Retirement - It's the Economy Stupid - Streets's Glass Ceiling - Cheap or Dear

Some Thoughts on Retirement - It's the Economy Stupid - Wall Street's Glass Ceiling - Cheap or Dear Printer Friendly Version

Kendall J. Anderson, CFA September 5, 2008

Some thoughts on Retirement

Last month I had reason to make a trip to Tulsa, Oklahoma which is famous for its petroleum industry roots and for Route 66 (The Mother Road and later the Will Rogers Highway), championed by Cyrus Avery.  I had meetings beginning Thursday evening, continuing all day Friday, and extending into a final meeting Saturday morning.  Instead of jumping on a plane I decided this was a good excuse to put a few things on the motorcycle and make the trip by bike.  Tulsa is approximately 1025 miles from Rock Hill.  Given that I did not have enough spare time to leisurely travel cross country, I made a quick trip via the Interstate, the reason Route 66 is no longer with us.

I will admit there was another reason for me to make this trip by bike.  Interstate 40 runs through Arkansas from Memphis through Little Rock and on to Fort Smith Arkansas.  At Little Rock, the road joins with the Arkansas River and begins its run through the Arkansas River valley.  In my book, this is one of the more attractive places in the country to visit.  Historically, the citizens of this region were poorer than most in the country, but made up for their lack of economic power with good old American know how.  About eighty miles east of Fort Smith and a mile from the interstate sits the little town of Knoxville, population 511.   This town is the main reason for my journey.

At the very edge of town is a cemetery.  Buried in the cemetery is James W. Morrow, my Grandfather. A round stone that he himself took from the Arkansas River marks his grave.  Although a proper gravestone has been added since his death, against his wishes, the round river stone is still there at the foot of his grave.  Grandpa Jimmy was a hard man, but he had to be.  He was born in North Dakota in 1907.  His mother died giving birth to his only sister and his father placed both children under the care of Grandpa Jimmy's aunt.  At age nine a circus came to town, and when it left my Grandpa Jimmy was driving the truck out of town, never to return.  He met my Grandmother in a TB hospital.  She was a nurse and he was the patient.  Oh, the stories he told about his adventures... some good, some not so good.

In the early sixties they moved from Iowa to Arkansas, taking all the savings they had to buy fifteen acres of pine trees in the Arkansas River Valley.  Grandpa Jimmy poured a slab, pitched a tent, and with a few tools and his two hands built their retirement home. It was four rooms, counting the bathroom, and made of cement blocks with green lumber for rafters covered with plywood and rolled roofing. With a garden, some calves and goats, a few chickens, fish from the Arkansas River, and two social security checks a month, they survived the remaining years of their life.

My first understanding of retirement came from my grandparents.  As a youngster it seemed to be the greatest of times.  After all, who gets to go fishing every day and play with baby goats?  It wasn't until later that I realized this was not for enjoyment, but a necessity.  From every indication I had, my grandparents were comfortable, and, for that matter, well off.  After all, they were not relying on their children to support them, which was the normal means of retirement for their generation.  In today's world this self-reliant form of retirement is not very feasible.

At Anderson Griggs many of our clients are individuals planning for retirement or individuals who have already retired and are in need of cash flow management. The need is obviously apparent for pre-retirees.  What can I say about the Baby Boomers other than the facts? Here they are (Fidelity Research, 2006):

• Average Boomers have a median total household retirement savings of $35,000.

• Average Boomer savings rate is $2,750 annually for retirement.

• Average Boomer with a 401K plan has savings of $80,000.

• 22% of Boomers believe they can rely on the sale of their primary home for income in retirement.  (My note - This is changing rapidly)

• 68% of all Boomers will need to work well beyond retirement age to cover basic expenses.

Based on these statistics, Boomers are not prepared for their own retirement. Most of our clients are not the average Boomer, and instead have substantial savings set aside.  Questions we get tend to focus on the proper investment approach based on benchmarks and terminal value, with major consideration given to cash flow.

In the financial advisory business we talk about cash flow in terms of numbers and percentages. In reality we are simply trying to answer two very important questions.  The first is "How much money do I need to have to have a check for this many dollars for the rest of my life?"  The second is, "Will I run out of money before I die if I spend this much?"

Most initial discussions are tied to removing some ideas that have been promoted by the media and industry peers.  The first idea is that you should age weight the amount of money invested in stocks and bonds.  By this idea, the rule of thumb is that the percentage of your portfolio invested in bonds should equal your age, and the rest of your money should be invested in stocks.  If interest rates never changed, your need for cash never changed, and there were no such thing as taxes or inflation, or if stocks were never over or under priced, then this would possibly have some validity.  However, the reality is that interest rates will change, needs for cash will change, and of course taxes and inflation will change and stocks will continue to fluctuate.

Another major misconception promoted by my peers in the industry is the idea that you can annually withdraw an amount equal to the market's average return.   If the market has historically returned 10% a year, shouldn't you be able to take out 10% a year and still keep all of your savings?  At first, this makes sense, but this would only be true if the markets never fluctuated.  If you take a 10% distribution and the same year the market has declined by 20%, you would need to have a 39% gain the following year without taking a distribution just to break even.  Good luck!

Retirement planning should be addressed on an individual basis, as should the amount and frequency of distributions. We are all different: our needs are different, our income levels are different, our savings are different, and our financial and psychological abilities are different.  Life unfolds in a multitude of ways, and each of us needs to address these individually at the appropriate time. Grandpa Jimmy relied upon himself and the taxpayer to provide all of his retirement needs.  You can do the same, or you can use common sense and the knowledge of how change can affect your own portfolio to make your retirement years a little more golden.

"It's the economy stupid"

What better way to leave Arkansas and enter into the world of politics by quoting one of Arkansas's own, James Carville? Mr. Carville was the campaign strategist for Bill Clinton's successful 1992 presidential run.  It was Mr. Carville who placed a sign in Mr. Clinton's Little Rock headquarters that simply said "The economy, stupid".

Mr. Carville realized that a presidential race is always decided by the economy.  Time and time again other agendas are discussed, but in the voting booth, on average, people vote with their pocket book in mind. Given that we are heading into the final sixty days of this year's presidential cycle, the economy will once again take center stage in daily discussions around the water cooler.

Most discussions do not involve hard facts, like the growth of GDP or increases in worker productivity, but rather are a philosophical discussion of economics.  The questions are similar to these: Is it right to tax one person at a higher rate and give that money to someone else? Is it right for our representatives to meet with lobbyists whose only concerns are encouraging the distribution of their goods or services?  These are questions of belief, and of course beliefs change with time.  History may or may not repeat itself, but we can look over a few facts about the past and the effect on our stock market of the times when Republicans or Democrats were leading the charge towards their own economic philosophy.

The following table shows the first year market returns following a change at the top from one party to the other (Data on the S&P500 is available from 1926 forward):

A quick glance at the table would lead you to believe that a change from a Republican administration to a Democrat administration is good for the market, and this is reinforced by other data for the entire term of control.  Since 1926 the S&P 500 has increased, net of inflation, 9.2% annually under a Democrat, and only 4.6% under a Republican.

However, don't make a judgment simply on these findings alone.  Statistics can reinforce any opinion. Let's look at this in a different light.  When FDR took the reins in 1933 we had just ended the worst of the great depression.  In 1961 when Kennedy took over, the economy was in a recession that officially ended in February of 1961.  Poor Mr. Carter came to power in a period of stagflation that did not end until the Federal Reserve took extreme action.  Mr. Clinton used "It's the economy, stupid" to win an election, and why not?  The economy was in a recession in 1991 which ended just one quarter before his election.

You will read multiple opinions over the next month or two, and my advice is to disregard statistical studies which are often meaningless. When you vote (and please do vote) don't vote based on who you think will help your portfolio the most.  Vote based on your economic and/or social philosophy.

Wall Street's Glass Ceiling

Washington's glass ceiling is ready to shatter.  We all know that the current election will result in something our country has never had: either an African American President or a female Vice-President. This will be good for the country no matter what economic philosophy you go by.  Breaking through this ceiling will ultimately lead to a better future.

Wall Street's glass ceiling appears to be made of tempered glass and has become even stronger over the years. Lehman Brother's CFO Erin Callan was fired this past June. There is currently not a single woman working in a position on Wall Street where she would be able to move up to the top spot at a major financial institution. Wall Street offers countless excuses, but I fully believe these are simply unjustifiable rationalizations.

Personally, I do not believe that race or gender should have anything to do with business success. One's rewards should be based on abilities and on motivation to move ahead.   I find it hard to believe that there is no woman with the competency or desire to lead a major financial institution.  Maybe once Washington's glass is broken, Wall Street's ceiling will follow.

Given the lack of leadership opportunities in the past, the history of women on Wall Street has far more to do with investors than managers. In the last quarter of the 19^th century, Hetty Green was America's wealthiest woman as well as the only woman in the markets during the time.

If you met Mrs. Green, you would have had a hard time trying to find the good in her.  She was given the nickname "The Witch of Wall Street."  It was Wall Street that gave her the vehicle to take a $6 million inheritance and turn it into $117 million over a 51 year time frame. I won't go into Mrs. Green's personal life, but I want to highlight what we can learn from her investment success.

Mrs. Green said the following: "There is no secret in fortune making.  I believe in getting in at the bottom and out at the top.  All you have to do is buy cheap and sell dear, act with thrift and shrewdness, and be persistent.  When I see a good thing going cheap because nobody wants it, I buy a lot of it and tuck it away."  Mrs. Green lived true to these words.  She bought a lot of stock, but only in times of panic.  She called it "her harvest" when she bought stock from men who'd gone broke.  From these "panic buys," dividends and interest rolled in at a rate exceeding $20,000 per day, which she compounded over the years, thus increasing her fortune. This understanding of the power of compounding is one of Mrs. Green's great gifts to the masses, trumping her not so great reputation.

Cheap or Dear

"Buy cheap and sell dear" is a common theme among Wall Street pundits.  It sounds simple but it leaves you with a bigger question: "When are things cheap, and when are they dear?"  No one knows if the Hetty Greens, John Templetons, Warren Buffets or Benjamin Grahams of the world were able to predetermine the times when stocks were cheap or dear, but I would bet they had some method for their madness.  We at Anderson Griggs also have a method we use to guide us in this determination.  It begins with a simple philosophy based on business and ownership rights.

We remove the thoughts of buying and selling, and think in terms of owning a business directly. As a business owner you are entitled to any earnings over and beyond the business cost.  If you have excess earnings, you can take a distribution in cash or reinvest the excess earnings into the business and use compounding to create higher earnings for the future.  As the business owner, you have direct knowledge of how much you need to operate your business and how much, if any, excess earnings you have.  With this knowledge you can quickly determine a "rate of return" on your ownership investment.  This rate of return is normally calculated as an interest amount and is easily comparable to other investments.  If you can get a higher rate of return from your investment in the bank drawing interest, why take all the risk of investing in your business knowing that the future is questionable?

We base our research on the market around these ideas, and think as if we were the owner of a private business without the worries and constant noise of the market. With the help of computers, and of data provided us by Zack's Research, we have converted the 500 companies in the S&P 500 to the equivalent of a single ownership interest, and have calculated a rate of return.  These are the results in table form for the week ending August 29^th, 2008:

*Anderson Griggs Portfolio Management Estimates

Tullett Prebon Information 25-Aug-2008b 15:29 GMT

When we compare our estimated return of 8.66% to a 2.116% return available from the US Treasury we can make a judgment as to which is cheap and which is dear.   For a long term investor who is able to overcome market fluctuations, the market looks as if it is cheap relative to interest rates, which look pretty dear to us.

Until next time,

Kendall James (Given in Honor of Grandpa Jimmy) Anderson, CFA

Anderson Griggs Portfolio Management