Tick, tick, tick goes California’s pension shortfall
Posted By Business Journal Editorial On April 12, 2010
A small but ardent group of voices in government and business have been warning for years that California was facing a severe and growing shortfall in funding the state’s generous public pensions.
Among the more prominent examples: Last October, Gov. Arnold Schwarzenegger’s top economic adviser David Crane, saying the state faced a pension shortfall of $250 billion, called generous benefits awarded employees at the peak of the tech boom a historic “theft” committed against the taxpayers.
We wrote at the time that California, its counties and cities were heading rapidly toward the day when they would be required to spend so much on retirees they would be unable to pay a police officer to patrol the neighborhood of his former retired colleague.
That day may not have arrived just yet, but it may be here sooner than even Mr. Crane thought.
Last week, a study conducted by Stanford University graduate students commission by the governor reported that the state’s three major pension plans face a combined “current shortfall of more than a half-trillion dollars.”
The shortfall includes $109.7 billion in fund losses due to the recession and investment losses, an amount that will have to be made up from public budgets.
As the governor’s office quickly pointed out, the more than $500 billion shortfall is six times the annual state budget – and completely unsustainable.
“The consequences are clear: Increasingly large portions of state funding for programs Californians hold dear such as schools, parks and health care will be diverted to pay for this debt. That is bad enough, but without reform, pension debt will only grow,” the governor’s office said.
The study, which relied on more conservative investment growth estimates than have been typically used, was immediately labeled as an attack on all state workers. But it is only recognition of reality that overly generous benefit promises are not financially sustainable.
What’s been promised is promised.
But its completely reasonable for the state to begin to shift toward 401K-style self-defined benefits commonly used in the private sector for new employees and new union contracts.
The shortfall – and ultimately the bill to California taxpayers – will only grow with every day the state delays making changes.
www.northbaybusinessjournal.com
Here is an excellent article originally published in 2001. I though it was such a good article, I decided to re-post it here, minus the outdated stock quotes.
What’s Wrong With Long-Term Investing,
Jonathan Hoenig, Smart Money, February 22, 2001
THE POPULAR MISCONCEPTION is that traders are foolish short-term gamblers while investors are the prudent, steady hands in it for the long term. But whether you call it trading or investing, the golden rule remains the same: Don’t lose money. While investment goals and styles are different, we are all gunning for the same result. Not great companies or funds with five stars, but consistent returns that outpace inflation.
As a trader, my goal isn’t to make trades all day long, but to secure a rate of return that protects my investors’ principal and makes them money…period. Saying it’s a tough market is just an excuse, and unlike investors who are “in it for the long haul,” I don’t see any compelling evidence that owning stocks for long periods of time is the best way to achieve that return.
Investors who preach “buy and hold” are kidding themselves. What the long haul speaks to isn’t the merits of stocks as an asset class, but the mathematical effects of compound interest over time. The point of the long haul isn’t that stocks will go up over time, but that even low levels of return will eventually create wealth as a result of consistent compounding. Fair enough. The problem is that “eventually” can be an awfully long time. So-called prudent investors have been misled by believing that stocks return about 12% a year. But that oft-quoted statistic actually represents a 72-year average — and I for one am uncomfortable waiting around that long to see if history repeats itself.
The truth is that we have absolutely no certainty that equities will outperform other assets over the hypothetical long term. We have even less certainty that equities will outperform during our actual holding periods, which for most investors are decidedly shorter than the 72 years on which much of the long-term credo is based. That’s why I worry about the short term and let the long haul take care of itself. After all, the long haul is just a bunch of short hauls lined up.
Think trading is dangerous? Try buy and hold. In my experience, the long haul is really just an excuse for leaving problems in your portfolio untouched and ignored. It encourages us to let trades become investments simply because we were wrong in our analysis. The long haul is what prompts people to buy XYZ at 100 expecting it will go to 120. But when it slides to 50, they wait…and wait…and hope…and wait, because we’ve been told that most stocks eventually go up and hey, we’re in it for the long term.
Long-term investors who hold onto, or dollar-cost average their way into, stocks in which they are nursing huge paper losses are making a big leap of faith. Isn’t it ironic, then, that the much-maligned trader who cuts his losses and moves on is charged with being reckless and risky while the investor who buys XYZ at 70% off its high is considered prudent? Not in my book….
Trading isn’t about making hundreds of transactions or jumping on a hot stock. It’s about being open-minded enough to realize that we don’t know the future — and flexible enough to admit that at some point we might want to trade one position for another. I am a trader because my interest isn’t in owning stocks per se, but in making money. And while I do trade in stocks (among other investments), I don’t have blind faith that stocks will necessarily be higher by the time I’m ready to retire.
If history has demonstrated anything, it’s that we can’t simply put our portfolios on autopilot and expect things to turn out for the best. You can’t be a trader when you’re right and an investor when you’re wrong. That’s how you lose.
Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management (Capitalistpig.com), a Chicago-based hedge fund.
Can You Time the Market? Making money by darting in and out of stocks is easier said than done.
David Landis, Kiplinger’s Personal Finance, August 2009
At least one major financial publication is getting soft on market timing.
We’re not as dead set against market timing …, but neither are we ready to throw in the towel on buy and hold. We think buy-and-hold investors could incorporate some mild forms of market timing to improve their results.
kiplinger.com
Debriefing Liz Ann Sonders
David Serchuk, Forbes.com, June 5, 2009
This article contains a lot of my own thoughts on market timing and buy and hold as investment strategies. I will go over these thoughts in a upcoming post.
The reason why we’re so adamant about this whole strategic asset allocation–which by the way is very different than buy and hold, this whole buy and hold is dead, well yeah if buy and hold means just buy a whole bunch of stocks and never look at them and never re-balance and don’t focus on asset allocation, then I say, well, that should have always been dead because that’s not really a disciplined process. But if you have a strategic asset allocation that may adjust over time as you get closer to retirement, whatever the reasons are, if you’re disciplined what you do is you let your portfolio tell you when it’s time to do stuff, as opposed to trying to figure out which bloviating strategist on CNBC that day is going to be writing there short-term market call. That’s just speculating. So if you’ve got a certain defined exposure to equities–domestic vs. international, with international developed vs. emerging markets, maybe some alternatives, and you know different subsets of fixed income, all of those things–if they get out of whack because you get math of appreciation or depreciation, you know that’s when you need to re-balance. And it forces you to do what we know we’re supposed to do: Sell into strength and buy into weakness. When left to our own devices and not adapting that discipline around strategic allocation, we end up doing the complete opposite. So you know it doesn’t allow you the bragging rights or the ability to guarantee no loss in portfolio because you pulled out exactly at the top and went back in exactly at the bottom. I don’t know anybody that can do that well anyways, certainly not individual investors. So part of our attitude is don’t even try and take a disciplined approach and understand your allocation relative to your risk tolerance. And it doesn’t guarantee no losses, but if that’s your goal, then you’re a conservative investor, period.
forbes.com
Is new book’s ETF-based timing system better than buy and hold?
Tom Saler, Journal Sentinel, May 31, 2009
A new book by money managers Mebane Faber and Eric Richardson offers some intriguing possibilities. The first sections of the “The Ivy Portfolio” (John Wiley & Sons, 2009) are interesting but do not directly address the issue of risk management. For that information, skip ahead to Chapter 7, where the authors provide a simple quantitative system for timing various markets that’s been tested over almost four decades. Here’s how it works. To maximize diversification, your portfolio is divided equally among five asset groups: U.S. stocks, foreign stocks, 10-year Treasury notes, real estate, and commodities. Exchange-traded mutual funds (ETFs) are used as a low-cost proxy for each asset class. Fund names and ticker symbols are provided. Once a month, you check if each ETF is above its 200-day moving average. (The 200-day moving average is available at virtually all financial Web sites that provide quotes and charts.) If an ETF is above its 200-day moving average, you keep it. If it’s below, you sell and move that 20% to cash, where it would remain until the situation reverses. Over the 36 years through 2008, the Faber-Richardson tactical asset allocation system beat a straight buy-and-hold using the S&P 500 by a cumulative total of about 2-to-1. More importantly from the standpoint of risk management, it never sustained a down year.
www.jsonline.com
Mauldin gets maudlin on future of equities
David Stevenson, Financial Times, May 29, 2009
…stop believing that equities will “inevitably” produce higher returns than bonds. “If you start today in the US, and go back to 1966, you would have been better off buying a 20-year government bond each year, rolling it over, than you would have been investing in the stock market,” he says, echoing a recent paper by Rob Arnott, the US analyst, that suggested that the cult of the equity was officially dead. “For 40 years, there has been no risk premium and yet we tell investors we’re going to give you a 4-5 per cent risk premium for stocks over bonds – that’s the long-term premium,” says Maudlin. “Well, I’d suggest that 40 years is the long term – that’s a pretty long run.” The sacred cow that needs to be slaughtered, in Mauldin’s view, is the strategy of “buy and hold” investing – beloved of nearly every fund manager in the UK, and the argument behind making regular monthly equity investments over the long term. “Buy and hold investing is something that was basically foisted on investors by an industry that wanted to keep assets under management,” claims Mauldin. “So, if you’re a long-only manager and that’s your hammer, then all the world looks like a nail. If you’re a fund manager, you’re not going to stand up and say: ‘You know, I don’t think it’s a good time to invest in my fund. I think we’ll just shut it down.’ You’d be fired!”
ft.com
Why Buy and Hold Is a Dreadful Mistake
Joseph L. Shaefer, Seeking Alpha, May 28, 2009
Check out the table titled “Bear Markets Since the Crash of 1929″ toward the end of this article. It is a real eye opener.
Buy-and-hold investors typically spend 0% of their time, energy and intellect on periodic rebalancing; 0% – 30% on asset allocation, and 70%-100% on stock selection. If they are mutual fund investors, they devote 0% on any of these, trusting the mutual fund managers to do all that. Instead, they spend – waste – 100% of their share-of-mind on picking the “best” mutual funds. … I believe that the rules that work in a bull market are turned on their head in a bear market. So buy-and-hold, hiding your head in the sand, and even asset allocation will disappoint. When the markets decline, they take the good and the great down right alongside the bad and the worst. Partly this is because of investor panic, more is because of institutional redemptions and the fact that institutional money managers are paid for performance. To keep their bonuses coming in, they’ll sell their mother if it will offset a loss that would otherwise place them below their benchmarks. This creates a waterfall effect and brings everything down, good, bad, ugly, or magnificent. In bear markets, buy and hold is a crock…. I have removed the 3-month “bears” that were blessedly brief and their recoveries quick and joyful. In doing so, we find the average decline of the four bear markets with both a 20% decline and a duration of greater than 12 weeks was 60.8% and took roughly 3 years to work themselves out. By this more accurate measure, this would be the shortest bear of the 5 since 1929. For that reason I believe this fine rally will shortly end.
seekingalpha.com
If You Think Worst Is Over, Take Benjamin Graham’s Advice
Jason Zwieg, Wall Street Journal, May 23, 2009
Today, it has become trendy to declare that “buy and hold is dead.” Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish. Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: “Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions.” For that to be true, however, the dollar-cost averaging investor must “be a different sort of person from the rest of us … not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past.” “This,” Mr. Graham concluded, “I greatly doubt.”
online.wsj.com
Faith in the creed of buy and hold cost us 10 years
Marcus Padley, Sydney Morning Herald, May 9, 2009
CONTINUING the very popular series on the lessons we have learned from the bear market, by Harry Hindsight. This week, part two. ■Lesson No. 7: Buy and hold is dead. “Buy and hold” or “set and forget” is unrealistic and utopian because it breeds inaction and denial. Our inaction in the past 18 months cost us 54.5 per cent and to recover those losses, the market has to go up 119 per cent. At the average return of 9.5 per cent a year, were we to be so lucky, it would take us another 8½ years to get our money back. So much for faith. Faith has cost us 10 years; that’s a long time to go nowhere and highlights the adage that time is money. Yes, it’ll be all right in the long term, but at the cost of 10 wasted years. Maybe that’s why the long term takes so long. Because no one makes the effort to try to do better. Plus the idea that you can make a decision on today’s information and that that information and judgement will persist for the next 20 years is about as arrogant as you can get. The difference between success and failure is not what you do before you buy a stock, but what you do after. Half this game is not picking the right stocks, but getting out of the stocks that you get wrong. It is about avoiding losses.
www.business.smh.com.au
Bull Predicts
Robert Lenzner, Forbes.com, May 7, 2009
Lakshman Acuthan says it’s a bull market in stocks; home prices are at bottom and the economy will grow by 4% at year end. One major downside: This V-shaped recovery could signal “a return to a boom-bust pattern rather than a mild recession followed by a soft recovery, as occurred in 2001, suggests Acuthan. “This pattern, if it develops, is bad for the concept of long-term buy and hold investing,” he says. In other words, investors will have to learn to navigate these choppy market moves and thrive on the volatility. For those fortunate or smart enough to have bought the “bottom” on March 9, Acuthan says let it ride.
www.forbes.com
“Gail Dudack on What’s Ahead for the Stock Market – The veteran strategist thinks the markets have hit bottom, but the buy-and-hold era is over. And don’t expect full recovery anytime soon.”
Businessweek – April 30, 2009
“We had been in what was considered a buy-and-hold market. We had been in a long cycle since 1982-83, and with a few bear cycles in between there was a pretty steady advance through 2000. I think that buy-and-hold period is gone. Investors need to be more aware of when the market is getting ahead of itself or is providing a great opportunity for a 6- to 12-month period. If you want to buy and hold, you need to be clear that what you are buying offers total return. So dividends have become much more valuable, and investors need to be sure they are buying companies that can weather this extended consumer malaise.”
www.businessweek.com
