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August 10, 2011

Simple: Ignore them.

I’m not that old but I can remember the days when it required a human to execute a trade on the floor of the NYSE. Obnoxiously-colored jackets, overpowering voices, and rapid fire hand signals were trader’s competitive advantages of the day. Today, even the love child of pianist Oscar Peterson and gunslinger Doc Holiday wouldn’t be able to compete with computer algorithms. Algorithms are the new competitive advantage in day trading. Accept it, deal with it, and move on!

These disruptive technologies known by names like high frequency trading (HFT) and low-latency trading (LLT) are taking over the global exchanges. Throw in the latest craze of ETFs designed to move two and/or three times as much as a particular index, and volatility shoots through the roof on the outlier days in the market.

According to Boston-based consulting firm Aite Group, in 2006 one-third of EU and US stock trades were computer generated. By 2009, nearly three-fourths of all US equity trades were automated. During the biggest trading day in history up to that point, in September 2009, ETFs reached an unprecedented 40% of trading volume. This rapid ascent of HFT and LLT would make Adam Smith both proud and nervous.

That’s because Adam Smith’s Wealth of Nations was all about how human nature and the natural laws of behavior will ultimately find the most efficient solution to a problem if left alone (i.e., little or no third party interference). Mr. Smith might correctly point out that computers can do a better job than humans when it comes to taking advantage of mispriced securities, making him proud. I happen to agree with this simplified position. Yet he’d be nervous, as am I, about the lack of human interpretation pervasive in today’s markets. Smith’s brilliant analysis requires human behavior to be part of the mix. HFT replaces partially emotionally-based behavior with pure logic. HFT and LLT may be quicker, but quicker doesn’t equate to smarter.

The famous $61 to $47 back to $61 move in P&G on May 6, 2010 during the Flash Crash is a perfect example of why computers aren’t smarter just because they are faster. Though P&G did trade at $47 for a millisecond on May 6, it wasn’t reality based. It was a fictitious amount created–and corrected–by trading programs. A line of computer code decided to sell at $47 and another line of code decided to buy. At the end of the day, P&G’s value had barely changed, human’s were given a few hours to make sense of the carnage, and sanity returned to pricing.

Back to the issue at hand. How can the everyman compete with these trading programs? Ignore them. Ignore the volatility. Ignore the violent swings. And most of all, don’t try to compete by day trading. You’ll lose. Colocation servers, genius algorithms, and Moore’s Law have sealed the fate of human traders. The only solution for the everyman is to return to fundamentals. Make buy and sell decisions based on a discounted value of a security’s future cash flows. It’ll make investing greats like Ben Graham and his famous disciple Warren Buffett proud and you—the everyman—wealthier. Trust me.

November 12, 2010

If you haven’t read all you can about the recommendations from the President’s special deficit-reduction Fiscal Commission, you should. Your kids will thank. I’ll thank you.

First off, I must commend the panel of 18–especially the co-chairs, retired Wyoming Republican senator Alan Simpson and former Clinton chief-of-staff Erskine Bowles—for their bold, realistic, actionable, and comprehensive recommendations to solve this country’s greatest threat. Our ever inflating national debt.

As a side note, I find it fascinating how bold these non-elected, politically-retired men and women are willing to be after leaving office. It’s a perfect argument for term limits, buts that’s a whole other topic for another time.

While the comprehensive report isn’t due until December 1st many of the details are being leaked. Let’s look at some of the bolder recommendations. The draft can be found at www.fiscalcommission.gov.

Defense Spending

Twenty percent (20%) of the federal budget–more than $663 billion a year–is spent protecting the American way of life at home and abroad. That’s nearly 10x the next largest “department’s” budget. It’s 14x the amount we spend on education, 11x the transportation budget, and 25x the energy department’s budget. It’s a big number that helps most Americans sleep comfortable at night. I’m all for maintaining our global military superiority, but trimming a small percentage off this figure makes a big difference in our budget. The Deficit commission is asking for a sizable $100 billion over the next five years equal to a mere 3% decrease each year. Put another way, that’s the cost of eight nuclear submarines. Every budget has room for a 3% decrease. Every budget!

Some of the specific cuts are hard to swallow such as a three year salary freeze on DOD employees and non-combat soldiers, but many are simply common sense such as integrating military schools with civilian schools ($1.1 billion in savings), replacing duplicate efforts by military personal with civilians ($5.4 billion), and my personal favorite to reduce procurement by 15% ($20 billion).

As a DOD approved contractor, I’ve seen the ridiculously inefficient bureaucracy that our military operates. I mostly blame the psychology of budget spending for this inefficiency—not the hardworking folks who are forced to follow these silly rules–but regardless of cause, there are billions in wasted spending with zero incentive to improve. The mentality goes like this: If your budget isn’t spent, it will likely be reduced the next year. Therefore capital allocators spend every last dime of their budgets and ask for more—often to inflate their perceived importance. “I’m responsible for a $150 million budget” always sounds more impressive than “I saved my department $3 million in wasted spending last year”.

Here’s a thought: let the decision makers keep 10% of the annual savings. They can doll it out to those that helped them shave the budget and all will be happy and incentivized to do what’s best for the American taxpayer! Simple.

Comprehensive Tax Overhaul

One version of the commission’s recommendation wipes out nearly all tax deductions and creates three lower tax brackets of 9%, 15%, and 24%. One version wisely left the mortgage interest deduction intact for mortgages below $500k—a brilliant political move which should help this idea gain traction.

As a side, being the financial geek that I am, I looked at my effective tax rate for the last 10 years. It averaged to 18.36% with a high of 29.65% and a low of 11.94%. In general and contrary to common sense, the lower my income, the higher my effective tax rate was. Some of that is due to my efficient tax planning and sources of income (i.e., investment income vs. earned income), but what surprised me is the average. These proposed tax rates will likely raise my effective tax rate and those of other top income earners. In other words, it will generate more revenue of the government. Meeting one of the commissions goals to reduce the national debt via revenue increases. If that’s what it takes, I’m happy to pay my fair share.

This radical change is reminiscent of the Reagan tax changes that donkeys and elephants alike agreed to in 1986. Unfortunately, we’ve added thousands of pages to IRS code since and muddied the waters, but it’s proof that miracles can happen even when Congress is in session.

I see three real benefits to this proposal. First, the simplification will allow many Americans to understand their tax liability better, resulting in wiser financial planning. As the military acronym K.I.S.S. teaches us, Keep It Simple Stupid. Second, the government will pull away from influencing individual fiscal behavior. As a libertarian, anytime the government is removed from influence, I see promise. Some have argued the government—via it’s “a house for all Americans” policy helped fuel the real estate bubble. Regardless of the cause, less artificial incentive will lead to more individualistic and fiscally sounder decisions. Third, the simplification will close the compliance gap, save billions in tax expenditures, and allow drastic cuts in the Department of Treasury’s $13B budget—most of which (>$10B) goes to the IRS. In other words, we spend more than $10B a year to collect taxes on ourselves. A simpler tax code means better compliance which leads to smaller IRS which reduces costs. Simple.

The proposed corporate tax rate of 26% is also brilliant. It brings us in line with many of our global competitors and allows U.S. based companies to repatriate foreign earned funds without negative tax consequences by replacing the extraterritorial system with a territorial system. In other words, profits are taxed where they’re earned. Corporations could do what they wish with after-tax cash. And since most of the world’s global companies are based in the U.S., it would favor us. It’s capitalism at its finest. Let capital flow to where it earns the highest return. Adam Smith would be proud.

Earmark Obliteration

Hands down my favorite provision. This non-elected commission understands the Congress’s pet projects (estimated to cost $3 billion a year) are the primary source of wasteful spending. Permanently banning earmarks will force Congress to consider the merits of a bill, not to horse trade for a handout in order to get their vote. Bravo Messrs Simpson and Bowles. Bravo. Now let’s see if Congress has the gumption to limit their own power for the better good of the nation. That’s the selfless act of real leader.

To keep this blog from running too long, I’ll leave the Healthcare and Social Security provisions for next time. Until then, be thankful we still have a few noble Americans looking after our long-term prosperity.

October 20, 2010

I’ve had it with the oversimplification of financial company commercials. Sure, the E*Trade baby is entertaining as hell.  And who wouldn’t like to trust Law & Order’s  Mr. Integrity–Sam Waterston–to lead them down the righteous path to financial security? But, beyond the blatant salesmanship and entertainment value of these commercials, I’m deeply concerned the wrong message is getting through to American investors. That message: Investing is easy—if you just use OUR tools and services.

Investing ain’t easy. It never was. It never will be. And those buying into this oversimplification are headed for an ugly realization—not to mention a shortfall in their retirement accounts when they hit 70 ½.

Of course I have a vested interest in my counter message that individuals need help with investing. It’s what I do for a living. If everyone followed Sam’s advice by opening up a TD Ameritrade account, used its “easy-to-use” portfolio allocator, and researched each investment they made with its “simple” tools, I’d be out of a job.

But Sam, are you going to explain to these poor D.I.Y. saps what average margins for E&P companies are and why they fluctuate with global currency rates? Are you going to be there to explain the impact of fuel on railroad earnings and how their very own retirement plan, separate from Social Security, impacts cash flow and long-term liabilities? Are you able to model the revenue potential of the next breakthrough in diabetes medicine and how much free cash flow it will add to a company’s bottom line? Are you Sam? Do you even know how to calculate free cash flow? Well, do you Sam?!

Regardless of the tools available to investors through discount broker websites, anyone—and I do mean anyone—who doesn’t have a rudimentary understanding of finance and accounting AND who is willing to spend the time researching AND tracking his or her investments, shouldn’t go it alone. Sorry, it’s just the hard plain truth.

You don’t self diagnose a tumor. You don’t perform your own root canal. You don’t draft mortgage contracts. And you shouldn’t kid yourself by trying to invest for your future UNLESS you know what you’re doing.

I realize sharing information about your income and investments is tantamount to sharing bedroom videos for many, but think of it this way. If you don’t do it now, you’re risking a lifetime of bad investment decisions that could have you living over your kid’s garage asking permission to borrow the car to get to Thursday Double-Whammy Bingo/Taco night! Now that would make for a great commercial…

August 18, 2010

I’m a big believer that when someone tells you “It’s different this time” you should subtract their age from 100 to arrive at the probability they’re WRONG. When it comes to investing, experience and a solid knowledge of history is paramount. Markets are cyclical. Fear comes and goes. Exuberance comes and goes. Market crashes WILL happen. But fundamentals are fundamentals and in the long-run they WILL prevail. History proves this.

The trouble is knowing when normalcy will return. British economist John Maynard Keynes said it best with, “Markets can remain irrational longer than you can remain solvent.” My response to this is a buy-and-hold approach. I don’t pretend to know what will happen over the next several months. But my DCF models which incorporate normalized margins, realistic growth rates, and historically-based discount rates, allow me to confidently value a business’s cash flows to arrive a reasonable valuation.

Applying these techniques and logic to the Treasury market, I come to the conclusion it is irrational. With the 10 year hovering around 2.6%–its lowest rate in history—I fear fear has taken over. Check that, I KNOW irrational fear has taken over.

Some say it’s different this time. They point to the jobless recovery and dismal housing numbers. They harp on these figures but ignore the one great principal of investing—buy low and sell high. With the 10 year at an all time high, why on Earth are money managers chasing it? Especially when everyone knows inflation will exceed 2.6% over the next 10 years? It has to, doesn’t it? Over the past 50 years, U.S. inflation, as measured by the Consumer Price Index (CPI), averaged 4.1%. Over the past five, 10, and 20 years the average was 2.6%, 2.6%, and 2.8%, respectively. So, unless you think we’re in for something “different this time”, the 10 year is a colossal value trap.

It’s never different this time. It’s just that the time it takes to return to equilibrium varies. Stay patient, don’t panic, and don’t follow the crowd buying Treasuries off the cliff.

May 13, 2010

The early 20th century psychologist B.F. Skinner invented a crude, and occasionally cruel, box for measuring the behavior of rats. He discovered and statistically proved that a rat’s behavior was effected by what FOLLOWED a positive or negative reinforcement. Not what preceded the reinforcement. In other words, even rats think about the consequences of their actions.

So why aren’t we applying this fundamental knowledge to compensation practices in America?

Before Skinner, Russian psychologist, Ivan Pavlov discovered the phenomenon of conditional responses by making a dogs salivate when presented with the mere IDEA of a tasty snack. Ergo, dog’s actions can be manipulated by dangling the right bacon-flavored carrot in front of their hyper-sensitive noses.

Again, why can’t managers across America understand that HOW they incentivize (i.e., compensate) their employees will lead to HOW they act?

I believe the recent, and many of the past, troubles that have caused major disruptions in our financial markets are a result of poorly designed compensation packages. Alter the way our decision makers are compensated and you’ll alter the way they act. It’s a practice I not only preach, but practice as my clients know.

Take the most recent Great Recession. Sure the conditions that led to a collapse in the U.S. housing market are complicated, but I postulate that it was the manner many investment bankers and mortgage brokers are compensated that led to the disaster.

First the investment bankers. The “carrot” of huge cash bonuses at year end based on a 12 month period of performance incentivizes decision makers to enhance that 12 month’s performance as much as possible. Anyone who can earn enough in one year to skate through life comfortably isn’t going to think about the long-term. Especially if they’re 28 years old and surrounded by similarly-minded bloated egos. The counter argument that if things collapse after 12 months the decision maker could lose his or her job doesn’t fly when you’re talking about 5, 6, and 7 figure bonuses. If you had the opportunity to make $5 million in one year WITHOUT regard for the future, wouldn’t you seriously consider it? Regardless of your ethics, it would be a constant thought in your mind which would undoubtedly effect your behavior. No ifs, ands, or buts about it. It’s human nature.

Next, the mortgage brokers. This rare breed had one goal in mind prior to the crisis. Sell a loan to anyone with a pulse, collect a commission, and move on. This behavior was enabled because a mortgage broker is paid to close a deal. What happens to the client and the loan has no impact whatsoever on their compensation. It’s a transaction. Get it closed, get paid, and move on. This must change if we don’t want to see another disaster in the mortgage market. If the mortgage broker was paid over five years based on the timeliness and completeness of his or her client’s payments, I guarantee we’d never have seen the liar loans, no doc loans, and the invention of negative amortization, interest-only, adjustable rate loans that fueled the housing crisis.

Rating agencies were another major contributor to the recent financial collapse. Rating agencies are paid to rate securities. Fine. But when you’re paid by the party that created the security, conflicts abound. With the three major competitors—Standard & Poors, Moodys, and Fitch—all vying for the lucrative contracts, Wall Street’s securitization machine simply shopped the three for the best rating. If Moody offered a BBB and Fitch was willing to go to AA, guess who got the contract? Once again, it’s simply human nature.

Similar to the ratings agency conflict of interest is the investment banker-security analyst conflict of

interest that resulted in the global research analyst settlement in 2003. After decades of dangling favorable or threatening unfavorable “buy, sell, or hold” ratings on equities, Wall Street’s troubled practices were finally exposed to the public and they were slapped on the wrist with a $1.4 billion fine. Prior to this ruling, equity analysts were paid exorbitant sums to opine on the value of a company and to provide a so-called price target. Their opinion was heavily influenced because their compensation was heavily influenced by the even more exorbitant investment banking fees that go along with raising capital for the very same companies that they were opining about. Call my company and “strong buy” and you’ll get your piece of the 7% commission on our next $300 million secondary. Call my company a “hold” and you’ll be left off the capital raise team. The global settlement tried to segregate to two businesses by making it illegal for the two sides of one business to share information with each other. IMHO, that’s like legislating that your brain can’t tell your lungs how much oxygen your heart needs. What’s the point of having a central decision maker (i.e., a brain) if they can’t cooperate. Good luck running a marathon.

Rather than ramble on about more inequities fueled by poorly designed compensation practices, I’d like to make a simple plea to the well paid directors that sit on corporate boards…

You control the purse strings for the top decision makers in America. Stop using “relative compensation” as an excuse for dolling out preposterous pay packages and design a plan that makes a manager rich if they significantly outperform the company’s business plan, properly paid if they reach those goals, and worried about their job AND livlihood if they underperform. Set reasonable time frames like three to five years and link their long-term compensation to difficult-to-manipulate measurements like economic value added (EVA) rather than easy-to-manipulate measures like earnings per share (EPS). Treat their pay packages like you would your children’s upbringing. Think of it in decades, not quarters or years. Quit incentivizing them to think like a paid employee and more like a fiduciary or founder or parent. Then let human nature work FOR the business and watch the lessons of Pavlov and Skinner reap rewards for years to come.

It’s the compensation stupid.

March 22, 2010

Regardless of your politics, last night was a historic night for the United States. Good or bad, it has changed the fundamental direction of our country, IMHO.

Our great nation was built on the backs of those who wanted a different–a better–system of government. Rejecting the feudal ways of Europeans, our ancestors set out to a create a system of government by, and for, the people. Our founding fathers sacrificed fortunes, popularity, and even the safety of their own family member’s lives to construct a set of laws that would allow those less fortunate to have a fair shot at making a better life in America. That carefully and eloquently crafted set of laws known as the Constitution has made the U.S. the economic, military, and righteous powerhouse that it is because it was built on the foundation of personal freedoms.

Personal freedom–the right to make GOOD AND BAD choices–is what gives America its power. We revel in achievement and boo failure. Our Constitution was designed to level the playing the field (as much as possible). It will never be perfect and/or make everyone happy. But it is the implicit assumption of competition hidden in its words that have allowed one of the few republics left on planet earth to prosper. Warren Buffett understands this which is why he has a devout faith that America will overcome anything it encounters. I still concur, but last night’s vote has me worried.

This philosophical retreat from personal responsibility and toward entitlement has created an United States of Entitlement.

No moral being can be opposed to helping those that need it most. Certainly not me. I accept the graduated income tax system in this country because I beleive those with more have a moral obligation to help those with less. But endangering the very system that has allowed many hardworking Americans to prosper and be generous is not going to help those less fortunate. Quite the contrary.

This new healthcare bill endangers America because it endangers the fiscal viability of America. The financial shenanigans played by both parties in Congress to “score” the cost of the bill is shameful. Hell, it’s plain old irresponsible. If any business ran the way the we run our country, it would be bankrupt. If any household used the accounting logic used by Congress, it would be bankrupt. I believe those that want respect must lead by example, and Congress is not setting a good example for its citizen. Ergo, I’ve lost respect for our Congress.

David M. Walker, the former U.S. comptroller general and head of the Government Accountability Office from 1998 to 2008 and current President and CEO of the Peter G. Peterson Foundation, has crunched the numbers for us. Sit down, they’re scary. Before this new entitlement bill was passed, Medicare carried a $36.3 trillion (with a “T”) unfunded liability. Social Security: a $6.6 trillion unfunded obligation. National debt, military and federal employee pensions, and other sundries added another $13.5 trillion in unfunded obligations for a grand total of $56.4 trillion in unfunded liabilities. That’s $184,000 per citizen and $483,000 per household.

If this populist shift from personal responsibility toward entitlement continues to work its way into American psyche, I fear America will have more in common with struggling socialist Euros and their continental cousins than the prospering ever-rising capitalist ways of China and its Asian cousins.

Good intentions are not good enough. Kicking the financial burden down the road will catch up to us. If you don’t believe me, ask the Greeks.

September 23, 2009

I’ve read a number of articles lately about the sizable losses posted by the largest endowments in the country for the year ending June 30, 2009. Yale’s $23 billion fund was down 25%. Harvard lost 27%. Cornell, Penn, and Columbia also suffered. Duh! Of course these massive funds suffered losses – the financial world was upside down last year. But I’m disheartened by the headline attention to one year’s returns and not the market trouncing long term performance of these funds. For example, Harvard’s average annual return over the past 10 years is 8.9% compared to a 60/40 equity/bond portfolio of 1.4% over the same period. Yale earned a 12% return over the 10 year period ending June 30, 2009. Compare that to the negative – yes, negative – 0.31% return of the S&P 500 over the past 10 years through September 22, 2009 and I have only thing one thing to say: Focus, people. Focus on the big picture, long term performance and don’t get distracted by the attention grabbing headlines. There’s always more to the story than a headline conveys. Trust me, I know. I used to write eye-catching headlines for my Fool and Morningstar articles to capture attention.

August 25, 2009

A recent WSJ article revealed the results to a Gallop Poll that asked: “Do you think now is a good time to invest in the financial markets?” In February of 2000 – just before the disastrous dotcom bubble burst in March 2000 – 78% of investors believed it was a good time to invest. Then in March 2003 – just before the S&P 500 embarked on an 88% increase through mid October 2007 – 41% of investors agreed that it was a bad time to invest.

Clearly investor sentiment is not a reliable gauge for when to buy and sell. This is why I preach AND PRATICE a disciplined portfolio approach to investing. Take emotion out of the equation and you’ve got a much better chance of achieving your goals. That said, if you don’t have a plan to reach your goals, you’re just plain lucky if you achieve them.

August 19, 2009

I’ve been looking for an outlet to keep my clients informed about the numerous issues that impact their financial lives. Here it is, the TNL Asset Management Blog.

My first entry is to educate those about the progressive U.S. tax system by highlighting some little known statistics. But first, a caveat. I’m not philosophically against a progressive – the more you make the higher percentage you pay – system. I’m simply tired of Congressman, Congresswomen, and political gas bags claiming that they want to give “average” Americans a “tax break”. Focus in on “tax break” because that’s the focus of my rant.

In order to get a tax break, one must first pay taxes. According to 2007 data, the latest available from the IRS, one-third of filers pay no – that’s zero, zilch, nada – personal income tax. One-third! The bottom 50% of earners with an adjusted gross income (AGI) of $33,000 have an average tax rate of just 3%. The top 1% have an average tax rate of 22%.

The other end of the spectrum – dealing with the so-called rich – provides even more confounding stats. The top 1%, those families with annual incomes above $410,000, pay 40% of all the personal income taxes. That’s $4 of every $10 collected by the IRS for personal income taxes paid by 1% of the families. Add in the next 4% of income earners – those with more than $160,000 in annual income – and you’ve sequestered the payers of 60% of all personal income taxes in America. Put another way, the top 5% pay nearly two-thirds of the personal income taxes in this country.

Just to cap off my IRS Statistics class, chew on this next time your contemplating a tax the rich plan, the top 1% of American families pay more than the bottom 95%. Increasing the burden on the wealthy to support the rest of the country may seem “fair” to some – especially since their numbers are so small and they receive little sympathy from the less fortunate – but based on the facts above, can we really keep demanding so few bear so much of our fiscal responsibility.

So next time you read about a plan to raise the top marginal tax rate or slap a surtax on those making over X amount of dollars, remember who pays for your defense and who funds your infrastructure.

October 1, 2008

Holy Insanity! What a week. There are not enough superlatives in the English language to describe this week but the following quote from the WSJ captures it well, “The Dow’s 1.5% decline on Friday represented its best daily performance amid an otherwise miserable week. The Dow plummeted 1874.19 points, or 18%, this week, worst in its long history.” For the first time in 112 years, the Dow Jones Industrial Average swung in a range of more than one thousand points on an intraday basis.

Every day this week, the market swung violently. It tried to rally numerous times, yet failed to hang on to any gains. One day, I think Tuesday, the Dow dropped more than 500 points in the last ten minutes of trading. Remarkable. Simply remarkable.

My orb (if you don’t get the reference, ask me when we talk next) is not only glowing blood red, but it’s pulsating—something I didn’t know it could do! Another first for the week!

I could go on for hours describing the carnage, but I won’t. Now that I’ve got you sufficiently depressed, I’d like to tell you why I’m NOT.

Simply put, the market’s mood changed in the last hour of trading on Friday. I saw it. I felt it. And I prayed for it. We rallied back from a 700 point loss on the Dow to close only 128 points down for the day. A pyrrhic victory, but a victory nonetheless. Barely 5 minutes before the close the Dow was in the green. Green is good!

Normally, as y’all know, I wouldn’t dedicate two brain cells to talking about the market’s mood, momentum, or such short-term concerns, but these aren’t normal times. The market has been taken over by a wave of fear driven by uncertainty. It’s in a panic. Fundamentals don’t matter.

Fundamentals don’t matter to them, but they matter to us, which is another reason I’m only consuming one bottle of wine before noon instead of two. I’m confident the great majority of core holdings in each portfolio I manage (many of which mirror my own holdings) because I’ve done my homework. I understand these company’s fundamentals, their growth drivers, their normalized margins, and most importantly at a time like this, their balance sheets. They’re sound companies with sustainable business models and may even advantage from this carnage as the weak drop off like moths entering a bug light.

Most of the companies you own are cash generating machines. Will this cash flow slow over the near future as we trudge through this recession? You bet it will. Will its earnings per share decline? Guaranteed! Will it go the way of the Dodo bird? Not a chance. In fact, if each client doubled down on their AUM with me, I’d probably spend 80% of the funds on the same holdings you have today. I liked the companies four months ago, and like them even more today. When I bought these companies I bought them based on what I expected over a 5+ year period of time. Not next week. Not next quarter, And not next year. In fact, you may notice I bought into this mess for some of you.

Again, I’m not attempting to toot my own horn and realize many of you won’t notice the drop for some weeks to come until you open your brokerage statements in November—should you choose to do so. My goal is ease your fears and tell you I’m paying attention—a lot of attention. I’ve made very few sales and a few buys during this turmoil because many of you were already fully invested, but I’m following the companies for changes in their fundamental business models and/or debt exposure. If I smell destruction, I’ll sell. But I will not sell in fear. I will not sell in panic. And I will not extrapolate—as the traders do all too often—the current conditions into the future. I may not look like John Houseman, have the experience of Warren Buffett, or market stabilizing oratory skills of Maestro Greenspan, but I do have discipline, a spine, a strong sense of history, and one hell of a contrarian belief. Buy when the markets are most fearful and sell when they’re exuberant.

Nobody alive has ever seen anything like this. The last panic in the U.S. was in 1907, if my history serves me well. I don’t presume to know when it will end—although my earlier comments hint toward my anticipation—but I do know it will end. We’ve pulled out of every disaster in the past and we’ll pull out of this one. If I didn’t believe that I wouldn’t have the majority of my personal wealth invested in U.S. securities and certainly wouldn’t have chosen this gut-wrenching, 24/7, difficult career.

As always, if you have any questions, gripes, or comments, don’t hesitate to call—day or night.