The Writers Coin

Last week the AP ran a story on the California Public Employees’ Retirement System (CalPERS) and how they were issuing bonuses to their employees despite the fund losing so much of its value. The first paragraph set the tone right away, as any good piece of journalism should:

As its investment portfolio was losing nearly a quarter of its value, the country’s largest public pension fund doled out six-figure bonuses and substantial raises to its top employees, an analysis by The Associated Press has found.

That tone I was talking about? It’s trying to rile readers up by implying bonuses were handed out improperly because some people were getting paid while the fund lost “a quarter of its value.”

I’ll be honest: when I read that first line, I was ready to shake my head and start wagging my finger at yet another group of people that are getting paid even when they don’t deserve it. I was fired up. A few graphs down, the fire is stoked:

Virtually all of CalPERS’ investment managers were awarded bonuses of more than $10,000 each, with several earning bonuses of more than $100,000 during the 2008-09 fiscal year. The cash awards were distributed as the fund lost $59 billion.

But read the rest of the article and you’ll realize there isn’t much to get indignant over—the way CalPERS doles out bonuses is actually really smart and really fair. Another quote:

CalPERS spokesman Brad Pacheco said bonuses are based on the fund’s performance over five years, not just the year immediately preceding the bonus, in order to encourage managers to seek long-term investments rather than short-term gains.

Brilliant! This is one of those major criticisms of certain investment funds: they’re so focused on the short term that eventually they crash and burn because they were only paying attention to making the numbers for the next quarter, not the next five years.

And in this case it means they get decent bonuses because the performance of the fund over the past five years was pretty good, despite the recent meltdown. Seems fair to me, especially when the fund outperformed the S&P during that time:

The Standard & Poor’s 500 index declined by 14.8 percent in 2007-08 and 28.2 percent in 2008-09, while CalPERS’ overall value dropped by 5.1 percent and 24.8 percent respectively.

Give them their bonuses and stop complaining—they earned them!

P.S. This reminds me of the ING bonuses and how I felt they shouldn’t have to give them backAfter all, a contract is a contract, right?

It’s true! Recent studies show that investors that have babies outperform baby-less investors by a whopping 72%!

Just kidding!

If it were that easy to become a better investor then CNBC would actually be worth watching and the Octomom would put Warren Buffett to shame.

So obviously, having a baby won’t automatically boost your portfolio, but here are some lessons that parenthood can teach us all that can make us savvier investors:

• Think Long Term: Even though babies are a continuous time bomb (they get reset over and over and over again and keep blowing up over and over and over again), parents are always thinking long term. Will breastfeeding make them immune to every allergy and ailment under the sun? Will reading to my newborn mean she’ll get into Harvard? If I watch too much TV with her, will she wind up living in an alley behind the 7-11? Some of it is extreme, but investors should take this advice to heart: always think long term because the short-term stuff is for traders, not investors. We want to grow our money over time, not try to get rich in a month or two. Don’t confuse the two.

• You’re always in the market: When stocks plummeted last year and everyone panicked, lots of people took their money out of the stock market and said “Forget it, I’m done!” They thought that by getting out of the market they wouldn’t have to worry about what was going on with the economy and that their money would be “safe.” But, like parenthood, you are always on. When you take your money out, you are basically watching it rot on the sidelines until you put it into some other interest-bearing vehicle. Once you have money, you are in the market whether you like it or not. Same thing as having a baby—there is no down time. Even when you hand her off to a relative you know and trust, you still worry that said relative will trip and fall and crack baby’s head on the granite counter top. Call it paranoia if you like, but investors and parents are always on.

• Don’t get greedy: When baby dozes off, it’s tempting to want to put her in the crib and start laundry, the dishwasher, some dinner, and vacuum. All while you check the 13 voice mails you have. Oh and then you’ll email all those people back that you never got back to. Guess what? It’s not gonna happen. This is as foolish as chasing all those “35% annual return” programs you see on TV and online. Take what the market gives you and don’t expect any favors. Don’t try to push too hard because you will get burned/overwhelmed when things don’t go as planned (disclaimer: this is coming from a guy who once said greed is good).

• Things can get really messy really fast: The mortgage meltdown was kind of like having your baby decide to projectile poop right as you’re changing her diaper in a relative’s living room and starts screaming as loud as she can. And then it hits you: you forgot the bag with the diapers and wipes in the car… at home. Doesn’t sound very likely, does it? Well, that’s what they say about every recession. In order to minimize these catastrophic events (because you can’t eliminate them altogether), you’ll need to…

• Always be prepared: I can’t stress this enough. Maybe tech stocks will flourish, foreign stocks might surge, and small caps could take a nose dive. Just like a baby, you never know what might happen, so be prepared for everything by keeping your asset allocation up to date and making sure you’re diversified in case a major swing (in either direction) happens. And if you’re close to retirement, for God’s sake please don’t have 80% of you portfolio in stocks. It sounds simple and maybe too easy, but it’s the same with baby: between dirty diapers, hunger, and tiredness, that’ll solve 90% of the crying/fussiness issues that can come up. That’s why parents carry huge bags with diapers, wipes, formula, changing pads, and pacifiers…that covers everything they can control. If you stay ready, you won’t have to get ready.

• Sleep when the baby sleeps: This has nothing to do with the market but for all those readers that will eventually have a baby, remember it and just do it.

• Prepare for the worst: Just like parents always have more diapers/wipes/outfits/formula/toys than they could possibly need, investors should always try to have some cash on hand. When the recession hit and the stock market took a nose dive, having cash to buy depressed equities puts you in the driver’s seat. Why do parents carry all that “extra” stuff around? Because they’re prepared for the worst and because it gives you peace of mind (which cash also does).

Any other parents have some investing tips that they’ve learned from having a baby?

This post was included in the Carnival of Money Stories

Image by Andrew Mason

There were a couple of interesting stories in the “papers” yesterday that I are worth mentioning. An AP-CNBC poll found that 55% of investors feel the market is only fair to some investors and that they don’t have confidence in buying and selling stocks. I understand that the flash crash spooked a lot of people, but take a look at what people are feeling:

Wild gyrations on Wall Street have made U.S investors leery of buying individual stocks and skeptical that the market is a fair place to park their money.

A random Joe on the street chimed in with some pearls of wisdom:

I don’t have any confidence in the stock market, to be honest. It’s just a gut feeling.

Gut feeling my ass—I’m guessing it has more to do with the intense media coverage (Will Stocks go to Zero??) and the uncertainty surrounding the flash crash. But as I read the story it almost felt like I was reading a news item from the Guatemalan papers: there’s a deep distrust/paranoia going on here.

People actually think that the stock market is/was rigged and they don’t stand a chance at making any money unless they are “in the know.” It’s a conspiracy!

Presumably, the people that are “in the know” are rich people. Not millionaires, but billionaires.

Which leads me to the other story I read that was pretty interesting. This one’s from the Wall Street Journal and it’s all about where those billionaires are putting their money right now.

What was surprising about the lunch was where the attendees are putting their money. Topping the list were vacant office buildings, farmland and Africa. Stocks look attractive, but the attendees pointed out that no one has made money investing in the indexes for 12 years.

I was thinking about all these things and then it hit me: just ask people what they’re feeling. So I’m doing that: are you guys scared of investing in stocks right now? Why? Do you believe the system is rigged? How much of a role in what you feel does the flash crash play and the fact that we still don’t have an answer?

Image by Capture Queen

Just got an offer from Netflix that can give you a free month of their service. That includes the Watch Now feature (which is basically “all you can watch”) and it’s one DVD at a time. So it you want me to forward along, just fill out this form and I’ll pass it along.