Racine Journal Times, WorkLife Section, July 20, 2008

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The question beneath the question

It’s official. The stock market is now in bear territory and, as usual, the question on the minds of most investors and market commentators is: When will the stock market hit bottom?

That’s a good question, and one that will invoke much discussion. The reality for most of us, though, is that the answer doesn’t really matter. Why? There are more relevant questions at a deeper level which need to be asked before pondering questions about the day-to-day fluctuations of the market.

Why am I so overexposed?

Investors who feel great pain when the stock market falls during major declines shouldn’t be asking “When will the stock market hit bottom?” The deeper question they should be asking is “Why am I so (over) exposed to the stock market when I don’t have the stomach to handle a 20-30 percent-plus decline?”

By digging down to the real, meaningful question, you’re no longer a victim of circumstances which are always and certain to be outside of your control. None of us have control over whether the market goes up or down, but we do have control over how we prepare for and react to its mood swings.

Why do so many investors ignore this maxim? My observations suggest that they either haven’t learned enough about the history of stock market cycles or they have contracted investment amnesia.

After studying the history of stock markets from around the world, one will quickly discover that market declines are common and should, therefore, be expected. If you’ve been investing long enough, you’ve probably experienced a few market declines. I wouldn’t be surprised if you either don’t remember how painful bear markets can be or, because you’re in a different stage in your life, this bear market feels a lot more painful.

Investment amnesia

I’ve had some fascinating discussions with people of all stripes when the subject, say at a party, turns to investments. I especially enjoy the stories about the “killing” that confident Joe Market made on that one stock or options strategy or fill-in-the-blank whatever. Investment amnesia almost always has Joe in its grips.

One fellow enjoyed bragging about how he made a lot of money in the stock market back in the ‘70s. I quickly reminded him that the 1970s was one of the most difficult periods to make money on stocks unless he was shorting (profiting from stock declines) most of the time.

I can’t be certain, but I suspect that he contracted investment amnesia at some point and became disillusioned about his investment prowess, for true investment skill is evident by examining the performance of one’s total portfolio (not just the investments that fare well) during a full market cycle (bull and bear) and relative to a reasonable benchmark.

What is a reasonable benchmark? For most, it isn’t beating the stock market. I don’t know why so many folks are obsessed with beating the market. I hear things like, “That fund is good (bad) because it outperformed (underperformed) the stock market.” Often, the fund manager isn’t even trying to outperform the stock market, so his performance is mischaracterized and judged inaccurately by those caught by such obsession.

In other words, you have to first know what the manager is trying to accomplish and what restrictions, if any, may be placed on him by the fund’s investment objective and mandate before making judgment on whether he did well or not, given the environment he was subject to, during good times and bad.

Ego check

Why would anyone want to be disillusioned, especially when it comes to something as important as money? That’s a question I’ve yet to fully answer, but I suspect it has something to do with human ego.

Our egos trip us up constantly. In his quest for female companionship, Macho Dude drives a shiny sports car because he assumes that his outward display of monetary abundance will compensate for his lack of kindness and respect toward the object of his desire.

The powers that be at XYZ Inc. make poor decisions time and again because their egos won’t let them look in the mirror to see their own folly.

Jane Modern Woman wants to make everyone happy, so she consistently burns herself out because saying “No” is harder than admitting that she can’t be everywhere and do everything and take care of everyone.

Our egos, like most things, aren’t inherently bad, but when they become the driving force of who we are and the decisions we make, we become imbalanced, disconnected and ultimately discontent.

Honest assessment

As in most times of turmoil, the economic events of the last 12 months have exposed those driven mainly by their egos. We, as observers of the events playing out on Wall Street, can use their example to ask of ourselves another deep question: “Am I letting my ego get in the way of my health, happiness and prosperity?”

If you’re honest with yourself, you’ll know the real answer to that question. Honesty is crucial because your ego will fight and defend itself by helping you rationalize your behavior. Your ego, as strong as it may be, is no match for authentic desire.

As Aristotle’s said, “There is no action without desire, for it is desire that causes us to act.” My son must have understood that at the tender age of 3. In his sing-song way, his consistent response whenever asked, “Why are you doing that?” by the “mature” adults around him was “’Cause I want to!”

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, June 15, 2008

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Sweet Land of Liberty

The 4th of July is just around the corner. Should Mother Nature give us a break, I’ll head to Main Street for the parade, watch the fireworks in the evening and have a cookout with friends and family in between. This will be our two hundred thirty third celebration of our country’s birth. I suspect that, as time marches on, the depth and meaning of our country, what it stands for and the birthing pains endured by our founding fathers and mothers may be getting lost among the floats, brats and sparkling lights.

I must have tuned out during history class. That’s probably why I had a glorified, inaccurate perception of what happened leading up to and during the creation of our country. Why, for example, I ever had the impression that the revolutionary war was easily won by a bunch of pitchfork-bearing farmers is beyond me.

When I started reading more about early American history, I was astounded by what the facts revealed. One of my favorite books, brilliantly written by David McCullough, is “1776.” With no navy, no trained armed forces, little food and supplies (including shoes!), an inept Congress and an enemy which was highly skilled, well-paid and numerous, it’s no wonder that General George Washington mastered the art of retreat. McCullough’s account, written like a novel, helped me realize that our eventual victory was nothing less than miraculous.

Reading up on our past

Along with Washington, there were many who offered a hand (and then some) in sculpting our country. Benjamin Franklin, Abigail and John Adams, Thomas Jefferson, Alexander Hamilton and James Madison made important contributions. You can read more about them and Washington in “Founding Brothers” by Joseph J. Ellis.

After reading Ellis’ book, I gained a better understanding of the character and fallibility of some of these larger-than-life characters. Franklin was cautious about heading down the road toward independence, but once on that path, no one was more instrumental in making it happen. “Benjamin Franklin” by Walter Isaacson is my favorite account of Franklin’s life.

Jefferson was brilliant but hypocritical. He also employed nasty political tactics at times, as Adams discovered. You can learn more about Jefferson’s on and off again friendship with John and Abigail Adams, as well as Adams’ remarkable life, including his relationship with Abigail in “John Adams” by David McCullough.

Thomas Paine made a critical contribution with his writings, influencing the colonists to rally for independence. In January 1776, Paine published a pamphlet entitled “Common Sense,” selling upwards of 150,000 copies. That’s an astounding number considering it amounted to 6% of America’s population – about 18 million today.

Why would Paine, despite never keeping any money earned, or attaining long-lasting fame, from this best selling publication, bother writing it? By the fourth paragraph of “Common Sense,” it’s apparent that Paine’s motivation was deeply-rooted – something I suspect he just had to do, irrespective of any worldly gains.

Paine stated:

“The cause of America is in a great measure the cause of all mankind. Many circumstances hath, and will arise, which are not local, but universal, and through which the principles of all lovers of mankind are affected, and in the event of which, their affections are interested. The laying a country desolate with fire and sword, declaring war against the natural rights of all mankind, and extirpating the defenders thereof from the face of the earth, is the concern of every man to whom nature hath given the power of feeling; of which class, regardless of party censure, is THE AUTHOR.”

It’s no wonder that Paine’s words rallied more colonists to favor independence. Words are powerful. They can build us up or knock us down. They can create, and too often, they can destroy.

Debt of gratitude

George Mardikian immigrated to America in 1922 after suffering atrocities most of us, thankfully, will never know. A victim of the 1915 Turkish government’s attempt, through genocide, to eliminate the Armenian residents of Turkey, Mardikian not only witnessed his father’s killing, but was also imprisoned for seven years in a Turkish prisoner of war camp. That’s 2,555 days of starvation, horrible living conditions and no freedom. It’s not hard to understand why Mardikian, soon after being released from prison, came to America.

Mardikian’s love for our country was deep and genuine, which he didn’t hesitate to express – both through words and actions. About his arrival to New York, he said, “I was born on November 7, but I celebrate my birthday on July 24. That’s the day I began to live, the day I saw the Statue of Liberty.”

If Mardikian saw Lady Liberty up close that day, he probably didn’t understand the inscription on her base – a poem, “The New Colossus,” by Emma Lazarus – but I’m sure he would not have been disappointed by her words:

"….From her beacon-hand

Glows world-wide welcome...

'Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tossed to me,

I lift my lamp beside the golden door!' "

My love for our country, despite all its flaws, has deepened as I’ve learned more about her history. There are many to whom we owe a debt of gratitude for creating and protecting (thanks, Dad) our great country. There are others, like Mardikian, who used their gifts to remind us, in word and in deed, how fortunate we are to enjoy so much freedom. Spend some time learning more about our country’s history and you may find the fireworks a bit brighter, your brats a bit tastier and the parade better than ever.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, May 18, 2008

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Checkmate

When I was in my early twenties, I jotted down a list of things I decided to do in my life. I had great fun making my “life” list, which I’ve modified over the years. Seeing it come to life, though, has been a blast.

“Learn to play Chess” was one of the items on my list. I eventually learned when my older son, tutored in the game by his uncle since he was three years old, offered to teach me when he was about nine. That I was being taught by my son made the experience even more rewarding.

After a few games, I started to see some parallels between Chess and life, especially as it pertains to decision making. Not surprising, I’m not the first person to see those parallels.

Garry Kasparov, World Chess Champion for fifteen years, also found aspects of the game which can be applied to life. His book, “How Life Imitates Chess: Making the Right Moves, from the Board to the Boardroom” provides insight from his experiences to help us learn how to think so as to achieve greater success.

But 221 years before Kasparov, another great thinker noticed similarities between life and the game of Chess: Benjamin Franklin.

In his essay, “The Morals of Chess,” Franklin said, “…several very valuable qualities of the mind, useful in the course of human life, are to be acquired and strengthened by [the game], so as to become habits ready on all occasions…” He later went on to list four characteristics we may learn from Chess, which are quite useful when applied to one’s finances: foresight, circumspection, caution and perseverance.

Foresight

On this, Franklin stated, “Foresight, which looks a little into futurity, and considers the consequences that may attend an action, for it is continually occurring to the player, “If I move this Piece, what will be the advantage or disadvantage of my new situation?”

Many folks struggling with their finances have no systematic method to monitor and control their cash flow, which is simply the money flowing in and out of one’s bank accounts. Without the benefit of seeing the consequences of decisions regarding your cash flow, it’s difficult to spot and correct problems before they occur. If you want to get a better handle on your cash flow and you’re comfortable with computers, try a personal finance program such as Quicken or Microsoft Money. If computers aren’t your thing, you could use a trusty columnar pad. It doesn’t matter what you use, just as long as you have some tool to help you develop foresight regarding your cash flow.

Circumspection

Franklin explained: “Circumspection, which surveys the whole Chess-board, or scene of action, the relation of the several Pieces, their situations, and the dangers they are repeatedly exposed to, the several possibilities of their aiding each other, the probabilities that the adversary may make this or that move, and attack this or that Piece, and what different means can be used to avoid his stroke, or turn its consequences against him.”

Anyone invested in the financial markets understands the importance of seeing the big picture. Kasparov also mentioned this as one of the skills of winning chess players. What’s the big picture for investors? It’s the level and interaction of interest rates, inflation, GDP, foreign exchange rates, government budgets, tax rates, unemployment rates, consumer sentiment, margin requirements, industry trends, foreign trade, commodity prices and on and on. These factors (and then some) provide an illuminating, aerial view to aid one’s judgment on which investment moves may help you close in on the King.

Caution

Franklin said, “Caution, not to make our moves too hastily. This habit is best acquired by observing strictly the laws of the game….but you must abide by all the consequences of your rashness.”

How often do you put off or forgo a purchase when you don’t have enough cash to pay for it? Many older folks, like my dad, who lived through the Great Depression had no choice but to be cautious with their money. Without credit cards, no money meant the family might go hungry. We live in a different world, though.

Caution requires patience. It helps you say, “No!” to credit card companies when they’re offering you more credit than you can pay off in ten lifetimes.

Perseverance

According to Franklin, “…we learn Chess by the habit of not being discouraged by present bad appearances in the state of our affairs, the habit of hoping for favourable chance, and that of preserving in the search of resources. The game is so full of events, there is such a variety of turns in it, the fortune of it is so subject to vicissitudes, and one so frequently, after contemplation, discovers the means of extricating one’s self from a supposed insurmountable difficulty, that one is encouraged to continue the contest to the last…”

If your finances, whether it’s your debt, investments or a mountain of bills, aren’t serving you as well as you would like, it’s perfectly fine to try something new. What isn’t perfectly fine, though, is to give up. Thomas Edison would never have changed our world in such a remarkable, positive way if it weren’t for his amazing perseverance. To him, his “failures” during the course of inventing something new just meant that he found another thing that didn’t work. As Edison said, “If we all did the things we are capable of doing, we could literally astound ourselves.”

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, April 20, 2008

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m = E/c²

Albert Einstein’s famous formula describing the relationship between matter and energy looks strange when arranged in the format you see above, but according to Brian Greene, a professor of physics and mathematics at Columbia, that is how Einstein first introduced it to the world in 1905. Just a bit of algebraic rearranging is required to derive the format to which we are so accustomed: E = mc².

Why would Einstein rearrange the components of this formula? Does it really matter if “m” is to the right of the equal sign rather than the left?

Since both formulas are mathematically equivalent, it doesn’t make a difference except, I suppose, to provide a different perspective. A shift in perspective, though, doesn’t alter the fundamental balance between matter and energy, and the fact is that the existence of one is dependent upon the other.

Distorting the truth

Unlike physics, human beings and the interactions we have with each other are not an exact science. Unfortunately, truth gets distorted at times.

As a practicing attorney, our country’s second president, John Adams, felt so strongly about upholding the truth that he risked his livelihood and reputation by defending a group of British soldiers on trial for the Boston Massacre of 1770. During the trial, Adams said, “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”

With so many Americans feeling the pressure of higher prices, job losses and a housing market on a diet, it’s easy to lose sight of the fact that we all contribute to the collective state of our economy. It’s not just a massive structure like a high rise building, void of individual building components. By understanding the role that we each play on an individual level, we can repair the cracks that led to our current, weakened state and foster greater stability in the future.

A change in perspective helps to understand the importance of balance.

Learning to take the bad with the good

Most would agree that pain is bad and pleasure is good. That’s why we seek pleasure and avoid pain, even to the point of excess. This creates a paradox: excess pleasure increases the likelihood of more pain.

Consider food, for example. In our country, food is no longer just an agent of survival. It’s morphed into a source of pleasure and a tool to ease psychological pain. Conversely, exercise – a source of pain for many – is avoided. By balancing more food with more exercise, excessive weight gain and other health problems such as diabetes wouldn’t reach epidemic proportions.

Similarly, those who sought an excess of pleasure by taking on more and more debt to spend and consume at an unsustainable rate – individuals, families, local & national governments and businesses – without balancing it with increased income to service their debt, are feeling the most pain. More pleasure in the short run created more pain in the long run.

What steps can we take?

What can we, as individuals, do to foster greater economic balance?

First, save and invest more. Not only does that help you, but it also helps the overall economy. For example, if corporations and banks don’t have access to enough capital, they can’t lend or invest as much, throwing our economy into reverse. And if foreign investors lose their appetite for our assets, that much less capital will be available for investment.

Second, this is an election year, so be mindful of those whom you entrust to represent you in government. Their decisions and actions will have an affect on all of us – whether positive or negative – for years to come. As John Adams reasoned, we might have to resist our natural inclinations and accept the stubborn facts.

What happened to Bear Stearns was not a freak accident. If we don’t address our excessive spending, is it too hard to imagine that the savers of the world providing balance to our excesses (mainly China & Japan) by funding our massive trade deficits could lose confidence in our ability to repay our debts? I don’t like high tax rates, but I recognize that our ongoing national deficits and imbalanced budgets cannot continue without a reckoning at some point.

We can’t keep spending more, whether for wars or entitlement programs, without balancing the other side of the equation with increased tax revenue and shoring up our national balance sheet. In other words, either government spending has to decrease or tax revenue has to increase in order for us to avoid going deeper and deeper into debt. That’s a mathematical fact.

Risk and return are linked

Another way we can foster greater balance is to recognize that risk and return are inexplicably linked. Investors, especially those hoping for the stock market to head higher would be wise to recognize that most stocks are experiencing a reckoning because a big portion of corporate earnings enjoyed for the past five years had more to do with excessive debt & lax risk control than organic growth. The tug of war between bears and bulls provides tremendous balance to the markets, as the bears provide fresh perspective to those who can’t bring themselves to put down their 20-oz. margarita.

Our country – so much more than the sum of its parts – has tremendous potential. We are its building blocks, so its stability depends on us as much as we depend on it. Seek greater balance, and the balance of the whole is bound to improve.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, March 16, 2008

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Purple is the new black

Fashion trends come and go.  Anyone who remembers those horrid bell bottoms in the ‘70s or big hair and heavy makeup in the ‘80s would agree that change is, thankfully, inevitable.  But one color – black – seems to be a constant.  Fashion designers try to throw it to the wind, but it comes right back like a boomerang.

Most women would agree that a simple black dress – sexy, slimming, timeless and classy – is a girl’s best friend when everything else in her closet looks drab or downright horrific.  So how do those on Fifth Avenue get us to buy the latest trends?  They throw “the new black” into the sentence to influence us to fall in love with the latest “in” color.

This year, purple seemed to be the new black.  Vera Wang – bless her heart – had a field day with it.  I actually love purple, but enough is enough.

I wonder if the crowd on Fifth Avenue gets together each year to opine on which color should be the new black.  Assuming the film, “The Devil Wears Prada” had some semblance to reality, I can just picture the elegantly dressed fashion moguls sipping cappuccinos and nibbling cranberry biscotti while deciding on behalf of the (fashion misfit) masses that, next fall, mustard will be the new black.

Fads on Wall Street come and go too.  Leverage (debt) was the “in” thing during the roaring ‘20s.  A lot of folks made a lot of money until an overheated, expensive stock market pushed up by greedy speculators turned on a dime due to weakness in the underlying economy, which was exacerbated by a Federal Reserve out of touch with reality.  Here we are, almost 80 years later, experiencing the aftermath of too much leverage coupled with a weakening economy.  The faces and names may be different, but the problem is the same:  lack of risk control.

Risk control:  Always in fashion

Risk control in your investment portfolio is what the little black dress is to a woman’s wardrobe. Timeless and classy, it’s something that will never go out of style over the long run.

What does risk control mean? At the very least, controlling risk means that you should have a good understanding of the potential downside risk (risk of loss) and upside return for each investment and your total portfolio. Risk and return are highly dependent upon the price you pay for the investment relative to its fundamental valuation. A higher (lower) price translates to less (more) cushion, or as Benjamin Graham labeled it, margin of safety.

That’s why so many on Wall Street obsess about whether stocks are inexpensive, fairly valued or overvalued. But do any of them really know? No, because the price that one is willing to pay for any investment is just a matter of opinion which, just like fashion, isn’t static. And opinions (prices) can get a little skewed when emotions like fear and greed are elevated.

For example, if you hear everyone you know, including your hair stylist and Aunt Mae saying, “I love ABC Public Company because it’s sure to be the next Microsoft,” especially when the market’s appetite for risk is strong, ABC’s stock could trade significantly higher than you would be willing to pay for it if you’re careful about controlling risk.

By knowing how much you’d be willing to pay for your investments, you’ll also discover the price at which to sell your investments – a difficult task for professional and Main Street investors.

What if, on the other hand, fear is running wild, causing the market’s appetite for risk to wane? Risk control, in this scenario, is counterintuitive because it’s hard to bring ourselves to purchase an investment, even though it’s offering juicy returns, when the market’s ever-changing opinion (price) is worrisome. No one wants to buy an investment and watch it drop 20%, so apply risk control by understanding that your aim is to control, not eliminate risk. After all, eliminating risk in a less risky environment (recessions typically end) isn’t much better than amplifying risk with leverage in a riskier environment.

Analyzing inflation trends

Another way to manage risk is to examine your investments and overall portfolio to determine if the positive outcome you seek or need (probably a positive return) is highly dependent upon a small number of factors. For example, when inflation is trending up, as it currently is, it can be quite damaging to financial assets – especially fixed income investments such as non-inflation-indexed bonds. Along with those ugly bell bottoms, a trip back to the ‘70s would quickly remind folks that too much inflation isn’t an attractive accessory for stocks and bonds.

Since the success of a bond-heavy portfolio in today’s environment is highly dependent upon inflation trending down, not up, it’s important to recognize that we have an expanding global economy, not to mention the Fed, pushing inflation in the opposite direction.

Change is certain, and so is investment risk. Those who were complacent about risk or, worse, snagged by the latest investment fads of the last few years are surely feeling some painful, purple bruises by now.

There’s nothing wrong with color in your portfolio as long as you understand the risks you’re taking and you know when to say enough is enough.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, February 17, 2008

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Back to Basics

Money touches almost every aspect of our lives.  Where you live, your career, transportation, education, relationships, health and children, just to name a few, are all affected by money.  That’s why it’s no surprise that 67% of Americans, according to a recent study, are motivated to get financially fit this year, topping the 57% who said they want to get physically fit.  If you, like many, are wondering what you can do to improve your financial well-being, it may help to get back to basics.

Here are four ways to shape up your finances by getting back to basics:

Be true to yourself

Humans are social creatures.  We’re built to watch other people and, in doing so, we develop a natural inclination to go along with the crowd just to fit in.  Over the long-term, that’s probably been helpful to the survival of our species.  But modeling ourselves after others can be unhealthy if we lose ourselves in the process and become disconnected from who we really are.  The evidence of your connection or lack thereof can show up in how you spend your time and money.

One clue to whether you’re staying connected to the real you is how often you feel regretful, bored or burdened after making a purchase.  If you’re true to yourself on a consistent basis, you’ll have positive, not negative, thoughts and feelings about how you spend your money.  That’s why I rarely make a purchase – especially a large one – unless it feels really good.  For me, that means two things:  1.) an ‘Absolutely, 100% Yes!’ visceral response and 2.) the item or service has to reflect me and my unique nature.  If it’s right for me, I jump in.

But if it isn’t right for me, as some friends have found out, I won’t budge.  My buddies are having such a good time with their Harley that they can’t understand why my husband and I have resisted their numerous suggestions to go hog wild.  Our consistent response has been, “We love that you love your hog, but we won’t love it as much as you, certainly not enough to buy one, so what’s the point?”  We’ve stood firm, and our friends respect our decision, so they recently suggested that we be the token chase vehicle as a caboose to their train of bikes.  And we happily agreed.

Open your eyes to the big picture

It’s all in the details, right?  Not always.  Let’s say you’re offered a promotion which entails a transfer to New York and a 20% pay increase.  Ignoring the fact that your largest expenditure – housing – could rise by 30% or more may lead you to take that promotion without negotiating for a higher raise.  Others lose sight of the big picture when they turn down a position that is light on pay but heavy on experience.  Paychecks come and go, but experience always stays with you, opening more doors and the chance to earn more down the road.

Investors sometimes lose sight of the big picture by tripping over a dollar to save a penny.  For example, it’s easy to tell how much a mutual fund costs by looking at its expense ratio or its expenses as a percentage of assets.  Higher expenses can be a drag on performance, but not always.  Sometimes, higher expenses are necessary to employ a unique investment strategy.  If such a strategy is successful in providing better performance (net of expenses), isn’t a higher price tag worth it?

Learn from your mistakes

We all make mistakes with money.  What we do with the knowledge offered by our mistakes, though, is up to us.  A wise sage once said that the definition of insanity is doing the same thing over and over again and expecting different results.  If you, like many, feel like you’re on a hamster wheel, running fast to nowhere, try a new, reasonable course of action and see if you get better results.

How can you learn from your financial missteps?  Start by preparing yourself for some honest, self examination.  It may be difficult at first, but it gets easier in time, especially when you begin to see tangible benefits, which can be huge.

That’s the biggest reason why I don’t just review my investment decisions that turn out to be profitable.  I review all my dogs too because they, more so than my winners, help me to consistently improve my investment decisions.  Always celebrate your successes, but examine your mistakes if you want to plant seeds for greater success in the future.

Follow your instincts

How often have you ignored your gut instincts and ended up in an awful position or relationship?  It’s that faint whisper we too often ignore because it’s so easy to rationalize away.

If something doesn’t sit well with you when you’re interviewing for that new job, but you just can’t put your finger on it, don’t ignore it.  When you’re shopping for a new car or a new home, don’t ignore that little whisper telling you to keep looking.  If you require more time to be totally comfortable with the purchase, it’s time well spent.

Just like your exercise equipment, money is a powerful tool to achieve greater well-being.  The key is to use it effectively no matter how much you have.  Get back to basics and you may be surprised at what you can accomplish.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, January 20, 2008

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Déjà vu

The Chinese New Year is just around the corner.  We’re winding down the year of the pig and about to usher in the year of the rat.  How appropriate.

Consider Angelo Mozilo, CEO of Countrywide Financial Corp.  Mr. Mozilo pulled a fast one on Wall Street, convincing most that all was well in mortgage land while simultaneously selling more than $265 million of his company’s stock over the last two years.  His average selling price?  $36.90.  Today, the stock is worth $6 and change, which would probably be lower if Bank of America didn’t come to the rescue.  How convenient.

Mozilo’s day in the sun, which can be described as “Kenneth Lay, Enron Debacle, Part II,” creates a healthy, cynical dose of heartburn for those interested in protecting their capital.  Cynicism, when applied in the right amount to investment decisions, is quite valuable as it causes one to take notice when the top dog of XYZ Public Co. says, “Do as I say, not as I do.”

As Groucho Marx said, “Who are you going to believe, me or your own eyes?” 

Is it possible to be cynical and optimistic at the same time?  Courageous short sellers would probably say, “Yeah!”  Their cynicism creates optimism (at least for them) in a unique way for they have the opportunity to capitalize on situations like Countrywide’s downward spiral.  But short sellers (expecting the stock price to decline) are reviled by the long-only crowd (expecting the price to rise), creating a tug of war between opposing forces resembling partisan tactics in our political arenas.  And this is exactly as it should be.

Debates are healthy.  An exchange of ideas between those with open minds, the courage to speak their minds and the willingness to learn is what fosters progress.  Those who fit the opposite of this description have been dubbed sheeple.  As you probably guessed, this funny word is a cross between sheep and people.  It’s used to describe those who accept what they’re told at face value, without contemplating whether the information makes sense to them, or if it accurately reflects their view of the world.

Many in a position of power love sheeple.  Naturally, life is so much easier without all those questions and accountability, but rarely better – especially in the long run.  That’s why I’m leery of any CEO who is visibly uncomfortable or evasive when anyone boldly peppers them with good questions.  Who’s the best known polar opposite of such a CEO?  Warren Buffett.  Mr. Buffett is so welcoming of questions during Berkshire Hathaway’s annual meeting that he spends countless hours answering as many questions as he can.  That, along with making them lots of dough, is one of many reasons Berkshire shareholders adore him so.

Heads of state are largely responsible for the success of the business they manage, but it’s also shareholders’ responsibility to keep them in check.  That’s why I’m even more leery when there aren’t enough shareholders asking those questions begging to be asked.

For example, stock analysts are so obsessed with the minutia of quarterly revenue and earnings projections that they often overlook the fact that it makes no sense to blindly accept a CEO’s word on the condition of the business he has been entrusted with while he’s liquidating the majority of his interest in that business.

This happened with Enron, and once again with Countrywide.  Investors blindly accepted the analysts’ recommendations to buy or hold the stock while chastising short sellers for being so un-American.  Did I say this happened with Enron, and once again with Countrywide?

Mon Dieu, we could call it déjà vu, but this scenario doesn’t quite qualify.  It didn’t just feel like it happened before.  It actually did happen before.

The same can be said of those who blindly accepted triple AAA bond ratings stamped on asset backed securities such as collateralized debt obligations (CDOs).  I suppose a simple question like, “I’m basing my decision on their information and analysis, so what are the ramifications if they’re wrong?” never occurred to those entrusted with shareholder capital.  Oops.

Apparently, investors enjoy learning lessons again and again – especially when the Fed keeps rescuing financial markets and consumers addicted to debt and low interest rates.  Those other, minor details such as debasing our currency, stoking inflation and a negative real rate of return on U.S. Treasury securities just aren’t that important.  How unfortunate.

One of the best outcomes of economic contractions is they correct excesses created by those like Mr. Mozilo, and bring to light their true character, which invariably (and thankfully) weeds them out of the system.

The other good thing about the current weak economic environment is that more buying opportunities are finally popping up for those who have waited patiently to buy good investments at a decent price.

What’s built up over the last five years won’t correct overnight, so the next year or so will offer even more buying opportunities, depending upon the severity of the recession.  Investors who are cynical when it makes sense to be cynical; optimistic when it makes sense to be optimistic; who wait patiently and refuse to join the flocks of sheeple do best whether or not the financial markets are wrestling with bulls, bears, pigs or rats.  Those ready to swing with gusto when they get their fat pitch will be rewarded handsomely.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, December 16, 2007

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'Two and you'

With the holiday season in full swing, parents might find this to be a good time to reflect on the gifts you’re about to bestow on the little ones in your life.

Whether your children have made their wish lists yet or not, you still have time to try something new this year. Ask them to make two columns on their list: one for objects only, which you could call “stuff,” and the other for activities involving your time and undivided attention. You might be surprised by the discussion you’ll have with your kids, as well as the list itself. I was.

My 8-year-old stated that he doesn’t want to completely give up the objects on his wish list, but he’d happily pare back the “stuff” column or exchange a few objects with activities if that means he can enjoy those objects and more time with his family. When I asked if he would rather have, for example, five video games (I would never buy that many) or two video games with some family time thrown in, he immediately chose the latter. I was pleasantly surprised.

To be sure that he wasn’t just saying what he thought I wanted to hear, I asked, “Are you sure you’d be happy with only two games?” To paraphrase, he said, “I’d rather have two and you.”

After he pondered the question for awhile, he also asked to exchange one object from his “stuff” column for an activity that doesn’t even require a purchase: a few Saturday afternoons sledding down that fabulous hill at Lockwood Park, using our sled collecting dust in the basement. That I have a new reason to enjoy sledding again made me wonder: who’s giving the gift to whom?

Don't forget what's really important

While every parent wants only the best for their children, living in a consumptive society makes it easy to forget what makes them truly happy. My son made it clear that objects alone are not the foundation of his happiness. It’s something I already knew, but it got lost somewhere in the depths of my mind. Thankfully, he helped me remember.

At the risk of sounding like the Grinch, it’s like we’re sleepwalking through an ocean of stuff that, after a certain threshold, has little, long-lasting impact on our satisfaction in life. If you’re skeptical, ask anyone over the age of 25 to name five gifts they received as a youngster which didn’t involve some enjoyable family time. I’d be surprised if they can recall more than two.

In a few years, Suzie will lose interest in the adorable tea set she’s thrilled to unwrap on Christmas day, but if you spend some time playing tea time with her, she’ll always have fond memories of her first tea set. Enjoy reading “The Lion, the Witch and the Wardrobe” (C. S. Lewis) with your little Margaret and you just might kindle her lifetime love of reading. Johnny will easily forget the baseball glove he got on his 7th Christmas, but throw in some fun time playing catch and he’ll cherish and remember that glove for years to come.

And so will you.

Less stuff = less pressure

You may also find that buying less stuff translates to less financial (and time) pressure, freeing up more time to enjoy with your kids. After all, buying more things doesn’t just require more time at work to earn more money. You also have to spend time to transport, wrap, clean, store and eventually discard it.

You might have heard that Europeans work to live and Americans live to work. Neither we Americans or Europeans can claim to have a utopian society; there are benefits and drawbacks to both ways of life. I have to admit, though, that a “work to live” philosophy is intriguing. Have Europeans, due to a longer, different history figured out something that we’re just beginning to ponder? Have they learned that all the time and effort it takes to produce a delicious bottle of Merlot doesn’t mean anything if one doesn’t have enough time to truly savor the fruits of their labor?

Most folks have children because they enjoy having them in their lives. That’s why your gift of time is not only a gift for them, but also a gift for you.

Now an exercise for you

How can you create more time when we’re limited by 24 hours per day? You can’t create more time, but just like money, you can use it more effectively. Begin with some honest reflection. Make your own list with two columns: one column should be labeled “How I Actually Spend My Time.” Label the other column “How I Want to Spend My Time.” Next to each activity, jot down a time estimate. Be sure to make your “Want to” list without overanalyzing it, as it’s something you should do from a gut level.

This exercise, just like your children’s new gift lists, will probably surprise you. By examining both columns, you’ll see where your priorities are, where you want them to be and the extent that they are in or out of alignment. This is one way to foster conscious, purposeful living. You’ll remember what really matters to you, and find ways to align your time and resources with it.

And since your children learn best from your example, these are gifts that will be passed on and remembered for generation after generation.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, November 18, 2007

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The Dirty 'I' Word

If you had to chart a course from Racine to Milwaukee, you wouldn’t be concerned if you veered off your planned route by, say, one inch for every mile of your journey because you’d still make it to Milwaukee.  But what if you veered off from your route by that same inch per mile when traveling from Earth to Neptune – 2.7 billion miles away – and you only had enough fuel and supplies to last for the duration of your planned journey?  Without a friendly alien willing to save the day, you’d be in serious trouble.

Minor flaws, left uncorrected, create not-so-minor results when exaggerated by time or distance. That’s why I felt compelled, about a year ago, to send an e-mail to the editor of a popular personal finance magazine. I’ve enjoyed reading this magazine for many years, as the articles are, by and large, informative and reliable. The article in question, however, offered faulty advice on the amount of money one should accumulate, by retirement, in order to support the amount needed to live on during your fall and winter years.

The target amount they errantly advised their readers to save for retirement is twenty times your current annual spending needs. According to their formula, you would need $1 million to support $50,000 of current annual spending. To their credit, the authors did state that their rule of thumb is a crude estimation. I couldn’t agree more. Why? The problem I pointed out to the magazine’s editor was that this rule of thumb doesn’t factor in the dirty “I” word: Inflation.

Ignoring inflation can cost you

$1.0 million may be enough to support a $50,000 annual withdrawal for those retiring right now, but for anyone retiring at a later date, that target ($1.0 million) has to be bumped up at an exponential rate, rising faster the further you go out in the future. Assuming an annual inflation rate of 3.2%, in five years, you’ll need $1.2 million (23.4 x spending) to support that same $50,000 withdrawal; in ten years, $1.4 million (27.4 x spending); in twenty years, $1.9 million (37.6 x spending).

Ignoring 3.2% each year seems like a minor flaw, but just like one inch off course per mile is minor if you’re the astronaut traveling to Neptune, the end result won’t feel minor if you have to accept a lifestyle that’s only 53% of what you planned for retirement. That’s one reason why, as I stated in last month’s article, following rules of thumb can be problematic.

What's your 'real return'?

Another problem caused by inflation when making projections far into the future is when, as we saw in the 1970s, economic and geo-political conditions send a burst of oxygen over burning embers of inflation. Without providing for some room for error, those who retired just prior to or in the 1970s felt the pinch of higher prices across the board – food, energy, medical care and housing. Sound familiar?

An even worse scenario, which we could be facing at the moment, is when you have a mix of inflationary pressures, dampened economic growth and Wall Street losing its appetite for risk. Given that tasty cocktail, overextended financial assets have a hard time cranking out healthy real returns. What are real returns? It’s the return you receive on your investments after subtracting inflation. That nifty number is what really matters because it determines how much wealth you’ll truly accumulate, and the type of lifestyle you’ll lead when retired.

The dirty “I” word causes more than one central banker to lose sleep, and with good reason. That’s why the Fed has recently warned that, due to inflationary pressures, it doesn’t have as much room as it would like for further interest rate cuts, despite stronger economic headwinds. I don’t envy Bernanke and his crew, as they’re in one big pickle.

Allow room for error

One of the best ways to deal with an uncertain future is to allow room for error. Countless businesses have failed and families destroyed, because those making decisions today – which ultimately affects tomorrow – made unrealistic projections with little or no room for error.

How can you allow room for error? At the very least, spend your time, energy and resources on those factors you can control, and none on those things outside of your control. For example, be sure to establish an emergency fund, which translates to less dependence on credit cards when unexpected events, like your washer breaking down or the loss of your job, occur. Living well within your means also allows room for error. For those 40 and younger, less dependence on government entitlement programs, such as social security, and more dependence on your own savings will provide more cushion in the event those programs are incapable of fulfilling their obligations to your generation. For your investment portfolio, room for error is provided by greater diversification, a well-rounded asset allocation and downside protection. Father Time also gives you some cushion, so it’s never too early to throw out that procrastination suit.

Life is messy. Nothing ever goes according to plan. Allow room for error and you’ll increase the odds that, despite the unexpected, you’ll stay on course and reach your final destination with very few bumps along the way.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, October 21, 2007

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What does happy look like for you?

Have you ever wondered why there are so many different diet books? Amazon.com has 232,418 books associated with the word “diet.” When I Googled “lose weight,” I got over 8 million results. If the basic formula for weight loss is, by and large, “less calories + more exercise = weight loss,” can there really be that many different ideas?

I suppose the reason for so many different ideas is that we are all truly unique from one another, and what works for some may not work for everyone.

That’s why I cringe when I hear one-size-fits-all financial advice, formulas and methodology. Similar to the weight loss formula, the basic formula for success with your personal finances is “budget + save + invest + protect = financial well-being.”

But the variations of how you can implement that formula are enormous. Since we’re all so different, that’s a good thing. Too often, though, we forget to exercise our inherent right for creative control over our lives, which means we may listen to something like, “You should save 10 percent of your income.” What if I want to save 50 percent?

One size rarely fits all

Here’s another one-size-fits-all financial tidbit: A 15-yr mortgage is better than a 30-yr mortgage because the total interest you pay is far less.

While the portion of that statement addressing the total interest paid is factual, use of the word “better” is debatable. This statement doesn’t address how high (low) mortgage rates are, whether they’re trending up or down, if there are worthwhile investment opportunities to funnel the extra payments to, your age and tax bracket, if there are one or two income producers in the family, how many years before retirement, and at least five other issues.

Similarly, the best economic choice is not necessarily the best choice for you in this moment. For example, many more Americans took out an adjustable-rate mortgage (ARM) in the past few years than ever before. Some did so upon advice that they could always refinance when their rate resets. As such, those with an ARM enjoyed a lower mortgage payment for a time, which appeared to be the best economic thing to do, right? Wrong. These folks were never advised that interest rates can and do rise, which means refinancing may not offer relief. They were never counseled that real estate prices can and do fall at times. Also, lenders can tighten their lending standards, making that new loan harder (or impossible) to get, especially for someone with shaky credit.

This one-size-fits-all advice didn’t inform many that lower mortgage payments for a short time might be too little compensation for assuming the additional risk of ballooning mortgage payments, or worse, losing a home.

What do you really want?

Since following rules of thumb can be problematic, a better use of your time, no matter what your age, is to focus your attention on what’s best for you and your loved ones. As difficult as it may be, that means setting your own standards, exercising creative control and turning a blind eye to what others are doing. A course of action that’s right for your neighbor, colleague or sibling could be completely wrong for you.

Whether it’s for your personal finances or anything else, planning for the future should strike a balance in such a way that your journey to and the end result are as enjoyable and fruitful as possible.

The first place to start is by asking, “What do I want?” Strangely enough, some folks struggle with this question for a couple of reasons. First, they’re so used to making statements like, “I just want to be happy.” While happy is no doubt a good thing to reach for, it’s just too broad.

You have to be able to answer the simple question, “What does happy look like for me?” If you have trouble answering that question, try a few thought experiments to let your imagination run wild until you can begin to see, taste, touch and smell and wrap your arms around it. Then your journey and eventual destination will come into focus, and the specifics of how, what, why and when will fall easily into place.

As good as it gets?

The second reason some have trouble figuring out what they want is they are so accustomed to the way things are that they have trouble believing it could be any better. They get stuck in “what is.” Among his many great performances, Jack Nicholson played the role of a quirky, obsessive-compulsive guy in the film, "As Good as It Gets." Nicholson’s character struggled to break out of his comfort zone because he knew his chance for greater fulfillment, due to a new love interest, could easily slip away if he didn’t move beyond his old ways. He, like many, got stuck at times because his long-time mantra was, “What if this is as good as it gets?” We all fall victim to such thinking at times, and that’s why it’s good to remember what it was like to be a kid.

For the last four years, I’ve had the pleasure of volunteering for Junior Achievement, a non-profit dedicated to educating and inspiring young kids to value free enterprise, business and economics to improve the quality of their lives. It’s incredibly enjoyable for so many reasons. At the top of my list are the fantastic things the kids say and create when I tell them to let their imaginations go free. They get especially creative when I have the opportunity to tell them there is no right or wrong answer. Their young imaginations soar in those moments because there aren’t any rules of thumb, one-size-fits-all anything, and “what is” hasn’t had time to solidify in their minds.

What does happy look like for you? Only you can answer that. Let yourself have some fun with that question, and you’ll be surprised at how good it feels to break out of your comfort zone.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, September 16, 2007

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I'll take a baloney sandwich

As one who has always enjoyed observing human nature and good food, there have been a few times when the combination of the two made me stop in my tracks.  Take the time, for instance, when I had the pleasure of an invitation for dinner at a pastor’s home while on a Habitat for Humanity trip in Armenia.  The hospitality my dinner companions and I received was indescribable.  Just picture a dinner table so overflowing with delicious food that the parade of additional dishes making their way from the kitchen had to be stacked two-high because there was no more room on the table.  The abundance of food, laughter, song and engaging conversation that night is one of my most cherished memories.

Another time food plus human nature made an impression on me was when, as a waitress many years ago, I served a family man a pricey meal.  How we got on the subject I don’t recall, but he confessed that, despite his income never being higher, he wasn’t really happy.  I quickly asked, “Why?” with a shocked expression.

He explained that he would rather have a baloney sandwich in the park with his family any day than to eat a steak dinner alone in a fancy restaurant.

That statement made a huge impression on me, as it’s not something you typically hear in a super-size-me society.  That family man taught me an important lesson that day:  Sometimes, less is more.

Time to 'Soak up the Sun'

The sentiment expressed by that husband and father strikes at the heart of the work-life balance that an increasing number of American workers are requesting.  Companies are slowly giving in, but only with reluctance due to a tight labor market.  A similar and important element, which is helpful to achieving greater success with your personal finances, is what’s driving this shift:  Contentment.

Sheryl Crow touched on this with “Soak up the Sun”:

My friend…..

I can’t afford his gas

So I’m stuck here watching TV

I don’t have digital

I don’t have diddly squat

It’s not having what you want

It’s wanting what you’ve got

Someone once made a quip that Webster’s should change the definition of money to “not enough.”  Do you, like many, find yourself thinking, ‘I don’t have enough money.  I’ll never have enough money.  Everyone has more money than me.  Those people have more than their fair share of money. The rich are getting richer while the poor are getting poorer.’?

If so, you’ve got a lot of company.  That club is bursting at the seams, but that doesn’t mean you have to belong to it.  As Groucho Marx said, “Please accept my resignation.  I don’t want to belong to any club that will accept me as a member.” In other words, you don’t have to join a mode of thinking that doesn’t serve you well.

Is it wrong to want more out of life?  Absolutely not.  From a pure economic standpoint, wanting more, along with the money it creates, is what makes the world go ‘round.  But when the gap between what you want and what you have (or believe you can have) is as wide as the Grand Canyon, seeds of destructive behavior get an extra dose of fertilizer.  As history has shown us, discontentment at the extreme is at the root of more than one war, overthrown government and genocide.

The impact of contentment

But extreme situations don’t brew overnight.  It takes time to percolate, and invariably begins at the most personal level – with individuals and families.  And it’s not about the gap between the rich and the poor.  People can be content with a little or discontent with a lot.  I’ve seen destructive behavior exhibited by deca-millionaires, meaning their net worth exceeds $10 million, because what they have will never be enough.  On the flip side, I’ve seen well-balanced behavior by some who will never have more than a fraction of those deca-milllionaires. 

Why does the level of contentment one has regarding money and material possessions matter so much?  It matters because the very thing that holds so many folks back from what they want (i.e., contentment) is the feeling of lack – a hard thing to shake.  Those who manage to release that attitude open up a world of possibilities and greater satisfaction with life.

Meet one family that's proud to call itself "cheap"

One family has figured out a way to make the “less is more” philosophy work for them.  Steve and Annette Economides proudly dub themselves, “America's Cheapest Family.”  Their book, “America’s Cheapest Family Gets You Right on the Money:  Your Guide to Living Better, Spending Less, and Cashing in on Your Dreams,” explains how their family of seven manages (and happily, I might add) to live on $35,000 per year.

The Economides family has managed to do what most Americans consider impossible, and they are doing it with dignity.  Their methods may not work for everyone, as it requires a lot of discipline, planning and courage to shun the status quo.  These folks are downright content with second hand clothing, furniture and soon-to-be-expired meat. 

What’s most remarkable is that not only did this family find the courage to resist a way of life that doesn’t serve them well, but they went further and consciously created their lives the way they want it to be and found their bliss.  And that is absolutely priceless.

By the way, baloney with a bit of lettuce on buttered, wheat toast is divine.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, August 26, 2007 Printer Friendly

Goldilocks, where are you?

Goldilocks has officially skipped out of town.  The not-too-hot and not-too-cold, but just-right economy we’ve enjoyed for quite some time was chased out by the Bear family.  Like many financial woes, the current problems stemming from a liquidity crises seemed to come out of nowhere.  But did they?  Warning signs have been flashing for 12 to 18 months, but perpetual optimists got complacent and went on with business as usual.

The turmoil in the bond market is unprecedented.  Billions of dollars worth of exotic financial securities were bought by those who never really understood them, which are now toxic waste.  Furthermore, financial strategies that are kissing cousins to those created by the geniuses at 6-feet-under Long-Term Capital Management, which required a major bailout in 1998, are proving that seemingly minor flaws magnified by leverage and arrogance is not a tasty recipe.

No one, including myself, can accurately predict whether this crisis will end up being a minor flu strain or one resembling the 1918 pandemic.  Either way, it’s not going to end well.  But that doesn’t mean it has to turn out badly for you.  If you have money invested in the financial markets, here are a few things to ponder:

Don’t get too close, and Papa Bear can’t bite.  Most folks want risk when the stock market is rising, especially toward market tops, so it’s only natural if your equities are taking up more space in your portfolio.  If a news report of a 300-500 drop of the DJ Industrials Average makes your stomach do a few somersaults, it’s time to reassess your stock holdings – both quantity and quality.  How would, for example, your stocks and overall portfolio perform if the stock market continues sliding?  How sensitive are your investments to interest rate fluctuations, or the need to refinance current debt or finance future growth?

Fight the urge to chase performance.  When reviewing mutual fund performance, keep in mind that hefty (or lousy) returns represent what’s already happened – not necessarily what’s going to happen.  If economic conditions have deteriorated, is it wise to invest in a fund showing good returns earned in and dependent on a more favorable environment? For example, many funds are, and have been for many years, heavily exposed to financial stocks, which boosted their returns while interest rates were declining and money was loose.  With the winds of change blowing from both directions, you can probably expect returns sported by funds tilted toward financials to take a beating for awhile.

Expect the unexpected.  Many of Hurricane Katrina’s victims suffered a double dose of tragedy because they believed that the levees would protect them.  And if those broke, at least their home-owners (or hazard) insurance would protect them, right?  For too many, both proved to be worthless.  That’s why a false sense of security is so damaging.  Many may be facing a similar situation with their bond investments.  Your bond investments might hold up in the current environment and help temper your stock losses, but they might not. 

On the domestic front, high yield (junk) bonds are most at risk.  Even bank loan funds, some short-term bond funds and commercial paper – typically low-risk investments – are suffering.  To make matters worse, bond-ratings firms such as Standard & Poor’s and Moody’s were slow to recognize the extent of the risk bondholders faced, and are now catching up with increased downgrades.  As such, bond managers required to meet certain mandates such as holding only high-quality corporate bonds may be forced to sell any downgraded bonds.  Such a scenario would only exacerbate an already weak situation, which will take more than a few days to correct.

Trust, but verify.  While our financial system is quite sound and the Federal Reserve can be expected to do its job as lender of last resort, be wary of any commentary that seems a little too rosy.  Less than three months ago, Chairman of the Federal Reserve, Ben Bernanke, said that the risks of the sub-prime mortgage mess were largely contained.  As of this writing, the Fed has injected more than $38 billion into the banking system, and other global central banks are doing the same – a sign of financial stress all around the world.  Furthermore, 117 major U.S. lenders have either filed for bankruptcy or temporarily ceased operations, with 14 more teetering on the same cliff.  All the while, market pundits addicted to the Greenspan Put are pounding the table for the Fed to rescue the day.  Again.

Jim Rogers said it best:  “People should be more concerned with the return of their principal than the return on their principal.”  It’s easy to forget such sage advice when markets keep reaching for the moon, and risk control is so old school.  It’s important to understand that a large component of healthy long-term investment returns is avoiding significant losses.  With that understanding, you’ll be better prepared to invest prudently in any economic environment.

What does that mean?  It means being proactive rather than reactive.  It means being calm rather than panicked.  It means having faith in our markets, but not blind faith.  It means patience.  It means being confident, but not arrogant.  It means having clarity rather than confusion.  It means seeking truth.  These are some of the characteristics that investors would be wise to consider, for with them, you can eat your porridge and sleep sound in a bed just right for you, with or without Goldilocks or the Bears.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, July 15, 2007     Printer Friendly

It's not easy being green

The American dream is turning into a nightmare for a multitude of homeowners.  With almost $590 billion of variable-rate mortgages due to reset at a higher interest rate between now and the latter part of 2008, the mortgage mess has yet to hit half-time.  While Congress tries to sort it out, homeowners are walking away from homes they couldn’t truly afford.  Many characters played their part in this tragedy; this wasn’t a one-man show.  The lead roles were played by those you can spot when you follow the money trail.

First, the lenders.  In years past, lenders had stringent standards about lending money.  Lessons learned during the Great Depression helped shape the mindset of Mr. Banker to carefully review the financials and character of Ms. Borrower.  Because her loan would stay on his books, he wanted to make sure, as best he could, that her loan would be repaid at a minimum.  Ideally, he’d get his interest payments too, but protecting his capital was most important.  As our financial markets evolved, Mr. Banker found it easier to package those loans and sell them on Wall Street.  Because Mr. Banker no longer carried the loan on his books, he wasn’t as concerned about getting repaid.  In other words, his money trail stopped at the point where all he had to do was to make sure his loans met standards established by the second set of characters:  the Investors.

It’s easy to spot the money trail blazed by investors.  After all, money is their agenda.  Yield-starved investors in a world of 1% cash interest rates played the perfect role of capitalist.  Any good capitalist would jump at the chance to borrow money at 1%, lend at 6%, to make a spread of 5% with (what appears to be) a low-risk strategy.  Some have dubbed this the carry trade.  Like most parties, it was fun while it lasted.  Now, the hangover is being felt by highly levered hedge funds playing said low-risk strategy.  What and whom can they thank?  An interest rate policy set by our third set of characters:  the Greenspan Fed and global central banks alike.

Like a two-headed monster, Greenspan’s Fed offered an open bar with cheap liquor then crashed the party when everyone got a little too drunk.  Knowing full well that its overly-accommodative interest rate policy (read:  too low for too long) was partially to blame for those teaser- and variable-rate mortgages catching fire and the perfect storm brewing in residential real estate, the Fed did nothing more than offer a limp word of caution to Congress.

Apparently, Alan Greenspan wanted to go out on a high note, so he left Ben Bernanke holding the bag.  And with an ironic twist Shakespeare would be proud of, Greenspan recently set up shop consulting for large institutional money managers about the state of the economy, part of which is the mess he helped create.  It’s a bit more difficult to see Greenspan’s money trail, but it’s still there.

Another set of characters in our tragedy is Congress.  While the Fed played its part with monetary policy, Congress played its role with fiscal policy.  Whenever tax has to be paid, especially a lot of tax, people take notice and modify their behavior.  In fact, much of our tax code was established to gently prod us to do some worthwhile things such as give to charity, save for retirement and own a home.

Not too long ago, home owners had to pay tax on any capital gains when they sold their home.  The tax, in effect, was a disincentive for folks to sell their home.  When Congress changed the law, which allowed most people to avoid capital gains tax on the sale of their primary home, it was like popping a champagne cork – just with a slight time lag.  Retirees who had long owned their homes in more arctic climes were better positioned to move to a warmer climate. Others figured that flipping homes and condos could be quite profitable, sans the tax.

At first blush, it appears that this tax law modification wouldn’t create a money trail to Congress, but it does.  While counterintuitive, cutting taxes does sometimes lead to an increase in tax revenue.  Congress lost out on the capital gains tax, but there was probably more gained from other sources which were the direct beneficiary of more housing-related economic activity.

While all these characters played their roles in this tragic drama, they just threw gasoline on a fire that was already lit by the green monster.  After all, a lender isn’t going to offer a mortgage to an unwilling borrower.  Millions of our American neighbors were willing to play their role in this tragedy, and much can be learned from it.

An anonymous sage once said, “The only person worth envying is the person who doesn’t envy.”  Give Mr. and Mrs. Jones a rest and turn your attention to what’s best for you and your loved ones.  Purchasing a home is a major transaction, and one that shouldn’t be taken lightly.  Do your homework.  Be prepared.  Don’t be afraid to ask questions.   Listen – really listen – when your questions are answered.  Take your time to understand everything you’re committing to and the papers you’re signing.  Get advice from a trusted source.  Follow your instincts.  Home ownership can be truly wonderful when you write your own story rather than playing a role in someone else’s tragic drama.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, June 17, 2007     Printer Friendly

À prendre ou à laisser

I’m not a big fan of game shows, but there is one I watch on occasion: “Deal or No Deal.”  The show has such wide appeal that it’s broadcast in 48 countries, with the French version, “Take or Leave It,” in the headline above.  Oprah recently got a taste of the show when she played a scaled-down version on her show.  What fascinates me about “Deal or No Deal” is the behavior of the contestants, which mimics the same game many play with real money in the financial markets.

During “Deal or No Deal,” a contestant is given the chance to win up to $1 million by choosing one out of twenty-six briefcases, which contains an unknown amount of anywhere between $0.01 and $1 million.  The contestant is required to eliminate briefcases from the remaining 25 in a succession of rounds, and each briefcase is opened to reveal its value.  After each round, Howie Mandel, the affable host, informs the contestant of the banker’s offer.  Howie then asks the infamous question, “Deal or No Deal?”  The contestant’s role is to decide whether to take the banker’s deal or keep playing.

The first thing I find fascinating about this show is that so many contestants believe they can affect the outcome of their random choices by making them, somehow, not random.  They pick numbers based on birthdays, anniversaries or sports jerseys.

Another interesting thing contestants do is, with hindsight, those prone to shoulda-woulda-coulda beat up on themselves for making the “wrong” choice.  According to Oprah, she was so upset about choosing the wrong case that she couldn’t think or talk about anything else for a week following her mini game.  She not only lost sleep obsessing about how she played the game, but in order to reach some closure, she had Howie on for a follow-up discussion on why she picked 8 instead of her favorite number of 11.

Economists and behavioral scientists like to study “Deal or No Deal” contestants because they offer a rare opportunity to help us understand behavior exhibited by folks making non-game-show financial decisions.  For example, many people overestimate their skill at picking stocks, especially when they have a bull-market tailwind at their back.  “Deal or No Deal” is like a Petri dish, offering us a glimpse into the minds of those who would be their own worst enemies.

By round four of “Deal or No Deal,” things get interesting.  I often watch in amazement when a confident Johnny Contestant passes up offer after offer even though the statistical odds of him winning more are against him.  If he goes too far and passes the point of no return, Johnny’s only hope for a pile of money is the amount in his briefcase, which never offered good odds.  It’s really sad when they finally open his briefcase to discover his winnings won’t even cover his cab fare to the airport.

Where did Johnny go wrong?  He miscalculated, round after round, the relationship between his upside potential and his downside risk.  Since the banker, for dramatic reasons, low-balls his offer in the first three to four rounds, it’s logical for Johnny to keep playing until the banker’s offer gets within a reasonable range of the actual value of Johnny’s briefcase.  But when the banker begins offering more than expected value, coupled with the fact that the increase of each successive offer is declining, Johnny is better off walking away.  That’s when he tempts fate (or the odds, to be precise) and goes for broke.

Some contestants in this situation do win big.  Like lottery winners, they wrongly influence many folks to throw their money at money-making or –winning schemes where the odds of success are against them.  Too often, they are completely unaware of their less-than-desirous situation.  Ignorance may be bliss for the winners, but not for the rest.

Do these game show contestants really mimic financial market participants?  Sometimes the resemblance is uncanny.  Consider the retired executive who let over $100 million of his wealth disappear in two short years.  By the time I was asked to provide a recommendation on his previous employer’s stock, which was after he rode an 87% decline, it was clear that this savvy businessman never pondered whether the bubblelicious tech sector could implode.  He never considered what would happen if the majority of his net worth got sucked into a black hole, never to be seen again.  He didn’t know that his happily ever after could vanish so quickly.

Now, he knows.

Like Johnny Contestant, a miscalculation between upside potential and downside risk was his mistake.  But there’s something even deeper that may explain the basis of mistakes such as these:  greed.  Human history clearly shows we’re prone to greed, which leads to poor financial decisions with limited (at best) or disastrous results.  Tulips, stocks, real estate, gold, silver, gambling and recently, Nigerian e-mail scams, are toys we have played with in our quest to get something for nothing.  Those who get their egos and emotions like greed out of the way learn to make sound financial decisions based on logic and reason.  Throw in some consistency, and you have great odds for a true happily ever after – no luck required.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, May 20, 2007

Sweet Simplicity

As our world becomes more complicated, it’s difficult to resist temptation to make things more complicated than necessary. In order to understand our world, we develop theories to explain the "why" of everything, which leads to a paradox: complicated situations are often explained by simple, not complicated, phenomena. The 14th century English logician, William of Ockham, seemed to understand this. He developed a principle best known as Occam’s Razor, which states that all things being equal, the simplest solution tends to be the best one.

Forrest Gump, the lovable character played by Tom Hanks in "Forrest Gump," was a simple-minded person. He managed to live a remarkable life despite - or rather because of - his simple view of things. Perhaps it was due to the fact that he wasn’t hampered by the complicated thinking that so often trips up those vying for a membership to Mensa. When some taunted Forrest about his low I.Q., he set them straight with, “Mamma always said stupid is as stupid does.” Gump understood that stupid (intelligent) actions are never born from true intelligence (stupidity).

Granted, Gump is a fictional character, but truth is often stranger than fiction. Whenever I encounter those who, by outward appearance, seem to be intelligent and well educated, and yet say and do nonsensical things, I can’t help but wonder: Is common sense out of fashion?  Is common sense suddenly overrated, and I didn’t get that memo?

Worse yet are those who play the blame game. You can spot such characters, as they tend to pour poison over their flower garden and then blame the sun for their dead petunias.

A few years ago, I was asked to review the services of a 401k plan provider at the request of a company run by folks who take their fiduciary duties seriously. In other words, they were concerned their employees’ retirement needs weren’t being met by their 401k plan provider. While speaking with the 401k provider rep, he revealed his true colors when he said, “Educating 401k participants is a waste of time because they are uneducatable about investments.”

Wow! Despite his education and alphabet soup of designations, this fellow not only had poor diction, but worse, he just didn’t get it. His attitude toward his client’s employees – his bread and butter – permeated every action he took  It wasn’t long before his firm was replaced. He probably blames competitive pricing for the loss of this valuable account. Those like him are destined to be life long members of the Limited Results Club.

The business world is rife with folks who can’t see the forest for the trees. Many use facts or statistics to rationalize their theories, without even knowing what those numbers mean or how they were derived. Sheer stubbornness is often mistaken for bold conviction, causing many to join the ranks of myopic thinkers – especially those aggressive enough to assert themselves as pack leaders.

As a young research analyst, I was occasionally sent to stock conferences hosted by brokerage firms that cater to institutional investors. Top dogs, such as the CEO and CFO, usually make their PowerPoint presentation and then take questions from the crowd of blue-suited analysts and money managers. On the surface, it’s business as usual. But I find several aspects of these events both interesting and perplexing.

First, if a stock is hot, meaning it’s had significant gains in the last 12-24 months, critical thinking amongst the blue suits – highly educated, credentialed folks – flies out the window. It’s herd mentality at its best. Those, like myself, who respectfully asked simple questions like, “You haven’t turned a profit since your IPO three years ago, so when do you expect to show a profit?” are considered cynical and cause normally gentile CEOs to turn a furious magenta. Apparently, I didn’t get the profits-don’t-matter memo either.

Another interesting aspect of these conferences is the impression – both good and bad – company heads provide. Several years ago, I heard Howard Schultz, founder and chairman of Starbucks, give a simple, straightforward presentation. In a matter of minutes, he knocked my socks off with his genuine business acumen. Later that day, I listened to (and chuckled at) the CEO of a shoe retailer who resembled a sleazy, side show manager you’d expect to find in a traveling circus. His presentation was a surreal, Vegas-like show bordering on the bizarre.

Understanding principles such as Occam’s Razor influenced me to study simple aspects of these companies, such as real, tangible profits or the character of those heads of state. Why? Experience has proven that these simple things are far more informative than the noise that many on Wall St. seem to prefer.

Simplicity is indeed sweet, but not for everyone. Why, for example, do well-paid managers focus most of their time strategizing on how to undercut their competitors’ prices, but ignore the fact that their receptionist skipped People Skills 101? Why do managers get promoted after firing their highest paid sales staff? Why do stock analysts issue a buy recommendation about the time that corporate insiders begin selling at an unusual, frenzied rate?

Another poignant line from Forrest Gump is when Forrest said, “Lieutenant Dan got me invested in some kind of fruit company. So then I got a call from him, saying we don’t have to worry about money no more. And I said, that’s good! One less thing.” The fruit company? Apple Computer.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvcounsel.com), a fee-only, independent registered investment advisory firm in Racine. Michelle can be reached at 262-898-8400, or m.ouzounian@verityinvcounsel.com.

Racine Journal Times, WorkLife Section, April 15, 2007

Perception is Reality

One of the most profound concepts in ancient Chinese philosophy is Yin and Yang, two opposing yet complementary elements said to be found in all things and processes in the universe.  The dark, passive, feminine, downward-seeking element is Yin, while Yang is the light, active, masculine, upward-seeking element.  Yin cannot exist without Yang.  Furthermore, part of Yin is found in Yang while part of Yang is found is Yin.

They are fluid elements, always moving relative to each other.  While mostly held in balance, imbalances between them can, and sometimes do, occur.  Should one reach an excessive state, the other will either enter a state of deficiency or it’ll become more concentrated.  For example, when conditions allow Yang to seek a higher and higher plane to the point of excess, Yin will sacrifice itself for awhile, but not forever.

This concept helps explain why economic recessions, bear markets and such can be viewed as neither bad nor good.  They just are what they are: a natural part of an ongoing cycle which is quite productive in tempering an excessive state planting seeds of greater destruction.  At the same time, contractions create an environment which fosters greater growth, just like the darkness of night allows the magnificent tomatoes in your garden to rest so that they may grow more fruitful (and tasty) under the sunlight of the following day.

If one’s perception, however, doesn’t provide the ability to see the beauty in the big picture – the Yin and the Yang – darkness will be a feared and destructive reality rather than welcomed and productive.

Perception is indeed reality, isn’t it?

For example, some would argue, “I lost my job because my profit-seeking, selfish employer had to make cutbacks.  It’s unfair.  I have a family to feed and bills to pay!”

While I understand and applaud anyone who exercises their inherent right to self preservation, resisting change only causes one to miss opportunities for the very thing they desire.  If self-preservation is that sweet touchdown, the pot at the end of the rainbow, then how does it serve you well to perceive your employer as profit-seeking (read: bad) and selfish?  After all, if your employer has no interest in profits, chances are you would never have had that job in the first place.

In other words, is it better to deceive ourselves to believe the “system” is unfair even if it means we’ve soothed ourselves, for a time, with the illusion that there is no correlation between an economy’s faulty foundation and its eventual collapse?  Profits are the fundamental basis of a capitalistic economy, which the Russians and Chinese resisted until, in their eventual wisdom, they discovered that their long-term survival would remain illusive without incentive and reward.

Does that mean you could feel good about being laid off?  As with everything, that’s a personal choice.  Ponder questions such as:  Does it serve me well to harbor anger & resentment about something I cannot change?  Or does it serve me well to view this change as a chance to seek a better life, perhaps greater abundance?

That’s what I told a friend after he was recently laid off.  He had every right to be upset, and I understand how awful it feels to hear, “We don’t value you anymore.”  It took a little while, but he eventually came to appreciate the advice I offered: This was the best thing that could have happened.  You’ve been talking about launching your own business for quite some time, and now you have the opportunity to do it!

And he has.

Should we, then, hope for layoffs, recessions and bear markets?  Again, that depends upon one’s perspective.  Since Yang equates to flourishing and self preservation, we can’t have it without Yin.  Thus, instead of seeing the darkness of night as bad, something to fear, I see it as necessary to authentic preservation and growth.  Your choice to perceive “negative” events in such a way may compel you to approach your dark nights differently, prepare for them and prosper even more.

You’ll understand you can go to sleep, light a fire or a candle, study our solar system to understand the day/night cycle, flip a light switch, or perhaps, sell flashlights.  Then, fear and resistance will no longer be your reality, which will free you to welcome and see opportunities offered by change.

That’s how one of my clients, who decided to retire early after being laid off due to outsourcing, allows greater abundance to flow to him because he appreciated, rather than resisted, my recommendation to invest in overseas markets.  While he intuitively understands that someone in one of those areas of the world is the recipient of his outsourced job, he doesn’t harbor resentment.  Instead, he has lived enough life to recognize that it serves him well to seize opportunities for him to flourish in a new way.

And flourish he has.  For a new beginning cannot occur without a previous, new beginning coming to an end.  Each new beginning – and the results that inevitably follow – are invariably due to choice.

Michelle Ouzounian, CMFC, is the founder and President of Verity Investment Counsel, Inc. (www.verityinvc