Thanksgiving, Finance & Poverty

Finance can defeat poverty

As we get ready to celebrate all that we have to be thankful for this year (and yes I have a lot to be thankful for) lets not forget those less fortunate. And lets not forget why most of them are so unfortunate...most of the world's billion hungry people live in countries where they have little incentive to prosper. For centuries economists have tried to figure out why certain countries prosper and others don't, you've probably heard some of these explanations. People in hot places don't work as hard. Wealthy countries have that old Protestant work ethic. Former British colonies are the richest countries. Nations with the largest populations of European descent do better. Geography, weather, tropical diseases, and nutrient starved soil doom certain areas to poverty . The lack of education and technology lead to poverty. While all of these theories  may have instances of relevance they just don't hold up to real world analysis. Take communist North Korea, with the same weather, geography and culture of its capitalist neighbor to the south, yet ten times poorer. Or the stark contrast twenty years ago between East and West Berlin. Or the stark contrast between those on one side of the Mexican boarder living in Arizona and those on the other side in Mexico. Or look at the difference between Cuba and Miami. Or look at China, where decades of stagnation and famine were reversed after they began introducing private-property rights.

Poverty happens where people have no incentive to prosper. Poverty happens where people believe that no matter how hard they work someone else will prosper before their children do. Poverty is all about incentives, or more appropriately the lack thereof.

People need incentives to prosper, they have to know that if they work hard and make money they can actually keep some of that money to improve their families future. The key to ensuring that those incentives are in place are strong rules of law and a government that believes in it. The government has to offer its citizens opportunities to achieve and innovate, and to keep most of the fruits of their labors. 

Fix incentives and you will fix poverty.

So this Thanksgiving lets not forget how fortunate we are to live in a country that was built on the rights of the individual, and let us continue to work to defend those rights here in the U.S. and help spread them throughout the world so we can truly put an end to poverty.

Happy Thanksgiving,

Chris Wiles

News on Rockhaven

Investment manager aims to lower risk

Sunday, November 22, 2009

By Len Boselovic, Pittsburgh Post-Gazette

As long and strange of a trip the past dozen years have been for investors, it's been equally long and strange for Mt. Lebanon investment manager Chris Wiles.
A year after Barron's named him the best equity-income managed based on his five-year performance, Mr. Wiles left Federated Investors in 1997 to launch his own investment firm, Rockhaven Asset Management. A dozen years and two detours later, he's flying solo at age 50, relaunching Rockhaven at a time when market behavior has even such professionals as Mr. Wiles stumped.
"It has very little to do with valuation and fundamentals. It has everything to do with where money is going to be treated the best," he said.
For the time being, that means just about anyplace but low-yielding U.S. Treasuries and the debilitated U.S. dollar, Mr. Wiles says.
"Almost everything else is more attractive," he said. As long as yields stay low and the dollar depreciates, investors will buy stocks, higher-yielding corporate bonds, [real estate investment trusts], commodities and gold."
However, once the unemployment rate drops, allowing the Federal Reserve to stave off inflation by raising interest rates, the party will end and it "won't be pretty," Mr. Wiles warns.
"I know it's setting up for something, but I don't know what it is," Mr. Wiles said. "When it changes, I'm going to be more defensive and protect on the downside."
The Sharon, Mercer County, native made a name for himself managing several Federated mutual funds, then did the same at Rockhaven. But the small firm's equity-income and dividend funds had a hard time drawing new money once the tech stock bubble burst in 2000. Hoping to attract more investors, he and co-owner AmSouth Investment Management sold Rockhaven in 2002 to Strong Financial, a Menomenee Falls, Wis., mutual fund operator.
A year later, Strong was one of several fund companies targeted by then New York Attorney General Eliot Spitzer and the Securities and Exchange Commission for improper trading. Strong was sold to Wells Fargo & Co. but Mr. Wiles didn't go along. He stayed in Pittsburgh, managing more than $2 billion in large cap portfolios for National City's investment management arm.
That lasted until the Cleveland bank's credit problems ended with its sale to PNC Financial Services Group last year. PNC already had large cap managers in Philadelphia, so Mr. Wiles restarted Rockhaven from his home. He was approved last week as a registered investment adviser by the Pennsylvania Securities Commission.
Investors looking for a "buy-and-hold" strategy won't find it at Rockhaven. Mr. Wiles says the strategy, recommended for many small investors, is dead. Here's why:
While stocks have returned about 9.5 percent annually since 1927, Mr. Wiles says that's misleading because it doesn't reflect the sharp swings Wall Street takes, movements that can produce dramatically different returns based on an investor's time frame for buying and selling. He cites the last decade as proof: the tech stock bull market and subsequent bear market, Sept. 11, the real estate and credit bubbles and the deluge that followed, and the market's rocketlike rise since March.
Mr. Wiles says he's developed a globally diversified strategy that will allow investors to get in and out of U.S. stocks, U.S. Treasuries, commodities, real estate and five other asset classes at appropriate times. What he came up with is a tactical asset allocation that won't squeeze the last penny out of bull markets but will minimize losses in bear markets. As a momentum investor, Mr. Wiles takes his buy and sell cues from swings in the prices of stocks, bonds and the other assets in his portfolio. He tested how those signals would have worked since 1999 and found that using them would have turned a $1,000 investment into $2,340 vs. $1,310 for the buy-and-hold investor.
"The key to the market timing I am doing is to participate in up trends and protect during downdrafts. It is really about lowering overall risk," Mr. Wiles said. "I have very firm buy and sell disciplines. Discipline and humility are the keys."
The knock on market timing is that, even if a manager makes the right moves at the right time, trading costs can eat up whatever advantage he has over a buy-and-hold manager. Mr. Wiles is curbing those costs by using exchange-traded funds. ETFs are baskets of securities built around indexes for stocks, bonds and other asset classes. Unlike mutual funds, which are bought and sold based on their price at the end of a trading day, ETFs trade like stocks. Their prices fluctuate throughout the day.
Mr. Wiles currently manages about $5 million. He is targeting investors with $500,000 or more, as well as charities and foundations with $1 million to $10 million.
While the last decade tested the mettle of even seasoned investors such as Mr. Wiles, it's been even harder on retail investors struggling to determine the best way to manage their retirement savings. Mr. Wiles doesn't think it's going to get any easier for them.
"They'll have to have a tougher stomach," he said. "I think markets are going to be volatile for a long time."

Len Boselovic can be reached at lboselovic@post-gazette.com or 412-263-1941.

Read more: http://www.post-gazette.com/pg/09326/1015180-435.stm#ixzz0XdA4PYKp

"Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside
And it is ragin'
It'll soon shake your windows
And rattle your walls
For the times they are a-changin'."

"The Times They Are A-Changin'"- by Bob Dylan

All chronic borrowers know how critical it is to keep a good working relationship with your banker. So it is no surprise that President Obama, winner of the Nobel Peace Prize, spent nary a moment letting pesky human rights issues get in the way of securing our next round of deficit financing, from our lead banker China. President Obama's first trip to China was a clear sign that "the times they are a-changin". We are at a turning point in relations between a weakening U.S. power and a China that senses its time has come. Unlike his trips to Europe where he was wildly embraced by the populace the Chinese authorities detained dissidents and stopped the wide broadcast of a town-hall meeting with students in Shanghai. Mr. Obama tried to argue that the Chinese need to allow the Yuan to strengthen, which would make China's exports more expensive, hence U.S. exports would be more affordable. This was met with a barrage of criticism from the Chinese that the U.S. was threatening the global recovery with its zero interest rate policy, which was leading to speculative bubbles around the world. He was also scolded to get his fiscal house in order and bring down the massive deficits. 

Asia, and China in particular are rapidly changing. Asia has accounted for about 50% of world GDP for most of human history. It dipped down to only 10% over the last couple of hundred years but has been rising quickly of late. China has grown recently via exports, (intra Asian trade actually exceeds trade with the West), but it is working rapidly on creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class, moving to big cities, eating more protein, and buying everything from cell phones to cars to computers. There are now 310,000 households in China with investible assets of at least $1 million. That ranks China just behind the top four — U.S., Japan, Britain and Germany. What’s startling, though, is the growth: China’s millionaire population has more than doubled since 2001. The Boston Consulting Group expects the number to double again in four years. China also has 106 billionaires, second only to the U.S. 
Demographically Asia has a huge edge over the West with it's much younger population (excluding Japan of course). This growth will continue to drive demand for nearly all commodities (energy, metals, and grains). China is growing weary of having most of it's currency holdings denominated in dollars. They're not about to make any big changes, but we should all expect them to gradually, incrementally, move away from the dollar. 

Of course they will have issues arise as they grow; pollution, protectionism, food and water shortages, and income inequality, just to name the obvious. But this is a society that is hell bent on improving the welfare of their citizens at any cost. This is a country that is spending $2 trillion on infrastructure, and building a new 75 story skyscraper every 3 hours! They will not be denied. 

The biggest threat to the United States is not military but economic. As we go begging, head bowed, for continued deficit funding, we lose control of our future and we lose some dignity. 

From an investment perspective we continue to have rather heavy exposure to emerging markets, commodities, and gold.

Brand New Day

"You can turn the clock to zero, honey
I'll sell the stock, we'll spend all the money
We're starting up a brand new day

Turn the clock all the way back
I wonder if she'll take me back
I'm thinking in a brand new way

Turn the clock to zero, sister
You'll never know how much I missed her
Starting up a brand new day

Turn the clock to zero, boss
The river's wide, we'll swim across
Started up a brand new day"

"Brand New Day" by Sting

Today I'm starting up a "brand new day"!

I’ve been a professional money manager for the last 25 years and have seen a lot, but the events of the last two years have truly illuminated for me a real weakness in the advice being given to many individual and institutional investors – “buy and hold”. Buying and holding the Standard & Poor’s 500 over the last ten years would have gotten you a nice 0% return, and a few ulcers.  Over my career, I have seen up years and down years. I have come to understand that being in the right global asset classes at the right time is far more important to total returns than picking individual stocks or bonds. Fortunately, with the advent and proliferation of ETFs the task of investing in exactly the asset class of choice is reasonably easy and inexpensive.

Last year, our global economy neared a complete financial meltdown, and governments and central banks around the world have spent trillions of dollars fighting Great Depression II. We may have won that battle, but the future holds much uncertainty as we figure out how to pay the piper with money we don’t have.

Rockhaven is really an outgrowth of what I am doing for my family and myself. Most investors I’ve met have the same long-term goal…to preserve and increase their purchasing power. I believe that this can only be done by continuously evolving with the markets, to be in harmony with what is working.  The future is always unknown, but one thing we can be sure of is that “buy and hold” is dead; instead risk management via disciplined asset allocation, or, if you prefer a Global Tactical Asset Allocation strategy is the way of the future.

I have prepared all my working life to implement this strategy, and I am now at a personal and professional place to be able to implement it for my family and others. I am very excited for both my future and that of my investors. If you would like to discuss this further please call me at 412-260-7917.

Chris Wiles, CFA

cwiles@rockhavencapital.com

www.rockhavencapital.com

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”       - Charles Darwin