Change - Keynes - Super Bowl - Curve Busters

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Change

In the past couple of months, our family has been together as a group more often than we have for many years.  As is the case when families re-unite, old photos are pulled from their resting place and shared with one another.  This time, a few pictures of me as a young man happened to be included in the mix.  The first thing I noticed was my hair.  Given the times, the length of my hair was not excessive, but rather it was close to what most of the young men of my generation accepted as normal.   When I say normal, however, I mean as viewed by my peers. My dad did not quite see it the same way. My dad was a barber, and here I was, a walking billboard exclaiming, "No need for Barbers." Granted, this caused a little conflict in our house.  Dad's generation, of course, grew up with short hair.  He believed that there were only two types of cuts that were acceptable for young men: the butch or the flat-top. Interestingly, if I pull out pictures of my grandparents, it seems that the look during their time was not the butch or flat-top, but rather relatively long hair and also a good deal of facial hair. And how about Justin's generation? You don't have to look hard; short hair for young men is back.

You may be asking yourself right now: what does the length of men's hair have to do with investing?  Are you thinking that we can use the length of hair to guide our investment decisions? Actually, what I mean to suggest is that every generation desires some method to show their differences from the previous generation. Every generation wants their time in the spotlight.  That change is not only inevitable, but sought out and accepted as desirable. Our newest President is fully aware of this generational need for change and used this message to become our President. After the first few weeks in office, he seems to be also finding out that not everyone is so willing to change, especially those who have a vested interest in maintaining the status quo. Change is not easy, and in fact, sometimes the status quo does have a day in the sun, and so it was with my hair and with my dad the barber.  I remember the day very well: it was the last day in June and it was my duty to report to the US Army Induction Center in Des Moines Iowa.  Knowing full well that the golden locks would soon be on the barbers' floor, my choice was whose barber's floor: my dad's or some unknown person's in Fort Leonard Wood, Missouri.  So, with a bit of a whimper, I went to my dad's shop and said, "It's time for a haircut."  Dad did not want to just cut my hair.  In his mind this simple haircut should become a national event.  So he quickly went up and down the street to bring in his buddies and fellow business owners to share in his glory.  I still remember the gleam in his eyes.

Baron John Maynard Keynes

Our country's economy and the laws that govern the activities of its players have also gone through generational changes. As always, there seems to be an economic thought leader who drives our political forces towards an understanding of what is needed to correct our current woes.  Baron John Maynard Keynes seems to be this thought leader whose ideas currently have the power in Washington.  Since power in Washington does have power over each of us, some knowledge of Baron Keynes is necessary.

John Maynard Keynes was born on June 5, 1883 and died on April 21, 1946.  He was a British born and educated economist who thought that the government should use both fiscal and monetary measures to smooth the ups and downs of the business cycle.  In 1936, in his book the General Theory of Employment, Interest and Money, he challenged his peer group of economists (the status quo) with the new idea that governments should stimulate demand by deficit spending during periods of high unemployment, and even went so far as giving the example of "spending on public works". When his General Theory was released for publication, the world was in the middle of the Great Depression.  The leading economists at the time, the status quo, recommended doing nothing other than punishing and restricting the activities of the financial institutions and stock market manipulators.  Keynes' book and its ideas were not readily accepted by these main stream economists, but it did have some influence on President Franklin Roosevelt's New Deal. How much, however, no one really knows.  Today I hear references to Keynesian economics thrown about by our politicians and commentators more than at any other time in recent history.  Consider this: if you are a politician and your power is derived on how much of other peoples' money you can control and direct, you would, by default, love Baron Keynes who advocated and gave you the economic authority of a legend to spend.

As a politician, it would be nice to just accept Baron Keynes' macroeconomic thoughts on deficit spending and disregard all other Keynesian works. When confronted about changes in his opinions, Keynes is reported to have said, "When the facts change, I change my mind.  What do you do, sir?"  He did just that in his 1942 book How to Pay for the War when he advocated for higher taxation, rather than deficit spending, in order to avoid inflation.

Don't get me wrong. I am a big fan of John Maynard Keynes as he was an economist that understood human nature and its influence on the economy and the investment markets. We keep a copy of Chapter 12, The State of Long-term Expectations from The General Theory, on our desktop and both Justin and I re-read the chapter quite often.  I would encourage our leaders to read Section VII of chapter 12 in which Keynes writes this:

"This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man.  If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; --it is the mere consequence of upsetting the delicate balance of spontaneous optimism.  In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends."

When I hear our politicians telling all of us that we are on the verge of economic destruction and that if we do not do something now we are bound to lose millions of jobs, I have to question their motives.  If our leaders tell us that our future as a society is doomed, that we have to save American jobs by limiting our freedom to trade, and that we must limit our growth in population by discouraging all immigrants, legal or not, from entering our country, I have to question their motives.  This political speak only discourages any investment, be it in a home or business or in the stock and bond markets, by all of us.  Can they not see that their statements have created fear in our minds, and that this fear cannot be overcome with a spending plan, no matter how large?  To cure this economy, it will take average citizens having the optimistic view that any investment made today will reward them personally for a long, long time.  I can only hope that once the stimulus package is passed our politicians take it upon themselves to reignite the "spontaneous optimism" that is necessary for all of us.

Super Bowl XLIII

Our clients and friends include a large number of professional football fans.  Even those of you who are not fans may have still tuned into this year's Super Bowl simply to watch those $3 million a minute ads.  As the Super Bowl is fresh in our minds, I thought it would provide a good analogy to help explain the day-to-day job that Justin and I perform on your behalf. Let's start with the MVP of this year's game, Santonio Holmes. Holmes is a Pittsburgh wide receiver who is 5' 11" tall and weighs in at 195 lbs; a big guy, especially when you know that the 195 lbs is pure muscle.  However, when compared with the other football players on the field, he really is a little guy.  On Super Bowl Sunday, though, Santonio Holmes was the greatest player in the game.

Now envision if we could clone Santonio Holmes ten times so that eleven of this same MVP would be there to play with the team. Wouldn't they just blow away any and all competition?  I know you real fans are chuckling right now, as you know Santonio would not have much of a chance attempting to stop a 350 lb beast of a man in front of him.  In fact, if any professional coach placed 11 wide receivers on the field at one time to play against another professional team, I would take a bet that the coach would be taken off the field before the end of the first quarter of play and be considered a little off his rocker.

Many individuals believe that portfolio management is simply picking the best stocks with no regard to other players on the field. This attitude is so prevalent that book shelves are stocked with "How to pick stocks," televisions are more concerned with "What stock the analyst is promoting," and of course every social gathering is filled with "If I had the money I'd be buying stock ABC".  There is more emphasis on picking an MVP than there is on winning the game.

Portfolio management is truly a game of professionals.  Today more that 75% of all common stocks and bonds are purchased and sold through a professional. The professional is not the local stockbroker or financial planner.  The professional is the manager of the mutual fund that the financial planner has recommended to you, the manager of your state or company's retirement plan, the manager of the endowment fund of your college, the manager of the foundation for the local philanthropic organization, or the few who manage separate accounts.  As a professional, my job is to be your coach.  As your coach, I need to know who I am playing against, who their personnel are, and what their game plan is.  At the same time, I need to know the players and who I should put on the field. I also need to know when a substitution is necessary and, most importantly, I need to have a game plan with one objective; to win the game we are playing.

Most of us as individuals have designed a game which is unique to ourselves. However, there is one team that tends to be the standard by which most individuals and professional investors measure against. The team is the Standard and Poor's 500, a team made up of 500 companies, some heavyweights and some lightweights.  The team 500 takes the field every day with 10 major positions, each representing one division of the US Economy.  As a coach, it is my job to know all 500 of these players, their size, their strengths and weaknesses, and what positions they play.  We accomplish this in very much the same way that most other professional coaches do: we study, we discuss and we review.  Here is how team 500 stacked up by position and weight and how our team stacked up against them on January 30, 2009:

As you can see, we have a team that has someone at every position. Playing against a professional without recognizing all positions will assure that the game will almost be impossible to win. You can see that our team differs from team 500.  This is how we as a coach have chosen to play the game against our competition.  Obviously, this does not give you any information about the players we have chosen to fill each position.  This can be found on your quarterly statements we prepare for you.  Because each of you has a unique game that you are trying to win, your individual statement is designed to reflect not only your players but also the positions you are playing against, be it team 500, team US Treasury, team CD or another team.

Of course, picking our players is a substantial task, but it is approached in a very similar manner as the one any professional coach uses.  We examine the players' past statistics of performance, any recent change in size or weight, any new players substituted by the coach of the other team, or any injuries to our own players which cannot be healed in a short period of time. Also, of course, a player who has been on the field for a long time may just be tired and in need of a rest.   All the substitution and changes have a single goal in mind: to win over time.

Curve Buster

Justin, my number one research analyst, has been lifting his own game recently by taking a couple of psychology and writing classes at Winthrop University.  Some of you remember your college days when grading on a curve was the norm.  For those who were never lucky enough to be graded on a curve, you can imagine that in a class of twenty or thirty, all twenty or thirty of you may fail in passing an exam or the course, yet your professor is bound to give at least two or three of you with the highest average an A.  In classes graded on a curve, there was always someone in the class who scored so well that they distorted the average.  This person was the Curve Buster.  Well, Justin is not under the same social or parental pressure of the majority of his classmates and has taken on the role of Curve Buster: loved by some and hated by others.  It seems he has brought this attitude to the firm with the single idea that our work should be the Curve Buster in the field of professional portfolio management.  Of course, I continue to tell him that it is easier said than done but I do admire his spontaneous optimism, and some of it does rub off on me.

Given that all professional portfolio manager results are scrutinized by the army of 600,000 or so financial advisors, financial planners, and institutional consultants  who distribute our work, we can only give thanks to them for their utmost belief in using a curve to grade us. Honestly, all of us professionals have failed over the past year, but some of us failed less than others.  It would be wonderful today to be just a "financial advisor" or "financial planner" because I could always say "It wasn't me, it was our mutual fund or separate account manager, and because of them, we had a lousy year."  Well, we don't have that luxury, because the buck stops here, and you deserve to see our grades.

Money Manager Review, now in its 20^th year, has provided in-depth analysis on over 800 of the nation's leading private money managers. It is the largest resource of its kind on the internet, whose clients include thousands of individuals, consultants, plan sponsors, foundations and charities who rely on Money Manager Review to find, compare and analyze private money managers.  We have provided Money Manager Review the average return for an average portfolio of similar objectives for ten years.  Here is how they have ranked these objectives relative to other managers they consider similar to us.  They rank managers by the amount of return, the amount of measurable risk taken and the most preferred ranking based on the efficiency of the manager, i.e., the return relative to the amount of risk taken.  Here are Money Manager Review's rankings as of December 31, 2008 for Anderson Griggs Portfolio Management, based on our efficiency:

Please visit MMR at www.managerreview.com for information concerning rankings and procedures.  Please contact Anderson Griggs Portfolio Management for questions concerning information provided by the firm to Money Manager Review.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia.  They operate in 18 countries and provide data on more than 290,000 investment offerings worldwide. Morningstar issues star ratings for thousands of mutual funds, separate accounts, and collective investment trusts based on their relative risk-adjusted performance compared with funds, separate accounts and collective investment trusts with similar objectives.  They rate portfolios on a scale of 1 to 5 stars with at least a three year history. Morningstar has given an overall rating of 4 stars to Anderson Griggs Focused Growth (Our US Large Cap Growth Objective) as of December 31, 2008, the company's last release for separate accounts and collective investment trust. On a pure return basis, our Focused Growth Objective outperformed 77.5% of similar managers within their database.  For a complete description of the Morningstar rating system, please visit the company's web site at www.morningstar.com.

Final Notes

During the month of January, we posted four new market commentaries and four audio programs to our web site. In last month's letter, we invited you to listen to WRHI's "Straight Talk" program on January 20^th and we promised to link to the program on our site for those who could not listen to the live show.  Sometimes things just do not work out as planned.  First, our new President's Inauguration was the 20^th, and this had to take precedent over our program, which was moved to January 27^th.  On the 27^th, a technology glitch caused a problem with the recording, so our ability to link to the program was no longer available.

Until Next Time,

Kendall J. Anderson, CFA

P.S.  Once again I need to thank those of you who have forwarded our commentaries and letters using our "Email this page" link at the bottom of each page.  The vast majority of our new clients have come to us from your referrals.  We will be forever thankful for your votes of confidence.