% of my overall portfolio, but I performed the rebalance in my former-employer's account.
Perhaps the more interesting situation nowadays is that my former-employer's 401(k) account is not my only active 401(k) account these days. Having been on the job for two full months now, my new employer's 401(k) account is going to grow exponentially. My hope is that it will grow higher than the markets fall, but when buying into the market, having a depressed market is hardly a bad thing. Additionally, I would be able to revisit past investment strategies, such as directing all new money into one fund or sector and then rebalance quarterly. It would make more sense to rebalance that account quarterly and then only rebalance this former-employer's 401(k) twice a year.
In future years, I may need to revisit my rebalancing methodology entirely. The option to roll my old 401(k) account into my new account exists, but the investment options are superior in my old account, so it is an option that does not appeal to me at this point. Additionally, I could roll my old 401(k) account into my Roth IRA. But, as for right now, I prefer having it separated.
It will be more interesting in May to see how my new 401(k) looks since I will have been contributing to that account for six months by that point. And, of course, it is anyone's guess where the major indexes will be at that time!
Market fluctuations are part of the game. The market does not always rise and never falls anymore than people do expect to always be happy and never be sad. The point, much like life, is to expect things will be better in multiple years to come based on the choices we make now. Few people are expecting the market to be up 10% by the end of the year (like I predicted it would be in my annual preview) but if the market falls 10%-15% in the first half of the year, then it would have another six full months to gain another 25% when the bears hibernate. That is not to insure a strong probability, but merely assessing possibility.
Overall, my account is down from where it started this year, as expected, but I was intrigued to see which fund had been performing best so far this quarter (which is to say, it had lost the least). It turned out to be my actively managed large cap fund. None of the moves to rebalance equaled 1% of my overall portfolio, but I performed the rebalance in my former-employer's account.
Perhaps the more interesting situation nowadays is that my former-employer's 401(k) account is not my only active 401(k) account these days. Having been on the job for two full months now, my new employer's 401(k) account is going to grow exponentially. My hope is that it will grow higher than the markets fall, but when buying into the market, having a depressed market is hardly a bad thing. Additionally, I would be able to revisit past investment strategies, such as directing all new money into one fund or sector and then rebalance quarterly. It would make more sense to rebalance that account quarterly and then only rebalance this former-employer's 401(k) twice a year.
In future years, I may need to revisit my rebalancing methodology entirely. The option to roll my old 401(k) account into my new account exists, but the investment options are superior in my old account, so it is an option that does not appeal to me at this point. Additionally, I could roll my old 401(k) account into my Roth IRA. But, as for right now, I prefer having it separated.
It will be more interesting in May to see how my new 401(k) looks since I will have been contributing to that account for six months by that point. And, of course, it is anyone's guess where the major indexes will be at that time!
Monday, February 3, 2014
Guilt-Free Investing
I apologize in advance that the complexity of this entry is a bit backwards. It will start with the most complex information first and then simplify into more attainable concepts. There are countless measures to the market, but one commonly quoted is CNNFN's own "Fear and Greed Index." According to Investopedia, it measures those two primary emotions that drive investors as generated by seven indicators:
1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average.
2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE.
3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
4. Put and Call Options - based on the Put/Call ratio.
5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds.
6. Market Volatility - as measured by the CBOE Volatility Index or VIX.
7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries.
Each of these seven indicators is measured on a single scale from 0 to 100 with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.
Furthermore, "Investopedia explains the Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values while unbridled greed can result in stocks being bid up far above what they should be worth.
"The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3)."
Accordingly, the nature of investing itself is based on fear and greed, both of which are commonly identified as sinful emotions. Is there any way to achieve guilt-free investing? Fortunately, the answer is yes.
John Bogle, best known for as the creator of index funds, has rallied against the sinful actions leading up to the incidents like the collapse of the Lehman Brothers, and Enron before it, as an irrational exuberance of greed in a way. His 2009 book Enough opened with a tale of accomplished authors Kurt Vonnegut and Joseph Heller attending a party by a billionaire hedge fund manager in Shelter Island. Vonnegut noted how that gentleman "(has) made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have ... enough'."
The temptation to reach for more is equally balanced by the fear of losing too much, which is why the Fear and Greed Index is relevant to daily market watchers. However, those emotions are controllable. Ignoring them and deciding that they will have no power are both successful methods for keeping them in check (the success of either of them most likely varies by each person). The fact is that no one started investing to lose money, and long-term investors are far more likely than not to gain, which is a success. Comparing it to other fields of greener grass is the first mistake. Concepts like "opportunity costs" truly exist and worthwhile factors for decision making, but they should stay in proportion to higher drivers that are more important.
The success of the index fund is a win against fear and greed. One of the most telling descriptions Bogle has given about index funds is that it enables every American to participate in the economy, effectively giving the average Americans access to "their fair share" of the American economy. When the market rises, the index fund increases. If the market retreats, the index fund will lose value. If investors create a simple portfolio by selecting index funds, then there should be no opportunity for greed (and likewise, if their intentions are pure, then there should be little concern for fear), and the profits realized are not a matter of wanting more, but simply partaking in the American economy. Setting aside any displaced intentions, pure index fund investors can enjoy guilt-free investing.
1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average.
2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE.
3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
4. Put and Call Options - based on the Put/Call ratio.
5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds.
6. Market Volatility - as measured by the CBOE Volatility Index or VIX.
7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries.
Each of these seven indicators is measured on a single scale from 0 to 100 with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.
Furthermore, "Investopedia explains the Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values while unbridled greed can result in stocks being bid up far above what they should be worth.
"The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3)."
Accordingly, the nature of investing itself is based on fear and greed, both of which are commonly identified as sinful emotions. Is there any way to achieve guilt-free investing? Fortunately, the answer is yes.
John Bogle, best known for as the creator of index funds, has rallied against the sinful actions leading up to the incidents like the collapse of the Lehman Brothers, and Enron before it, as an irrational exuberance of greed in a way. His 2009 book Enough opened with a tale of accomplished authors Kurt Vonnegut and Joseph Heller attending a party by a billionaire hedge fund manager in Shelter Island. Vonnegut noted how that gentleman "(has) made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have ... enough'."
The temptation to reach for more is equally balanced by the fear of losing too much, which is why the Fear and Greed Index is relevant to daily market watchers. However, those emotions are controllable. Ignoring them and deciding that they will have no power are both successful methods for keeping them in check (the success of either of them most likely varies by each person). The fact is that no one started investing to lose money, and long-term investors are far more likely than not to gain, which is a success. Comparing it to other fields of greener grass is the first mistake. Concepts like "opportunity costs" truly exist and worthwhile factors for decision making, but they should stay in proportion to higher drivers that are more important.
The success of the index fund is a win against fear and greed. One of the most telling descriptions Bogle has given about index funds is that it enables every American to participate in the economy, effectively giving the average Americans access to "their fair share" of the American economy. When the market rises, the index fund increases. If the market retreats, the index fund will lose value. If investors create a simple portfolio by selecting index funds, then there should be no opportunity for greed (and likewise, if their intentions are pure, then there should be little concern for fear), and the profits realized are not a matter of wanting more, but simply partaking in the American economy. Setting aside any displaced intentions, pure index fund investors can enjoy guilt-free investing.
Tuesday, January 28, 2014
Betting on a Losing Fund
I invested the minimum into the Fund; expecting it to spend the duration of its time in my portfolio at a significant loss considering, after increases of 75% and 40% increase in 2009 and 2010, respectively, it went down 20% in 2011, 13% in 2012, and another 35% in 2013. However, I suspect it may be substantially undervalued now, or at least ready for some upward recovery. Therefore, I made the minimum initial investment and I plan to move any earnings (potentially, including reinvested dividends) into a better fund, letting the investment stay at its minimum or fall where the market takes it. Effectively, I am betting on a losing fund. In the best case scenario, I would be wrong about the fund's abysmal future. In the worst case scenario, I would prove myself correct about the gold market.
Often investing is so backwards from our human nature that reverse psychology may be the best guide, just like putting more money into a falling market (which paid off huge for me in 2009). Relying on human instincts or applying what has been learned from other experiences to the stock market is not a successful strategy for investing.
Additionally, I put the minimum initial investment into Vanguard Health Care Fund on Wednesday evening, and I am strongly considering Vanguard Small-Cap Value Index Fund in the near future. All of these moves are inspired from the same fact that, although I believe the markets may set a few more record highs, I expect that the top of the market has been reached for all intents and purposes, so there is nowhere to go but down. In fact, the market has been down ever since my first move(s) on Wednesday. It would be beneficial to position my portfolio to hedge against market risk, but unfortunately, where the sharpest market declines will be are difficult to ascertain. In other words, if I expect to lose a lot of money soon, then shifting unrealized earnings into a losing fund is not a big risk. After all, I do not expect to have this money a year from now as it is.
The benefits of diversification are easy to understand. Personally, I think most investors latch onto the concept far too early. But if all your money were housed in a couple funds, then eventually (regardless how broad the funds are), it would be foolish not to diversify into specialized assets (specifically, sector funds) when the warning signs of a market decline are seen.
Case in point, I ran the numbers on my move this evening, and my new sector funds are down a combined $112 since I moved into them. However, if I had not pulled the money that day, then I would be down another $60, so clearly I made the right choice!
Monday, January 13, 2014
CNBC: Want better returns? Hire a good-looking CEO
Want better returns? Hire a good-looking CEO
http://www.cnbc.com/id/101292577#!
—By CNBC's Kiran Moodley
Attractive chief executives receive higher total compensation, better returns on their first days on the job and boost stock performance when they appear on television, according to the preliminary findings of a new study.
Joseph Halford and Hung-Chia Hsu, two economists at the University of Wisconsin, released a working paper called "Beauty is wealth: CEO appearance and shareholder value." In the paper, they rated the attractiveness of 677 CEOs from S&P 500 companies based on "facial geometry."
The study wanted to find out whether there was a positive relation between the attractiveness of a company's CEO and a return on investment in that company, something argued by John Graham, R.Campbell and Manju Puri in a 2010 paper from Duke University. These three authors said that good looks made CEOs appear more competent and gave them better negotiating skills, enabling them to extract better deals for shareholders.
When looking at the relationship between CEO attractiveness and stock returns around their first day in the job, Halford and Hsu concluded: "We find that FAI (facial attractiveness index) has a positive and significant impact on stock returns surrounding the first day when the CEO is on the job, indicating that shareholders seem to perceive more attractive CEOs to be more valuable."
Halford and Hsu told CNBC that Marissa Mayer, the president and CEO of Yahoo, was a good example, based on their report. "She scored 8.45 (out of 10) in our facial attractiveness index and is among the top 5 percent (best-looking) in our sample," they wrote. "Yahoo has been doing well since she became the CEO (about 158 percent increase in stock price).
"Of course, we don't mean that all the increase in stock price is from her appearance. We just find that there might be some positive correlation between the two."
The economists conducted a variety of tests, for example, analyzing 1,830 merger and acquisition deals between 1985 and 2012. They discovered that: "The evidence...suggests that more attractive CEOs receive more surpluses for their firms from M&A transactions, a finding consistent with the hypothesis that more attractive CEOs improve shareholder value through superior negotiating prowess."
Furthermore, the paper looked into CEO television appearances—which they restricted to those shown on CNBC.com between 2008 and 2012—and whether there was any correlation between the appearance of an attractive CEO and stock returns. Halford and Hsu concluded that shareholders responded positively to viewing more attractive CEOs on television.
Does this mean that Halford and Hsu would suggest that companies hire stunning CEOs to ensure a more profitable existence?
"Our results do not suggest that, when searching for CEOs, firms should only look at appearance without considering other abilities," they wrote in an email to CNBC. "On the other hand, for firms that rely more on the negotiation and visibility aspects, maybe they should place more weight on appearance when searching for CEOs."
This is not the first time the interaction between beauty and business has been investigated.
In 1994, University of Texas economist Daniel Hamermesh coined the term "pulchrinomics," or the economic study of beauty. He wrote about the topic in the American Economic Review, commenting on a study conducted by himself and his colleague, Jeff Biddle, where interviewers in the 1970s had had ranked the attractiveness of U.S. and Canadian workers, as well as noted their earnings. More attractive workers were found to earn a 5 percent premium over those of average appearance.
"Wages of people with below-average looks are lower than those of average-looking workers; and there is a premium in wages for good-looking people that is slightly smaller than this penalty," the report noted.
Commenting on Halford and Hsu's report, Robert Williams, principal and director at recruitment firm Asia Media Search, said first impressions were important.
"A commanding presence will add credibility either consciously or subconsciously, rightly or wrongly," he told CNBC via email. "My guess would be that Wall Street, like Washington, will always put stock in good looks as a measure of ability.
"I wonder if in today's instant media world, whether Abraham Lincoln, with his acne scarred face, lanky body and high pitched voice, would ever have been elected, or FDR for that matter. Would the television media focus just on his wheelchair?"
He concluded: "As a recruiter, I feel the focus should be a candidate's abilities and accomplishments, not the smile. But human nature is what it is."
http://www.cnbc.com/id/101292577#!
—By CNBC's Kiran Moodley
Attractive chief executives receive higher total compensation, better returns on their first days on the job and boost stock performance when they appear on television, according to the preliminary findings of a new study.
Joseph Halford and Hung-Chia Hsu, two economists at the University of Wisconsin, released a working paper called "Beauty is wealth: CEO appearance and shareholder value." In the paper, they rated the attractiveness of 677 CEOs from S&P 500 companies based on "facial geometry."
The study wanted to find out whether there was a positive relation between the attractiveness of a company's CEO and a return on investment in that company, something argued by John Graham, R.Campbell and Manju Puri in a 2010 paper from Duke University. These three authors said that good looks made CEOs appear more competent and gave them better negotiating skills, enabling them to extract better deals for shareholders.
When looking at the relationship between CEO attractiveness and stock returns around their first day in the job, Halford and Hsu concluded: "We find that FAI (facial attractiveness index) has a positive and significant impact on stock returns surrounding the first day when the CEO is on the job, indicating that shareholders seem to perceive more attractive CEOs to be more valuable."
Halford and Hsu told CNBC that Marissa Mayer, the president and CEO of Yahoo, was a good example, based on their report. "She scored 8.45 (out of 10) in our facial attractiveness index and is among the top 5 percent (best-looking) in our sample," they wrote. "Yahoo has been doing well since she became the CEO (about 158 percent increase in stock price).
"Of course, we don't mean that all the increase in stock price is from her appearance. We just find that there might be some positive correlation between the two."
The economists conducted a variety of tests, for example, analyzing 1,830 merger and acquisition deals between 1985 and 2012. They discovered that: "The evidence...suggests that more attractive CEOs receive more surpluses for their firms from M&A transactions, a finding consistent with the hypothesis that more attractive CEOs improve shareholder value through superior negotiating prowess."
Furthermore, the paper looked into CEO television appearances—which they restricted to those shown on CNBC.com between 2008 and 2012—and whether there was any correlation between the appearance of an attractive CEO and stock returns. Halford and Hsu concluded that shareholders responded positively to viewing more attractive CEOs on television.
Does this mean that Halford and Hsu would suggest that companies hire stunning CEOs to ensure a more profitable existence?
"Our results do not suggest that, when searching for CEOs, firms should only look at appearance without considering other abilities," they wrote in an email to CNBC. "On the other hand, for firms that rely more on the negotiation and visibility aspects, maybe they should place more weight on appearance when searching for CEOs."
This is not the first time the interaction between beauty and business has been investigated.
In 1994, University of Texas economist Daniel Hamermesh coined the term "pulchrinomics," or the economic study of beauty. He wrote about the topic in the American Economic Review, commenting on a study conducted by himself and his colleague, Jeff Biddle, where interviewers in the 1970s had had ranked the attractiveness of U.S. and Canadian workers, as well as noted their earnings. More attractive workers were found to earn a 5 percent premium over those of average appearance.
"Wages of people with below-average looks are lower than those of average-looking workers; and there is a premium in wages for good-looking people that is slightly smaller than this penalty," the report noted.
Commenting on Halford and Hsu's report, Robert Williams, principal and director at recruitment firm Asia Media Search, said first impressions were important.
"A commanding presence will add credibility either consciously or subconsciously, rightly or wrongly," he told CNBC via email. "My guess would be that Wall Street, like Washington, will always put stock in good looks as a measure of ability.
"I wonder if in today's instant media world, whether Abraham Lincoln, with his acne scarred face, lanky body and high pitched voice, would ever have been elected, or FDR for that matter. Would the television media focus just on his wheelchair?"
He concluded: "As a recruiter, I feel the focus should be a candidate's abilities and accomplishments, not the smile. But human nature is what it is."
Monday, January 6, 2014
CNNFN: Fundamental index funds: Great players, wrong game
Fundamental index funds: Great players, wrong game
http://money.cnn.com/2013/12/01/investing/fundamental-index-funds.moneymag/index.html?iid=H_M_News
By Paul J. Lim
Several years ago a group of investing heavyweights, led by Robert Arnott of Research Affiliates and Jeremy Siegel of WisdomTree, claimed to have built a better index fund.
Ever since, these "fundamental indexers" have waged a public debate with Vanguard founder Jack Bogle and other passive-investing purists over what an index fund is.
That argument distracts from the true advantages of fundamental index funds. Like traditional indexes, fundamental indexing calls for owning most of the stocks in the market, instead of picking individual issues. But rather than holding shares in proportion to a company's total market value, the new funds weight them based on attributes such as earnings, dividends, or valuations.
As a result, their portfolios tilt toward value stocks, or shares that are cheap relative to profits or assets.
"And all the evidence we have seen is that there is a value premium" -- that is, an extra return for value stocks -- says Paul Kaplan of the fund research group Morningstar.
They also skew to smaller stocks, which likewise outperform over long periods. (Says who? Eugene Fama, for one; he just won the Nobel in economics.)
Purists cry foul. "Anytime you depart from the market, you're an active manager," says Bogle.
Here's the thing, though: Even if you think this is another form of active stock picking, it turns out fundamental funds may be the best possible way to do that. Arnott now argues that "we're more of a threat to active management than to cap-weighted indexing, because investors are more likely to be deeply disappointed with their active managers."
For example, PowerShares FTSE RAFI U.S. 1000 ETF, which tracks Arnott's strategy, gained an annualized 18.7% over five years, beating the S&P 500 and 91% of all active large-cap funds. Similarly, WisdomTree Earnings 500 and WisdomTree SmallCap Earnings beat more than 60% and 90% of their respective active peers.
How? In addition to their tilts, these funds enjoy a cost edge. WisdomTree Earnings 500 charges 0.28% of assets, a percentage point less than the average active fund. It also trades infrequently, cutting transaction costs.
So if you want to dabble in active funds for a shot at out-performance, consider using a fundamental fund instead.
A portfolio half in an S&P 500 indexer and half in an average active large-cap fund would have returned 15% annualized over the past five years. Had that active stake been in the PowerShares fund, you'd have earned about two points better a year. That's a fundamentally sound result.
Send a letter to the editor about this story to money_letters@moneymail.com.
MY OPINION: Jack Bogle has described Index funds as providing the average investors with “their fair share” of the American economy. In essence, it’s protection against greed. Bogle has waged war against greed, as evident in his book Enough. I am not surprised that he would dismiss these funds from his design of "index funds."
http://money.cnn.com/2013/12/01/investing/fundamental-index-funds.moneymag/index.html?iid=H_M_News
By Paul J. Lim
Ever since, these "fundamental indexers" have waged a public debate with Vanguard founder Jack Bogle and other passive-investing purists over what an index fund is.
That argument distracts from the true advantages of fundamental index funds. Like traditional indexes, fundamental indexing calls for owning most of the stocks in the market, instead of picking individual issues. But rather than holding shares in proportion to a company's total market value, the new funds weight them based on attributes such as earnings, dividends, or valuations.
As a result, their portfolios tilt toward value stocks, or shares that are cheap relative to profits or assets.
"And all the evidence we have seen is that there is a value premium" -- that is, an extra return for value stocks -- says Paul Kaplan of the fund research group Morningstar.
They also skew to smaller stocks, which likewise outperform over long periods. (Says who? Eugene Fama, for one; he just won the Nobel in economics.)
Purists cry foul. "Anytime you depart from the market, you're an active manager," says Bogle.
Here's the thing, though: Even if you think this is another form of active stock picking, it turns out fundamental funds may be the best possible way to do that. Arnott now argues that "we're more of a threat to active management than to cap-weighted indexing, because investors are more likely to be deeply disappointed with their active managers."
For example, PowerShares FTSE RAFI U.S. 1000 ETF, which tracks Arnott's strategy, gained an annualized 18.7% over five years, beating the S&P 500 and 91% of all active large-cap funds. Similarly, WisdomTree Earnings 500 and WisdomTree SmallCap Earnings beat more than 60% and 90% of their respective active peers.
How? In addition to their tilts, these funds enjoy a cost edge. WisdomTree Earnings 500 charges 0.28% of assets, a percentage point less than the average active fund. It also trades infrequently, cutting transaction costs.
So if you want to dabble in active funds for a shot at out-performance, consider using a fundamental fund instead.
A portfolio half in an S&P 500 indexer and half in an average active large-cap fund would have returned 15% annualized over the past five years. Had that active stake been in the PowerShares fund, you'd have earned about two points better a year. That's a fundamentally sound result.
Send a letter to the editor about this story to money_letters@moneymail.com.
MY OPINION: Jack Bogle has described Index funds as providing the average investors with “their fair share” of the American economy. In essence, it’s protection against greed. Bogle has waged war against greed, as evident in his book Enough. I am not surprised that he would dismiss these funds from his design of "index funds."
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