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Kiplinger, Mutual Funds, and Monkeys

The Weakonomist — Tue, 17 Jan 2012 14:30:17 +0000

I’d almost forgotten about how much I loathe the personal finance magazine and site Kiplingers (see here and here). Should you not be familiar with the publication, Kiplingers publishes many articles which I find to be lazy and in some cases, irresponsible. A lot of people subscribe to the site and magazine and probably think the advice is good and properly vetted.

But the problem is that couldn’t be further from the truth. The Editor in Chief is a career journalist who was born into money. The Executive Editor is also a career journalist. That doesn’t matter too much, they surely know what good content is. But to say they know what responsible content is, especially in the space of personal finance, is an aberration.

The Kiplinger 25 is a list of actively managed mutual funds published by the magazine every year. For all intents and purposes, it’s their recommendation of the funds you should be invested in. The Executive Editor published an article at the beginning of the year summarizing the performance of their list in 2011. In general, he seemed quite pleased with the performance of the mutual funds they picked. The table below summarizes the performance.

Nothing to sneeze at, nothing to brag about. But there’s one glaring omission from this table. And I’d expect you to perhaps not notice it, but Kiplinger should.

The magazine publishes this list each year in an issue that doesn’t arrive until the end of March. So 2011 performance matters not since you’re already 3 months off. For the website’s sake, I’ve created a chart showing the returns of these funds against a simple S&P 500 index from April to 2011 last year.

Hmmm, I wonder why they didn’t track performance from the time of publication? Certainly doesn’t make them look as good. And to say nothing of the fact that the simple S&P 500 index fund has about 20% of the fees as Kiplinger’s worst performer. If you want crappy performance and lots of fees, the Kip 25 is the place to go.

Kiplinger could admit they should have measured performance from publication date, but that doesn’t account for the performance of funds that were added or subtracted from the list last year. So let’s look at them.

One was added: BBTEX. As you can see, it handily kicked the butt of a simple index fund. I can’t knock it, even after adjusting for risk and fees, it beats the standard low maintenance benchmark. There are perhaps critiques worth investigating, but I’ll let Kip have a win here.

What about the removed funds? There were two: SLASX and FAIRX. I’ll save you the math, but they just removed two funds that were under performing already. But since you would have bought them from the prior year list you’d already have lost some of the money. The simple index fund outperformed SLASX by 1% and FAIRX by 7% from 2011 before Kiplinger told you to dump them. This doesn’t take away from the fact that these funds blew for the whole year and you would have been right to sell, but it makes them look less omniscient.

If you want, ignore everything before this paragraph.

And for the sake of argument let’s just throw out everything I said and make this as easy as possible to understand. Even by the magazine’s own flawed metrics only 6 out of 13 funds outperformed my simple index fund for the full year (VFINX was up 0.2%). Using the estimated time of publication that number drops to 4 out of 13. Statistically speaking, a monkey should be able to do better than that.

But no one should have to do that. The dirty truth about investing in the 21st century is quite simple. And if you’re a reader of independent personal finance blogs, you already know it. Don’t buy actively managed mutual funds. Track records don’t matter, they were in the past. Active funds are expensive for you and your money. Index funds are dirt cheap, and don’t try to do anything but track an index. If you want diversification, you should be looking for indexes in different classes, but specific funds. But you can’t beat the market year over year. Neither can Kilinger’s list.

Finally, the last time I wrote an article against Kiplinger one of their editors called me out for being a short term oriented investor. Full disclosure: I own three mutual funds (VITPX, VFINX, and VFWIX). I own one stock, about $100 in a former employer that I bought on a whim and am too lazy to sell. I have long term horizons on my investments (with >99% held in retirement accounts) and have never changed fund holdings unless something I own is no longer offered.

If Kiplinger thinks I have a short term horizon when tracking them, it’s only because they change their holdings every year and I just don’t have the time to track their entire portfolio of recommendations through time. Happy to do it, but no one is going to pay me to. But I sleep easy knowing I don’t get paid to give terrible advice and hide it in well-edited content.

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Weakend: Every Presentation Ever

The Weakonomist — Sat, 14 Jan 2012 15:46:21 +0000

Been there. In the audience, and unfortunately, facing it…

Via: Curiosity Counts

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The Worst Ideas Of 2011

The Weakonomist — Wed, 21 Dec 2011 14:51:26 +0000

The year is coming to a close and it’s time to look at some of the ideas that were either introduced this year or killed off. These are just a few that I could think of, I really need the help of you readers to identify all the other bad ideas from the year:

Rebranding rich people: Republicans in Congress started referring to rich people as “Job Creators”. Obama started it with the idea of raising taxes on the rich only. There’s been little proof showing rich people are the job creators, and opponents are quick to point out that with 70% of the economy being consumption, it’s customers that are the job creators. We’ll see next November if the job creators mantra lived on.
Ma Bell is back? Not quite. AT&T wasn’t allowed to merge with T-Mobile. Someone probably read a history book for once.
Countries can share a currency without sharing policy: I can’t wait for the 2032 Olympics when the USA takes on the USE for dominance in the world’s most popular sport: football. Of course what kind of football game that will be is unknown. I suspect in 2012 much of Europe will take a major step towards unity, but it will need at least a generation to really converge culturally.
Wikileaks to take over the world: You’ve forgotten about Julian Assange haven’t you. Whether it was the world converging on one guy or just that guy’s ego being too big, the controversy around him took down Wikileaks too.
The world is ending: Maybe next year.
Oprah can retire: Oprah thought she would step down from her show and run a network. Well the network sucks and no one is watching, so she’s coming back with a show.
Tea party policies will work: Scott Walker learned the hard way that the point of the Tea Party isn’t really to improve things, but to maintain the status quo. Radical policy just isn’t in the cards.
People care about professional sports: Despite ESPN’s greatest efforts, very few people actually cared about the battles over work agreements in football and basketball. It was worsened by people not having an appetite for a perceived (if inaccurate) battle between millionaires and billionaires.
That government will actually shut down: The first time people paid attention. Now even the most naive citizens understand the game. Somewhere a wolf is weeping.
You’re bigger than the show: Simon Cowell and Charlie Sheen are both learning their shows can survive, and even thrive without them. Poor Cowell’s new show can’t even get half the ratings of his old one.
It’s Friday, Friday: Maybe that wasn’t a bad idea, but it is nauseating.
Pretty women who can’t sing dominate album sales: Adele, I love your pipes and love you even more for not trying to sell albums with hotness.
Protests without a goal will work: Even the Daily Show started making fun of the protestors. Many protests worked this year, for good reason.
Jobs that leave the country will never come back: A personal favorite. Samsung is now making Apple chips in the US, and more and more foreign auto manufacturers are bring jobs back to the US to make cars here. This is the result of a truly flattening world.

Okay readers, what did I miss? Load up the comments!

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The Media Cycle And Insider Tranding In DC

The Weakonomist — Mon, 14 Nov 2011 14:10:57 +0000

The media was abuzz on Monday about this whole Congress getting to trade on insider information thing. 60 Minutes had a segment devoted to their investigation that ran on Sunday night. It is most definitely worth a watch. If you don’t want to watch it, here’s the skinny.

Insider trading is basically investing using information that isn’t public. It’s against the law and is what Martha Stewart when to jail for. But it’s not against the law for anyone in Congress to do it, and they have access to tons of insider info.

Imagine you’re a big dog in Congress. It’s the fall of 2008, the stock market is teetering and may crash at any time. The Secretary of the Treasury and Chairman of the Federal Reserve brief you on the conversations they’ve been having with banks. They tell you that in a couple of days they’re going to announce earth-shattering news that will likely crash the markets. This is not information normal citizens have and they can’t trade on it. But you go out and sell all the bank stocks you own, and maybe even take on a few investments that will profit from the ensuing crash.

This isn’t just a hypothetical, it really happened. And there are other stories, including sketchy investments from Nancy Pelosi and John Boehner that would possibly put you and I in jail, but it just makes them richer. The 60 Minutes segment shows how it would be illegal for a company to pay off a member of Congress with cash, but you might be able to by giving them access to your stock for cheap.

The outrage is justified, and I want to do my part to make sure people know about it and stay pissed off enough about it to demand that insider trading be outlawed for everyone.

That’s why I told you about it 6 months ago. I applaud 60 Minutes for their journalism and production value, but original they are not. Academics have been studying this for years. And this story has cropped up in the media before. The color 60 Minutes added was in digging up real examples of the insider trading.

I honestly hope that people get pissed off enough about this to demand real change. Our elected officials are paid more than enough to live comfortably, and many are already financially fit when they run in the first place. Further still, others work as lobbyests or get good private sector jobs after leaving Congress. They don’t need special benefits to help them get rich while in office. Not only is it ethically questionable for anyone to act in the way some of our elected officials have, it’s downright hypocritical that they can while others go to jail.

Whether anyone actually engages in such an activity is irrelevant. It should be outlawed regardless. So get mad, stay mad, and demand something be done about this. Occupy Wall Street, Tea Party, I’m looking at you. Don’t let this slip out of the headlines for another few years while this crap continues.

Image: edalisse

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Weakend: Penn & Teller

The Weakonomist — Sat, 12 Nov 2011 16:12:53 +0000

Here’s why I love Penn & Teller: they are afraid of nothing. They used to have a show on Showtime called “Bullshit!”. They debunked all kinds of ideas and theories over 8 seasons with crude language, a little bias, a lot of facts, and tons of hilarity. Here’s a few of the ideas they took on over the years: alternative medicine, creationism, ESP, PETA, war on drugs, hypnosis, college, Mother Teresa and Gandhi, Boy Scouts, death penalty, reparations, hatred of WalMart, handicapped parking, world peace, stress, organic food, and martial arts.

Some topics are more controversial than others, and in some cases I personally disagreed with their conclusions. But they were entertaining and informative nonetheless. It’s said that Penn intended for the last episode to address all the criticisms of the show, calling it the “Bullshit of Bullshit!”. The show was canceled so we may never see something like that, but I believe they would have done it because these guys seem to have no ego nor care of people don’t like them. I love that.

Now Penn & Teller have a new show on the Discover Channel called “Penn & Teller Tell a Lie“. The premise is pretty simple, they tell a number of interesting stories about people or things, and make one up. As the viewer you guess which is the lie. Listeners of “Wait Wait Don’t Tell Me” on NPR will be familiar with such formats. But it’s not the show that I love, it’s just the two guys. Their delivery is on point, and they do more than simply set up the next segment. If this show never takes off, I doubt they’d care. In the first episode I saw they acted like they were going to tease you through the commercial break to see or learn something cool. But instead they called out producers and editors all over for using weak tactics to get people to watch commercials. Instead, they relied on the actual quality of their material to be enough to get me to watch through the commercials to see what was next. And I did.

If you haven’t seen their act, or any of their shows, consider this a huge endorsement of the team. They’ve been working together since the 70s, and lots of videos of them can be found online. Many of them include magic tricks, and they often explain exactly how they did the trick. I’m linking to a couple but they could be taken down from YouTube at anytime so just search for them. Here and Here.

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The Curse Of The Madden

The Weakonomist — Wed, 19 Oct 2011 14:46:48 +0000

Fans of football or video games may be familiar with the the John Madden Curse, but for others I might need to explain. There is a very popular video game that provides realistic football game play called “Madden”. Since the late 90s the game has featured a well known football player on the cover each year. Usually they players that have had a good season the prior year. Perhaps unusually, those players typically suck the next season. In fact, only one player in the last decade hasn’t sucked the season they ended up on the cover: Larry Fitzgerald.

I’ll give you a few examples:

2004: Michael Vick on the cover. Broke his leg before the season even began. His team sucked that year.
2008: Vince Young on the cover. Publicly announced he would be on the cover and that the curse didn’t apply to him. He got hurt and his backup was good enough that Young was benched even after recovery.
2012: Peyton Hillis on the cover. Not only is Peyton not even close to his stats from last year, other Peytons are struggling too. Peyton Manning is one of the league’s best QBs and has been out all season. Sean Payton, coach of the Saints, tore is MCL and broke his leg; and even Hall of Famer Walter Peyton had a book published about him painting the picture of a drug addict with homicidal/suicidal tendencies this fall.

The curse is spreading…

Or is it. They Peyton expansion problem notwithstanding, most of the players featured on the cover of Madden all have a few things in common. They all had good seasons the year before. But we all know past performance is not an indication of future performance. Anyone with a mutual fund is familiar with that. So picking the star from last year doesn’t really guarantee they will be one the next year.

But if you go through the list, and are a big football fan, you’ll notice something else. Most of these guys were relative unknowns before they had a breakout season. Statistically speaking they weren’t likely to have another good season. But, financially speaking, they were also itching to ride the star train while the tickets were cheap. When you get your 15 seconds, you got to play it right in order to turn it into 15 minutes.

There are a number of fantastic football players that have never been on the cover of Madden. For one reason, they don’t really need it. They have their endorsements and sufficient media attention. Being on Madden might be overkill for some players.

The Madden Curse sure is interesting to talk about. However all it is really doing is showing what is very common in football, it’s damned hard to have a consistently successful career. It’s not always the fault of the player, it’s hard for teams to surround a good player with good talent that magnifies how good the star is. Football is also an aggressive sport so injuries are very common. If you’re a player and get a call from EA sports about being on the cover for the 2013 game, don’t be afraid. Whatever is going to happen to you is going to happen anyway. That train may only stop once. Toot, toot.

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Sometimes You Don’t Need An Education

The Weakonomist — Mon, 17 Oct 2011 14:45:09 +0000

In most cases, a good education is the most important foundation to a successful life. We’re taught this by parents, and economists regularly corroborate it with statistics showing lower unemployment rates and better incomes for people with greater education.

But of course we are regularly reminded of dropouts like Bill Gates and Mark Zuckerberg, but of course they are exceptions, not rules. What is consistent among most successful dropouts is they left school for something. Something was in the pipeline. They didn’t drop out because they were bored with school. But, perhaps being bored with school led them to the hobbies that launched successful companies. The NY Times ran an interview of someone that has not achieved celebrity level success, but is a successful and very interesting dropout nonetheless.

Meet Dan Schneider. By the time you were popping pimples before algebra class he was leading managing his first team of employees. By the time he could legally drink, he had a successful cell phone retail business with more stores than you could count on your hand. By now, he’s probably still not 30, he’d taken a 2.5 year retirement and now started a 3rd business. And I’m not talking a business like a blogger starts a business. His company has a few dozen employees that are highly paid industry and accounting experts. But that’s less important for this audience.

Dan has a 9th grade education, but based on his interview he’s clearly more intelligent than most of us. When someone at his company makes a mistake, they are made to buy everyone ice cream. He doesn’t want bad news after 3pm because he doesn’t want to take it home with him and fester on it all night. He understands that training and hiring is expensive and gives fat retention bonuses to his employees. The wisdom and business acumen of this guy is incredible. Sure, Mark Zuckerberg has an enormous company and is worth likely thousands of times more than this guy, but he had the help of others. Schneider doesn’t have investors, and has never had a company so large it needed tons of expert managers to run the business. He’s self-taught.

You don’t really need to know too many details about him, but if you do here’s the interview and another one he did on local public radio, as well as the site of his company that explains what they do (it’s pretty cool).

What you do need to understand is that like most successful dropouts, he was running to something, not away from something. He had something better to do with his time than sit in class. Just like Bill Gates did and Zuckerberg. Most dropouts leave school because it’s hard, or frustrating, or in the case of college too expensive. But they simply leave with no long-term goals seemingly in sight. Perhaps everyone who does drop out thinks they are like Schneider. And maybe, if you’d interviewed him at the age of 16 he might not look any different than another dropout. I don’t really know. But it’s unlikely he struggled with school.

For most people school and college are places to grow up and determine what you want to be for the rest of your life. Some people find it earlier. Others find it later. But the ones that do find it earlier are the exceptions, and it’s important to look at the circumstances that brought them success more so than the action of leaving school.

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Very Bored With People Asking ‘What Recession?’

The Weakonomist — Tue, 04 Oct 2011 14:51:11 +0000

Above you is a chart from Google Trends showing the popularity of the phrase “what recession?” You see it show up any time some kind of report shows an elevated level of spending or income that seems to fly in the face of the current economic climate. The chart clearly shows the phrase gets popular around times of uncertain economic strength. Notably it’s ticked up again lately. The term was clearly more popular when the recession was just getting started and it dropped off as we entered a recovery. This is the type of trend that lags the overall economy, which means it’s a reflection of how we tend to feel about things in recent memory, not the present or the future. Said otherwise, the media LOVE this phrase whenever the economy is weak.

“What recession” is a term I’m not a fan of. You go to Olive Garden and see people ordering wine and big meals and think the recession can’t be so bad. Just in the last few days I’ve seen the term to talk about auto sales and haircuts. But we can go as far back as you want to 2008 PC sales or early 90s CEO pay.

These ideas come from our monkey brains’ inability to fit a square peg into a circular hole. We hear “recession” and think the following things:

It impacts everyone
It impacts everyone at the same time
It impacts all industries the same way
It impacts them all at the same time in the same way
Humans are rational with their money and make smart decisions

While you might see everyone at the Olive Garden on a Saturday night, what you might not be seeing is the lunchtime crowd. And you’re certainly not seeing is the closed off section in the back of 20 tables not in use. While auto sales may be doing well, that’s a reflection of pricing and incentives, as well as availability of comparable used cars. Consumer demand and a “what recession?” attitude are just one of many factors.

These reports making you think that some group isn’t feeling a recession are usually monthly reports. If in the next month the report shows activity more indicative of a recession do you think those same headline writers will take back the last one? No. Because once something has moved to the back page, or the archives, of a site, no one remembers it. Not even the people that wrote it.

I look forward to a true recovery some day in which we can stop playing the “what recession?” game.

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Voter’s Remorse

The Weakonomist — Fri, 30 Sep 2011 14:58:21 +0000

I am really not a fan of polling. They capture someone’s opinion at a time it doesn’t matter. We all know Congress has terrible approval ratings, but almost every person that runs for re-election gets it. Why? For one thing people have a better perception of their elected official than the actions of Congress as a whole. But I think the main reason is that these polls really don’t matter when it comes to elections.

Do people really regret voting for someone so much that they don’t vote to re-elect them? Unlikely. Look at the chart below, it’s Bush’s approval ratings all during his presidency:

Obviously 9/11 had a significant impact on approval ratings, but by the time he started campaigning for reelection Bush was polling just about where Obama is now. A campaign will have the effect of increasing Obama’s approval ratings. That’s the whole point. And between Obama and whomever he runs against they’ll probably raise over a billion dollars just to try to move that approval rating just a few points in either direction.

What I’d really like to see is some polling company track the approval ratings of 1000 people over an entire election cycle. If someone really doesn’t approve to the incumbent, I’d like to see if that really translates into them not voting for someone. I endorsed Obama in 2008 but I’m on the fence right now. Will that really translate into me not voting for him? No clue.

Please polling companies, do something useful. But if you did track these numbers and learned that the polling results today don’t translate into actual lost votes tomorrow, you kind of put yourself out of business. Guess we’re probably stuck with this crap forever.

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Weakend: Knowing The End

The Weakonomist — Sat, 10 Sep 2011 14:08:41 +0000

A new study shows that knowing the end of a story makes the story itself all that much more enjoyable. Spoilers allow us to not focus on the plot and really get engrossed in the details.

If you’re like me and don’t even want to waste your time and money on things like going to see movies, check out The Movie Spoiler. I’ve been going there for years to get a good 10 minute breakdown of any movie that seems interesting but isn’t worth the effort of watching.

I need one of these for books too. Anyone know of one?

Photo: deeleea

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