Portfolio - "Update"

I recently did make a major change to my portfolio. I sold some stock and raised some cash from CDs to finance a home purchase for my family, where I will live. It was complicated and took advantage of two short sales and a still discounted home price (about 26% from the 2005 new-home purchase price). The result for me, holding the mortgage on the home. So, besides the mortgage, stocks, etc are....

PEP (Pepsico)
WAG (Walgreen)
PG (Procter and Gamble
KO (Coca Cola)
GPC (Genuine Products)
MMM (3M)
ADP (Automatc Data Processing)
HAS (Hasbro)
KMB (Kimberly Clark)
T (AT&T)
SYY (Sysco)
JNJ (Johnson & Johnson)
AVP (Avon Products) 2014 call options

The stock portfolio represents about 13% of my net worth, Gold/Silver about 2%,  and CDs, cash and Mortgage (about 85%). And I will be using my investment cash flow to build up my stock portfolio to about 25% of my net worth, depending upon which stock opportunities exist. Also, I continue to hold no debt.

My Review of "Paying the Price"

5 out of 5 stars......

First off, I already respect the author, Mark Zandi, since he does appear to be one of the more reasoned voices during the last several years during this financial mess of recent years.

And after reading the book, I also conclude this book is well-reasoned and excellent for anyone who seeks to be better informed about what has happened and the risks which lie ahead. Some of the things from the book which I think are noteworthy.....

1. Great Recession bad, but bottomed by 6/2009 with 8.75M jobs lost and unemployment 10+%. By 2012, Occupy WS and youth have re-shaped lives, some good (save more/spend less), some bad (less likely to seize opportunities or start new ventures even though the economy needs them).

2. Large businesses are doing well, WS is back and bank failures have abated. What policy makers did to stem the financial panic and combat the Great Recession (GR) remains controversial, but can be judged a success, including the auto bailout.

3. Obama blundered by saying unemployment wouldn't rise above 8% with the Recovery Act.

4. Government policy stopped deflation in housing, while being least effective with mortgage modifications and re-financing's.

5. Dodd/Frank not perfect but had some good things - didn't solve "too big to fail," but makes failures more manageable like with stress tests.

6. The US outlook has never been brighter.

7. Only when the US gov't went all-in in acquiring stakes and debt of largest US financial institutions did the system's free-fall stop.

8. Unlike 2000, the Global Economy was using US financial institutions for investments/savings - Treasuries first then mortgage-backed bonds. Securitizing of bonds and of mobile homes, credit card debt, no-down, no-doc mortgages, etc resulted in regulators hurt by complexity of the system. Banks usually capitalized at 10xCash, but investment banks 30x and Fannie and Freddie 70x.

9. Fannie and Freddie were bit players -- mortgages dominated by the private sectors, but in 2008 concern triggered panic - Lehman should have been taken over, not permitted to fail. After bailouts, banks resumed lending to each other, FDIC ended silent runs by raising FDIC insurance. TARP made it all work. Also TAF, banks borrowing from the FED via silent auctions, creative loans to investment banks, PDCF, TSLF, QE's, etc all helped. However, ultimate judgment can't be made until the FED begins retreating from all the stimulating.

10. Emergency unemployment insurance is one of the largest economic multipliers.

11. Austerity made Europe worse. The US Recovery Act (ARRA) passed Feb 2009 GR ended in June. CBO said ARRA lowered jobless rate by 2%.

12. Should have been rapid principal markdowns on mortgages. FHA came to life, but offered loans as intended in 1930's. Temp. tax credits worked, stops buyers from waiting for prices to drop further.

13. Bankruptcy is OK for non-financial companies, but not for financial ones since they deteriorate quicker/bank runs, etc. Fixing the financial plumbing - Dodd/Frank not perfect, but helped - stress tests and identifying SIFI's sooner and making sure they have enough capital and liquidity. Important to have large banks so the US remains competitive in the global economy. The US financial system, despite its risks, powers the most productive economy in the world. Financial crises are most difficult because they choke off credit - so, must restart credit ASAP to fuel a staggered economy.

So, an excellent book, especially welcomed because Mark Zandi, the author, I judge to be more open-minded than the typical economist.

Forget the "Fiscal-Cliff"

Forget the "Fiscal-Cliff." As I have been saying, the recovery had entered a self-sustaining phase several months ago when Housing bottomed and started up. Then, fairly recently, CA's recovery went into an accelerated mode, with CA's budget forecast to be in surplus in 2014 and CA's largest drop in unemployment in 25 years. And, with CA being 12% of the US population, CA can now lead the nation in the accelerated recovery. Well, now comes along a true signal of how powerful the CA accelerated recovery is......Bakersfield, once a significant oil town, is now booming, and with CA so good on environmental things, I think the "fracking," etc will be done in a responsibile manner, even innovating new such techniques for export elsewhere. And, with Bakersfield median home prices of about $130K, I can see a booming migration of people, businesses, schools, colleges, etc to the area.

My Review of "The Knockoff Economy"

4 out of 5 stars........

The book makes the point that copying in many cases actually increases innovation, contrary to what some think that Intellectual Property (IP) must be protected always or else there will not be enough incentive (money) for people to make important new innovations. Sure, sometimes IP must be protected, but the author tries to show, quite well, that it is overused and in many cases restricts innovation, along with having other negative effects. From the book, I took note of the following.....

1. Fashion is an area with little IP protection and the copying thrives along with innovation and profits in the industry, and actually improves the whole industry. Copying is the way trends develop and the pioneer gains reputation in the process which can translate into even more for the pioneer, than if the original product was protected via copyright. And, really it is impossible to protect most things as just slight changes to a product can always be done defeating a copyright, anyway. Not to mention the costs of lawsuits, etc for the pioneer to try and protect something, in time,and money. Also, the speed of the copying hastens fashion cycles, making more innovation and profits- induced obsolescence..

2. As for morality, unlike stealing a car, stealing an idea still leaves the originator with the idea, plus also since someone else has the idea there is greater chance for innovation, improvement of the idea.....this brings up the term "piracy paradox."

3. Cuisine is another area, with little IP protection, which thrives because of the copying, encouraging many variations/innovations like the Korean taco - LA's Korean Tacos in a Truck - Kogi. The recipe can be copyrighted, but the "built food" can't because it is so easily changed in minute ways. Chefs can't protect food concoctions, but can the look and feel of a restaurant.

4. Comedy, also rife with stealing, but slightly different presentations are what makes comedy thrive even more. An example is Louis C.K and Dane Cook.

5. Football, also.....can't copyright plays, yet football thrives like never before. Plus, the originator still holds an advantage by being the first - even if another team copies the play, the team might not have the kinds of players best to execute it and would take years of drafting, trading players, new coaches, etc to match the originator's team.

6. The financial industry, also. Even with copying the originator, by reputation and lead time can gain advantages which others can never match.

7. The computer database industry, also. Can't copyright data, but the ways it can be organized. e.g. Lexis-Nexis,.Factiva.

8. The VCR actually created new industries, like video rental, also new revenue streams for the maker of films.

9. "Useful articles" is a benchmark in copyright law - a dress is useful, a painting is not therefore can copyright. Though, there are special cases, a dress which is more ornamental than functional might lead to special protection. A printed fabric is protected, but the cut and style aren't. Also "trade dress" is protected, the packaging for instance, but not necessarily the product inside. So, trademarks, brands and logos are protected and can increase the value of its products/services even if they are easily copied, in fact copying actually can increase the values.

10. Positional goods - those which create status, like trademarks, logos.

11. Also, copying can spur innovation, what lawyers call "derivative works," tweaking of the original.

12. Copying can also lower the consumer's knowledge costs, by seeing trends happen right before their eyes - also called "anchoring."

13. Social norms can protect IP better than laws sometimes, like with comedians, chefs, etc.

14. The book also discusses "first mover" advantages and disadvantages.

15. For music, can make exact copies, but can't reproduce the performance, live session/concert, etc, so the performance aspect is thriving even more despite the copying, etc. Also, some restaurants won't allow takeout or home delivery.

17. Open source software is discussed. Wikipedia more successful than Microsoft's Encarta. Linix operating system also has led to a new company, Redhat. Plus, creates competition to put pressure on Microsoft, etc to keep improving their products.

18. Fonts are also discussed, zillions of different ones, lots of copying and tweaking....plus, the usefulness test, can't print w/o them, so only certain ones can be protected, so creativity thrives, creating more and more fonts.

Anyway, the book does give one a better understanding of the effects of copying, which it seems more often than not increases creativity, innovation and overall prosperity. After reading it, I think my understanding of IP and its effects is better.

Nation's Economic Recovery Accelerating!

The recovery did reach, in my opinion, a self-sustaining mode, recently, led by housing which normally leads a recovery. What is new, is that now, it looks like the self-sustaining recovery has entered an acceleration phase, with the news that CA's recovery is now on solid footing, with the budget now forecast by independent sources to possibly have a surplus by 2014, plus recently released unemployment numbers showing the largest percentage decrease in over 25 years. CA has always been boom and bust, with the busts always coming back to all-time high economic highs. Since CA represents about 12% of the nation, it does look like CA will now accelerate the current slow recovery.

I am no fortune teller....I look at facts....and what is currently happening. The only thing I can see stopping this accelerated recovery is some unexpected catastrophic event......not already known risks like the "fiscal cliff, "Greece," "Gaza," etc.

My review of "Occupy World Street"

5 out of 5 Stars.....

This book is a response the Occupy Wall Street and other Occupy movements around the world, where the protestors know there is something wrong, the 1% vs the 99%, most people on the planet, but so far haven't come up with any comprehensive descriptions of the problems or possible solutions, because it is so complex. The author lays most of the blame on neo-liberal economics and related politics, beginning around 1980 with US president Reagan and Britian's Margaret Thatcher - basically complete free-trade and free movement of money with negligible government regulation, resulting in a transference of wealth from public hands and the poor and middle class, into the hands of the wealthy and well-connected. This all represented, in the US, along with, to a degree, Britain, which he calls "The Empire," where what has resulted in a corporatocracy, a form of fascism, where the political system is bought and paid for by large corporations where this capitalism seeks cheap labor and resources from around the world, all the while using up the planet's resources to the point where we are nearing a point of no return where the survival of the world's civilization is at stake unless we change this direction.

What the author claims is that we are going through a paradigm shift from Cartesian/Newtonian physics to Quantum physics at the world level, where the world is a living organism where it isn't "cause and effect" at the world view level, but everything is connected. He offers a possible solution, a Gaian society, led by some small nations and leaders including some wise elders from around the world, to work together with new organizations and local currencies replacing the WTO, IMF and World Bank to work toward a sustainable planet which will change the way we live from from one of greed and accumulating money and material things to one where there is more meaning to our lives.

The book is divided into 6 parts - Planet under siege, Drivers of Destruction, The Empire, New values/New beliefs, Toward a Gaian World Order, Getting There.

Among the things covered are...

1. Global warming (carbon footprint), extinction of species, genetic engineering a risk, antibiotic resistant bacteria, monoculture (industrial farming reduces crop rotation, etc).

2. Corporatocracy is a threat to our civilization because it is overloading our ecosystem as exhibited above, plus overpopulation.

3. Peak oil is mere decades away - tar sand oil and natural gas via fracking use more energy to produce, especially when clean-up costs are included.

4. Tainter's Theory - civilizations solve problems using greater complexity until they become so complex the are overwhelmed by it and collapse.

5. Currently, nations measure progress by GDP, but GDP includes negative things like building of prisons, disaster clean-ups, etc. A more accurate measure GPI (progress)which started declining about 30 years ago.

6. Greater consumption leads to speculative bubbles. Bhutan has a Gross National Happiness Index.

7. Gini Coefficient measures income disparity where societies have shifted to "Greed is good" philosophy which at high levels as it is now, always leads to social and health problems with people rebelling.

8. Beginning in the 80's banks migrated from low risk investments to high risk ones including derivatives, high leverage, Credit Default Swaps, naked derivatives, unrestricted capital flows allowed speculators to get money out of countries fast if bets went bad leaving countries to suffer, front-running to exacerbate trends, repeal of Glass-Steagall, etc.

In sum, a very good look into the problems we face, though the author's solution is more speculative, but a good way to get our discussions started, so we can head in a better direction than we are now going. So, a fine book, even for neo-liberal supporters so that they know what is brewing.

GDP up 2%

Economic news today is that the GDP increased 2% for the last quarter, compared to an estimated 1.8% and up from 1.3% in the last quarter. To me, it seems the economic recovery continues, slowly, but continues.

I think the Great Recession, despite being in recovery mode for about 3+ years, really ended a few months ago with Housing appearing to have bottomed. Housing generally leads an economy out of recession.

In addition, autos and light trucks are doing very well, further signaling a healthy economy.

Corporate investment is flat, but for now that is OK, as representative of unemployment which is a lagging indicator of economic recoveries.

As for the "fiscal cliff," which some think will start a new recession, I will be surprised if a recession begins because of that. I think the recovery is now pretty much in self-recovery mode, so now is the time to begin reducing the deficit, plus the fiscal cliff is really  a misnomer since not all effects from it happen right away, plus there will likely be some modifications made within the next few months.

There is also a concern about Bernanke leaving the Fed next year. I do think there is appropriate worry if he is replaced by someone who takes a different approach. Although I do think Bernanke was complicit in the Housing Bubble, I think he has been very good since the bubble burst and his QE's have been very important in capital formation by way of a rising stock market and strong Treasury bond market. A lot of capital AND debt was erased by the Great Recession financial collapse.

The stock market has been overdue for a correction and there usually is a year-end rally. And, the year after a presidential election is usually a time to be defensive, but the stock market is not in bubble territory, so any weakness is just an opportunity. History does show that the stock market does do better with a Dem president than with a GOP president and I see no reason for exception for the next four years. as of now.

My Review of "Too Much Magic"

4 out of 5 stars.....

The author, James Howard Kunstler, though he denies it, is a doom and gloomer. Though I don't subscribe to what he envisions, I do think there is credibility in it for a longer term than he sees, so it is definitely worth learning what he writes so the reader can better know what challenges are ahead for humanity which do require more serious policy decisions by the US than which are currently in place. Here's some of his thoughts in the book.

1. He sees a worse crisis than the crash of 2008.
2. We are already past peak oil and population overload.
3. Warnings - BP oil blowout, Fukoshima nuclear meltdown, lots of tornado's, hurricanes, floods, droughts, etc.
4. Time frame We've already entered the zone of middle-class dissolving and no consensus about what to do.
5. Jevon's paradox, Tainter's model - greater complexity and diminishing returns?
6. Something for nothing mentality/legalized gambling. Cheap fast food, happy motoring, air conditioning. Peak everything. Then came housing bust after 2005. Roman culture took centuries to wind down.
7. We had peak debt which leads to deflation/contraction which we will never emerge because less money for auto loans,etc. Lack of public funds to fix roads. Auto bailout money should have made car companies make railroad stuff since will need a betterrailroad system.
8. Entropy - beginning, middle, end with only one direction. "Too much magic/"complexity. Farewell to drive-in utopia, suburbia over.
9. After WWI - suburbia building boom, roaring 20's, impetus for bubble economy, 1929 crash, then after WWII suburbia boom continued..
10. Women's lib in 60's really just 2 workers needed to continue suburbia,run lives of families.
11. GOP he calls the party of stupidity, mostly in sunbelt - suburban sprawl complete with oil, air.cond. - future bleak - "rural idiocy." Total bailouts (incl international) = $77T.
12. Hopefully towns will be redeveloped - more compact/dense/inland since climate change will flood coastal areas. - skyscrapers will be obsolete because electricity costs will be too high. Since San Diego near Mexico, there will be a fight over the terrain. Unable to garden grain crops. "New Urban-ism" still car centric, too complex.
13. Thinks Ray Kurzweil's "Singularity" where technology will solve problems is the vision of a mad scientist - AI can't transcend biology, genetic engineering, virtual sex, eternal life, nanotech robots/nanobots in humans, elsewhere is nonsense. He has no idea of diminishing returns or the dark side of humans. Gaia Theory where Earth is a living organism is just a so-so theory.
14. Party politics began to decline in 60's. Clinton turned over the economy to WS, continued with GW Bush. WS went from 5% of the economy to 40% - repeal of Glass-Steagell - neo-liberal economics. Lobbyists dictated healthcare and regulations with Obama. GOP led wave of anti-intellectualism. We benefited from post WWII - Highway system, cheap gas, FDR programs -TVA, military bases/military middle class + a prosperity gospel in churches - "God rains money on the favored."
15. Reagan turned the US from largest creditor nation to largest debtor nation. Began the corporate takeover of America by WS.
16. After WWII the US was in charge - no competition for goods, lent countries money to buy goods, #1 in oil/energy - an empire. In 60's began to crumble. Reagan lucky - north sea, Mexican, USSR's oil. Clinton lucky - leveraged buyouts, but then US went from manufacturing to junk bond mess and the S+L mess. Then the housing bubble and derivatives - Brooksly Born warned, but government didn't listen. Peak oil, peak debt, peak banking.
17. Solar panel makers use 11% of silver supply. Wind and solar energy use rare earth minerals which are rare, radioactive, pollute and cause other problems. By 2100, sea level is predicted to rise 3-17 feet and temperatures 3-7 degrees F. Most critical effect of climate change is food scarcity. US will become balkanized because not every immigrant learns English and adopts culture. The space shuttle retired/science compromised because US is out of money.
18. The only thing complex societies haven't been able to do is contract which will be necessary.

So, the author is good at describing the path we are on, but I'm not big on fortune tellers - I doubt things will go exactly as he says. But, the bok is an interesting read and does describe well the sequence of major events and where they have led us and what future changes are. 

Portfolio - "Update"

It's been awhile since I posted an update. It really hasn't changed too much, although I did exit Treasuries since I wanted to lock up profits and because the bond market is in bubble territory while better interest rates exist in the stock market with the kinds of stocks I own. Also, I am planning to enter the housing market, so I put the bond proceeds into cash/money market accounts also from locking in some stock profits, so also reducing some of my stock portfolio, while also managing it - Adding HAS and MDLZ. In the order of largest position to the least.......

HAS (Hasbro)
PG (Procter and Gamble)
KMB (Kimberly Clark)
PEP (Pepsico)
SYY (Sysco)
KO (Coca Cola)
WAG (Walgreen)
GPC (Genuine Products)
MMM (3M)
JNJ (Johnson & Johnson)
T (AT&T)
ADP (Automatc Data Processing)
MDLZ (Mondelez)

The stock portfolio represents about 20% of my net worth, Gold/Silver about 3%, Cash/MoneyMarket about 10%, and CDs (about 67%).

My Review of "The Other Side of Wall Street"

This is an interesting memoir of a Wall Street insider's (Todd Harrison's) look at his life, so far, and his experiences in Wall Street. Things of note...

1. His grandfather, Ruby, told him all you have is your name and your word, and that honesty, trust, and respect were the foundation of any successful endeavor. Over the years, Todd confused net worth with self-worth. Dad left when he was 2, Mom and Todd moved from house in NJ to apartment in Great Neck, LI. He was diagnosed with ADHD, didn't fit in socially, placed in private school, 7th grade in Great Neck South Middle School, Bagel shop boy at 13 - learned if you want money get a job. Still had ADHD, but did well in sports and had a pretty traditional childhood. Jr and Sr year HS spent in CA to be with dad. Applied to UC Santa Barbara, San Diego State, Boston U., and Syracuse. Went to Syracuse, good education, sports program, fraternity, did well. Met friend Kevin Wassong at Syracuse, talked about working together sometime, Kevin got job at reative Arts Agency, Todd got a business degree, in finance so to be near the "cash register." Todd got an internship at Morgan Stanley, then hired by them after school - Chuck Feldman made the offer.

2. At MS, clueless at first, worked at the equity derivative desk. Slow, but learned - "Buy-write" - long calls, short stock, "synthetic put" - long stock, short calls - "married put" ,long put, long stock.

3. Jim Cramer called, "Do you like ....what do you think? Todd said "yeah," Cramer hung up. Learned to give quick answer, not waste time.

4. 1st yr - $28K, no bonus. One incident told sell something, couldn't, told to lie.

5. 2nd yr - same, no bonus, warning, 3rd yr,/1993 - $75K, 4th yr, $150K

6. Had a big loss with First Interstate Bank, learned money makes you do things you don't like, became arrogant, cocky, innocence gone replaced with power.

7. Saw that WS had an uncanny ability to recreate, repackage and sell risk. And, saw steady stalwarts passed over for promotions - bad things happening to good people - all politics. Then, he was "ambushed" - told he couldn't be trusted, joined the Galleon Group hedge fund, they needed a derivative specialist. Struggled at first with Galleon - no bonus, told lucky to have a job. Then, Asian contagion, Greenspan stimuli, seeds of dot.com bubble which evolved into booms and busts in next decades.. By 1999, things were good, he began to covet things, wanted to be a partner.

8. Moved to Cramer-Berkowitz hedge fund as partner, smaller $400M fund, base salary $300K + % of profits, ran trading operation. Cramer was master of momentum and Berkowitz had a brilliant analytical mind. After Cramer threw a tantrum over a bad trade, Todd saw the true colors - you are only as good as your last trade - never the same for him. 4/2000 NASDAQ dropped 20%, in Summer, Cramer had Todd write column for Street.com - "The switch was flipped." Dad in jail in Hawaii, Bipolar like Cramer, Todd decided to leave, $5M final paycheck, $700K annual salary at the time. Cramer went on to CNBC, Berkowitz headed fund, Todd went to Street.com to write.

9. 9-11 hit, falling out with Street.com, decided to leave.

10. Met Casey Cannon, entertainment field, found bridge between finance and entertainment, Minyanville was born with "Hoofy and Boo" characters, launched 10/2002 along with the Ruby Peck Foundation. 12/2002, quit Berkowitz-Cramer, Street.com and started own small hedge fund. But made wrong call after financial collapse, didn't anticipate strong recovery, was wiped out. Became depressed. It took losing nearly everything to understand what real wealth was - happiness is not in a bank account.. Fork in the road, almost insolvent, decided to focus on Minyanville and foundation, Kevin Wassong joined him - remembered, "do whaat you love and the money will come." Minyanville won an Emmy. Finally, real success. In business, be an animal, in life, be yourself.

So, a pretty good memoir. My thinking from the book, is that he was successful at Galleon, because he had good tips, but recent uncovering of insider trading at Galleon, Todd was only successful because he was given illegal info, though he probably didn't know it was illegal. And, his success trading at Cramer-Berkowitz, was because Cramer, a genius of momentum, caught the dot.com bubble run-up just right. His real talent was in learning the inside of Wall Street and writing about it in an entertaining way. So, a worthwhile book, in learning a little bit about one of the Wall Street players and his connections.

4 out of 5 stars.

My Review of "The Drunkard's Walk"

The book, "The Drunkard's Walk: How randomness rules our lives," looks at randomness and really randomness plays a greater role in what happens with humans than people, in general, think. I found the book to be exceptional. Although I have always suspected what the book claims, the book backs up its conclusions with mathematics. Plus, it does it in a fun way, making for a very enjoyable book, also. Although not specifically a financial or investing book, the book really is helpful in understanding such stuff. Some points which I noted are....

1. Human intuition is ill suited to uncertainty since in the 1930's researchers noted that people couldn't make sequences of random numbers nor recognize a random sequence.

2. Sometimes in life things happen which can't be foreseen.

3. The amygdala in the brain is active when making a decision, hence decisions are emotional.

4. Rewards work, but punishment doesn't. The opposite is just regression to the mean.

5. Examples which are more likely due to randomness - Roger Maris/1961, success of certain movies and studio heads.

6. Research has shown that people will assign greater probabilities to outcomes which are described in greater detail, the "availability bias."

7. Arithmetic didn't really exist until the 16th century, hence probability not understood before then.

8. DNA in courts - lab error = 1/11, DNA = 1/1B, so chance of error more like 1/10.

9. The Law of Sample Space - Gerolano Cardano - the Book of Games of Chance - 16th century.

10. The Probability of Points - 2 entities competing.

11. Pascal's Triangle - if need to know # of ways in which you can choose some # of objects from a collection that has a > or = #. Pascal's wager -odds about consequences of a pious life, 1/2 if G-d exists, ie. if pious. Confusing, but discussed.

12. Sweepstakes - cost of mail cheaper than chance of winning. Lottery, odds of winning same as one person dying driving to place which sells lottery tickets, but not advertised that way. Dice and roulette wheel are not perfectly balanced, so some uncertainty, not predictable.

13. The book mentions calculus and how it is composed of 1) a sequence, a succession of elements,b) a series which is the sum of the sequence of elements, and 3) a limit where the sequence is heading. But, in Zeno's paradox, the paradox is resolved because of constant motion, no stops. That's how Bernouli attacked the the relationship between probability and observation - toss a coin 10x maybe 7 heads, toss a zillion times expect 50% heads. Bernouli's Golden Theorem - large enough sample to ensure confidence within a certainty. Too small of a sample = the law of small numbers. For instance 1/3 chance that 5 of a CEO's performance will reflect his ability, so better to analyze his abilities rather than just look at results.

14. Bayes's Theorem is discussed where conditional probabilities. Prosecutor's fallacy/ mistake of inversion - just because A happens then B doesn't mean if B happens A will happen. Examples are SIDS deaths and OJ trial.

15. Understanding and quantifying random error led to a new field - mathematical statistics.

16. Wine tasting influenced by all kinds of things, price, context. Statistical measurements include standard deviation, standard deviation squared = variance. Also the Error Law known as a normal distribution or bell curve - in certain cases can expect certain proportionality of results. But, social physics not all normal, like Pareto principle - 80/20 rule or regression to the mean concept. Brownian motion shows Drunkard's Walk, randomness.

17. Book mentions V2 rocket attacks in WWII and cancer clusters, more due to randomness than predictable patterns. The human need to feel in some control interferes with the accuracy in perceiving natural events.

18. Lorenz's Butterfly effect - just small changes can lead to massive differences in results. Plus, unlike laws of physics, human affairs are too complex to predict. Asymmetry makes things impossible to predict, yet look predictable on retrospect, like the stock market. Also, people failing or in poverty may be more random than predictable.

In summary, a terrific book - will likely change the way a reader looks at things, or if a reader does think that way the book will show the mathematics behind it, in a very readable form. 5 out of 5 stars.

Portfolio - "Update"

I've done a few things to my portfolio. When a CD came due, rather than roll it over, with interest rates on CDs not as good as dividends for the kind of quality stocks I own, I added more shares of some stocks I already owned and added stocks of Johnson & Johnson (JNJ) and Walgreens (WAG). I added JNJ because it was now selling for much lower than I had previously sold it at and it remains a quality company with a nice dividend which is raised annually, plus it has a super great balance sheet. WAG, I have never owned, but have always wanted to if the dividend was in the range which is acceptable. Now it is, also with a pristine balance sheet and a policy of raising dividends generously each year. So, now with my kind of stocks generally paying more than CDs, stocks now make up about 23% of my assets - higher than my usual goal of about 15%.

Plus, I have sold the shorter term TIPS I owned since they were at a profit and reinvested the funds in longer term TIPS which I was able to buy below par, so I was guaranteed a profit with them, plus they offer protection against future inflation. Plus, some of the profit from the TIPS I sold, I used to buy more shares of the stocks I own.

Stocks are listed in order of largest position to least:

KMB (Kimberly Clark)
PG (Procter & Gamble)
MMM (3M Corp)
PEP (Pepsico)
KO (Coca Cola)
SYY (Sysco)
KFT (Kraft)
ADP (Automatic Data Processing)
T (AT&T)
GPC (Genuine Parts)
BMY (Bristol Myers Squibb)
JNJ (Johnson & Johnson)
WAG (Walgreen)

My major asset remain CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home, especially in the areas which were first to collapse during this Housing decline. I also own US Treasuries, about 6% of my assets. Right now I own inflation protected ones (TIPS). The ones I hold are...

2028's

I like them because they protect both against deflation and moderately against inflation. I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

The "Joseph Oppenheim Specu-Vestment."

It is possible to speculate with stocks, yet at the same time invest in them. I am an investor - investing being buying stock in a company I would like to own fully if I could, which deals in products or services used all the time. And, the company must pay a good dividend and has a record of raising it each year. As an investor, I don't want to speculate - speculating being hoping for a short-term profit based on the price of a stock rising. But, there is a way to speculate, without really speculating. That is, by buying a stock I would be content to hold long term, no matter what it does in the short term, but I suspect there is an opportunity for a short term gain. So, if I buy the stock and it goes up quickly, I can sell and take a quick speculative profit. However, even if I am wrong about the short-term, worst case is I have just bought some shares in a stock I am content to hold long term at what I think is a good price. It is win-win and what I call a "Joseph Oppenheim Specu-Vestment." Note, that this also includes what I have termed previously, the "Joseph Oppenheim Kicker Theory" to investing - that is by buying a stock which has both a short term price gain potential and is also a long term investment quality - buying a stock at a time when it also has an extra kicker - a speculative one..

This is the only way I think speculating is OK, and like I say, is also an investment if the short term gain doesn't happen.

The "Joseph Oppenheim Kicker Theory" to Investing

For everything in life, including investing, I always look for what I call a "kicker," something extra which increases the chances for success and/or reduces the chances for failure, or just adds something beyond the main goal(s). Let's say you are looking for a job. Maybe one pays less but is located where people come to vacation - with many fun things to do and great weather - I would say it has a kicker. Same with investing. Some investments protect against inflation, some against deflation, but there are also some which protect against both even if the don't offer bigger rewards. This "kicker" is really a built-in hedge or diversification. I like the word, kicker.

For instance, let's say I want an investment which will protect me against deflation, but in case I am wrong and the opposite happens, inflation, then I can also win. This would be different that just buying a hedge or diversifying. Hedging and diversifying are also important tools, however, if one can essentially find the equivalent already built into the investment or decision, that is a "kicker" and in my opinion makes for a better investment.  So, in the case of such an investment, like a higher rate long-term Certificate of Deposit (CD) would be a protection against deflation, however if the CD has a low or reasonable early withdrawal penalty, one could always easily exit the CD and open a new one with a higher rate at a minimal cost, if inflation happens and interest rates unexpectedly go up significantly.

Another example. when selecting a stock, first I look at it as I would in buying a business, essentially shares of a company I would like to own completely if I could. So, thinking along that line, I would want a businesss which would do well no matter what happens with the economy. That would lead me to a company providing some kind of low-priced staple or service which people need all the time.

Another example, I always recommend investing in quality assets, be they stocks, bonds, etc. Even though potential rewards might be less than with riskier assets, there is always a premium paid for quality and due to unforeseeable situations, it might be difficult to dispose of a non-quality asset. So, in such a case, I call quality a kicker. Another case, CDs come without paying a commission, again, a kicker. Same with buying a home, look for a kicker -like it can be also used as a vacation home, etc

Sure, some might want to speculate and thereby obtain a greater return if one is right, that is by taking greater risk, but that is where I separate a speculator from an investor and I only want to think of myself as an investor, that is building in some protection while not getting greedy. Greed is not good and speculation and greed seem to go hand in hand.

Comment on the Economy - "America's Economic Crossroads"

It is a little past the middle of 2010 and we are in what has been called, "The Great Recession," since the end of 2007. Thus far, we have rebounded from the extreme panic which began in 2008 and bottomed in March of 2009, but recently some indicators suggest that we might be on the cusp of a "double dip" recession which could turn from recovery to some severe nastiness. Indicators are the weakness of some European economies, signalling hardship for Europe which could threaten demand for US exports and other assets like US securities, etc. And, there is concern for US government debt levels which could threaten the US currency and the US's ability to issue debt to finance further economic recovery. Plus, US unemployment remains  a concern, with the economy not creating enough jobs, especially by private employers.

So, I say, we are at an economic "Crossroads." I think the most important indicators to watch to see where the US goes from here are 1) The US stock market - I use the Dow since it has been around longer than the S&P and does track the S&P pretty accurately anyway, and 2) The US bond market - I like to most watch the 10-year Treasury Bond interest rate.

As for the Dow, after rebounding to about 115000, it recently declined to around 10,000, an acceptable profit taking from the recovery rally, but further deterioration from there could cause real worry.

As for the Bond market, 10-year Treasuries have an interest rate of about 2.70, which is cautionary of upcoming weak economics, though there is strong demand for the bonds, hence a somewhat healthy sign still for the US economy. So, both stocks and bonds each indicate some good things, but also some worry - in effect the "crossroads" I mention.

It looks like this crossroads will likely be resolved in one direction or the other with the upcoming Congressional elections in November. The way I see it, with the economy still deleveraging (the removal of private debt - foreclosures, bankruptcies, etc), there is no immediate risk for the government to take on more debt as long as the money is well spent. By well-spent, I mean things which are investments, which eventually return more than they cost. Things like education, healthcare, infrastructure, and energy efficiency. So, for sure we should not lose jobs which work in that direction, hence the federal government should help state governments so as not force them to layoff such workers or cut such programs.

Since the indicators I mention are still positive from the depths of the Recession, it does seems Obama and Democratic leadership in Congress can be judged as successful, albeit modestly. Plus, it seems other than a few Republicans, most have been working against the President and Democrats actually hoping they fail, that is America fail. And, what almost all Republicans propose is exactly the opposite which the economy needs now, like I mention above.

Yes, the deficit and national debt are problems, but not right now. And, like I say with the stock and bond markets up from the end of 2007, that should mean improved government tax revenues in 2011 as long as they remain healthy for the rest of the year. So, as for our government debt, all that is necessay now, is to come up with a plan to lower it, and there is a bi-partisan committee chartered with that, in place now.

So, we are at a crossroads and much is to be determined with the November elections and anticipation of what the results might be. Plus, the stock market does usually experience stress in September and October.

My Review of "The Communist Manifesto: A Modern Edition"

The reason I wanted to read The Communist Manifesto now is that I don't remember reading it in school and this current financial mess, called the Great Recession, seems at its core the result of greed gone wild, underpinned with our system of capitalism which seems to have in it the very incentives to bring on this excessive greed. So, I was hoping this book would give me some meaningful thoughts with which to further have clues to the way things might play out during this financial mess including the political ramifications. And, from what I do know about Marx, I suspect what happened here is something he had thought out, in a general way, many years before. The Manifesto and the book's foreword cover things like......

 

1. 1847, Marx and Engels joined the League of the Just (renamed the Communist Party) with its object to overthrow the bourgeoisie with rule by the proletariat and a new society without classes or private property.

 

2. 1871, Civil war in France - Marx defended it and it then gave him notoriety as a dangerous leader of international subversion and feared by governments.

 

3. Over the next 40 years the Manifesto conquered the world and carried forward a rise of new (socialist) labor parties. None were called Communist until the Russian Bolsheviks. Mostly in central Europe to Russia. Small in SW Europe.

 

4. When a major state (Russia) represented Marxist ideology, the Manifesto became a  text in political science and still remains so.

 

5. It was written for a particular time in history

 

6. Marx and Engel's Communist Party was not an organization - more of a historical document.

 

7. Two things which gave the Manifesto its force - a) the vision that capitalism was not permanent/stable, b) The revolutionary potential of a capitalist economy.

 

8. We live in a world where this transformation has largely taken place.

 

9. Capitalism can't provide a livelihood for most of the working class.

 

10. There will always be the oppressors (capitalists - bourgeoisie) versus the workers

 

11 The Bourgeoisie has stripped all occupations down to paid workers.

 

12. The need for constantly expanding market for its products means ultimately global.- effecting even a world literature, cheap prices - will make all nations bourgeoisie.Eventually overproduction leading to barbarism because of too much civilization. The proletariat/workers  become mere appendages and lose all character. Brings more collisions between societies and trade unions will flourish. The worker groups get bigger and more powerful through education provided by the bourgeoisie. Other classes except the proletariat will decay.

 

13. Wage labor rests on the competition between laborers. Communists flourish independently of national borders.

 

14.Communism abolishes bourgeoisie property, no big deal since 90% of private property belongs to the bourgeoisie. Small peasant property is destroyed daily by industry. Average wage of laborers is the minimum wage, just for subsistence. Education is rescued from the influence of the ruling class. Since family is a bourgeoisie thing affirmed by property, family is destroyed - children are transformed into simple articles of commerce and instruments of labor. Working men will have no country. Communism's desire is to abolish countries and nationality. National differences and antagonisms will vanish. External truths like freedom and justice will be common to all states. But, communism will abolish eternal truths like religion and morality - a new basis. Communism will raise the working class to the ruling class.

 

15. Specifically, communism will:

    a) Abolish property in land and application of all rents to public purposes.

    b) Abolish inheritance.

    c) Confiscate property of emigrants and rebels.

    d) Have a national bank.

    e) Centralization of communication and transportation by the state.

    f) Factories and instruments of production to be owned by the state.

    g) Combine agriculture and manufacturing so there will be no distinction between town and country.

    h) Free education.

 

So, I would say the Communist Manifesto, though really just applied to a time in history and times have surely changed quite a bit since then, but I would also say what it was concerned about also shouldn't be ignored when trying to understand the current economic stress we are in. Our capitalism, though obviously very successful especially in many respects, does show strain in the following areas, as Marx could have likely anticipated like a) the gap between the well-off and the poor and even middle-class has dangerously widened such that our political divisions reflect that and has turned more heated and split, making compromise among our politicians very difficult - hard to govern the country efficiently. b) He warned that the bourgeoisie (today's well-off) has been unable to effect the tools to elevate everyone enough, judging by our failing infrastructure, healthcare costs the highest in the world, etc. c) He anticipated the global impact, ever searching for the least cost workers, such that our manufacturing workers are left without jobs. We can even see this global force in our illegal immigration problems - workers from Mexico, etc coming here, somehow even breaking down our borders - something Marx  apparently could see. I did leave off some other things in how the Manifesto was relevant now, in this short paragraph, but from the points, above, it can be seen there are others.

 

In conclusion, I give the book 5 out of 5 stars. It is a short enough book and just its impact has been monumental in history, it is worthwhile to keep in mind as one tries to figure out what might come next from this Great Recession.

My Review of "The Big Short."

The book, by Michael Lewis, is very good at detailing the situations and characters involved in the financial mess caused by the recent housing bubble and how a few people anticipated it and bet big on it happening.

The book starts with a quote by Tolstoy about the importance of being open-minded in order to understand complex things and being close-minded keeps someone from understanding even simple things. The author was amazed how in the mid 1980's, Salomon Bros. would pay him good money, a 24 y.o. with no clue. Yet, he figured out then that the big money was made in the bond market not stocks, leading up to the junk bond collapse in the 80s. He then wrote about it, and here it was essentially happening all over again with the bond people. CEO's knew nothing of the risks their bond traders were taking. He hoped bright college students would avoid Wall Street, rebel against it and just pursue what they loved. But, no, the financial system would again be discredited. He then goes into these key things in this mess like:

1. Meredith Whitney, then an obscure analyst at Oppenheimer & Co, with just a BA from Brown who studied English, said Citicorp was so mismanaged it would cut its dividend or go bust. The so-called experts were still not acknowledging the risk in the sub-prime mortgage market - not that they were corrupt, just stupid. She was trained by Steve Eisman who also gave her a world view - how to see the big picture when analyzing stuff. She read about John Paulson, a hedge fund manager, who made big bets against the bonds and there were a few others. Eisman, U. Penn and Harvard, but also yeshiva trained and loved the Talmud because of its contradictions - he had the mind set to look for investment contradictions. He saw Wall Street going where it never went before - into the debts of ordinary Americans - cash flow from pools of mortgages - the only risk back then was of borrowers paying off soon, but never not at all. So, this new market, never really tapped into to such an extent, homes, and let less credit-worthy people to buy homes, but the real risk was in letting them cash out and refinance to get more money, basically a fast buck business with the issuers of the mortgages just selling them off and not caring what happened long term. Society had changed, with incomes more skewed, more wealthy and more struggling - so this was a way to let those left behind in the economy to prosper, even feel wealthy - letting them borrow easily. Oppenheimer was getting into this new market. Eisman needed Vincent Daniel, from Queens and SUNY Binghamton whose father was murdered - so different roots, to parse data. Found that delinquency rates were hidden, only profits from prepayments were visible.

2. 1997 Russia defaulted, 2002 Eisman saw HFC was a fraud - tricking customers on interest rates, Eisman was aware of ACORN -was a Republican until he saw an entire industry, consumer finance, existed just to rip people off.

3. By 2005, 75% subprime loans were floating rate, fixed for just 2 years. Long Beach Savings was the first to get into this, soon followed by big WS banks - run by the bond departments.

4. In 2004, Michael Burry got into them, seeing decline in lending standards, but hard to short, then he discovered Credit Default Swaps (CDSs). Charlie Munger gave lecture about the "psychology of human misjudgment."

5. 2ndQ 2005, credit card delinquencies at all-time high, but home prices continued going up. Hallmark of a bubble/mania/fraud.

6. AIG on the other side of the bet, issuing the CDSs. Goldman created the CDO and synthetic CDOs which had in them CDSs. Home prices didn't need to fall, just not go up as fast. Tom Fewings, the first in AIG to spot trouble - when seeing WSJ article on New Century. Joe Cassano, head of AIG FP didn't think home prices would fall, at least not nationally, all at once - eventually did change his mind, but still exposed. Mid 2006 home prices began to fall.

7. FICO scores had blind spots - didn't acct. for people's income, could be rigged by getting a new credit card and paying off right away, no differerence between "thin file" and "thick file" borrowers, teaser rates hid risks, averages were used for pools of mortgages which hid the amount of low FICO scores of those who should never have been given mortgages, "silent seconds" allowing borrowers to have no equity in their home.

8. Few used CDSs as outright bets against housing, most were used as hedges while still hoping for the bonds to work out. Exceptions were those who listened to Greg Lippman's pitch, like John Paulson. Paulson/Eisman/Burry understood the risk. Ledley/Hockett/Mai just bet on the least likely possibility - their strategy. Rule of thumb - buy homes when price equal or less than 10X rent and sell when 20X.

9. Names and acronyms hid risks - CDOs not called subprime backed CDOs, but structured finance CDOs, RMBS, HEL, HELOC, ALT-As were just no-doc crappy loans, Rockridge community not called Oakland so homes would sell for more. Actually, 80% of a CDO was overrated, so even better to bet against the higher tranches, since the CDS would be cheaper but the same likelihood of default.

10. Wing Chao, called a CDO manager, which were essentially front men for WS firms, could collect bigger salaries and imply they actually studied the CDOs.

11. Rating agency people were underpaid- should have been paid more to attract talented people - they just made their money by collecting fees for each rating, so just pushed them through quickly. Like a Ponzi scheme - more morons than crooks, but the crooks were higher up. WS just propped up CDO prices while it could - fraud was rampant - neither the WSJ nor SEC was interested.

12. Now Bear Stearns at risk. Merrill had advised Orange county before their bankruptcy, was in the middle of the Internet bust, 80's bond market bust, so naturally they would be in the middle of this.

13. Jim Grant couldn't figure out CDOs then realized that was the story to be told.

14. When Goldman got into the bet against CDOs, then CDOs began to tank. 4/2007 New Century went bankrupt. BS leverage 40:1,Lehman & ML 32:1, Morgan Stanley & Citicorp 33:1, GS 25:1. Only a slight decline could bankrupt them all. 9/2008 Lehman went bankrupt, ML $55B loss - sold to BA. WS firms were the dumb money, CEOs stupid. Bear Stearns Chioffi and Tannin arrested.

!5. It was greed, sure, but more the incentives which channeled the greed. Then, the people who didn't see it happening were the ones to clean it up - H. Paulson, Geithner, Bernanke,etc. Then H. Paulson engineered the $700B bailout of the worst culprits.

An important book, the only criticism I have is that it could have been shorter, but I guess the author did want it to read like a story and illuminate some specific personalities, which will probably make the book easier to make into a movie.

4 out of 5 stars.

My New Book is Just Published - "Become a Private Investor"

It's available at Amazon.com.

Portfolio - "Update"

I've added a position in AT&T (T) to my stock portfolio. The stock pays a high dividend (about 6.5%) and raises it annually. With a PE of around 12 and the price having dropped recently, it was very attractive. Stocks represent about 15% of my investment portfolio.

Listed in order of largest to smallest holdings:

KMB (Kimberly Clark)
PEP (Pepsico)
PG (Procter & Gamble)
MMM (3M Corp)
SYY (Sysco)
KFT (Kraft)
ADP (Automatic Data Processing)
KO (Coca Cola)
BMY (Bristol Myers Squibb)
T (AT&T)
GPC (Genuine Parts)

My major asset remain CDs. I don't own a home, though I do think that is OK, as long as one doesn't go into much debt to do so. I have no debt at all, and never want any, though I do think some is OK for a home, especially in the areas which were first to collapse during this Housing decline. I also own US Treasuries, about 7% of my assets. Right now I own inflation protected ones (TIPS). The three I hold are...

2015's
2013's
2028's

I like them because they protect both against deflation and moderately against inflation. I also own some gold (coins), but it is only about 3% of my assets and use a safe deposit box to store it. Gold does not qualify as an investment, but I do think it is warranted as a small insurance policy on US currency.

My review of "Drive"

"Drive" is an excellent take on what motivates people in modern society compared with times past. Things it covers are:

1. A couple of decades ago rhesus monkeys solved a puzzle without a reward of food, water or sex. They began playing with it and solved it, implying a thrid drive - some intrinsic reward. They even made more errors when an external reward was used - raisens. Then, more recently similar results were found in an experiment (a Soma puzzle) with humans, implying humans also have this third, intrinsic, drive - for novelty, challenge, with scientific proof counter to what business usally does to motivate workers.

2. Like computers, societies have operating systems - a) Motivation 1.0 - in older times just for survival, b) Motivation 2.0 - the industrial revolution led to rewards and punishments, carrots and sticks to motivate workers, c) Motivation 2.1 - some refinements like flex hours and casual dress, d) Motivation 3.0 - purpose driven rather than monetary compensation - think Wikipedia versus Microsoft's Encarta encyclopedia, Firefox, Apache web server, Linix. Strongest motivation - enjoyment. Vermont - first state to implement a new business organization, "low profit limited liability corporation" with purpose maximized rather than profit.

4. Behavioral economics shows people motivated also by irrational motives. US census showed many non-employer businesses. Financial rewards can turn play into work - reducing performance, loss of creativity. - the Sawyer Effect.

5. Extrinsic rewards can work for left-brain algorithmic tasks, but not for right-brain flexible problem-solving, creative solutions - can lead to bad, even unethical behavior and sort-term thinking like what led to the recent Great Recession - too much pay caused epic problems. Goals which lead to mastery are good - rewarding the activity better than rewarding the result.

6. Rewards best if unexpected, not if-then but now-that.

7. Self Determination Theory (SDT) - Type I person - 3 needs of a Type I person: a) autonomy - over 4 T's - task, time, technoque, and team, b) mastery - a flow - 3 laws to get in the flow - mindset, pain, asymptote - getting closer and closer to perfection but never reaching it, c) purpose - words are important like having an oath, when an employee says "we" rather than "they" for the company.

8. Toolkit for a Type I person - a) flow test - one sentence for a person like freed the slaves for Lincoln, b) small question - like was today better than yesterday, c) take a "sagmeiter" - a sabbatical like every 7 years - do something different like travel, d) do annual personal performance reviews, e) get unstuck by going oblique - by pushing out of a mental rut, f) move 5 steps closer to mastery - deliberate practice, g) 3x5 cards with question/answer to give meaning to each day, h) create your own motivational poster.

9. Nine ways to get your organization to be Type I - have 20% free time, encourage peer-peer now-that rewards, conduct an autonomy audit, take 3 steps to giving up control, play "whose purpose is it?", Reich's pronoun test - we or they, design for intrinsic motivation, Goldilocks for groups - not too easy, not too hard tasks, turn offsite into "FedEx day."

10. Type I compensation - get it right then get out of sight. Ensure internal, external fairness - harder job gets paid more, etc. Pay more than average.

11. Tips for parents on how to motivate kids: homework - autonomy, mastery, purpose, have a FedEx day, Do It Yourself (DIY) report cards, don't combine allowances and chores, praise strategy and effort not IQ, let kids see the big picture of things.

Overall, this book is very insightful and an easy read - recommended - 5 out of 5 stars.