Posts Tagged ‘investments’

James Grippando’s Novella “The Penny Jumper” – Trading Stock at Lightspeed

Monday, December 12th, 2016

#highfrequencytrrading $daytrading #stockmarket  thepennyjumper #daytrading #pennystock

 

John J. Hohn - Writer, Reviewer and Commentator

John J. Hohn – Writer, Reviewer and Commentator

Time is money, but what is the price tag that comes with it. Bestselling author James Grippando sets the amount at about 160 million every trading day on Wall Street. That’s for a single millisecond or .001 seconds. Why so much? Simple. High frequency traders on the world’s stock exchanges go to great lengths to gain a millisecond advantage over their competitors. In an intricate network of computers and trading systems, one millisecond gives a firm the chance to increase profits by jumping up the price on large blocks of stock by one cent per share. Companies losing money to the high-jacking of the data stream want to put an end to the practice. Their quest sets the stage for Grippando’s excellent novella, The Penny Jumper.

It will take an complex algorithm to stop the penny jumpers from hitchhiking onto the trades streaming from every corner of the globe. In fact, it would require a genius, one presumably beyond the reach of Wall Street, nestled obscurely in a university staff somewhere working in a field of pure research. Turns out Ainsley Grace – young, pretty and bright – is engaged in a monumental project at MIT that would harness all the telescopes of the world and convert them into one huge cyclops to penetrate outer space. The distances data must travel from the far flung locations needs to be synchronized before a composite image is possible. Ainsley configures an algorithm that has all the scopes seeing as one. Kudos for the achievement, however, do not come with a bonus that would alleviate Ainsley’s heavy student load debt. She accepts a consulting job with a Wall Street firm who is wrestling with the penny jumper problem.

James Grippando - Auhor

James Grippando – Auhor

Leaving Boston for New York, Ainsley comes up with the algorithm her employers that will protect them against the penny jumpers. Problem is, before she can collect her six figure fee, her program is stolen, and to top it off, she is the accused of absconding with it herself. She is being framed but proving her innocence is no easy task and there are disarming twists and turns along the way that make her plight at times seem hopeless.

Author Grippando’s tale of Ainsley’s adventure in the wilds of capitalism, where greed is good, is exquisitely symmetrical. Everything he starts, he finishes. No loose ends. The author’s style is lean and efficient, providing just enough detail to orient the reader with each setting. The pace of the mystery is almost as fast as the data streams central to the story without sacrificing insight into the characters or concocting unlikely coincidences to move the plot along. The courtroom scenes are compelling. The dialogue crisp and authentic. Ainsley’s relationship with her attorney and friend, Connor, is straightforward and realistic; in a word, refreshing. Grippando is a master at breaking down the scientific premise of the plot into layman’s terms. In his hands, brevity does not equate to superficiality. The author quotes Carl Sagan, for example, to answer to the age old debate of agnosticism versus atheism. He takes less than a paragraph were others have wasted pages. In a story about really bright, thinking people, the author’s genius shines in a plot that has thoroughly thought . There are plenty of surprises along the way, right up until the final page.

The Penny Jumper Cover

The Penny Jumper Cover

The Penny Jumper is nearly flawless. Author Grippando is marvelously inventive with every detail to keep the story credible, save one. Bad guy, Vlad Kosov, uses mob muscle to get the price reduced by half on a 50 million dollar property in Hong Kong. Real estate transactions at that stratospheric level, especially in Hong Kong, just don’t seem vulnerable to on-site threats from a thug. It wouldn’t matter so much, except that the man who is intimidated into selling is important to the rest of the plot. Readers may trip but not break stride on this detail because the story line is so compelling and beautifully presented. The Penny Jumper is thoroughly entertaining if a bit unsettling once readers realize the high volume trading network at the heart of our cherished free enterprise system might possibly be more vulnerable than most may think.

This review first appeared in somewhat condensed form on bookpleasures. com

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Market Downturns Disclose Hidden Investment Goals

Sunday, September 13th, 2015
Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

Market downturns bring out the worst in some. People may not know it, but they often want more from their investment portfolio than gains and income. Like other major arenas in life—some load more baggage onto a portfolio than it was designed to carry.

Making more money guarantees nothing except make a person wealthier. Assuming grinding poverty is not the cause of unhappiness, money can do nothing to change anyone’s self-esteem. An unhappy person will be an unhappy investor. When the market is going up, they are not making enough. When it is dropping, they are losing too much.

If you want to make good investment decisions, define your goals. Write them down and review them from time to time.

A legitimate goal on the list might be funding college education for your children but not “help me overcome my disappointment with my children.” A legitimate goal might be to retire early but not “help me get my spouse to agree on when to retire.” Sound silly? Truth is that these  unarticulated goals lurk in the darker recesses of the subconscious, just beyond the investor’s awareness. They draw life and breath from all the unhappy, worrisome areas  in an investor’s life. They surface when things don’t go well, especially a market downturn. They are the stuff of panic.

A financial advisor is not a psychologist, no expert at intervening in a personal crisis. He or she has limited training in helping a client overcome negative feelings about losses, missed opportunities, or the failure to do better let alone about disappointments in past losses, a troubled marriage, rebellious children, wearisome job, or life itself.

Wall Street Stock Exchange

Wall Street Stock Exchange

The financial industry attracts predominantly two personality types—the stridently confident, self-absorbed extrovert and the pensive, analytical, technically oriented introvert. Neither receives much training in handling clients who are upset, or angry, or sad, or whatever. They don’t want to be burdened with helping a client define what is really wrong with life. The client may not think he or she is presenting the  advisor with such a loaded agenda, but the energy driving the client’s side of the discussion — the worry, the anger, the disappointment — often is disproportionate to what is happening in the dollar-and-cents world of the portfolio.

A story may illustrate the point. One couple, clients of mine, owned a successful small business. They worked out of their home. They had no children and financial success became a focal point in their lives. Their aggressiveness spilled over into their investment style. During the dot.com craze of the 1990’s, they bought large blocks of Silicon Valley startups that soared with the trend.

A Loaded Agenda . . .

When the speculative surge collapsed, their portfolio took a terrible tumble . She had made most of the stock picks initially, giddy over the projections that analysts were making in what was then dubbed the “new economy.”  It was beyond her to admit that they had been carried away by the hype and failed to harvest their profits in a timely manner. Their stocks were always going to up no matter what. She did not want to acknowledge she had created a long list of failing choices.

She and her husband measured their loses from “peak to trough”—from the highest point an issue achieved to the lowest level to which it had fallen. Forget that at any given moment at least ten percent at either end of the scale is usually not supported by the fundamental value of the company. Stocks are almost always over or under valued. One that has run up dramatically is probably over bought; one the crashes, over sold. But according to their way of looking at things, they had sustained real dollar-and-cent losses that totaled hundreds of thousands. Their portfolio became an album of misery and lost fortune. As if that wasn’t enough, with the market downturn she blamed him for not selling when the time was right. Tranquility at home got tossed onto the pile of losses.

Trading Floor - U. S. Stock Exchange

Trading Floor – U. S. Stock Exchange

At this point, they came to see me. I did not see the anger and bitterness in their concerns, only that they felt defeated and discouraged. Despite their losses, they were wealthy by any measure. None of their life goals were threatened. But that was not their game. They had one rule; make as much money as possible. It was unrelated to anything they wanted in life like, say, a trip around the world, a home at Lake Tahoe or an art collection. They wanted wealth for the sake of wealth. When a person doesn’t know what is sufficient, no amount is ever enough.

Discouraged, they told me that they didn’t want to make investment decisions any longer. I took them at their word. Rather than deal with their trouble, they decided to turn everything over to me and thus escape from it. Bad idea.

She never forgot that they missed a chance at making huge profits. She never forgave him for not making the right call on selling. (The decision to sell, by the way, is far more difficult to make than the decision to buy.) He took me aside one day and asked me to go easy on selling all the big losers in their portfolio because it brought the whole subject up again between them and he was weary of the conflict.

I made a sale one day that generated a capital gains tax bill of $25,000—the maximum long-term capital gains tax rate at the time was 15%. Doing the math, the couple had gains in one issue of $166,667. The forecast for the stock had turned negative. I felt that I had finally taken them out of a position at the right time. The couple received a confirmation of the sale in the mail. Their monthly statements provided all the detail about their gains and losses.

Relative terms . . .

Wall Street Bull Bulls make money. Bears make money. Hogs get slaughtered.

Wall Street Bull
Bulls make money. Bears make money. Hogs get slaughtered.

When we had discussed capital gains taxes, I proposed that using losses to offset gains in other successful positions would minimize their capital gains tax bill. Minimize and maximize are relative terms. Precision is needed to avoid misunderstanding. Capital gains, for example, might be expressed in as a percentage of the total portfolio. Thus 5% of a million dollar portfolio would direct the advisor to not exceed $50,000 in net capital gains. Doing so would limit the taxes due at the end of the year to $7,500 at the maximum rate of 15 percent. Taxes are always a consideration but should not override other tenets of sound portfolio management. Profits generate taxes. It’s that simple. Nevertheless, this couple wanted to avoid all capital gain taxes. They benefited more than most from living in a free enterprise, capitalistic economy, but  they did not want to pay anything whenever they profited. They were experienced investors and yet never understood the avoiding taxes was impossible if profits were to be taken at the most opportune times.

They didn’t read the confirmation of the sale when it was mailed to them. They didn’t read their monthly statements that reported the capital gains and losses for the month and the year-to-date. So when their accountant called to report that they needed to write a check to the IRS, it came as a huge surprise. My relationship with them came to an abrupt and angry end. Stocks with large losses were still in the portfolio—stocks that I could have sold to offset their capital gains, stocks that I did not sell because, even beaten up as badly as they were, they still held out the potential of regaining their strength. A market drop is rarely measured and rational. A lot of good companies get caught in it along with the troubled issues in the outgoing tide. Furthermore, I wanted to respect the husband’s wishes by not calling their attention them.

The game was up . . .

She left a long, vicious message on my answering machine that destroyed any chance of appealing to them on the basis of friendship. The proceeds could be reinvested in stocks with more promise that would make up for the amount spent on taxes. Given any period of time, they could have continued to enjoy growth in the market, but in the uproar over the taxes, time was lost in discussing the issues. As a final proposal, my compliance officer offered to reverse the sale, even though it was months later. The clients realized, of course, that their losses in value would be far greater than the amount of the capital gains taxes. Not placated, the compliance office finally told them that they were free to take their complaint to an arbitration panel—a step most brokerage houses want to prevent. That was the last I ever heard of the case and the last I ever saw of the couple.They went to every attorney in town and got none to accept their case.

They took their problem marriage and their inability to set realistic goals to another unsuspecting financial advisor. The saga will play out all over again when conditions are ripe.

Investing is always on a continuum. Just as it is nearly impossible to foretell the end of a movie by view a still shot of one scene, standing dead still with a view of the market as if it were a snapshot is also a mistake. The market and the economy are dynamic. Good investors stay poised to act as conditions change. They realize that the real challenge is to have the money they need at a given point in time; i.e. to start a business,  for retirement, or other life goal. Human psychology is a serious, sophisticated subject. It is beyond the scope of any postings I ever plan to make except to note some relatively simple steps to take the intrigue out of the investing process. Make sure that goals are realistic, well defined, written down, and shared.

Money has a limited, important role in life. Managing it successfully is not difficult. It may be a broad subject, but one with very little depth to it. Keeping a clear head for making decisions is very important. Loading up the portfolio with expectations that need to be addressed or realized elsewhere in life burdens a portfolio beyond its nature to carry. The minute one tries to make wealth do something that it cannot, decisions become flawed and success become less and less likely.

Angels Exist. You May Have One in Your Life.

Friday, July 25th, 2014
John J. Hohn, Author and Reviewer

John J. Hohn, Author and Reviewer

#angles #miracles #corporatelife

Angels exist. They are among us. You probably have one in your life and don’t know it. You probably see one every day but fail to recognize him or her. Why? Because angels are not as you have been led to believe. They are not the angels of legend who belong the heavenly hosts that descended upon the shepherds to announce the birth of the Savior and then vanished into the night sky singing Gloria in excelsis Deo. Those angels may or not exist. It is not my place to contend one way or another. All I know is that it is highly unlikely that you will ever see one from those ranks. If you want to see angels, you need to learn how to look for them. I assure you that many move among us right here on earth,

Angels are probably mortal. Their lives are subject to the same twists and turns that destiny has in store for all of us. Angels work miracles, however. Nothing flashy, understand. Their miracles are quiet, ordinary gestures of understanding, acceptance, forgiveness, and kindness. And what is so surprising about the miracles angels work in the lives of others is that they have no reason to do the things they do. They do not seek praise. They do not seek wealth. They can even be embarrassed if the beneficiary of one of the unselfish acts tries to thank them.

Angels, thus, are usually not a member of a person’s immediate member. Family members always are expected to act in the generous and loving way. That they often fail in this simple assignment is grist for the counselor, or failing that, the divorce attorney. If you have an angel in your life, you cannot shake him or her off. The angel is there until such time as fate declares that your relationship is concluded.

How Angels Operate . . .

Perhaps it would be best to illustrate how an angel operates and you will get a better understanding of how to look for one in your life. Angels do not like public recognition, so the names of those who have graced my life have been changed to protect their identities. There was Zacharias. He was my boss at one time. Shortly after I went to work for him, my marriage collapsed. I struggled to maintain my concentration in my work. I’m a pretty emotional guy. I wasn’t handling the crisis very well. I was doing so badly, in fact, I thought that I could die from the stress. I told Zacharias that I was having a difficult time. Things were so bad that I could not keep my mind on my work for more than a few seconds at a time. He understood. He accepted everything I said to be true as it felt for me. He told me not to worry and sent me home to rest. I did. Finding myself refreshed, I returned to work the next day. Zacharias didn’t mention it again.

Traditional Angel. Chances are you will never see one.

Traditional Angel. Chances are you will never see one.

Next came Noah. Noah was a redheaded gregarious southerner who was hired into a position that made him my boss. At the time, I was supervising a unit that reconciled money market trading accounts every working day. Nothing in my background qualified me for the position. I have never liked supervising people. I have never been skilled at bookkeeping chores. The bank frequently promoted people into position as managers who had no experience with the processes some of their subordinate supervisors were required to oversee. My boss, in other words, could not offer me technical help.

The decision was made,  the lack of competence at every level notwithstanding,  to bring in a new computer-based accounting system for a special client who had millions of dollars in an account in my department. Trouble was, the software purchased was for short term investments and could not accommodate anything that had a maturity date longer than 31 days. The client had notes and other commercial paper with maturities stretching out more than six months. My department was asked to cram everything into the new software whether it fit or not, something roughly akin to stuffing three cups of peanut butter into a thimble. Of course it didn’t work. Everything spun wildly out of control when the first 30 day period passed. Notes with distant maturities still in the system came tumbling out of the system like so many potatoes from a ripped gunny sack.

Keep a Lid on It and Make It Work . . .

I discussed the problem with the systems people. They didn’t want to admit a mistake had been made in acquiring the program. “You can make it work,” they insisted.  Yeah! That’s right. They asked me, an English major, to do it and keep a lid on everything . Well, guess what. I did. I create a subroutine to keep track of all of the longer maturing securities. I worked weekends and got everything reconciled with the help of an intern so that I could produce a credible report. Then it happened. (more…)

Variable Annuities Insure Beneficiaries Against Loss Due to Market Risk

Friday, April 26th, 2013

This is the second in a series of articles that I am writing on variable annuities. Readers are urged to read the first installment before tackling the one that follows.

My initial article about variable annuities stressed:

  • Financial advisers have strong incentives to sell variable annuities as they pay more in commissions than most other investment vehicles.
  • Variable annuities offer an array of funds into which the owner can allocate funds based upon the owner’s objectives and risk tolerance.
  • Variable annuities offer tax-deferment of capital gains and dividend and interest income, none of which need to be reported until funds are withdrawn from the annuity.
  • Contributions to variable annuities are not tax-deductible as with IRA’s, 401(k)’s or 403(b).
  • Annuity companies charge an early withdrawal fee during the first several years that an annuity is in place. Funds can be withdrawn, however, prior to the age of 59 ½ without incurring a tax penalty from the IRS.
Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

Everyone knows that investing entails risk. The stock market goes up and down. The bond market is in and out of favor. Even gold and precious metals can be volatile. Nothing is an absolute sure thing.

Variable annuities, however, assume most of the market risk for the investor by insuring the amount invested for the beneficiaries named in the contract in the event of the owner’s death. Thus, the value of the owner’s estate is not subject to market risk. This is an attractive option for investors who are within a decade or so of retirement when mortality becomes a very serious component in financial planning for a surviving spouse or children.

To illustrate, an investor could fund a variable annuity with $50,000. The contract would insure the initial investment so that, if the value of the investment dropped because of poor market performance to, say, $30,000, the named beneficiary would be paid the initial amount of $50,000 in the event of the owner’s death.

Protecting the Growth

Further, many companies insure the value of a variable annuity beyond the amount of the initial investment. Many contracts stipulate that the company will pay the highest amount achieved on the anniversary of the effective date by the funds in the contract. The original $50,000, in other words, might grow so that on the third anniversary of the contract, the variable annuity is worth $70,000.  If, in the year thereafter, the market collapses, and the stated value of the funds within the annuity drops to $45,000, the beneficiaries named in the contract would receive the $70,000 value level recorded on an anniversary date.

Contracts do not insure the highest level achieved in the market. They insure the highest amount achieved and recorded on an anniversary of the effective date of the variable annuity.

Over the years, additional insurance features have been added to variable annuities and companies are continuing to innovate. Insured income is one such innovation and one that I plan to cover in my next article.

Not a Substitute for Life Insurance

Insurance against market risk is a major advantage of a variable annuity. It is not a substitute for life insurance, but a supplementary protection for the estate of the owner.  Fees for variable annuities are higher because of the life insurance feature. The health and age of the owner is not considered in the application. The insurance component of the fee, therefore, is a flat charge, and it is the same for all owners as the contract is not rated as a life insurance policy would be.

Because variable annuities are long term contracts with early withdrawal fees, they should be considered only when other contingencies have been addressed in a financial plan including an emergency contingency fund, fully funded retirement plans such as an IRA or 401(k). Usually owners are advised not to tap into a variable annuity for retirement income but to hold them in reserve because of their insurance value. The reserve strategy presupposes that other funds will be invested to supplement retirement income from social security and/or pensions. Under most circumstance, a balanced financial plan for retirement would commit no more than 25 per cent of a portfolio to a variable annuity.  Although variable annuities are covered by the Security Investors Protection Corporation (SIPC), it is generally not advisable to invest more than 10 percent or $500,000 in any one variable annuity company.

Considering Only Financial Strong Companies

Prospective buyers should consult Best’s Insurance Guide for the rating of the strength of the company(ies) being considered. Do Not Accept the adviser’s or salesperson’s word. Best’s rating system is very sophisticated and uses language that is calculated not to offend the companies being rated. That said, the description that Best’s give whereas  further study often reveals that they are not a good choice. Final selection of a company should be from top two or three tiers of the Best system.  The hierarchy of the rating system is explained on the internet and in Best’s published annual volumes, the latter being available at most public libraries.

Variable annuities are a very valuable retirement and estate planning investment. The designation of  primary and secondary beneficiaries facilitates immediate payout of the proceeds of the contract upon the death of the owner, unlike the rest of an estate which can be delayed by probate or actions on behalf of heirs in protest against a will or revocable trust. Care needs to be taken in selecting a contract and the company making it available. The purchase is not a casual decision. Any buyer being rushed to a decision should be suspicious of the salesperson’s intentions or the quality of the product being recommended.

Thanks for checking in. I welcome comments below and invite you to look through the pages of my web site. Watch for my next article on variable annuities which ill be posted in a few days.

Variable Annuities Offer Tax Advantages as a Retirement Investment Vehicle

Saturday, April 20th, 2013
Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

Financial advisers have several good reasons for selling variable annuities to their clients. They get paid more for one thing. On most other investments, the higher the amount a client invests the lower commission rate is for the adviser. In mutual funds, this is called a “break point.” An advisor, to illustrate, may get paid 5.00% when a client buys less than $25,000 of shares in a stock mutual fund. If the purchase falls between $25,000 and $49,999, the adviser may get paid 4.50%. Thus at $24,999, the advisor’s commission is $1249.95, but at $25,000, the amount drops to $1125.00. Commission rates vary from company to company and depend largely upon the kind of fund being sold, but the break point pricing is accepted industry wide. If a client ever finds an adviser recommending a slightly lower purchase, a higher commission may be the reason.

For an industry that is capable of some of the most exotic probability computations, it is to be asked why after all these years hasn’t a formula be worked out to replace the anachronistic break point system. The variable annuity industry has solved the problem, but their solution favors the adviser and not the investor. With variable annuities, the commission schedule does not have break points in it. An adviser gets paid the same percentage at $250,000 as at $25,000. Investors need to be aware that the incentives to increase the amount of every sale are there for the adviser.

Variable annuities differ from fixed annuities in that variable annuities allow the investor access to an array of mutual funds, and the money placed in the variable annuity can be spread out or allocated among the funds available in a manner that suits the objectives and risk tolerance of the investor. An aggressive investor, for example, may want 85% or more of the money in the variable annuity directed toward equity or common stock funds. More conservative investors may prefer bond funds instead. Fixed annuities do not provide this kind of flexibility.  Fixed annuities are invested as the annuity company directs. The owner of a fixed annuity usually has little or no say in the investment strategy.

Variable annuities offer the same tax advantages as an IRA or 401(k) in that the growth of the funds in the annuity and the interest and dividend income earned are tax deferred until such time as a withdrawal is made. Then withdrawals are treated as regular income and taxed as income in the year that the withdrawal is made. Unlike an IRA or 401(k), however, no tax penalty is assessed on withdrawals made prior to age 55 ½. Also, it is very important to recognize that payments into a variable annuity cannot be treated as a tax deduction. An investor is advised under most circumstance, therefore, to make a maximum contribution to an IRA or 401(k) before considering the purchase of a variable annuity.

Variable annuities are long term investment vehicles. Companies almost always impose an early withdrawal charge to offset the cost of issuing the contract and the selling costs. Early withdrawal charges are usually on a declining scale and may start as high as 15% and remain in effect for as long as 10 years after the date the contract is issued.  The percentage amount charged and length of time during which the early withdrawal charge is in effect varies from one company to the next. Since most advisers represent more than one company, a client should ask about early withdrawal charges and request a comparison if more than one contract is under consideration.

In my next post, I will discuss the insurance features of variable annuities. Please watch for it. Thank you for looking in on my web site. Please feel free to check out the other pages or leave a comment below.

When a Million Is Not Enough–Conclusion. Expensive Games Get Played

Wednesday, March 28th, 2012
Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

  #marginloans  #financialplanning  #investing

I was a professional trainer for several years in the 1970’s with Wilson Learning Corporation who developed Counselor Selling—a sales training program based on Transactional Analysis (TA). The program capitalized on public interest in TA as popularized by Thomas A. Harris’ best selling I’m OK, You’re OK. Eric Berne is cited as the person who developed the theoretical groundwork for TA as published in his Games People Play. The language of TA demystified psychology for the average person.

The popularity of TA has faded over the years but the validity of its approach to understanding human behavior has never been rejected. One of Berne’s especially durable models in Games People Play illustrates how a person can assume one of three roles in a psychological game, sometimes because of a predisposition for the role or coercion due to circumstances. Berne labeled the roles as victim, rescuer, and persecutor. Readers are urged to follow the links in this text for a comprehensive explanation.

The Customer is Always Right

It is easy as a financial advisor to get caught in a game. The inducement, of course, is the desire to acquire or retain a client. The customer is always right means that the advisor needs to pull a lot of punches. Confrontations are out. Diplomacy is the rule with no small amount of circumlocution thrown in.

I was wary when the two older men and younger woman wanted to discuss my client, Jennifer, (not her real name) who had received the million dollar lump sum divorce settlement and then allowed herself to be bilked out of most of it by her boyfriend, Big Dan. Within in three years, her fortune dwindled to less than one third of its initial value. She shoveled cash to Big Dan for three years and then opened her home to her family of freeloaders. That’s a rescuer racing headlong for victim status. The trio now hoping to save her from herself may have wanted to strike while the pickings were still good. There was still a little meat left on the bone.

They, of course, could be as they presented themselves, rescuers of pure intent doing good for it’s own sake. They wore their Christianity on their sleeves but it meant nothing to me. A million dollars doesn’t usually attract the altruistic.

Better Planning Time Belongs to Better Clients

My client called to say that she wanted to meet with all three friends to discuss her situation. I agreed but it was the extra mile for me. My time was valuable. No advisor enjoys putting a long-range plan together for a client who will not commit to it. Better planning time belongs to better clients. But I went back to the computer and worked things through again. Several things were immediately obvious.

My client had too much house. The additions made it worth approximately $650,000, although in a better location it would have commanded more. She was paying approximately $3,200 a month in interest on her margin loan. That was a little more than 5.00% of her total portfolio, which meant that I would need to be aggressive to earn her enough to meet day-to-day expenses, and I didn’t want to take the risk involved in doing so.

She needed to get out from under the margin debt. The rules for margin accounts dictate how much can be loaned against the collateral. Up to 90% can be loaned against an insured municipal bond, for example. But only 50% can be loaned against the common stocks that are subject to fluctuations in value. The large loan against her holdings demanded that the portfolio be infused with as many bonds as possible to give it greater stability and provide the margin to cover the loans efficiently. The downside was that bonds would not help the holdings grow very much. Every dollar in interest was sopped up by the margin loan, and my client kept going deeper and deeper into debt to cover her living expenses, money flying out of her account like bats flushed from a cave. She had spent roughly $270,000 right off the top, which reduced her holdings to $730,000. $460,000 of margin debt netted her account at $270,000, her only source of income as she had yet to begin looking for a job.

A Way Out

I laid out a simple program. She needed to sell her house and buy a more modest one to replace it. If she reinvested $175,000 in a replacement home, she would free up $475,000 to pay of the margin loan with a little to spare. Her portfolio would be restored to a value of roughly $745,000, which could be managed to generate about $3,725 a month income with no mortgage to pay—enough to live on and expect that her portfolio would grow over time.

“I can’t sell the house. It’s what I spent the money on.”

“I know that you have a lot invested in the house, your feelings and your money, but you need to consider it,” I said.

“What will my folks do? They live there now.”

“I know that you want to  consider them. What did the do before the moved in with you?” I asked.

“They worked for an airline company, but they were laid off.”

“Have they looked for other work?” I asked.

“That’s their business. You don’t think that I’m going to tell them to get out and look for a job, do you?”

“It may come to that,”  I replied pleased that the trio in the room nodded in agreement.

Jennifer’s woman friend leaned forward and said, “They are not your responsibility, sweetie. They are taking advantage of you.”

“I just want to help them until the get a new start.”

“But they are not trying to get a new start. You know that. You can see that. They are just living off you,” the friend said.

“They are Grampa and Nana to my boys. I could never explain to them why I threw them out.” (more…)

When a Million Is Not Enough — Part II ( Margin is not the Answer)

Wednesday, March 14th, 2012

John J. Hohn and dog Jessie

Everyone saw it coming except my client. Big Dan pulled up stakes and left. My client had backed him until her million dollar nest egg was severely depleted and her own well being in jeopardy. The margin loan (See Part I) was not being repaid. It was on the books at a rate of 8.50%. Advisors are often compensated for promoting use of margin loans. They can get paid a few basis points on the interest. My policy was to avoid margin. My reasoning went as follows:

  • The interest charged on margin loans is a difficult to beat with a return on investments.
  • The rate  is usually higher than what a bank might offer.
  • Borrowing money to bolster portfolio performance is inherently risky and usually reflects a lack of planning. If a client doesn’t have enough money to make a plan work, the goals have not been set realistically
  • Borrowing is addictive. Once an investor takes out a margin loan, additional borrowings become easier and easier.
  • Planning becomes much more complicated with the additional task of retiring the loan to be worked into it.
  • Borrowing on margin is almost always justified because the investor wants to make a high-risk purchase. A sure thing is almost always a long shot and when it doesn’t pay, the loss is twice as painful because the loan is still on the books.
  • Most investors would not borrow money from a bank or mortgage company to fund an investment purchase, as it seems too risky. A margin loan is no less risky, just more convenient, so much so investors do not stop to think.

True to form, my client called one day to tell me that she wanted to buy stock in a local software company that planned to put all the books ever published on the Internet and allow anyone with a computer to access them. No. This wasn’t Google. It was a local start-up that was being put together by a man who had one failure notched in his belt already—a robotics company that never got off the ground and lost thousands for scores of local investors.

“Everybody is getting in,” she insisted. “We’re friends. I see him at the club all of the time.”

I asked her if she had seen any literature, a statement from an investment banker, or anything of the sort.  “He’s not going to delay things by jumping through all of the bureaucratic hoops. He says business is over regulated by the government anyway.” I realized that she could write check on her account any day that she wanted, so I thanked her for calling, promised to look into the situation and call her back.

Research is Part of a Financial Advisor’s Service

I was curious. But I also believed that primary research is part of the package of services I offered my clients. Clients often take a narrow view a financial advisor’s service. The advisor gets slotted into a role as a stocks and bonds broker who buys and sells for them and little else. The advisor may do little to discourage the client. Research does not always end up with a recommendation to buy or sell anything. The advisor will see the time as unproductive, and if the advisor is being paid on a per-trade basis, research is not necessarily income generating. It can lead to other investment ideas or  help build loyalty because it is a value-added dimension of the relationship with the client, but the payoffs are not as immediate as many advisors might like.

I discovered that the founder of the new company was not following the usual protocol in making an initial public offering. I was unable to reach him by phone and he never returned my calls. I asked other financial advisors in town for whatever information they had on the company and everyone reported the same results. I called my client to let her know what I had found. (more…)

Financial Advisor Enjoys Referral to First Millionaire Client.

Friday, March 2nd, 2012
Author John J. Hohn, Retired Financial Adviser

Financial Advisor John J. Hohn, Retired

She was going to be my first million-dollar account. It was my first year as a financial advisor. The attorney who handled her divorce referred her to me. In her 30’s, she was very attractive. Her poise, I found out as time passed, was more a product of her ignorance over what to do than cultivated reserve. She had learned—and one can only guess at the causes—to play the role of the consummate victim.

A million-dollars ought to have been enough to maintain a modest but comfortable lifestyle even for someone in her early 30’s. The stock market averages a return of 8.00% over the period for which records have been kept. $80,000 might be a little too much to expect year in and year out. But she was also awarded child support by the divorce court, and although her ex had yet to come through with the payments, he was the wealthy son of a wealthy family and there was no concern over his ability to pay.

A Million Dollars Ought to be Enough

I proposed a moderate risk portfolio for her, one that balanced a well-diversified allocation of stocks with a robust collection of bonds and ample access to cash for living expenses. She seemed to understand the plan. She seemed impressed with the need to stay within a budget. Nothing could have been further form the truth.

“It was just such a cute car,” she explained over the phone one afternoon. “I didn’t think that it would hurt to buy it. It was the only one they had. It’s a convertible.” She was on vacation at the beach when she called. She bought the car from a dealer she didn’t know. She paid sticker price for it. She paid cash. She did not trade her station wagon because, as she explained, she still needed it for hauling her boys around.

I allowed that perhaps $55,000 off the top of the portfolio might not make that much difference over the long haul, but that she needed to recommit to her budget. I began to fill the Dutch Uncle role that often falls to a financial advisor, one for which he or she is really never trained as so much depends on the advisor’s own life experience—a good argument for choosing an advisor who is at least 35 years old.

I heard from an attorney that she had won her case against her ex for the back child support. “The case came up in a best practices review bar meeting as an example of overcharging,” he explained. “These guys really ripped her. Their charges were so egregious that the participants reviewing the case actually laughed about it.” She had employed a well-known firm in Winston-Salem, one with whom I had dealt often enough to know how expensive they were, and in more than one case, how arrogant they could be. (One of the firm’s partners showed up for a lunch with a multimillion dollar client and me, and it became immediately apparent that he had not reviewed the file before meeting with us.)

I was alarmed, of course, and without revealing my source invited the woman in to meet with me. I told her that the fees she had been charged were exorbitant and she should appeal through the North Carolina Bar Association for a review. She refused. The attorneys had taken approximately 98% of the award that the court had given her. She did not want to make the effort, although some adjustment was all but assured because her case was so outrageously over the line. (more…)

Inflation Persists as a Concern for Folks in Retirement on a Fixed Income.

Friday, January 27th, 2012

Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

I worked in the financial services industry for over 40 years, the last fifteen of which as a Financial Advisor for Merrill Lynch in Winston-Salem, NC. My novel, Deadly Portfolio, builds a story around Matthew Wirth, a retiring financial advisor who, in preparing for his own retirement, is turning his practice over to junior partner, Morrie Clay.  The following interview, while fictional in its presentation, expresses opinions based upon my experience. I have been retired since the end of 2007 and I am no longer a licensed investment advisor.  –John J. Hohn, Author

Reporter: Mr. Wirth, you are just one month into your retirement. Do you have any special thoughts on the transition into retirement, especially the financial side of things?

Wirth: It’s like shoving off in a boat. You need to work things out so that your savings and investments are good for the duration. There is no stopping to replenish anywhere along the way. Not unless you want to become a greeter at Wal-Mart or take up some job that a senior can handle.

Reporter: That doesn’t sound like anything you have in mind at this point in your life.

Wirth: No. I hope not. My wife and I still have income from Social Security and dividend and interest income from our investments. Also, I’m not opposed to harvesting profits from time to time. The tax rate on capital gains is often less than the rate a couple pays in income tax. Too many people, especially retirees, hold on to their stocks too long, well past their peaks and into decline. The selling decision is more difficult decision than the buying decision. If a stock has done well, we think that it has more room to run. But every high from high someday declines. The same research that goes into buying a stock or a fund goes into selling it. Research, decide, invest. It’s that simple.

Reporter: You make it sound so cut and dried.

Wirth: Investing is simple. Human beings are complex. There is a point of diminishing returns to research. Usually three good reasons are all anyone needs to make a decision. Anything less usually does not help people feel as sure as they wanted to be.

Reporter: So you are a buy-and-hold investor?

Wirth: Absolutely. These guys, the fast draw artists, glued to their laptops waiting for a stock to break one way or the other are too much for me. Some trading platforms can be downloaded to smaller devices like cell phones, and a trader can buy or a sell at any time from any place. I wouldn’t want to live that way. I don’t believe in holding a stock come hell or high water either. People who retire with a lot of their company’s stock often hold too much of their old employer’s stock, and they can not be convinced to sell it. I some cases, like Merrill Lynch, Wachovia, Bank of America, Krispy Kreme—too mention a few—they paid terribly for their loyalty.

Reporter: Let’s say that I am a buy-and-hold investor. Do I watch my stock portfolio? How closely should I watch the market?

Wirth: Great question. I’d say never. Never watch the market. Watch the economy. Human beings control the market. Humans are motivated by fear and greed. The economy is a much more reliable predictor of how well investments will perform. I like to compare it to horse racing, although I don’t put investing in the same category as gambling. Look at the economy and find the lanes that are most likely to produce a fast track. In a recession like the one we have been experiencing, defensive stocks—staples, health care, medical care—have provided the better performance. That will change. When it does, find a few good horses in the other lanes. You’ll do fine.

Reporter: What about bonds? You haven’t mentioned them.

Wirth: Good old, boring old bonds. Retirees favor them too much. They think that bonds are the untouchables and will never lose money. But they do. Think back to the inflation that this country experienced in the last couple of years of the Carter Administration. Money market funds—cash—were earning 16 to 19 percent at the time because the government lost control. We had a war to pay for. We had Johnson’s “Great Society” to pay for. We were in debt for both so we just let money get real cheap. We paid the debt of at rate of about 60 cents on the dollar. Bondholders took a bath. The interest they were getting paid didn’t keep up. When their bonds matured, they had no buying power left in them. It’s another whole story—maybe another interview on some other day. That’s why I am concerned about the spending and the huge national debt today. We keep bringing up short-term solutions, but none will work. Letting inflation take over will look too easy in the long run and people living on fixed income will bear the brunt.

Reporter: Could that happen again?  That kind of inflation?

Wirth: It’s happening all of the time. The only question is how severe is it. When I graduated form college in 1961, anyone landing a trainee position with a major company felt great at being offered $5,200 a year for a start. A dollar went a lot farther in those days, of course. I bought a house for $18,000 in 1969. In 1978, it sold for $82,000. The same house.  Nothing much had been done to it. A good automobile in 1964 might have cost $4,800. Today, the sticker price is probably $48,000. We aren’t getting anywhere with all of this. We are just putting bigger numbers on everything and going down the road as if nothing is wrong. (more…)

The Best Time to Buy or Sell in the Stock Market.

Sunday, January 8th, 2012
Author John J. Hohn, Retired Financial Adviser

Financial Adviser John J. Hohn, Retired

As a retired financial advisor, the question that I am asked most often is, “Is it safe now to get into the stock market?”

I answer, “No. It’s never safe to get into the market.”

When the market is falling, I hear, “Do you think I should get out?”

Again, “No.”

Investing isn’t like swimming at the club pool, diving in on sunny days, splashing around, getting out and jumping back in again, but avoiding the water altogether when the weather is disagreeable.

A doctor called at the height of the 9/11 crisis. He wanted to sell everything in his portfolio. “Go to cash!” he demanded. Nothing would dissuade him. His timing was exquisite. He called the very bottom of the market for the first decade of this century.

In the 1990’s, a physician and his wife had over $3,000,000 invested. Empty-nesters, they loved the ocean and had a seasonal home on an island off of the Atlantic coast—nothing but smooth sailing ahead of them. One spring day, their accountant observed that they had not made much money in the market the previous year. The so-called dot.com market was booming. They were missing out. All the cautions about the runaway inflated bull market did not deter them. They transferred their account to a different broker that the accountant recommended. He sold their elegant portfolio of dreadnaught stocks and intrepid bonds, and tossed the cash into technology stocks. Within a few short weeks, their nest egg was eviscerated to less than half. All of it had been dumped into the grossly over valued market when it was within 1 percent of the  peak for the century. (more…)