Righting the Ship (Conclusion)

So how would you sum up investors’ rights?

Investors have the right to competent, honest advisors that put them first, that keeps their mouths shut, and that communicate clearly. All this is to say that investors should be special—not put on a pedestal, but made a priority. Advice and actions should be tailored to fit each investor’s situation. Financial counsel should feel comfortable, and if it doesn’t, they have the right ask questions until they understand.

The best way to feel at ease with advice is to have a plan and to put the plan in writing. An investment policy statement is a great way to develop your financial philosophy and clarify your objectives. Having a written plan helps everyone understand what you want to do with your money. This is especially important when times get tough.

With rights come responsibilities. Creating a plan is something that investors and advisors should do together. It helps everyone understand where you’re going and how to get there. All investors have goals. Writing a plan makes them clear.

Douglas R. Tengdin, CFA

Chief Investment Officer

Righting the Ship (Part 4)

How can investors secure these rights?

The way to get what you deserve is through communication. And investors should have reports, statements, and regular contact that’s clear and complete, and that tells them what’s going on.

It starts with the statement—that humble mailing that can run for pages and pages of incomprehensible jargon. Because everyone want’s something slightly different, it tends to be a “kitchen sink” document that goes to everyone and satisfies no one. Instead, it’s complicated and confusing. But communication doesn’t work if it is just a one-way proposition.

Investors need to ask for statements and reports that make sense—and that state clearly what’s happened with their money, what decisions have been made, what fees have been paid, and how it’s invested. A “black box” may be appropriate in physics or engineering, but it has no place in money management. If investors don’t understand what’s being said, they have a right to ask questions and be given answers.

Any time people work with your money, you should be told what they’re doing. If an advisor won’t be clear, find someone who will be.

Douglas R. Tengdin, CFA

Chief Investment Officer

Righting the Ship (Part 3)

What do we mean when we talk about investors’ rights?

Investor rights are non-negotiable. They’re the principles that should undergird financial industry practices and securities laws. What’s legal isn’t just the minimum standard necessary. In many cases it’s totally inadequate to the task of safeguarding investors’ interests.

One example of this is in the area of confidentiality. Americans tend to think that their securities laws are the best out there, but this is an area where our societal mores and expectations lag behind Europe’s. In general, investors should expect that information they share within a fiduciary relationship will remain within that relationship, and won’t be disclosed to others unless they need to know it to serve that relationship. This should apply to everything—not just finances.

But in a tell-all celebrity culture where cell-phone cameras and digital recorders are ubiquitous, privacy seems almost quaint. Some folks even worry now about having their bank statements mailed to them, out of concern about the Postal Service—which doesn’t seem that outlandish, lately.

Collecting information and using it for anything other than an investor’s interest should be seen as deeply immoral. Anything less is unacceptable.

Douglas R. Tengdin, CFA

Chief Investment Officer

Righting the Ship (Part 2)

What should investors expect?

When investors are buying financial products and services, their cash is paying the bills and salaries of the professionals and institutions that they’re working with. So how should they be treated?

One expectation they should have is that their interests should come first, before that of the finance professionals or the companies they’re working with. That is, the investor’s welfare should be considered before the professional’s. This seems obvious, but this implies, for example, that investors need to know how the people working for them are getting paid. Are they earning commissions, or on a salary? Do the commissions get paid all at once, or are the spread out? If there are other fees, what is the basis for those fees? And are there any potential conflicts?

Investors have a right to ask these questions, because everyone has “skin in the game” one way or another. People can hope that other folks will do the right thing, but they need to know whether they’re getting paid to do the right thing. And when investors’ interests and professionals’ interests diverge, they need to know that, too.

It’s by being open and honest with their clients that professionals can earn their trust. And without trust, there can be no business.

Douglas R. Tengdin, CFA

Chief Investment Officer

Righting the Ship (Part 1)

Do investors have rights?

It’s a fair question. After all, it’s their money. But the financial industry is filled with fast-talking rogues who might make you think twice about that. Ponzi schemes and outright fraud are only the tip of the iceberg. There are all sorts of ways for advisors can take advantage of the folks with capital that can fall short of what’s illegal.

First, investors have a right to honest, objective, competent advice. That seems like a no-brainer, but it can be harder than you think. Honest advice means that the advisor needs to know the laws—securities laws, tax laws, fiduciary laws—that govern the instruments under consideration. In today’s complex world, there are frequently conflicting issues that need to be sorted out.

For example, is it legal to own a limited partnership in an IRA? How about real-estate? Sometimes the answer can surprise you. It may be legal, but there can be significant tax implications—especially if you or a relative use the real estate that the IRA holds.

Honesty isn’t just telling the truth. It also means being clear and forthright. Anything less is simply unacceptable.

Douglas R. Tengdin, CFA

Chief Investment Officer

Turning Japanese (Part 4)

Where is Japan going?

To answer that question, you have to know where Abenomics is going. Economists around the world have been supportive of Mr. Abe and his “three arrows”—easy monetary policy, fiscal stimulus, and structural reforms. The theory is that the first two can promote growth in the short run, which will provide political cover for the third: changes in labor laws and other regulations that can promote private sector investment-led growth.

Because to return to stable, solid growth Japan’s economy must become more flexible and competitive. Government restrictions, anticompetitive laws, bureaucratic interference, and relatively high taxes all impede growth and make it difficult to do business. Indeed, Japan was ranked 24th out of 185 nations on doingbusiness.org; the US is ranked 4th. Starting a business is especially hard; Japan is ranked 113th in that area, behind Ghana and Tanzanea.

For Japan to turn around, they need to remove the protectionist, crony controls that have grown up over the past 20 years. The reforms will take some time to have an impact. Let’s hope that Japan’s people can wait that long.

Douglas R. Tengdin, CFA

Chief Investment Officer

Inside Ben’s Brain

Defensive. Nervous. Pensive.

That’s how Ben Bernanke came across yesterday during his press conference. In a halting way, he discussed adjusting Fed economic targets, stock-vs-flow theories of balance sheet management, and—the big news—tapering Fed purchases of Treasury and Mortgage-Backed securities. But what was most interesting was what the Fed Chairman didn’t say. Early on he noted that he would not discuss whether he would like to stay on as Fed Chair.

Maybe that’s he’s just shy, or maybe it’s because President Obama noted that he had stayed on longer than “he was supposed to” the day before, but that’s the one question the Chairman seemed ready for. Otherwise, he was edgy and tense, tapping his hand on the podium, half-closing his eyes in an inward gaze as he expounded some of the subtleties of monetary policy.

So why was he nervous? Bernanke’s been an outstanding leader, bringing transparency and collegiality to an arcane and confusing institution. It’s taken a toll, though—his beard has a lot more grey now than it did in 2006. But as someone once said, “It’s not the years, it’s the mileage.” Given the ground he’s covered, Ben just may be ready to leave it behind.

Douglas R. Tengdin, CFA

Chief Investment Officer

Turning Japanese (Part 3)

Does Japan even matter anymore?

Twenty years ago Japan’s economy, was the second-largest in the world. Their export machine dominated global trade. Europe was an afterthought—divided and struggling with “Eurosclerosis.”

But now it’s Japan’s economy that’s mired in stagnation. China grew past them as the second-largest individual economy years ago, and the united Euro-zone has more potential than either. Japan’s population is ageing and declining. With an insular economy and an overvalued currency, today Japan seems mainly useful as a cautionary study in the dangers of deflation.

But that was before Abenomics. Japan is home to much world-class engineering and precision manufacturing. By deflating the currency, Abe hopes to boost Japan’s competitiveness. And a resurgent Japanese economy would prove a ready market for cheaper foreign goods, if Abe can create the political will to open Japan’s borders to imports as well as revitalize exports.

A resurgent Japanese economy would be good for the global economy. If it’s good for Toyota, it just might be good for everyone.

Douglas R. Tengdin, CFA

Chief Investment Officer

Turning Japanese (Part 2)

What is Japan trying to do?

On the face of it, end deflation, weaken the yen, and revitalize the economy. Abenomics is the fiscal and monetary policy package put together by Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda. It consists of monetary reflation, deficit spending, and labor market reforms. For years, Japan was regarded as the sick man of Asia. But if Abenomics can get their economy moving again, that won’t be the case anymore.

As stock prices shot up and the Yen fell, some investors looked at Japan’s potential GDP and thought the market could treble before reaching fair value. But trees don’t grow straight to heaven, and a stray word from the Prime Minister in mid-May broke the up-trend; now the market is down about 20% from its peak. Traditionally, a 20% decline constitutes a bear market. Is Abenomics dead?

Probably not. The market shot up so quickly that investors’ expectations were bound to be disappointed. A minister discussing his concern with Japan’s 240% debt-to-GDP ratio doesn’t constitute a divided cabinet. The Nikkei is still up 50% over the last seven months.

Japan has many options for dealing with its debt and other financial issues. If Abe and Kuroda can break the back of deflation, everyone will be better off.

Douglas R. Tengdin, CFA

Chief Investment Officer

Turning Japanese (Part 1)

Has Japan turned around?

During the ‘80s Japan’s market was booming. Their export-led economy was capitalizing on the growth in world trade, their stock market grew 10-fold from 1974 to 1989, and the market value of the imperial palace in Tokyo was supposedly greater than that of the State of California. Japan, Inc. was considered an economic juggernaut—a model of targeted subsidies and managerial expertise that could dominate any market it chose to.

Then the bubble burst and things went into a tailspin. Even though their economy continue to grow, the stock market fell by half and went into a 20+ year bear market. Last November the Nikkei Average was 80% below the record high it set in December of 1989. Japan’s economy has become a byword for the perils of deflation and economic stagnation.

But if inflation and deflation are primarily monetary phenomena, can monetary intervention cure them? That’s what we’re about to find out. Last Fall Prime Minister Shinzo Abe articulated his economic policy: a regime of monetary expansion and deficit spending dubbed Abenomics. The yen fell by over 25% and the stock market doubled.

Japan’s new intervention is a grand experiment. We will soon see where the experiment leads.

Douglas R. Tengdin, CFA

Chief Investment Officer