Friday, March 20, 2009
Q&A With Less Antman
This month I have interviewed Less Antman, a fee-only personal financial advisor for whom I have a tremendous level of respect and admiration. I learned about Mr. Antman some time ago following a tip from a good friend & mentor, Dick Davis, who suggested I read his free newsletter and financial planning message board. From my close review of his work, Less is someone you will benefit from knowing (and reading) which is why I've asked him to participate in this Q&A.
Now, if you're a trader and buy and hold investing seems completely moronic, I recommend that you read this Q&A anyway and print off a copy so you can review later. You too will learn something in this Q&A.
As always, we both hope you will enjoy it and find it helpful in your journey.
Q&A With Less Antman
Kirk: Welcome to the Q&A Mr. Antman. This is the first Q&A session with a fee-only financial planner and I look forward to sharing your perspectives.
Less Antman: I’m glad to be here. Now where’s my fee?
Kirk: As they say, the check is in the mail!
As a quick introduction, please tell us a little about yourself?
Less Antman: I was born in the sleepy little village of New York City in 1957, but have lived in Southern California since the age of 6. This year, I will celebrate my 25th anniversary married to my wife, Diane, who loves me so much that, since the day we met, there hasn’t been a single day when she has asked me if I could just be serious for a minute. For the record, I can’t, and hope it won’t make this interview too painful. I am philosophically a Taoist, meaning I go with the flow and treat life as an adventure to be experienced rather than a problem to be solved. Politically, my wife and I are anarchists, as our housekeeper can verify.
Kirk: When and how did your interest in investing and the stock market begin?
Less Antman: My interest in investing began at the age of 10, observing my stepfather every morning as he watched a program on KWHY 22 in Los Angeles called Charting The Market With Gene Morgan, spoke to brokers long distance, and day traded stocks and commodity futures. When my stepfather died, he was working on his memoirs, entitled "How I Turned A Million Dollars Into $25,000 In The Market In My Spare Time". I was fascinated by the Standard & Poor’s Stock Guide his local broker sent every month, and pored over the numbers, hoping to learn enough to help him make better choices. He paid for me to attend an investment course when I was 16, where I concluded that the broker teaching it was a nice man who knew nothing about valuing stocks. That was when I went to the library and picked up Benjamin Graham’s "The Intelligent Investor" and became hooked for life.
Kirk: Please tell us more about your professional and educational background.
Less Antman: I was class valedictorian at Schurr High School in Montebello, then attended the University of California at Berkeley from 1974 to 1977, and still hold the record for being the only attendee of Cal never to smoke marijuana, although I did sit near the fraternities at football games, so I did inhale. I majored in Business Administration with a specialization in Accounting.
After graduation, I went to work for a CPA firm, passed the exam, and started teaching for a CPA review course in 1979, which I continued to do until 2005. After being licensed as a CPA in 1981, I started a part-time practice that was initially devoted to tax preparation, and later expanded to comprehensive financial advice. For a long time, I would advise people on investments at no charge, and also informally advised many of my students after class. I am proud to say that I probably helped more than a hundred of my students set up their very first IRA, and put them into truly awful investments that have outperformed 90% of all stock investors.
Since we had ample income for our needs from my teaching, tax preparation, and comprehensive advice, I saw no need to ever charge for my investment services, which also allowed me to avoid registration as an adviser. I finally had to bite the bullet in 2001 when friends I was advising insisted that paying for dinner wasn’t compensation enough. Now I get paid for money management AND my clients still pay for dinner.
Kirk: How did you learn how to become an investor?
Less Antman: I read every book in the investing section at the Montebello Public Library as a teenager, including books on fundamental investing and technical investing, and still spend part of each day reading about personal finance and investing. I set up paper portfolios with the help of the S&P Stock Guides, learning how hard it was to translate the great-sounding strategies in the books into strategies that did better than the market. I learned various forms of technical analysis, discarding method after method that failed to work more than random chance would predict. I did eventually settle on one successful stock picking strategy, buying stocks selling below “net net working capital,” but discovered the problem of taxation of gains and market adaptation, as those opportunities pretty much disappeared in the mid-1980s thanks to popularity. Simple strategies have a way of doing that.
Eventually, I found a sure-fire timing strategy involving naked option writing and reliance on the Elliott Wave, which made money like clockwork until October 19, 1987, on which day I managed to lose everything I had accumulated in my entire adult life except for my IRA.
I’m proud to say that, if you ask my wife, she will tell you I was as happy that day as any other, if not happier. One reason is that, at the young age of 30, I had learned the most valuable lesson of my life, and knew it. When I started my IRA, mutual funds were virtually the only option, and I had chosen the Twentieth Century Growth Fund because they were one of the only no-load funds to let me get in for $25 a month, which was all I could afford when I got my first job. I never bothered to monitor it, but when it was all I had left, I was surprised to see how well it had done over those years, even after the crash. Initially, I attributed it to the fund itself (and James Stowers, the manager at the time, does deserve enormous credit), but I also found other funds that had done well, and whether or not it was coincidence, they were mainly funds that stayed invested in stocks through thick-and-thin (Twentieth Century Growth Fund was always 100% invested). Being a tax guy, I also determined that taxes bit into these returns considerably in taxable accounts, and that led me to index funds. I later found even more tax-savvy approaches involving individual stocks and even a little bit of margin. By no means am I an index-only guy.
Kirk: Can you think about the one or two things that made the biggest difference in developing your skills?
Less Antman: Besides the October 19th crash, I’d have to say my mom. In contrast to my stepfather, my mother was and is a superb investor, who taught me to believe in markets, think long term, and not be afraid to keep virtually everything in equity investments. She is in her 80’s, and is still invested that way. She still handles the rental real estate, but I’ve been managing the stock portion of my parents’ portfolio for over 25 years, and because she is my mother, am only charging her a 25% management fee, hopefully not payable for a long, long time to me and my brothers.
Kirk: In your opinion, what is the most important thing you've learned so far?
Less Antman: Humility. I diversify widely as an admission of ignorance. I don’t try to buy low and sell high because I can’t predict the short-term direction of the markets. And I never fall for the snake oil of guaranteed investments and safe havens. In fact, I think I may understand humility better than any other person on earth. Oops.
Kirk: You've said that "the most useful objective of personal financial planning is not financial wealth, but financial peace of mind. A person who thinks about money all the time isn't wealthy, regardless of how much they have, and the one who has no worries about money is the one to be envied." I agree 100% with this statement. So, here's my question - how do people worry less in these challenging times?
Less Antman: The long-term answer is arranging your financial affairs so you don’t have to think about them, either by automating them or outsourcing. My clients, obviously, have chosen the latter, and both 2002 and 2008 were smoother years for them psychologically than you might think. But it is easy for a do-it-yourselfer to automate savings, investment, and billpaying, and a pair of scissors can simplify your debt issues down to one credit card (or two). Needless to say, this is where I believe buy-and-hold investors and delegators have a big advantage. But a trader can manage as long as they are only trading a part of their portfolio and truly treat it as a game or hobby.
The quick fix can be put into one word: PERSPECTIVE. I’ve been able to snap people out of their worries instantly with a few arguments. I’ll give the first sentence of each and you can use your imagination:
(1) “Relax, you’re going to die someday.”
(2) “Count your blessings.”
(3) “What’s the worst that could happen?”
(4) “Isn’t this the 6th time the world is coming to an end?”
(5) “Optimism is the only realism.”
(6) “How did people live 100 years ago without the Internet?”
(7) “Do you think the Angels can go all the way this year?”
Kirk: From a ground-level sentiment perspective, what are you seeing in your clients these days (fear, apathy, hate, etc.)?
Less Antman: Nobody likes having their investments drop in value, of course, but I don’t accept clients unless they accept my long-term philosophy, and most have been fine through this decline just as they were in the last one, and as I expect they’ll be in the next one. Resignation is the main emotion: they just focus on other stuff. A few clients have asked me for a pep talk, which I gladly give. My investment policy statement specifically refers to the 50% decline from 2000 to 2002 and reminds my client that such declines can and will happen again. That is also the reason equities provide such high long-run returns: nobody would tolerate these drops without the expected reward. So far, no client has ever fired me for poor performance: it’ll happen someday, but I don’t want clients who don’t trust me or who expect guarantees.
Kirk: What are some common problems/issues you're seeing out there among your clients?
Less Antman: Spending. Many clients draw from the investment accounts, and I give them a couple of options: either draw 4% a year rising as the account grows and with no need to cut back during declines, or draw 5% a year rising and falling with the account balance. I have to rethink the latter, since those following the latter approach are finding it tough to cut back, while those using the former are comfortable.
Kirk: Please tell us about your Simplyrich Advisor's Portfolio (SAP)?
Less Antman: I have no model portfolio, as I build each client’s portfolio based on their life situation and their other investments. But I have a lot of people who want my advice: my free newsletter has over 1,200 subscribers, and as long as they’re not paying me, I have no problem offering generic ideas to assist them. So I decided in 2007 to post my personal portfolio, pointing out in detail the unique aspects of my situation that affect my choices.
Kirk: How has it performed since its creation back on July 31, 2007? (i.e. full-year 2008 results & YTD in 2009)
Less Antman: You’ve been dying to ask me that, haven’t you? Obviously, a buy-and-hold equity strategy has done poorly during the recent bear market. Well, take a look. It lost nearly -37% in 2008 and -17% through the end of February. Do I get credit for the fact that the portfolio tripled in value during the bull market preceding that? The portfolio wasn’t created on July 31, 2007: I just started posting my personal results then so that people would stop asking me for a model. It has beaten the S&P 500 9 years in a row, including 2008 (by a fraction of a percent).
Kirk: As you say, those are still respectible results when evaulating it over a longer-time frame. I am also assuming that you may have money in the SAP. So how are you personally faring in this bear market?
Less Antman: It IS my entire personal portfolio (adjusted to an arbitrary starting value to protect my privacy). It is not a model: I don’t have a model portfolio, because each client is different. In fact, not one of my clients is invested this way. Only us (me and Diane).
Kirk: One obvious standout for this passive portfolio is its heavy allocation (30%) toward commodity futures. This obviously was a good strategy during the great commodity boom, but what makes you think commodities deserve such a high allocation in an investors' portfolio over the long haul?
Less Antman: Commodity futures have a strongly negative correlation to stocks over intermediate time frames, and are the only equity investments with such a relationship. Over the years, a portfolio that had both domestic stocks and commodity futures had much less of a variation in performance, because they rarely went down in the same year. Obviously, 2008 was one of the exceptions, as was 2001, and 1981, but those were the only 3 years in the past 4 decades. In more than 90% of all calendar years, at least one of the two rose. Going forward, that offers a strong probability of smoothing the inevitably rocky road of equity investing.
Kirk: Other than underperformance, what could occur to make you rethink this heavy allocation toward commodities?
Less Antman: Actually, underperformance wouldn’t do it if it accompanied by outperformance of stocks, since it is the negative correlation I crave for me and my clients. If other investment categories were to be discovered with negative correlations to stocks and equity-like returns, I would lighten up on collateralized commodity futures in order to take better advantage of the others once reasonably priced investment vehicles became available. Also, I already limit commodity futures exposure to around 10% for clients in taxable accounts, since commodity futures income is fully taxed every year, lacking the deferral possibilities of stocks.
Kirk: Another ingredient to this portfolio is its allocation toward foreign and emerging markets? What's the justification for this especially since we've seen that overseas markets have not decoupled from the U.S. as so many people previously thought?
Less Antman: Over intermediate time periods, they do decouple: international markets have significantly outperformed the US in the 2000s, US stocks significantly outperformed international stocks in the 1990s, international stocks significantly outperformed US stocks in the 1980s, and on and on. During panics, there are times when everything drops except money, but eventually people run out of fear adrenaline and the real differences between countries assert themselves.
Kirk: The SAP portfolio also holds no "idle cash" and is a 100% long-equity portfolio. After seeing your Market Timers Hall of Fame page, it is obvious that you have strong reservations about market-timing theories and strategies. Please explain your contempt for market-timing.
Less Antman: Have you got a year? I’m planning an article on the subject for next month’s edition of my email newsletter, but I’ll do my best to summarize:
(1) All the successes I’ve seen attributed to market timing are either purely hypothetical or achieved by selective recall. My lifetime results are spectacular if I get to ignore October 19, 1987.
(2) The hypothetical results are inevitably calculated without adequately accounting for implementation costs, let alone the probability of market adaptation when a method becomes popular.
(3) Taxes devastate timing strategies in taxable accounts. Advocates sometimes acknowledge this in passing, but the disclaimer is frequently missed.
(4) Volatility is not risk: if the final result is inferior, the fact that the ride was smoother is not adequate compensation. As for the argument that risk-adjusted returns can be brought above market averages through leverage, this overlooks the fact that margin is only allowed in taxable accounts, where taxes devastate timing strategies.
(5) To the extent volatility is an emotional issue, it is better to cultivate ignorance by automated or delegated investing. Many people have lost more than 50% of the equity in their homes over the past couple of years without a panicky urge to sell, because daily price quotes aren’t in their face.
I do not believe the market is a random walk. I do believe there is some evidence of short-term momentum and a lot of evidence for intermediate-term reversion, and that some modest departures from total neutrality are reasonable (though not necessary for long-term success). But market timing advocates are rarely modest in their claims.
Kirk: As someone who employs market-timing in my approaches, I find no fault with these points except to suggest that there are methods to nullify and/or at least tackle some of these objections (i.e. lower tax liability by trading only in ROTH IRAs - to creating an automated timing strategy that takes emotion and volatility out of the equation.). As you say, however, those who decide to employ approaches based on market-timing must know all of the facts involved as they're not frequently touted and realize that when all things are considered, there's a mountain of evidence that still supports a buy and hold strategy for the average Joe.
Speaking of which, in last month's Q&A, Mebane Faber talked about a simple timing strategy using moving averages that has historically shown significant outperformance. Why do you think using a simple strategy like this is wrong?
Less Antman: Because none of the reported long-term results were achieved by anyone, nor would they have been achieved by anyone using that strategy during the periods studied, nor is it likely that legitimate and easily duplicated strategies will work once they become popular.
I like and respect Mebane Faber: I think his blog is the best advisor’s blog on the web, he is one of the few who properly understands diversification, including the value of commodity futures, and he is one of the few who has mentioned the surprisingly low median return of stocks in comparison to the mean return, which is something I use to beat index funds after taxes for many of my clients. I’ll go so far as to say he is someone to whom I would comfortably entrust any relative, friend, or client. Moreover, he is an honest man who admits mistakes. He actually offered several market timing ideas during 2008 and early this year, many of which turned out badly, and while those who are talking about him only comment on the moving average strategy, he detailed the ideas he offered that didn’t work out on his blog, which leads me to believe he won’t lose his head with all the current praise, which can easily convince someone that they’re virtually infallible.
In fact, he consciously provided all the evidence needed to challenge his paper within the paper itself, in the “Practical Considerations” section, although I don’t think he fully appreciates the significance. For example, take the 109 years that moving averages beat the S&P 500 (or, equivalent prior to its creation). Just commissions and spreads would have wiped out the 1.24% listed advantage: the roundtrip commission and spread in the 1960s for large stocks was around 3% and, if memory serves me from my readings, was around 5% in the 1920s. It is lower today, but you can’t attach today’s commissions to historical results if you’re going to measure them correctly, because the anomalies very likely existed in part because of higher transaction costs.
As Mebane noted, Jeremy Siegel discussed the 200-day moving average applied to the Dow Jones Industrial Average in his wonderful book, "Stocks For The Long Run." He had similar long-term results, but also noted that the system broke down recently, falling more than 5% a year below the market averages BEFORE ANY TRANSACTION COSTS for the period 1990 to 2006. Mebane, oddly enough, offered a radically different Exhibit 7 in his study. Now it might be that he adopted monthly closings without a band purely for simplicity, but the fact remains that there is virtually no theoretical difference between a 200-day moving average and a 10-month moving average, and the fact that one worked nearly 5% a year better than the other should give us pause.
That said, I think the nature of a moving average is that it should keep people out of the V-stage of bear markets, at the price of whipsawing and lower long-run returns, and there may be some investors who won’t invest in stocks unless they can be assured of avoiding those V-stages. It’s just that I don’t accept such people as clients.
Kirk: Fair enough Mr. Antman. So, under the SAP, how often do you adjust the holdings?
Less Antman: Since I want to keep life simple with the SEC, I rarely change my personal portfolio. Maybe once a year. I review client holdings on a quarterly basis and, for those with taxable accounts, harvest tax losses and reinvest. I don’t rebalance in taxable accounts, and often let tax-sheltered allocations get 5-10% away from targets before rebalancing. Maybe I’m acknowledging short-term momentum.
Kirk: In comparison to the SAP, what is your view of using other passive lazy portfolio strategies? Namely, what makes your allocation better than the rest?
Less Antman: Over super-long time periods, most equity categories converge. Kenneth Fisher did a study on the 30th anniversary of the creation of MSCI Country Indexes, and discovered that all developed countries had annualized 30-year returns within 1% of the global average. So I think all the lazy portfolios are pretty good in the long run, the main difference being the level of exposure to equities.
That said, not everyone has a 30-year time frame for their investments (although most do if they’re under 45 or have important legacy goals involving children, grandchildren, or charities). Over shorter periods, my greater diversification is more likely to produce results nearer the long-term average. In particular, of course, I think the commodity futures component smoothes results over intermediate time periods. As 2008 has shown, nothing guarantees smoothing over the short term, but 2008 was the first year since 1931 in which all 4 broad equity categories dropped (domestic stocks, international stocks, real estate, and commodity futures), so for a passive investor, I still think it is extremely valuable.
Kirk: If anything, portfolio design is becoming tougher in a world flooded with choices. Most of us simply have too many ETFs, stocks, options, alternative assets, and strategies to consider. So, how do you suggest investors confront and overcome this obstacle?
Less Antman: You don’t HAVE to consider all the options available. You’ll likely outdo almost everyone you know over the long term with just a domestic stock index fund and international stock index fund, as long as you can ignore the sneering of timers during bear markets. If you’re older, you do need to give some attention to alternate investments unless you’re wealthy enough to have annual draws under 4% of your liquid wealth. I think commodity futures are the most valuable thing to add: 10% to an all-taxable portfolio and 20% if you have some available tax-sheltered accounts. No need to keep as much as I do personally.
I think at least 80% of someone’s long-term assets belong in set-it-and-forget it lazy portfolios. For those who want to try and beat the market with timing or trading, put up to 20% in a trading account and have a blast, but only if you actually ENJOY doing it. I have some couples that invest 80% of their assets with me to keep the cautious spouse happy while the carefree one tries to beat me with an Ameritrade account. I have others who just hold back 20% and keep it in the bank because they think I’m nuts to invest 100% in equities. The key is to have MOST of your assets in diversified growth accounts you can ignore. Add complexity only if you enjoy the game.
Kirk: As many of my members will quickly attest, you now are sounding a lot like me with this reply!
Beyond creating well-diversified portfolios for your clients, do you consider anything else (like technicals, investor sentiment, fundamentals) in your market view and subsequent portfolio exposure?
Less Antman: In my individual stock accounts, which are managed for tax savings, I need to develop buy lists that are diversified by industry and internationally. In doing so, I do consider two fundamentals: total operating income and low debt to equity ratio. Most of the returns of the stock market come from a small percentage of the stocks, and using individual stocks instead of funds poses the danger of missing those super stocks. The analyses of the companies that have soared to the sky over long periods indicate that they were usually highly profitable and generated cash flow internally, so I use those screens to select representatives in each industry.
Harvesting losers and holding winners is also, inherently, somewhat of a technical momentum strategy that helps catch super stocks, even though I do it for tax reasons.
Kirk: Using the free MSN Deluxe screener (which is considered the best free stock screener available), can you create a screen that would basically target what you're specifically looking for here?
Less Antman: Okay, I created a screen in MSN Deluxe Screener. Here's the criteria file you can import and use on your own or follow this criteria in other screeners:
Previous Day's Closing Price Display Only
Current Dividend Yield Display Only
State Display Only
Industry Name Display Only
12-Month Income: Cont. Ops. >= 100,000,000
Debt to Equity Ratio <= 1
Market Capitalization >= 1,000,000,000
12-Month Income: Total Ops. >= 12-Month Income: Cont. Ops.
12-Month Income: Cont. Ops. High As Possible
Market Capitalization >= 12-Month Income: Cont. Ops.
As of March 18th, these are the results of this screen.
I limit my actual buy list to one stock per industry, but the MSN Screener won't do that part so you'll have to do some filtering. I typically choose the most profitable non-US company, if any, or the most profitable US company otherwise. I end up with biases reminiscent of fundamental indexing.
Kirk: As you know, buy and hold investing has been declared dead by many. What's your take?
Less Antman: Your sample is biased. By definition, all stocks are owned by SOMEBODY at all times, and there are plenty of institutional investors and 401(k) participants who are in all the time. Let me know when Vanguard goes bankrupt, and then I’ll believe buy-and-hold is dead. Its death is announced every bear market, and its rebirth every bull market.
Kirk: Ok, let me try this one. Because the market is lower today than it was a dozen years ago and because many individual stocks are lower today than they were a lot further back than that, there are many who believe "long term" can no longer be less than 20 years and that the stock market is essentially a young persons' game. Your thoughts?
Less Antman: Am I allowed to swear in this interview? First, only the US market is lower. Second, on a total return basis, including dividends, it is up 13% for the dozen years ended February, and even more since the March rally began. Third, a portfolio split between US stocks, International stocks, REITs, and Commodity Futures is up over 60% in the last dozen years, and is higher over any time period starting 6 or more years ago. Perhaps a US-only portfolio has a 20 year time frame, but that's why I keep harping on the need for a much broader equity diversification than is typically recommended.
Kirk: Since you've mentioned diversification, let's talk about this. You've said that "people have a tendency to underestimate the critical importance of diversification." Yet, those who actually diversified themselves properly through exposure to commodities, foreign equities, etc. have been killed unless by diversification you mean holding lots of cash or positions that benefit from market declines (like short ETFs for example) which I know you do not agree. So, my question is this - how does an investor properly diversify in this environment and over the long haul?
Less Antman: One bad year doesn’t mean the marriage is over: the last calendar year equity diversification completely failed was 1931, and it has yet to fail over time periods of 3 or more years. That is a short enough period of time to wait out declines, and clients DO hold cash equivalents for near-term needs that cannot wait that long. I’m only 100% equity for longer term investing or those whose cash draws are a trivial percentage of their wealth.
That said, I’m always looking for categories that meet two criteria: (1) equity-like returns over time and (2) low or negative correlation with my other categories. Timber fits, so I use that as well, and managed futures are close to having reasonably priced vehicles. I’m also open to uncorrelated alpha strategies as soon as reasonably-priced vehicles exist. My allocations HAVE changed over time.
Kirk: In your most recently newsletter, you shared research that suggest that the 10 years ended in 2008 look like the worst on record for investors (including the Great Crash). But, that when you looked in the past, you noticed that following past troubling decades they were immediately followed by 8 to 10 consecutive years of positive returns. With that in mind, do you think history is going to repeat itself and why?
Less Antman: I don’t know, but since I do believe there is considerable evidence for mean reversion over periods of 3 to 5 years, I think the odds are heavily on the side of intermediate term bulls.
Kirk: Apparently you agree with Burton Makiel that the market has a tendency, after 3-5 years of above or below average performance, to pull back toward the "average" or "mean." Even though it is down sharply, this bear market is only 1 1/2 years old. Is it your sense, according to this "reversion to the mean" concept, that we are likely to have to wait another 1 1/2--3 1/2 years before we see the market return to an "average" level?
Less Antman: No, that's not how either Malkiel or I mean it: bear markets almost never last as long as 3 years. The returns over the past 3 years are already far below average for US stocks, because an investment 36 months ago would be down 39% as of the end of February, while it would have been up over 30% in an average 36 month period. So mean reversion already is suggesting a strong bull pull. It is also down 29% over the past 5 years, which is even farther from the expected gain of more than 60% in a typical 5 years.
Kirk: Many investors, including Warren Buffett have been talking about a Treasury bubble. In fact, you're on record for saying that Treasury bills are "not builders of wealth" and that they are "probably going to default in the intermediate future." With that in mind, please explain this view and whether we all should we be shorting Treasuries out there or using ETFs that benefit from their demise as part of our portfolios?
Less Antman: Because of Medicare and Social Security, the US government was already on its way to either hyperinflation or default starting around 2020 or so, but the Bush administration moved up the expected default date considerably with the Medicare Prescription Drug Program and the various bank robberies of 2008. The recent pork bill signed by Obama makes things even worse.
In that light, the passion of investors to rush out of all forms of equities into Treasuries reminds me of the horror movies in which the idiot babysitter is conned into thinking there is a murderer inside the house, causing her to open the door and rush outside, leaving the safety of the house to run into the arms of the killer.
Over long periods of time, no investment can possibly be safer than the productive businesses which provide the world’s goods and services. The government can only tax revenue that producers create: without them, their obligations cannot be honored. Credit default swaps on international markets recently priced default insurance on 5-year Treasury notes at the level of single-A+ bonds, yet they are currently yielding only AAA+ rates. Even if they don’t default (and I don’t see that happening in the next few years), yields should adjust to the higher risk, and that will mean a fall in price. Also, when the risk of inflation is better perceived, all nominal bonds should rise in yield and fall in price.
I will confess that, while there is always the problem with shorting that the market can remain irrational longer than you can remain solvent, US Treasuries, with the major exception of TIPS, look horrendously overpriced to me, and I can see a great deal of merit in a trader shorting them at current prices. Of course, I won’t be doing so.
Kirk: You can't turn on CNBC these days without some portfolio manager recommending corporate bonds. What's your view?
Less Antman: Relative to equivalent time period Treasuries, they look good to me, though that isn’t high praise. The biggest danger is that long-term inflation will still devastate high quality bonds because they’ll be repriced to yields that cover inflation. I find all nominal rate bonds scary because of the fiscal and monetary policies of the government, but if the CDS market is correct, AAA and AA corporate bonds are safer than Treasuries while offering a better return.
Kirk: You have previously preached the importance of spreading your bets all over the globe. In fact, you've said that "Nobody knows the best place to invest, and the consequences of putting too much in one place can be devastating, so it might make the most sense to put your money EVERYWHERE." In fact, you've said that by holding just two mutual funds - Price Total Equity Market Index Fund (POMIX) & Price International Equity Index Fund (PIEQX) you would have investments in over 3,000 different companies spread around the globe. That said, the performance of both have been truly awful. Do you think some investors may be in danger of over-diversification and, if so, what are signs you look for that may be the case?
Less Antman: I knew we’d get to my “truly awful” advice eventually. First, let’s put this recommendation in context. On my web site I noted that there was no excuse for a person to say they didn’t have enough cash to diversify, because they could own over 3,000 stocks for only $100. That was my only point. But I’m willing to defend it as an allocation strategy: over long periods of time, that has performed far better than most actual investors. Dalbar Associates has been studying investor behavior since 1985, and concludes that the average stock investor has been underperforming the market averages by around 8% per year since then.
If you want to keep pointing out that equity investors have done poorly since October 2007, that’s your right, but real life timers and traders have nothing to brag about in terms of their actual results compared to buy-and-hold diversifiers. It is only their theoretical results that put me to shame. I believe that truly awful split between two T. Rowe Price funds will beat most investors in most years, and virtually all of them over the long term, based on the psychology of actual investing.
Kirk: For the record, I don't believe the allocation you've set up there was poor advice. As always, you've got to consider the time frame and all strategies will see periods of significant underperformance. To not expect that is not to understand how the market operates.
You have also said that "One of the most misunderstood concepts in investing is that of risk." How so?
Less Antman: Risk is usually defined as volatility. I define financial risk as the probability of not being able to pay for something you need. If someone saves 10% of every paycheck over a 40-year working life and keeps it in the bank, they will have seen virtually no volatility, but will only have around 4 years of income in the bank, since bank accounts typically offer a return after inflation and taxes of nothing, or even a little less than nothing. If they put 10% of every paycheck into a US-only diversified equity portfolio, they would have seen wild volatility, and while an average portfolio would be at 15 years of income, the worst case scenario was only 7 years of income.
Now, even assuming the absolute worst result (and notice I’m not even considering the diversification benefits of international stocks, REITs, and commodity futures, which would have raised the worst case considerably), 7 years of income is still better than 4. Who is in more danger of not being able to pay their bills or running out of money? Who is more at risk as a result of their investments?
Here’s the thing. Over periods of time up to around 7 years, the worst performance of stocks has been worse than the worst performance of cash or bonds. Over longer periods, the worst case scenario for stocks has been better than the worst case for cash or bonds. My last newsletter noted that the decade ended 2008 was the worst ever for US stocks, with a 35% real loss, but that T-bills lost 41% in their worst decade. T-bonds lost 43% in theirs.
Over 17 or more years, US stocks have NEVER had a negative real (after-inflation) return, while bonds have earned negative returns after inflation in time periods as long as 56 years. The worst 40 years for bonds lost 60% after inflation (but still before taxes), and it was starting from a low yield comparable to today’s pathetic Treasury yield.
The point is that you need growth in a portfolio unless you are so wealthy that a slightly negative annual return won’t drain all your resources over time. So investments with lower expected returns expose you to the risk of not having adequate growth, which is, in my view, more important to most investors than the risk of a bad year or two.
Kirk: Speaking of risk, some astute market observers (like Teresa Lo) have been suggesting that people implement a plan to hedge a potential run on life insurance companies by borrowing the max against their policy in case the worst should come to pass. What are your thoughts/recommendation on this as a financial planner?
Less Antman: Since I never recommend clients buy life insurance with cash values, this isn’t a topic that usually comes up, but for those who already have it before I come on board, I typically try to get term insurance to replace it, then engineer a 1035 exchange of the cash value into a low-cost no-load variable annuity, such as those Fidelity, Vanguard, and Ameritas offer. That gets it safely away from their insurer without loan interest or tax penalties. For those with large surrender penalties, I can see borrowing from a risky insurer, although I haven’t yet had a client with a large enough exposure of this sort to address.
Kirk: One of the questions I receive most these days are where to park idle cash (i.e. find safe havens) away from the market. If one of your risk averse clients asked you the same question, how would you respond?
Less Antman: If you asked me that question a year ago, I’d have said Treasury Inflation-Protected Securities (TIPS) without a second thought. The 15% decline in their value in a matter of months last year disturbed clients who considered them safe havens far more than the decline in equities, which they knew were volatile. Moreover, they’re as prone to default in the intermediate term as other Treasuries. I think they’re underpriced right now, but that is a market call. Seriously, with the Fed and Treasury so out of control right now, I’m hesitant to call anything safe. Ignoring default, which I don’t think is a serious short term risk, you have the choice of money market funds that will suffer losses under inflation and TIPS that will suffer under deflation. I still prefer TIPS overall, since deflation also means a lower cost of living, but the first answer is to retire all debt, including mortgages, before holding cash equivalents in any significant amount. TIPS remain my favorite cash equivalent, although I'm thinking it over at the moment. Remember, the best inflation hedge over the short term is commodity futures and the best over the long term equities in general.
Kirk: The negative effect of inflation and taxes destroys the myth that treasury bills and cash (and gold) are safe havens. But can't you put a cash value on the "peace of mind" that comes from knowing your net worth is not subject to daily erosion (at least not the dramatic visible erosion you see in stark numbers on your monthly statement)?
Less Antman: Yes. Some compromises with pure economic rationality cost very little and, if the psychological benefit is sufficient, are justified. What worries me is to leave the impression with people that their safe havens are guaranteed preservers of wealth, especially when there is a very strong possibility they will earn negative returns after inflation in the immediate future.
Kirk: Laddered CDs seem to be a popular choice in this environment for risk-averse investors. I know you're opposed to municipal bond funds but how do you feel about a laddered CD strategy?
Less Antman: What about the risk of inflation? For those who insist on keeping cash, the utterly trivial increase in yields from locking the money into a CD for more than a few months isn't worth the risk. Put the money into TIPS, and get a better yield with protection from inflation.
Kirk: On the other hand, if a client asks you to bring out your crystal ball and figure out the best opportunities over the next few years, what would you tell them?
Less Antman: What I’d actually tell them is, “Who are you and what have you done with my client?” No client of mine would ever ask this question, since they know I wear my ignorance of the future as a badge of honor. But I don’t mind being a hypocrite for your readers. For 9 straight years I’ve beaten the US stock market for a simple reason: the US stock market has performed worse than the average equity category for 9 consecutive years, and is currently as oversold on a long-term basis as it has ever been. I expect it will be the star over the next few years. But please don’t tell my clients I said that.
Kirk: We all have people we respect more than others. Who do you look up to and why among all of the professionals you know?
Less Antman: I'm a loner who has learned from reading the words of others and not from meeting them directly. Still, it’s pretty easy to identify the people in this field I most respect. First and foremost, Charles Ellis, former Managing Partner at Greenwich Associates. Although I thought through much of my philosophy on my own, his "Winning The Loser's Game" is the book that put it together in my head, and there is nobody who has better captured the reasons for my commitment to a 100% equity strategy.
Second, Roger Gibson of Gibson Capital. He authored "Asset Allocation" and was pushing for thorough diversification during the late 1990s when it only earned him condescending sympathy and irritated clients, who wanted to do as well as their buddies by sticking to US technology companies. In fact, the DOPE portfolio I created on my web site was based on a multiple asset class presentation he has been giving for over a decade.
Third, Kenneth Fisher of Fisher Investments. My stock selection screens are based largely on the methods his father, the late Phil Fisher, developed and that Ken applies to global investing in his monthly columns in Forbes. I don’t directly use his picks, but am not surprised to see holdings of my clients pop up in his columns.
Fourth, Mebane Faber of Cambria Investment Management. I may not agree with him on timing, but he is popularizing the thoroughly diversified asset allocation approach I believe is best, and has a curious mind and willingness to share that has made my own research easier. And if anyone ever convinces me I’m wrong about market timing, it will be Mebane.
Kirk: What do you think may be the key ingredient to their success?
Less Antman: They all have analytical minds that commit them to going where the facts (as they see them) require, even when it isn’t conventional wisdom and when it might be difficult to sell to their clients. They are fiduciaries in the highest sense, because they never place salesmanship above their own sense of their clients’ best interests.
Kirk: Very well said! How have your own methods evolved and changed over the years?
Less Antman: I started out a Graham and Dodd stock picker, became a market timer, and then a committed diversifier, all before starting to manage other people’s money for a fee. The main changes in my strategy have been tax-motivated, as I started developing individual stock strategies that actually produced higher after-tax returns than index funds, especially for clients with other gains needing offsets, and later I started using margin, but only to the level needed to offset investment income, so that expected returns stayed about the same but income taxes diminished further. Since then, the changes have mainly involved the additional of new investment categories and changes in investment vehicles as the industry started offering new products. And I continue to read the investment literature that comes out, looking for reasons to change my fundamental approaches. I end up rejecting most of the new ideas, but I’m a skeptic rather than a cynic, so I do change my mind.
Kirk: Please share one of your largest mistakes in recent memory and anything you learned directly from the experience.
Less Antman: I assumed serious deflation was not possible with a government that consistently ran deficits and a Fed chair who was committed to not repeating the deflation of the Great Depression. I learned in 2008 not to exclude any scenarios, even those that seem nearly impossible.
Kirk: In recent years, have you learned anything that has made a positive impact on your approach? If so, what?
Less Antman: I wasn’t that enamored of commodity futures initially, because I confused them with commodities, and didn’t realize the critical differences (gold futures and gold are not identical investments). Some research convinced me I was wrong, and learning how strong the negative correlation was between commodity futures and other investments caused me to significantly modify my client portfolios starting in 2003, reaping enormous rewards for them, even taking 2008 into account.
Kirk: Can you give us some idea of what tools you find most helpful to monitor the markets?
Less Antman: I think constantly monitoring the markets is counterproductive: noise rather than news. That’s another trader vs buy-and-holder difference.
Kirk: On Simply Rich Wiki you write, tongue in cheek, "There are much better hobbies than following the stock market. Find one." This advice is easier followed when stocks are going down and disenchantment sets in than when they're roaring ahead. What should the investor's mindset be if he insists on watching CNBC?
Less Antman: The same as when he watches a porn channel: watch for pleasure and not enlightenment.
Kirk: What does your daily routine mostly consist of?
Less Antman: I've been semi-retired since graduating from college, never working more than 20 hours a week. Except when traveling, my normal wake time is 3 pm in California, after the market has closed, and my afternoons and evenings are spent with Diane, reading, and browsing the Internet. My feeds on Google Reader often lead me to interesting research, and I usually move around the web without plan to confirm or debunk interesting ideas. Sometimes, that’ll get me doing a little spreadsheet work to test out theories or something along those lines. If I’m writing articles, it is usually then.
My actual workday starts close to midnight: I check my email and respond to all correspondents, aiming to zero out my inbox every day (of course, I don’t always succeed). I delegate everything that isn't advice-related to my wonderful administrative assistant, Jessica, whom my clients adore. Most days I then work on one client, keeping in mind that I'm a comprehensive advisor and may not be working on their investments. My total work day averages 2 hours a day, 7 days a week, but is flexible based on what needs doing that day. When I’m finished, Diane and I practice our ballroom dancing, I take my run, then I read to her while she goes through her nighttime routine. We usually get to bed around 6 am or so.
Needless to say, my clients don’t pay me by the hour, or I’d starve to death. They only care that I make their lives better and let them forget about money.
Kirk: I have to admit, a 20 hour work week sounds very nice. As they say, quality vs quantity can and often gets the job done!
In your research time, what information and indicators do you place a great deal of emphasis on more than others?
Less Antman: As mentioned, I look for large, profitable, low debt businesses, but mainly I’m aiming to diversify by industry and internationally, so simple screens are all I use. As mentioned, I’m not a cynic, only a skeptic, and am considering the incorporation of some technical criteria. I think the research on proximity to the 52 week high is the most interesting.
Kirk: Do you believe individual investors have an equal chance to profit from the market as much as the professionals? Why or why not?
Less Antman: In theory, individuals can beat the average professional just by indexing. So, yes. In practice, individuals investing on their own do miserably because of all the emotional issues associated with money. So, no.
Kirk: What are some characteristics you find in those who are the most successful?
Less Antman: There is only one that I think is universal: PATIENCE. It takes patience to be a saver, patience to accept the uncertainties of equity investing, patience to diversify and give up the possibility of a quick killing, and patience to wait the several years it takes before equities become as close to a sure thing as you’re likely to find in the real world. I think this quality is critical whether one is a passive or active investor: I’ve seen long-term successful stock pickers (Buffett, Stowers, Michael Price, Tweedy & Browne), but they usually take their time with research and then hold their picks for years (although some use stop-loss orders, believing that poor momentum means they picked incorrectly). One reason I’m waiting to find a successful timer is that the very nature of it makes it harder to be patient. I’m sure there are exceptions, but I haven’t seen a convincing case yet. Maybe Mebane Faber will be the first.
Kirk: As a fee-only financial planner, what are some common financial mistakes beyond investing that you see in your clients?
Less Antman: The most serious non-investing financial mistake, bar none, has involved the choice of living quarters. This is related to my difficulty in bringing down the spending of some clients, because they committed to houses that were too expensive, or bought when they should have rented, or rented luxury apartments in the best areas when they should have lived in a slum next to a pig farm. Many people now facing foreclosure will find out it was the best thing that ever happened to them.
Going without disability insurance is second on my list, since disability is the one event that can truly destroy a person’s life, and disability insurance is the one insurance that can become impossible to obtain after a single incident involving illness or injury, so delaying can mean never obtaining it.
Doing their own tax returns is third. While not a problem for the simplest situations, there are things I’ve learned from my client’s tax preparer that I never would have learned from them, and people constantly miss deadlines for filing, contributions, and estimated payments because they insisted on doing it themselves. By the way, I don’t prepare tax returns for clients anymore.
Carrying credit card balances, not maxing out on tax sheltered savings opportunities, not spending $40 and a few hours at the computer to prepare some basic legal documents, buying cash value life insurance and variable annuities when not appropriate, and buying an SUV just to have a bigger purse, have all cropped up from time to time.
Kirk: What are some suggestions you have to avoid making those same mistakes?
Less Antman: Now, let’s see, what should I recommend? I’ve got it: see a fee-only comprehensive financial advisor! There are superb hourly planners in the Garrett Planning Network who will do a once over and give you a list of things to do, often costing less than $1,000, and smart ass CPA planners from California who will charge $3,000 to fly to your home, review everything you provide, give you a report card, and then work with you over a period of months to help get all these things handled. Or read the next edition of Andrew Tobias’ "The Only Investment Guide You'll Ever Need" from cover to cover.
Kirk: The popular mantra of financial planners offering retirement planning advice is "SAVE" and "LIVE BELOW YOUR MEANS". Now, with 12 million people out of work, it seems this advice is being followed involuntarily. Do you think this forced "doing without" will result in more effective future financial planning in this country?
Less Antman: Since the day I managed to blow all my investment profits except my IRA turned out to be the best thing that ever happened to me, I'm sympathetic to the idea that a job loss might result in long term gain from better habits. But I'd rather see the members of the Federal Reserve and managers of the bailed out banks be the ones to learn the lessons that come from unemployment.
Kirk: Do you still favor the Nevada 529 plan via Vanguard for college kids savings? For children's portfolio growth, do you favor broad-based index funds or individual growth stocks?
Less Antman: I still like the Vanguard Nevada plan a great deal, although I use the iShares Arkansas plan with my clients because of the greater number of investment choices. I prefer the predictability of index fund returns to individual stocks unless the child's portfolio is so large that tax harvesting might become a useful strategy.
Kirk: According to current law, anyone who dies this year will be estate-tax free up to $3 1/2 million--and will then be subject to a 45% tax rate. Next year there's no estate tax but in 2011 the exemption drops back to 1 million with the excess taxed at 55%. The prevailing view is that the Democratic Congress will change the law before year-end and keep the exclusion at $3 1/2 million & 45%. If that happens--and since most estates are under $3 1/2 million---wouldn't a good part of estate planning be largely negated?
Less Antman: Yes, although basic documents to avoid or simplify probate are always appropriate. What is frustrating is that these constant changes in the law make long-term planning difficult, and the threat to drop the exemption back to $1 million makes it impossible for planners to relax. Of course, I have several clients with estates far in excess of $3.5 million who still have to plan for taxes.
Kirk: To make sure retirees don't outlive their income and to control risk, the conventional wisdom is to maintain something like a 50% stock--50% bond ratio after retirement. But you recommend a much higher per-centage in stocks. Why?
Less Antman: Actually, I recommend a lower percentage in stocks: 40%. My neutral retirement portfolio is 20% in US stocks, 20% in International stocks, 20% in REITs, and 20% in Commodity Futures, with the final 20% in short-term or inflation-protected bonds. The reason is that this portfolio has higher expected returns and acceptable volatility. But everybody is different: a wealthy retiree might go 100% equities to invest for the heirs, and an older retiree without important legacy goals might go with 40% bonds and 15% each in the equity categories, which has lower volatility than the traditional portfolio with a higher expected return. Again, these are oversimplified examples, and I have reasons to fiddle with them based on individual circumstances.
Kirk: Every financial planner I've met favors certain mutual fund families in making their recommendations to clients. Which are your favorites? As you know, Dimensional Fund Advisors (DFA) out of Santa Monica, CA are especially popular because of their good long term performance but the public can only buy DFA index funds through a financial planner who is on their approved list. Are you on that list and how do you feel about it?
Less Antman: Vanguard and Fidelity are my favorites for most investors, but I retain a soft spot for T. Rowe Price, because it is the most welcoming no-load fund family for beginning investors with very little money, letting people in for only $50 per month. I use the PIMCO Commodity Real Return Fund for commodity futures exposure. DFA is a fine family, but their unique offerings are in areas I don't feel the need to include.
Kirk: You've made 4 book recommendations at your website for those who wish to learn more. What are some other education resources you find helpful (if any)?
Kirk: Although he updates it every few years, Andrew Tobias' book on personal finance, "The Only Investment Guide You'll Ever Need" was written over 30 years ago. Is it still your first choice for new personal finance readers?
Less Antman: This isn't quite as bad as recommending myself, but I offered extensive suggestions to Tobias for each of the last 4 editions, and am currently putting together notes that I'll be giving him for the 2009 version, so I can assure you it meets with my continued approval, even though Andy and I don't see eye to eye on all matters.
Kirk: Even though their TV delivery may irritate some, it's hard not to learn something from Jim Cramer and Suze Orman (granted the need for constant filtering). What's your take on each?
Less Antman: Suze Orman generally offers sound advice in personal finance areas other than investing. I don't watch CNBC.
Kirk: A common element I find in all successful investors is that they are always working on expanding their knowledge and improving their strategies. What have you been working on lately in this regard?
Less Antman: I’m currently developing my notes to help Andrew Tobias update his "The only Investment Guide You'll Ever Need", which will give me ample reasons for all sorts of research, some of which will end up in his book, if he so chooses. On investing, I’m doing research on Mebane Faber’s new incarnation of the old moving average strategy, to see if there’s any reason to reconsider it, and to write about it next month. I’m also doing more study on safe withdrawal rates from investment portfolios. And I’ve got lots of study to do on the new tax rules and implications for my clients, both those in the latest bill and those forthcoming. And other ideas come up constantly, and get 1 or 2 intensive days of research from me before I move on. I spend far more time reading about personal finance than practicing.
Kirk: Finally, if you had one piece of advice to share with all traders and individual investors what would it be?
Less Antman: Put 10% of everything you earn into a globally-diversified equity portfolio and then get back to enjoying the miracle of life.
Kirk: Thank you so much Mr. Antman.
I always evaluate these Q&A sessions based on whether I personally learned something myself and this Q&A certainly has met that goal.
Remember, Mr. Antman is a licensed CPA in the state of California who provides comprehensive financial planning services on a fee-only basis. Based on what I've read (and know), I highly recommend you visit his message board (especially if you have any questions about this Q&A or other topics) and subscribe to his free newsletter for his thought-provoking perspectives.
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