Well we got no class
And we got no principals
We ain't got no innocence
We can't even think of a word that rhymes
School's out for summer
Like most people, one of the most important lessons I try to teach to my daughters is ethics. We want our kids to "do the right thing", but what exactly does that mean?
For most of us it really is quite simple; telling the truth, being loyal, taking responsibility, being compassionate, acting with courage and perseverance. To me these are the traits that separate the good from the bad. It really isn't that complicated. Ethical people are those that act in ways that benefit both the individual and society as a whole.
Today's teaching point - Weinergate.
Its pretty hard for young teenagers to escape the constant barrage of Weiner jokes, so it was no surprise when my daughter asked, "So whats with this Weiner guy?"
Well dear, he's a creep. He sent inappropriate photos of himself to girls he didn't know, photos of his umm, "name". On top of that he's married, and a Congressman elected to represent his constituents. When he was initially caught, he lied profusely that it wasn't him. Finally when more evidence came out he admitted to it, but made perfectly clear that he did nothing illegal and didn't violate any House of Representative rules, therefore he wasn't resigning.
Unbelievably, House Democratic leader Nancy Pelosi is calling for an ethics committee investigation. Get real, can't we save the taxpayers a bit of time and money?
Let's review:
1. He is a creepy pervert.
2. He is a liar, both to his wife and those he swore to represent.
3. He doesn't take responsibility for his actions.
4. He lacks good judgement, or any judgement.
On all grounds this man is guilty of being unethical. Who wants to go in to work each morning, and sit across from a man that you know is totally unethical? I think congress has a few more pressing issues than Weiner's weiner, let's move on.
You Beat The Market By What?
One of my pet peeves in the investing industry is the lack of ethical uniformity among the various providers of investment advice. The clearest example of this is in performance reporting. It is absolutely amazing to see the various methods used to report performance. Years ago the SEC cracked down on the mutual fund industry and now requires them to report total returns (price change plus dividends, after fees and expenses) when comparing themselves to indices. CFA charter holders are required to abide by even stricter guidelines known as the Global Investment Performance Standards. Unfortunately this is not the case for many investment advisors or newsletter publishers, who aren't always covered by such rules.
The biggest ethical violation is comparing the total return performance of a portfolio to the return of an index (like the S&P 500), and not including the dividends. It is simply outright fraud. Since 1926 dividends on the S&P 500 have accounted for over one-third of the indexes total return. In periods of negligible returns dividends can account for well over half of the return.
You would be amazed to see how many touts (I struggle to call them investment advisors), massage, bend, or simply exclude data that would make their performance look less than stellar. Even someone as well known as Jim Cramer isn't above the ethical dilemma of data manipulation. In an excellent article in the WSJ ( The Intelligent Investor: Here's One Way to Beat the Market - WSJ.com ), Jason Zweig shows that Cramer's Action Alerts PLUS touts how his portfolio "had some truly incredible results." From Jan. 1, 2002, to April 1, 2011 the portfolio's "total average return has averaged more than DOUBLE the return of the S&P 500." An accompanying graph shows the S&P 500 returning 15.5%, while Cramer's portfolio returned 39.2%. WOW, sign me up, all that for only $300 per year! The secret to Mr. Cramer's truly incredible performance; he decided to include dividends on his investments, but left them out of the S&P 500's return. If he would have included dividends for the S&P 500, his return of 39.2% would compare to the S&P 500's total return of 38.3%. Not bad but not incredible. He would have beaten the S&P 500 by a tad, as long as you don't count the fee of $300, and the trading costs on an average of 774 trades per year. Hey, Jim should be given a little leeway, he's in the entertainment business, not the investment management business. When asked about this ethical lapse, Jim referred Mr. Zweig to his legal counsel. Can you blame Cramer and his marketing machine, its pretty hard to sell your services (as well as your media persona) if your returns over the last nine years were below those of the unmanaged S&P 500 index. (As an aside, I lost all respect for Cramer in the early 2000's, when he constantly sided with his buddy, the ethically challenged Eliot Spitzer).
For most of these guys, what they are doing isn't illegal, unethical yes. It is up to you the consumer to, as Cramer says, "Do your research."
Six Straight Losing Weeks
This slow, gradual, correction is getting ready to join the record books. This is only the 17th time since 1928 that the S&P 500 has suffered a six week losing session. Below is a table that highlights the prior 16 six-week losing streaks. A quick glance at the table reveals a couple of things. First, this correction of about 6% is one of the mildest, and is 4% below the average six-week sell-off of 10.2%. Second, the market generally bounced back the following week, and was also up six weeks later. Generally, but not always.
One of the most interesting things about this correction is the general lack of angst. Volume is light, and the VIX (volatility index) is rather benign. Apathy seems to be the best descriptor.
Enjoy your summer, its shaping up to be a rough one.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
