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THE BLUE MONEY REPORT.
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The Blue Money Report
"Money clarifies one1s speech greatly, while no one listens to the poor."
~ Chinese proverb.
Welcome to the Blue Money Report
Today's Commentary: 09.19.02 Toxicologists often say that the problem lies in the dose. Drinking water is good for you; drink too much and you will drown.
The three Rs of investing are simple: Risk, Reward, and Reality. To much of one can be cause your portfolio serious harm. In other words, the dose makes the poison.
Risk is one of the most difficult to understand. We all have a good idea of how risk works. We tend to weigh risk with a yardstick of balance. 'Is it good for me?' we ask as we select the food we eat. 'Is it safe?' we ask as we choose to drive instead of fly. 'Is it pleasurable?', 'is it convenient?', 'is it hazardous?', we ask as we assess the worth of effort. In investing, risk takes on another aspect of day to day. It becomes the ability to worry a little, or worry a lot. Perhaps, it means enough risk to never need to worry.
We need only ask what level of worry will exist with any risk we take. Enough has been written about the subject of risk and your tolerance to fill an ocean, but little amkes sense if you have no goal for reward. What we worry about may have little effect on the reward?
When we decided, as beginning investors, to take our money from beneath the mattress or from the countertop cookie jar and place it in a location where it could create wealth, we determined our level of risk. It was perfectly safe right where it was. It would have still been worth exactly the same amount day after day. But we decided that money invested is money with the opportunity to grow. We took on the risk.
So we began looking around for someplace to put that hard earned cash. Immediately, we were faced with the question of how much risk would like to take with your nest egg. Too little risk with leave you with too small of a reward. Too much risk and you might find yourself on the upside of increased wealth or worse, the downside of lost principle. This is when we realized that risk was merely a rider whose ability to move forward was related to the tandem movement of reward as well.
The cookie jar was a no risk situation. It is also a no reward choice. Small risk, small reward. Greater risk, the greater risk of reality.
Why not greater reward?
Over the past three years, which has begun to seem like an eternity, we have seen the risk in the marketplace increase to unacceptable levels. But the risk was always there, the reality was what was ignored. We knew that when we decided to put our money to work, we would be taking a chance. Yet we still took it. I have a friend who eats and drinks organically taking the best care of his body possible. He has, in his mind eliminated much of the risk to a shorter life by enhancing himself. And then, without any real reason, he skydives. He jumps out of a plane with little reward for his risk other than an thrilling experience followed by a safe landing. Relying on his parachute to open, he takes risks far greater than the man who sits down to a 20 ounce t-bone steak night after night.
Should he worry so much about his daily activities only to risk everything on a single test of fate? When we invest, we do something quite similar. We start off with considerable research, available from numerous resources. This research is fed by advice in some cases, sometimes paid for and sometimes not. We look at the pros and weigh the cons and from that information, we make a decision.
And then we worry. We understand time horizons and risk adversity. We can comprehend the reasons for our actions, feeding ourselves with what would be a healthy diet of information. And we plunge with our 'chutes strapped to our backs. And as we free fall, we do either one or two things. We become exhilarated, the wind in our faces, the earth racing to meet us, pulling us with its gravity into its grasp. Or we worry.
The reality of what we do when it comes to risk and its upside counterpart, reward, is going to determine the level of worry we assign any investment. Each month, I am amazed at the redemptions in the mutual fund industry. I am amazed at the sudden, panicked sell-offs of stocks whose performance should be expected to be down with the sluggishness of the economic recovery. Wasn't the reality even considered?
This lack of consideration by some investors has hurt those who remain firm in their commitment to the markets as a better place than the cookie jar. September and October have historically been months of great investor anxiety as warning season comes in full stride. But this comes as a surprise each year to market veterans. Each day there seems to be a sell-off in some company whose numbers are not in line with expectations. I wonder why this is catches so many experts off guard. If a company's fundamentals are intact, and the awareness of the current market situation has been figured into the equation, why does the dose of reality, the warning that this quarter or next might not be good, send a stock tumbling to new lows? The risk was there. The reward has been factored in. But the reality has been ignored.
Mutual funds have reacted to redemptions in a way that is damaging to those investors whose belief that things will get better at some point in the future. These managers have had to continue to turnover portfolios in search of something better, more profitable, and less likely to be the next company with a reality check. And they are forced to carry cash for those redemptions for those who haven't figured out the reality for themselves.
The sooner we understand the fundamentals of worry, the risk, reward, reality scenario, the sooner we can back to the business of moving forward. It is possible that there is just too much economic noise out there to hear oneself think.
Until that moment, when the clarity of the air rushing past us turns into the sudden jerk from our open parachutes, we will just have to hope that the flip side of risk can be taking none at all.
Today's Commentary: 09.18.02 Marcus Hook PA. was refinery row. I haven't visited the town in over thirty years, but my memories of it's pungent air, dirty buildings and low income housing, still paint a vivid scene in my head. I remember that the men who worked there were brutally blue collar and the hoagies produced by the local sandwich shops were usually piled high with meat to satisfy that sort of appetite. My father worked down there for over twenty years, a man of great intelligence, misplaced in a job that picked him.
Each day, the men would file through a gate where the guard would watch them punch the time clock on their way home. One day, an acquaintance of my father's was stopped at the gate. The man, according to the story was one year short of his retirement. He was stopped and asked to open his lunch pail. He did, and he was fired without hesitation. Inside was a single roll of toilet paper.
My father explained that not only did the man lose his job, and his pension, but the greatest suffering that could be bestowed on a man, was his loss of dignity. He had committed a crime against his employer and was branded a thief. We were astounded as kids at the punishment that the man had received. The thought that one roll of toilet paper was so important as to risk the man's employment was beyond what we would comprehend. The lesson, we were told, was based on the fact that security probably did not catch him the first time, or the second time, but probably after thirty years of the same repeated crime.
That was still not as bad as his loss of face, his inability to face his co-workers.
Yesterday, Jim Cramer, the hyper-loud partner of Larry Kudlow, made the statement in defense of Jack Welch, "But, it was a bull market!". Jack Welch, as many of you know, is credited with great feats in growing General Electric from a $12 billion company into a $500 billion concern. His accomplishments have been well noted and his payment for those accomplishments have been, according to bull market standards, equally as well noted for their grandiose size. Almost.
Mr. Welch has been informally asked about the arrangements he negotiated with GE for continued payments of perks that he received when he was CEO. The SEC, who is now being accused of witch hunting, even if informally, asked whether this was appropriate. Mr. Welch, an extremely rich man, offered to undo the deal and pay his rent and expenses himself.
Dennis Kozlowski, former CEO of Tyco, who seems to be staying in the news recently will probably be spending some time at Riker's Island penitentiary in New York for his crimes against his former company. His dealings were not part of negotiations, as were Mr. Welch's, but the nature of what he did with the money his company generated have gone beyond what he was compensated for his work.
Now some of you are crying foul at mentioning these two men in the same context as the poor fellow that was fired for stealing bathroom supplies. But I am struggling to see the difference.
Jack Welch did run a great company, and he was paid for it. Was his ability worth continued payment after his tenure was complete? Was his ability to negotiate such a deal when the markets were indeed bullish different than what Mr. Koslowski took as part of his greed?
I find little comfort in the excuse of fellow capitalists and money managers for these wrongs as if the ability to run a company (and be well compensated for it) is so far different than working for the same company, passing through the security exits and having your lunch pail inspected. Would Mr. Welch have been able to explain why he had a check to cover his rent stuffed inside his jacket pocket? Would Mr. Kozlowski be able to explain what he was doing to the guard in the gatehouse?
I do not think that the same scrutiny is being awarded those who make the rules for security when it is those very folks who are seeking to find loopholes in them.
To say it was a bull market may be comparable to saying, "hey, it s only a roll of TP!".
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