Investing – John Pollock talks on Stock Picking

Investment Planner – Stock Picking

“While Cramer may be entertaining and mesmerizing to many of his viewers, his aggregate or average stock recommendations are neither extraordinarily good nor extraordinarily bad.”

Really?  Says who?!  Is there someone out there who considers Cramer to be a plausible investment planner?  This quote appears in an article I just read, which claims to have proof that Jim Cramer, of the popular Mad Money TV show, is not a lousy stock picker.  Now, this kind of thing always aggravates me.  I hate stock picking.  If you’ve watched any of my video blog at, you know I consistently urge my customers to stop trying to pick stocks.  So imagine my surprise to read an article that says Cramer isn’t a lousy stock picker.  My attitude?  Every stock picker is a lousy stock picker – it’s just the nature of stock picking.

I have to credit Jim Cramer with at least this much – he is a great showman, though I think he’s no investment planner.  He can be fun to watch (at least in small doses), and I won’t rule out the possibility that people can learn interesting things about the market by watching his show.  But did you know that his show is produced by the same people who produce the Jerry Springer show?  Think about it.

But still, let’s be analytical about this – like an investment planner would be.  If you read further into the article, you learn that two researchers from Northeastern University analyzed all of Cramer’s trade recommendations and found that Cramer’s picks would have shown a gain of 12.1% over the last few years, during a time where the Standard and Poor’s index only gained 7.4%.  That’s not bad, right?  But check out the fine print.

Cramer tends to pick small-cap stocks, and guess what – small-caps tend to grow quickly!  That’s just how they work.  Knowing that, let me tell you how you beat Cramer’s portfolio.  Tell your investment planner that you want to stop picking individual stocks, and buy a broadly-based structured fund that focuses on small-cap stocks.  You’ll cut out the trading costs (consider that each trade that Cramer recommends would probably cost you ten bucks in trading costs), you’ll cut out the taxes, and you’ll have better returns.

And here’s another nice benefit; you won’t have to waste an hour of your life every day watching Cramer’s show!

Dallas Wealth Coach – Variable Annuities

I have made my feelings pretty clear on radio in this blog and in my book just how much I do not like Variable Annuities. As a Wealth Coach and a Tax Planner I have not seen a single good reason to open an account with a Variable Annuity. I have several well thought out reasons as to why they don’t make sense, but I have never written them down. I wish there was a short (I have several long ones) book that explains the pros and cons of variable annuities. I wish there was a book that was written by an outsider, someone that understands and can articulate the technicalities, but really doesn’t care one way or the other what your choice is because he has no vested interest.

My wish was granted. This simple to understand book will arm you with all the knowledge you need (heck, you’ll know more than the salesperson) and the specific questions to ask.

Full Disclosure: I didn’t write it (wish I had) and I don’t get paid to endorse it, but the few dollars you invest in the book will save you thousands of dollars in bad decisions.

Go get it! Here.

Financial Planning Education – Financial Gravity

Financial Planning Education – Financial Gravity

I spend a lot of time with my clients developing their financial planning education.  I want to ensure that I don’t set my clients up to shout “I don’t believe in gravity!” while leaping off a cliff… to their doom.  How much does a strongly held belief shield one from disaster, if the belief is wrong?  Not too much.  Doubting the impact of gravity (so to speak) is obviously foolish, but so many investors disregard the equally important rules of Financial Gravity.  Doubting the effects of gravity will have a very disruptive impact on the peace you experience in your life.

I have three rules of financial gravity that are part of the financial planning education that I impart to my clients.  The first rule is this: Get Out of Debt Before You Invest.  Most of my clients don’t have a lot of credit card debt, but step one is clearing the consumer debt you have.  Other personalities in this space spend a lot more time on the credit card issue than I do – see Dave Ramsey’s Financial Peace University materials for example.  I tend to have wealthier clients who don’t have a lot of credit debt, so my focus in this debt management area revolves around mortgage debt.  I think everybody should be out of debt before investing, including paying off their mortgage.  You heard me: get your mortgage paid off before you invest.  Why?  Because of something I call cash-flow equivalent return.

Here’s an example to bolster your financial planning education.  Say you’ve got $100,000 to invest, and a $100,000 mortgage.  Should you put that money in the market, or pay off the mortgage?  Here’s how you make that decision – answer this question:  What rate of return would I need to make on that money in the market to make my mortgage payment?  If that rate is higher than you can expect to get in the market, you’ve got a better return on your money by paying off your mortgage instead.  And here’s a bonus: that rate of return is guaranteed!  If you pay off your mortgage, you absolutely will improve your cash flow by the amount of your mortgage payment – no doubt about it.

Financial planning education is an ongoing process.  Some ideas you learn the hard way, others can be learned by following the good advice of others.  So here’s Rule number two: Lower Your Investing Costs.  You must be vigilant in holding down the costs of your investing, or the costs will eat away at your gains.  Two things drag down your rate of return: taxes and fees.  So, first, you need someone who can help you manage the tax impact of various kinds of investing.  I avoid recommending mutual funds to my clients, in part because of the tax impact.  Mutual funds that own non-qualified assets can incur capital gains taxes even if the overall fund loses value.  That’s a problem, and it’s a drag on your investing that is totally needless.

Fees are the other big drag on your portfolio, and your financial planning education should be thorough enough to let you spot unnecessary fees.  My industry, financial advising, is overly pricey.  Lots of companies charge very large fees for the services that they provide.  I hold down the fees my firm charges as much as I can – I’m always less expensive than the other guy – always, always, always.  I never lose clients because of the price of my services.  Now, most of you are paying 2 or 3 or 4 percent management fees even with big companies like Fidelity and Vanguard, and you think you’re getting a pretty good deal.  I can prove to you that their portfolio management techniques incur embedded fees that increase the cost of working with them.  That takes the costs to your portfolio far above the advertised management fee.

Financial Gravity Rule Number 3 is: Diversify, Diversify, Diversify – this idea is one of the most important parts of your financial planning education.  Most investors aren’t nearly diversified enough.  I recommend investors should be in a minimum of 12 asset classes, preferably many more.  The assets should be non-correlated, meaning that if one drops in value, that doesn’t necessarily cause the others to drop in value too.  This is a nuanced process in portfolio development – and it’s easiest to do if you have one advisor overseeing that whole process.  Trying to get good diversification with multiple advisors is tricky – there’s too much chance of overlap, and of missing ideas you need in your portfolio.

So those are the three Rules of Financial Gravity, and the starting point of your financial planning education.  Get Out of Debt, Cut Costs, and Diversify.  Ignoring the rules of financial gravity will have the same devastating effects you get when ignoring the tendency of masses to fall to Earth without support.  Does the name Bernie Madoff ring a bell?  That’s what happens when you neglect Rule 3.  Diversification would have helped countless people avoid losing their whole life savings.

Following these three rules and developing your financial planning education will put you on the path to Investor Peace; it will bring you closer to knowing the things You Can’t Not Know.  By that, I mean the 20 Questions You Must Answer to Have Investor Peace.  (Come to my monthly seminars and I’ll explain it.)  And it will free you from fretting about your investment portfolio so you can have an impact on your world and add meaning in your life.  Don’t ignore the effects of gravity!

Dallas Financial Planner – "Free Market" doesn't mean "Pro Business"

As a Dallas Financial Planner I get in lots of discussions about finance that seem to lead into politics. One misconception I frequently run into is that “Pro Business” is the same thing as “Free Market”. This excellent article I saw on Forbes by Dan Carden is the best I have read on the difference between the two. – John Pollock

“Free Market” Doesn’t Mean “Pro-Business”


Is a “free market” agenda the same thing as a “pro-business” agenda? Economists of a libertarian persuasion find this frustrating because our enthusiasm for free markets is often mistaken as enthusiasm for specific businesses or corporate interests. But just because something is good for General Motors does not mean it is necessarily good for America.

I propose that we dispense with the rhetorical conflation of “pro-business” and “free market.” Or at the very least we should understand the difference between the two. One of the key features of a free market is that it is a system of profit and loss. The “free” part of “free market” means free entry and exit. In a market economy, you are free to earn and enjoy enormous profits as your just reward for taking the world as you found it and producing some kind of new good or service that makes the world a better place. In economists’ parlance, you earn profits by creating wealth.

At the same time, you are free to enjoy enormous losses as your just punishment for taking the world as you found it and producing something that actually makes it a worse place. In other words, you earn losses when you destroy wealth and waste resources.

Here I will invoke my friend Steven Horwitz’s First Law of Political Economy: “no one hates capitalism more than capitalists.” Matt Ridley says it well in his recent book The Rational Optimist, and I agree with him:

I hold no brief for large corporations, whose inefficiencies, complacencies, and anti-competitive tendencies often drive me as crazy as the next man.  Like Milton Friedman, I notice that ‘business corporations in general are not defenders of free enterprise.  On the contrary, they are one of the chief sources of danger.’  They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age.

Milton Friedman, Nobel Prize in economics and ...Milton Friedman Image via Wikipedia

Consider the following scenarios and ask what the “pro business” and “free market” outcomes would be:

1.  A private company wants a patch of ground on which to build a hotel, a grocery store, a shopping center, or an office building. The “pro-business” solution is to seize the land via eminent domain and claim that the increased tax revenue is a public benefit (if increased tax revenue is going to be our standard, why don’t we compel labor force participation and make everyone sell their property to special interests?). The free market solution says “if the owner will sell to you, it’s yours, but don’t expect to be able to get government officials with guns to go get it for you.”

2.  A private company is struggling to make ends meet. It manufactures a product that no one wants to buy. The “pro-business” solution is to raise taxes and give the proceeds to the company or lend the proceeds to them at a reduced interest rate. The “free market” solution says “either get better at what you’re doing, or get out of the way of those who can.”

3.  A private company faces competition from foreign producers. The “pro-business” solution is to regulate or tax foreign products to make them more costly relative to the domestic product. The “free market” solution says “get better at what you’re doing, or relinquish the resources under your control to those who can better serve consumers.”

Do free-market solutions sound harsh? Perhaps. Is it cruel to leave the fate of a business up to the vicissitudes of market competition? I don’t think so. In a free market, people compete to see who can best secure others’ cooperation. Government, on the other hand, works by the threat of violence. If we’re going to use government to protect a business, we can only do it by threatening violence against its potential competitors.

I teach economics, and I write for a couple of different websites. If I were to insulate myself from foreign competition by hiring the mafia to prevent potential foreign economists from teaching classes that compete with mine or from writing articles that compete with mine, it would be a criminal act. Change “teach economics” to “make cars,” “mafia” to “government,” and “foreign economists” to “foreign car-makers” and you have flag-wrapped American industrial policy.

In a free market, you are welcome, and indeed encouraged, to enter the mousetrap industry if you think you can build a better mousetrap or find a way to make similar mousetraps more efficiently. The other side of that coin is that you will be encouraged to leave the mousetrap industry if it turns out that your mousetraps are not better, but inferior.

A “free market” agenda is not the same thing as a “pro business” agenda. Businesses should not be protected from competition, losses, and bankruptcy when they fail to deliver for the customer.  All three are essential to truly free markets and free enterprise.

Financial Planning – Retirement Tips – Hedging

Retirement Tips – Hedging

When you hear people sharing retirement tips, you may hear discussion of ‘hedging’, most of it in reference to people looking to put a ‘hedge’ around their investments to protect them from inflation.  Now, there’s no guarantee, but there’s plenty of reason to think that the massive amounts of money being printed in Washington is going to trigger inflation.  This was a hot topic at a conference I was at a few weeks ago.  One interesting fact is most of the money that has been printed hasn’t been released into the financial bloodstream yet, and inflation may not start happening until the money is actually released by the Fed.

So what is hedging, and is this one of the retirement tips you should pay attention to?  Basically, hedging is a technique for reducing risk.  The goal is to incorporate multiple investments in a portfolio so that the same market move that is decreasing the value of some part of your portfolio is simultaneously increasing the value of something else.  But how do we measure risk?  One way is with volatility.

Volatility measures how much the price of something changes in a given amount of time – and watching it can help you correct problems before you retirement tips over the edge of a cliff.  An investment that has large price swings shows higher volatility than one whose prices stay flat.  Statisticians (you remember stats – that class you slept through in college?) measure volatility with a statistical measurement called a standard deviation.  The higher the standard deviation, the greater the volatility.  And in investing, the higher the volatility, the higher the risk.

Some retirement tips are worth considering, and others are not.  Is hedging part of the first group or the second?  Let’s look at some common inflation hedges, and their standard deviations.  What are people using to hedge their portfolios?  The big three at the moment are commodities, oil, and gold.  So how risky are these investments?  Let’s see.  Commodities have a standard deviation of 27.5%.  Is that a lot?  Let’s look at some other investments to get our bearings.  U.S. Treasury bonds have a standard deviation of 3%.  Long-term government bonds are at 11%.  The S&P 500 index has a standard deviation of 19%.  So if you look at commodities, they are considerably more volatile, and therefore more risky, than the S&P, and think of how many people aren’t even to willing to risk their portfolio on an S&P index fund!

So commodities are a big risk at 27.5% – if you hear someone sharing retirement tips who recommends commodities, be wary!  Where does gold rate on this risk scale?  Take your heart pill – 37%.  And oil’s even worse, with a 39% standard deviation.  Gold and oil, taken together, are twice as risky as investing in the broader stock market.  And this is what people are using to hedge their bets?  How much sense does it make to reduce risk in your portfolio by adding still riskier investments to it?

I’m not completely against investments in these three areas, assuming that your investments are rational, long-term, strategic moves based on solid mathematics and investing science instead of rumors and retirement tips.  But usually, they aren’t.  The people buying gold at Harrod’s department store in London aren’t doing so because they have made a thorough analysis of the fiscal wisdom of that move – they’re just scared.  When you make bad investment decisions based on fear of what you saw on the news, that’s not hedging, that’s opening the hedge to let in trouble.

Financial Advisors – Fee Based Financial Advisors

The Truth About Fee Based Financial Planning

Fee based financial planning eliminates conflict of interest.  You can eliminate the conflict between your financial health and your advisor’s bottom line just by using fee-only advisors.  Says who?  So says the people who sell products based on fees.  As it turns out, that’s a myth.

Sellers of fee based financial planning products like to put “FEE-ONLY” in big letters in their advertising, to distinguish themselves from commissions-based sales.  The hitch is that fee-only advising only eliminates one kind of conflict of interest.  They do have a point, mind you – commission-based products do create a conflict for the seller.  The more of a commissioned product the salesman can sell someone into, the more money she makes.  But at some point, the amount of the portfolio she sells into that product goes above the amount that is healthy for that investor’s situation.  For a commissioned salesperson, the big question is where to draw the line.

But there’s a second conflict that fee based financial planning creates that’s less obvious.  The fees associated with fee-only advising are not high enough to incent advisors against becoming an enabler of short-sighted investor behavior.  What do I mean?  In 2008, over 70% of financial advisors did what their clients asked them to do while the market was going through its meltdown.  People paid their advisors an advising fee, but then told their advisors what to do with their portfolios.  Why didn’t all these advisors stand up for financial good sense?  Why didn’t these advisors warn against the folly of market timing?  Why didn’t they refuse to turn their clients’ paper losses into actual losses – especially when they had decades to recover the loss?  They caved because they didn’t want to lose their fees.  As long as their clients keep coming back for advice, the fees keep on coming.  If a fee based advisor tells a client something the client doesn’t want to hear, he runs the risk of losing the customer, and watching all those potential fees walk out the door.

A lot of the work I do involves fee based financial planning, so it shouldn’t surprise you that I had this kind of situation happen to me in late 2008.  During the meltdown, a panicked client called me and directed me to sell all of his holdings.  He wanted to get out of the market, and fast.  I told him no.  He threatened to take his business to someone else.  I recommended he do so.  Why?  I will never continue taking fees from a client while making bad financial choices on behalf of that client.  If one of my clients wants to make decisions for his profile that I think are financially detrimental, he doesn’t need me as an advisor.  He can save a lot of money by making his own financial mistakes instead of paying me to make them for him.

I get paid to be a coach, whether that’s in performing fee based financial planning, or in selling a commissioned product.  If a coach says to his star athlete, “one more set of pushups”, and the athlete says, “no thanks, I’m quitting for the day”, something is wrong.  The coach knows best, and the athlete is costing himself the opportunity to be his best by putting himself in his coach’s place.

Don’t assume fee based financial planning means no conflict of interest.  Assume they have a conflict of interest.  It’s not a conflict that sells you into lots of different investments to generate commissions, but it is a conflict all the same.  Make sure your advisor is a coach who will protect you from uninformed decisions and help you maintain the discipline to have a portfolio that wins in the long term.

Small Business Tax Planning

Small Business tax planning

The following comes from an excellent site I frequent


According to the latest ADP jobs survey for June, the private sector’s contribution to the job market is smaller than expected. (See the WSJ article, “Private Sector Adds Few Jobs,”)  Yep, looking at the bare-bones private sector, minus Census jobs (which do quite well of padding the employment numbers), the results are somewhat troubling.   Large and medium-sized businesses have added jobs, but small businesses with fewer than 50 workers have cut jobs.  What’s going on?

While I don’t have a direct psychic link to the small business community, I suspect they are pondering their future and it looks a bit frightening.  One of the largest issues is most likely the new health care plan and the perverse incentives it creates in hiring.  (See “Obama’s Tax on Job Creation.”)  Perhaps businesses are getting a head start on preparing to avoid the health care mandate and maximize the tax credit they receive for providing health insurance.  But it does not bode well for job growth.

Another issue may be the new taxes imposed on the wealthy and small businesses.  (See “New Taxes on the Wealthy are Bad News for Everyone.”)  The new 3.8 percent Medicare tax on unearned income and the proposed increase in the two top marginal income tax rates will undoubtedly hurt the self-employed as their effective tax rates could potentially double.

Meanwhile, as Congress fiddles (tax breaks on capital gains for small business or not, increased funding for SBA loans or not, financial reform? maybe…nobody knows yet), already-decided policies, such as the Credit Card Act (which could raise the cost of credit for our entrepreneurs), are manifesting themselves in the form of reluctance from small businesses.  And who can blame them?

For all the talk of small business being the “engine” of job growth, there is not much fuel to keep that engine running.


As a small business owner, I can comment on what I am doing and I am being far more cautious than I have been in the past and I have scaled back a lot of things that I used to do without a second thought. I’m passionately optimistic for the long term health of this country, in the short term, I am more tentative. — John Pollock

Seth Godin – The Forever Recession

I read Seth Godin every day, he is an idea factory and he get my brain moving in the morning (he shares this task with caffeine). The Forever Recession is a small article that explains very succinctly the importance of an idea called Creative Destruction, and why it is important. — John Pollock

Here is a direct link to the article.

The forever recession

There are two recessions going on.

One is gradually ending. This is the cyclical recession, we have them all the time, they come and they go. Not fun, but not permanent.

The other one, I fear, is here forever. This is the recession of the industrial age, the receding wave of bounty that workers and businesses got as a result of rising productivity but imperfect market communication.

In short: if you’re local, we need to buy from you. If you work in town, we need to hire you. If you can do a craft, we can’t replace you with a machine.

No longer.

The lowest price for any good worth pricing is now available to anyone, anywhere. Which makes the market for boring stuff a lot more perfect than it used to be.

Since the ‘factory’ work we did is now being mechanized, outsourced or eliminated, it’s hard to pay extra for it. And since buyers have so many choices (and much more perfect information about pricing and availability) it’s hard to charge extra.

Thus, middle class jobs that existed because companies had no choice are now gone.

Protectionism isn’t going to fix this problem. Neither is stimulus of old factories or yelling in frustration and anger. No, the only useful response is to view this as an opportunity. To poorly paraphrase Clay Shirky, every revolution destroys the last thing before it turns a profit on a new thing.

The networked revolution is creating huge profits, significant opportunities and a lot of change. What it’s not doing is providing millions of brain-dead, corner office, follow-the-manual middle class jobs. And it’s not going to.

Fast, smart and flexible are embraced by the network. Linchpin behavior. People and companies we can’t live without (because if I can live without you, I’m sure going to try if the alternative is to save money).

The sad irony is that everything we do to prop up the last economy (more obedience, more compliance, cheaper yet average) gets in the way of profiting from this one.

Dallas Investment Advice – Matt Ridley: When Ideas Have Sex

The following video in not overtly Investment Advice. But, if you listen you will hear that things are always getting better and they are getting better at a staggering speed.  I recommended Matt Ridley’s book a week ago called The Rational Optimist here is a video of a talk that comes right from the book.

Let me know if you liked, Matt Ridley: When Ideas Have Sex, below.

Bond Investing

Bond Investing – This falls under “history repeats itself” category.