Late Night Thoughts Listening to Mahler

Reality and Reflection

Gustav Mahler, the profound composer who died over a century ago, was known for his emotionally intense symphonies that have been associated with late-night listening and existential reflection.

Maybe I’m a little dramatic but investors would do well to now spend a little time in such reflection of their investments and strategies. Like his symphonies, today’s markets feel both grand and unsettling. 

What Could Go Wrong?

To be kind, markets are at least volatile and into uncharted territories. A lot of investment writings the past several months have been on whether or not we're in a bubble, and what we should do about it. 

Price to earnings ratios, a common measure of stock valuations, are very high. Other troubling signs include the huge capitalization levels of the largest handful of stocks making up the S&P 500 index, largely centered on technology.

These giants—known as the Magnificent Seven—dominate the S&P 500. Is this wrong? Not if their earnings skyrocket over the next several years. But that could be an expensive bet.

One of my favorite current indicators of trouble is the people now getting into stocks for the first time. Even more concerning, they’re often buying investments they may not understand.

We have amateurs who should be cautious buying into high priced stocks and sometimes into unknown investments. How about autocallable structured notes? My word checker can't even find the term.

Lessons From Three Crashes

What could go wrong?

Lots. I have lived through three market crashes: the 1987 Black Monday when the Dow dropped over 22% in one day, the largest one-day drop by percentage in the index's history. 

Then came the dot-com bubble, when the NASDAQ rose sevenfold before collapsing nearly 80%. It took over a dozen years for investors to gain back these losses.

And, finally, the housing bubble of 2008 where the S&P 500 dropped 56%. I lost about half of my life savings in this train wreck.

I'm writing today to tell you two things. First, we're probably in some kind of bubble and second, if you haven't experienced losing a lot of money in a short period of time, I have no words to tell you the pain. Mahler's 9th symphony would feel upbeat in comparison.

Tips For Today’s Investor

I lied. I have one more thing to tell you, and that is to share some tips for surviving whatever the markets are doing right now.

As painful as these three bubbles and crashes were, I had few regrets during or after. We always know what we wished we had done but that is of little help for the future. So what might you do in today's markets?

I always remembered something I heard when I was a kid: Buy low, sell high. People argue this maxim endlessly but it is mostly true.

So my first tip is to not move more money into what are almost surely overpriced markets. Buying into the Magnificent Seven could look like a bad strategy down the road.

Conversely, rather than buying into overpriced equities, you may want to consider selling some of your high priced equities. But I wouldn't suggest any big market timing.

That is, selling everything while waiting for the Big Crash could look like a bad move years from now while you’re still waiting for it to happen.

This is a good time, though, to consider your market allocations. You may want to rebalance back to what you once claimed as your ideal allocation.

Of course, that probably means selling winners and buying losers, which is always hard. And if you can't, consider what you might do if your winners dropped in half in the next month.

Regardless of the promises we make to buy low and sell high, when those times arrive, we find it hard to actually sell something that has done well and buy something that isn’t doing well. People's instincts are to assume the last 2-3 years of returns will continue forever.

This is poor thinking, our Neanderthal brains. A friend of mine told me in January that he had sold most of his international funds and moved them into US equities.

Internationals have done poorly for years but have far outpaced US markets so far this year. It was a bad move this year but would have been a great one several years ago. Market timing is a proven loser.

Stay the Course

My final recommendation is that you consider staying the course. It's what my hero Ronald Reagan did early in his presidency when the US was deep into one of its worst recessions. His advisors were strongly recommending big changes.

But he believed in what he was doing, regardless of what we thought of that plan then or now. Largely because of this strategy, he went on to become one of the most popular presidents ever. It worked.

Like Reagan, investors sometimes need conviction—not because they know the future, but because they believe in their long-term plan.

Staying the course—that is, doing nothing—is often your best plan with investing. A natural response to change, good and bad, is to do something. Activity with markets is not a good default.

If you have followed some basic investing principles such as keeping to an allocation, understanding what you own, not trying to time markets, keeping five years of income you may need in a money market or other short-term fixed income assets, you are probably just fine.

Then when the markets do crash—and they will someday—be very cautious about selling anything. Remember: Buy low, sell high.

Mahler knew how to end in silence. Investors should too—sometimes the wisest move is to do nothing and let the music resolve on its own.

Seven Days Inside America’s Healthcare System

I spent last Christmas in the hospital, my first stay since I was born. Although not an emergency, I needed my operation sooner than later. It was a humbling experience in one of the most complex, high tech sectors of modern life, much of which didn't exist when I was born.

I have a long relationship with heart disease. My father and his brother both died from it in their forties. Although older, their parents also both died from it.

Since I was young, I have been keenly aware of my bad genes. Wanting to live a long life, I never smoked, watched my diet, ran and developed other life habits to minimize my exposure to heart disease. 

It mostly worked. The kids are grown, we have grandkids, I'm safely retired and we’ve been walking five miles a day for years. 

Since my first physicals after college, I was encouraged to watch my diet, to run and to take medications to lower my cholesterol (even though my cholesterol numbers were good). 

In their zealous determination to keep me healthy, I once failed a treadmill test. They assumed that I had probably already had some heart attacks. But on further review, they cleared me to do anything I wanted. It was a false alarm.

But last year my luck ran out. I woke up a couple of times feeling short of breath. I wasn't sure what was a virus and what was more serious, but I reluctantly went into the clinic.

Once they heard my symptoms, they immediately sent me to the emergency room, offering me a ride in a wheelchair. (They let me walk.) For the first of several times, they told me to plan on spending the night—or a week.

But every time they sent me home. It's hardly an exaggeration to say that it took two general practitioners and four cardiologists a month to diagnose my problem. I had a bad heart valve and I would need it fixed.

And that means open heart bypass surgery, the "big one" as multiple people reminded me.

Open heart surgery for a valve problem is a non-trivial medical procedure. I had once read that if you ever saw open heart surgery performed, you'd wonder how anyone survives. 

Although it's safe and quite common, I knew enough to not want to hear what they were going to do to me. 

When writing up my health care directive years earlier, I repeatedly stated that in the end-of-life world, I was most afraid of pain. Dying isn't a fear of mine. 

So when they had me lying flat on a gurney and asked if I had any questions, I had one: What pain could I expect over the next several hours. 

I was told that I'd be unconscious before I left that room and I wouldn't feel anything. As for dying, I wouldn't know it if it happened. 

Open heart surgery for a valve replacement requires a team of at least seven people. It started with making a 7 to 8-inch incision down the center of my chest. They cut through my breastbone and spread my ribs apart to reach my heart. 

They connected me to a heart-lung bypass machine which takes over for my heart and lungs, both of which are stopped during the surgery. Finally they were able to repair my valve, which probably took about thirty minutes of the four hour surgery. 

Once my valve was repaired, they restored the flow of blood to my heart, got my lungs and heart working again and disconnected the bypass machine. Finally, they wired my ribs back together and closed me back up.

My first memory waking up was hearing my sons, a welcomed sound. I couldn't see yet but I could point and name which one was talking, which got them laughing. The nurse was right—I had felt nothing.

All went well sans a common complication that extended my stay a bit. Before they operated, I heard repeatedly that I will "do well." But after not eating for days, I didn't feel well. Early one morning, a nurse was making a routine visit.

Talking to her, I started to cry. I told her that I was confident that I would be well, but it sure didn't feel well then. I was on emotional overload. She was so kind. She gave me two hugs.

This was mostly my experience with the people that cared for me, whether the surgeon, the nurse who I talked with last before my surgery, or the one who gave me a hug when I needed one. They were very kind, very professional and most notably, very busy.

I was intrigued by the number of people who were involved in my recovery: nurses, doctors, pharmacist, maintenance and cafeteria people. They did their best to accommodate me for anything I asked for.

I was also high in a brand new glass medical facility overlooking Lake Superior. I had a private room with a gorgeous view. Sometimes I'd awake in the middle of the night and just look out over the quiet city and lake. It was stunning.

For years, I've been intrigued by the healthcare system. I realized long ago that healthcare is expensive, consuming about 20% of everything the U.S. spends today, nearly four times what it was when I was young.

My general observation from the outside has been that the system is exceptional in its output but is bloated and mismanaged.

I'm reminded of it when I receive two conflicting arrival times for the same appointment, when I provide the same information repeatedly or when I'm mailed indecipherable multi-page statements, often with "do not pay" stamped across them. 

Although I stand by many of my criticisms of our healthcare system, I admit that after my stay, I am quite amazed at it, and I have a new appreciation for why it is so expensive.

Having worked my life in IT operations, I quickly came to an understanding of where the money goes in healthcare. It's not in the $200 drugs, the overpaid specialist or our modern facilities.

Roughly, two-thirds of healthcare is labor, the people I saw all day long, plus many more.

And there's no AI or robotics that are going to straighten out my bed, which happened every several hours for days. No automated valve replacement. Ditto drugs, IVs or food.

After some days I realized I hadn't taken a shower. I put together a plan to get myself into the shower seat, turn on the water and wash myself up enough to feel better. This was the plan of a man who couldn't get out of bed without help. 

Good luck with that! I asked my nurse if I could take a shower. No problem, he said. "I'll be back in ten minutes." 

When he returned, his first words were that he would help me get undressed and onto the seat in the shower, but he would do all the work. My only job was to tell him what I wanted cleaned.

I'm still traumatized! I wondered what you have to pay a nice young person to give an old man a shower. But I soon realized that this is his career, and it was less work than washing his dog. 

Any pride I still had was gone! But I was clean and felt good. When he was done, he just asked if I needed anything else and then went on to his next task.

So what does open heart surgery, including seven days in the hospital, cost? This brings me to the most intriguing question of my stay, and that is what I call healthcare's imaginary money. 

The list price for my stay was $200,000, more than the median life savings of a retired person. Where did that price come from?

But my insurance said the price was $62,213. The surgeon billed me $17,110 but my insurance paid $2,112 as full payment. And for me? I paid the surgeon nothing and then $1,828 for everything else, a fraction of the total cost. 

The internet says that the average cost for my procedure in my area is between $80-200,000. How does a logical mind wrap themselves around figures like this? 

I now doubt that there is any silver-bullet for fixing healthcare and its costs. But here are a couple of thoughts. 

Start by getting the costs into real numbers that can be compared and challenged. What does something actually cost? Does anyone know?

Then build on the existing healthcare exchanges. They can seem burdensome but they live with real numbers and provide individual options. Nearly half of Medicare is already processed through their own exchange. Why not employers and Medicaid, too? 

And finally, let’s acknowledge that it’s the price for modern life, and that price is high: about 20% of everything you earn. We can argue all day about who pays for it, but in the end, collectively we all are.

While in the hospital, I listened carefully to every recommendation for a good recovery. They emphasized exercise and diet, and I intended to follow all that they said. 

I shared my plans with the staff, telling them that I loved them all but my goal was to never see them again.

Gold: Yesterday, Today and Tomorrow

Recently, in order to get through a sensitive metal detector, with some pain and effort I removed my wedding band. I hadn't had it off in years. 

I later had it resized and polished, and was quite surprised how nice it looked. It all reminded me of an old gold mine that I grew up near. Let me explain.

Rings have a long history, often used to signify power and status, and more recently, achievements and love. 

Not one to care much about marking myself with symbols, I tried to pass on a wedding ring. My wife convinced me otherwise.

Researching rings, I learned that I could have our rings made using gold that had just recently been mined and processed from the Ropes Gold Mine.

This is the old mine just a few miles from the house I grew up in in the Upper Peninsula of Michigan. The mine had recently reopened. 

I ordered two rings. We both have our rings. And each other. And three boys. And four grandchildren.

I recently saw an ad pushing the sale of gold. Yes, it's climbed a lot lately, up nearly 7 times in the past 20 years. 

Note, though, that in the same period the S&P 500 index is up five times (excluding dividends). In recent years, gold has not been a bad investment but history suggests it's not what it's said to be.

Back to our rings. When I was a kid, we occasionally brought our garbage to an open dump that was on the same gravel road as the old Ropes Gold Mine. There was a small sign recognizing this mine from the 19th century. It had been closed for decades.

The Upper Peninsula is known for its iron ore mining, which has been mined continuously since it was first discovered in 1844. Copper was once a big industry, too. But there were also over a dozen gold mines in the area.

The Ropes Gold Mine was the most notable of these gold mines. It was started by Julius Ropes, a chemist from Vermont who had searched for gold and silver on the west coast and in the south.

In 1862, at age 27, he came to the Upper Peninsula working for a local druggist. Mining had already been active in the area for years.

Mr. Ropes married a local girl, settled in my hometown, Ishpeming, Michigan, had four children and eventually opened a drugstore. He was very involved in the city, becoming postmaster and a school board member.

They lived in a house just a few blocks from the family home my great-grandfather bought about the same time, a home both my grandfather and dad grew up in.

Mr. Ropes continued his prospecting for gold and silver, and eventually discovered both in what became the Ropes Gold Mine organized by him in 1881. Mining began shortly afterwards.

It continued operations for fifteen years until it was closed due to financial difficulties. It produced $645,792 worth of gold, worth about $90 million today.

Note, though, that had this same amount of money been invested in the S&P 500, it would be worth tens of billions of dollars today. 

During this time, after accounting for inflation, gold went up about 4 times while the S&P 500 went up over 2000 times. Ok, enough of this. But I will carry this point out later to show just how bad of an investment gold is.

The Ropes Gold Mine remained closed for most of the 20th century. I remember as a kid walking through the mine ruins many times, looking through the history that sat overgrown with trees. Mounds of ore and equipment lay about, the former obscured by brush, the latter more rusted with each passing year.

Gravel roads eroded into trails, now as frequented by deer as man. But gold won't rust or be washed away, and beneath 100 years of shrubbery, it still coursed through the land's veins.

During these years the Ropes Gold Mine changed hands several times. As is usually the case, finances and investing were the drivers.

The big breakthrough came in the 1970s. Gold prices spiked, going up nearly 15 times while the S&P 500 about doubled (including dividends). Callahan Mining Corporation bought the mine and reopened it in 1983.

They ran it again for nearly ten years when it again closed primarily due to the rising cost of operating the mine while the price of gold fell. It’s during this second run of the Ropes Gold Mine that I bought our wedding rings.

Our marriage has been very good. But as an investment, the gold in our rings didn’t do so well. When I had my ring resized, I asked for an estimate on what it is worth. 

They said it was worth about $1100, three or four times what I paid for it nearly forty years ago. How does that compare with the S&P 500? Including dividends, that same money would be worth $18,000 today, more than ten times what the gold is worth.

Gold has a long history going back thousands of years. There's a reason it is considered a timeless item with an inherent value. But gold doesn't do much other than make nice jewelry. 

Although it's backed by more than crypto currency, it’s not by much. They both are mostly only worth what someone else will give you for it. It's the same with most commodities. But in this case, there's emotion and history, unlike natural gas or wheat.

That's quite different from money invested in companies. Almost all stocks are backed by companies with products and facilities, with many paying dividends. 

There's not a lot of emotion to Proctor & Gamble or Apple Computers or Ford Motor. Nothing to share at a wedding or to carry on your finger for decades.

But from a cold financial perspective, these companies make and sell things that people want, and as an investment they lap gold again and again.

By how much? According to Stocks for the Long Run by Jeremy Siegel, after accounting for dividends and inflation, the S&P 500 has averaged nearly 7% a year return since 1800, rising over 23 times in this period. 

During the same time, gold has averaged less than one percent a year, rising only 4 times after inflation.

Yes, gold occasionally goes up fast as it did in the 1970s and as it has again this century. But from 1980 to 2000, it hardly moved while stocks went up by multiples. And even in this century, gold hasn't done much more than keep up with stocks.

They claim gold is a hedge against inflation. Maybe and sometimes. It worked in the 1970s. But, no, it doesn't normally track with inflation any more than bonds or stocks.

Gold is wonderful. I like my ring. I like its history, both through ancient times and into the Ropes Gold Mine. I like what it symbolizes.

But an investment? No. If you own the actual gold, you have to store and secure it. If you buy it electronically, whether directly or through a fund, you're open to all the same issues that come with trusting others' commitments to you.

People rarely do well with gold. But in the long run, buying and holding stocks, whether individually or in low-cost funds, it is hard to lose. 

At the same time, love, history and sentiment can’t be measured purely in financial terms. I’m still glad that I have my wedding ring.

What Goes Around Comes Around

I have spent my career working with computers. I still enjoy using new gadgets or learning how something like AI (artificial intelligence) works. Yet, not everything in tech is new, even in computers.

 

I recently learned that mainframes, a relic from the 1950s, are alive and well, and in fact, their sales are increasing, presumably because they are quite suited for AI. Mainframes and AI are not words that should coexist! Here’s what has happened.

I learned to program decades ago writing in Fortran. Fortran was one of the first high-level programming languages, written before I was born. It was designed primarily for scientific and engineering calculations.

My programs ran on an IBM mainframe, a powerful computer that easily processes huge amounts of data, known for their speed, security and reliability.

 

The name comes from the large cabinets (main frames) they were once stored in. Mainframes could weigh tons, living in large, temperature and humidity controlled spaces with maintenance personnel always onsite.

I also knew COBOL, another early high-level programming language, designed for business applications. Since then, I've programmed in an endless number of languages and hardware configurations.

 

Both grow like weeds, each addressing some special situation or need. Since their start, new notable programming languages have been developed at the rate of about one a year.

Over time, mainframes dropped off in use as computing moved to servers, personal computers and smart phones, the hardware now generally used in today's internet.

I’ve known for years that COBOL has some residual holdings in business applications such as payroll processing, most notably Walmart. But I was surprised when I heard of someone who had recently used Fortran.

I continued searching, and yes, what goes around may come around. Mainframes, Fortran and COBOL are all alive and well.

Mainframes were the first commercially available computers. Because of their expense, originally they were only available to large organizations, including the government. They are essentially "black boxes,"  an environment that does not interconnect well with the outside world, a sharp contrast to today's tech environment that is essentially an endless interconnected network.

But this closed design that encapsulates processes has some benefits. It is easier to control both the hardware and the software, giving it a high degree of reliability, availability and security.

 

Further, because most of the processing happens in a physically small area, processing can be very, very fast, able to complete computations in a fraction of the time they may take running on multiple servers and workstations, a common configuration today.

So, yes, there are not just a few mainframes hanging around but instead they are a viable industry, nearly all run by IBM. A majority of the companies in the S&P 500 have at least one mainframe, and many industries such as banking, airlines, insurance and government rely heavily on mainframes for their core functioning.

And now they are coming into use for AI, primarily because of their core competencies: fast, reliable and secure. And they can be cheaper to run, too.

I also found that millions of lines of COBOL code runs daily. It's estimated that more than half of all business transactions globally are processed using COBOL. And for similar reasons: It's fast, secure and it works.

Many of these business processes still handled by old languages have changed little. Payroll does about the same as it did fifty years ago: hours, rate, total pay, deductions and net pay. Process once every week or two, or once or twice a month. In payroll, there's really nothing new under the sun.

And what about my Original Language, Fortran? It is still widely used, a top choice for heavy number-crunching in scientific and engineering fields such as meteorology and physics.

 

It has survived for some of the same reasons other old technologies are around: It is fast, has lots of libraries accumulated over decades and there’s just not a compelling reason to move to something else.

To be clear, these ancient tools have changed dramatically over the years. A mainframe today, almost exclusively built by IBM, is millions of times faster than their forebearers, and much smaller. Their architecture has changed little but the individual components are made using the most modern technology.

Although less so, old languages still in use today often have many of the modern constructs so common in newer languages, such as object orientation, parallel processing and recursion.

The world of technology changes at lightening speeds. New ideas and possibilities are endless. But like so much in life, there are functions and needs in technology that were solved decades ago, and there hasn’t been a compelling reason to change.

There might be a life lesson buried somewhere here.

Delayed Gratification

One of my life tenets is delayed gratification, a concept where I’m surely out of sync with much of the developed world. I learned early that instant gratification is expensive and that the ability to hold off on the endless purchases that are heavily pushed will get one ahead of the curve. And once that happens, a whole new world of opportunities opens up.

I recently heard from the opposing side. The Wall Street Journal had an enlightening article on just the opposite - why we shouldn’t delay the “extras” in life that can make us happy. Oh, pity the hundreds of generations that preceded us who didn’t have these options for a good life.

My wife and I are now living the advantages of our delayed gratifications. Both children of Depression-era parents, we share a disdain for debt.

I grew up in a new house that still has never had a mortgage and is still in our family. Neither of my parents had college educations; my dad was a miner, my mother a bookkeeper.

But this counter-culture has its challenges. I remember early in my career making a meal for my friend at my townhouse, a new home that I purchased with a mortgage. It was quite nice, with vaulted ceilings and a garage that I had never had access to before.

My friend noticed my manual can-opener. It was an upgrade from the camping one it had replaced. I probably used it once or twice a month. It took me a few seconds more to open a can than the modern electric can-openers that I didn’t want to spend money on, but also didn’t want cluttering up my countertop.

“Why do you suffer with things like this?” she asked me. “Suffer?” Only in the U.S. would I have been seen as someone who lives with hardship. How do I respond to this question? OK, let’s begin by saying that this is probably our last date.

Today, my wife and I live in a beautifully renovated hundred year-old home on a hill near Lake Superior. We have more than we’ve ever needed and most of what we want.

Yes, we’ve often held-off on purchases, delaying gratification. Our first summer place was a three-season lake cabin without indoor plumbing.

I’ve driven more than one truck until it was virtually worthless. We’ve never carried credit card debt, never financed a car since we married and paid off our home before turning fifty.

“Suffer?” I loved our cabin. I remember rising before sunrise, starting a fire outside, sitting with my wife in the quiet morning, drinking coffee while the kids slept. I had won the lottery.

We live in a world that pushes us to spend every dollar we have, and then charge the rest up on a credit card. Who can enjoy the outdoors without a new SUV, a toy I first got in my forties. 

The media never mentions what happens if you lose your job, or the shackles these debts put on your life.

Don’t be deceived. You won’t have more in your life by borrowing money to get it early. Delayed gratification is a key ticket to a secure and comfortable life.

So I can hardly contain myself reading the Wealth Management section in the Wall Street Journal. Jacqueline R Rifkin shares the downside of delayed gratification. She eloquently talks about her experiments where people are asked to imagine buying a bottle of wine. The study examines the impact of opening the wine now or delaying opening the wine.

Ms. Rifkin concludes that “in reality” some go too far, putting off the “sweet things in life” (e.g., a bottle of wine or a nice-smelling candle) until it’s “too late.” She speaks longingly of this bottle of wine, of “drinks with friends, birthday dinners, celebrating a promotion.”

I painfully read through the article just in case there was some wealth management help here, but, no, it grinds on, noting the “high price” and “stress” we pay for putting off such basic needs.

I acknowledge that there is a reasonableness to delaying purchases, that hoarding for some unknown future has its limits. I’m not recommending a miserly and selfish life isolated from your community.

But we are mostly unaware of how expensive it is to take on debt for things that are hardly critical to survival. In the long run, spending less than you earn has huge financial benefits for you.

No surprise that Ms. Rifkin is a professor of marketing. She’s in the right place, trying to justify our first instincts. But this is no help for wealth management. Or happiness.

If you’re interested in getting ahead of the debt cycle and building a net worth that gives you vast freedom to enjoy life your way - rather than the ways sold by marketeers like Ms. Rifkin - delayed gratification is one of the keys to getting this done.

And about your “suffering” along the way, consider for a moment that nature and its wonders don’t require an SUV. Relationships don’t require some special bottle of wine. Wonderful gatherings are as close as your kitchen and pantry. Love and art and humanity are available wherever you are.

And it doesn’t require an electric can-opener. Yes, delay your gratifications, because in reality, you need little of them to find contentment, happiness and security.

A Fool and His Money

Recently, Jason Zweig wrote a fascinating article on how Wall Street continues to extract oversized fees from investors. The dollars are astounding, especially when almost any investor can open a free online brokerage account at any of several firms, invest their money in an exchange traded fund (ETF) that tracks the S&P 500, and charges as little as .03% a year.

Let me explain this carefully. This is not 3% which funds may still charge you. It is not .3%, or three-tenths, of a percent. This is 3 hundredths of one percent. If you put $100,000 into this fund, you would pay $30 a year in fees.

For example, today, you can go to Charles Schwab, open a free online brokerage account in about ten minutes, deposit any amount of money you like, buy an indexed ETF for the entire US stock market, pay no transaction fees, keep the money there for a week or a lifetime, and pay pennies a year in fees. You need look no further for a great deal.

But what are people doing instead? According to Mr. Zweig, they chase returns, buying alluring and sexy funds. Think hedge funds. Alternative funds.

Funds that claim to return 2-3 times more money than the S&P 500 (the 500 largest stocks traded in the U.S., representing about 80% of the $43 trillion dollar capitalization of the U.S. public companies).

What are these funds? They vary, but they may use any of a variety of non-traditional and often risky strategies and investments, such as commodities or cryptocurrencies, or borrowed money. Of course, risk is rarely mentioned when they are advertized.

According to Mr. Zweig, the intermediaries in these funds "regularly rake off one-sixth of the gains... for themselves." He cites a recent study that over decades, average investors in stocks return sometimes as little as half of what the S&P 500 returned during the same period.

He notes that while fees on index funds approach zero, alternative and hedge fund fees have barely dropped, some keeping more than half of all gains.

This isn’t new information. The reason for this huge inequity to investors is that Wall Street knows how to market. Fancy names and strategies, and highly selective marketing of occasional extreme gains is so much more enticing than the average return of the U.S. stock market.

But don't be fooled. These funds are highly selective in the data they share and the arguments they use. This enables them to make outrageous claims that are seemingly true, but don't work in reality.

I've said it many times in this blog and I'll say it again: If you invest in the S&P 500 with close to zero fees, you will far outperform most of the showy investments that people try to sell you.

You should never pay a transaction fee to own a U.S. equity, whether a stock or a fund. You should not pay any annual fees for an unmanaged online account.

You should pay close to zero fees on a U.S. fund, indexed or otherwise. And although it's not sexy, you almost certainly will outperform most of these schemes that investors throw away their money on. And it is far less risky.

There are endless reasons that we have a world of big money confiscating the earnings of common investors. Numbers are hard to follow. People struggle to look back at data more than a few years old.

Expensive clothes and soothing words give a false sense of security. These firms make used car salespeople look like Mother Teresa.
 
But while few of us have hours each week to spend trying to follow arcane figures and strategies, investment firms work tirelessly to confuse you into believing they are the good guys trying to help you out.

But they are not. They are trying to keep you away from the easiest, cheapest way to earn money in equities - near-zero-cost indexed funds.

A close friend of mine understands the value of money and hard work, but does not like working with numbers. Periodically, he has asked me for help with his investments. I have said these same things to him multiple times. But he reluctantly handed his investments over to someone he trusted.

It went well for a couple of years, which was enough to keep him engaged during some trying years that followed. But then things went wrong and when he looked closely at what his advisor had done with his money, he again asked me for help. But this time he was determined to do it himself, which he has done ever since.

One day he again called me with a question on his investments. He told me how once a year, he takes a piece of paper, writes down all his gains or losses for the year for each of his accounts. Otherwise, he does little with his investments, keeping them in low-cost indexed funds, rarely making trades.

He told me what his percent gains were, and he wondered if he had something wrong. They seemed too high. No, he had it right.

He hadn't spent the year agonizing over daily or weekly or monthly returns. He didn't move his money into any hot fund. No Bitcoin here. Just simple indexed funds that charge almost nothing. And he did very well, as he continues to do.

Unfortunately, there are many who want a portion of your money for themselves. Don’t listen to them. Keep it simple and keep your fees very low. And then you, too, can enjoy solid gains - and keep almost all of it for yourself.

The Financials of Smartphones and Batteries

I was recently pricing a new smartphone. Standard Samsung or Apple phones start around $800 (plus taxes and fees, a screen shield and a new case). The most common reason for replacing them is a dying battery.

Phones normally last two or maybe three years, depending on who you talk to. I use my phone a lot but after nearly five years, it’s still running well. Some years ago, I did some research on phone batteries and found that with some discipline, you can extend the life of a phone significantly. Here’s what I learned.

The short course on phone life is that batteries are stressed by how you charge them and by the demand you put on them. Heat is also a source of battery trouble. Here’s some further details if you’re interested in potentially saving yourself hundreds of dollars on phone costs.

The information on batteries can vary, partially because smartphone retailers want to present their phones as easy to use, and this often means a shorter life. Further, they have more than a little interest in you buying more phones.

But the independent data on phone batteries is fairly consistent. In spite of today’s battery hype, little has changed in the technology behind the lithium-ion batteries used in phones. And the rules that apply to your phone battery mostly apply to any lithium-ion battery, whether your watch, laptop or electric car.

One of the best ways to extend the life of a lithium-ion battery is in how it is charged. They are most efficient when working at around 50% capacity. Draining a battery below 20% is one of the worst things to do. It’s also best not to charge it much past 80%.

Charging it to 100% and then running it down below 20% is a sure way to shorten your battery’s life. Some phones now come with a system setting that will stop charging before it reaches 100%.

It’s also good to use chargers approved for your phone. Most off-brands work fine but some can overcharge a phone. You are fine charging your phone through your computer or laptop. Finally, slow charging is better than fast charging. There may be options on your phone to only allow slow charging.

There’s one last charging issue, and that is a parasitic load. Do not charge your battery while it is also being drained significantly, such as watching a video or gaming. Charge your battery when it is mostly idle.

In fact, the best way to charge a phone is in short, slow periods when the phone is idle, keeping the battery somewhere in the middle of its capacity.

The next battery issue is drain. In general, the less you drain it, the longer your battery will last. Balancing this with your needs can be a challenge.

One of the biggest uses of the battery is the screen. There are some things you can adjust, such as reducing the brightness and having a shorter screen timeout (auto-lock).

Another problem can be Wi-Fi, Bluetooth and GPS. They can be a silent battery killer if you’re in an area with spotty coverage and your phone is working to keep itself connected. If you know you don’t need any or all of them, shut them down.

Another heavy drain on phones can be any of several apps, such as Facebook, Messenger and Instagram. They can be constantly operating in the background even when you aren’t using them. If you don’t need them, turn them off.

Finally, if you’re running low on your battery and can’t get it recharged, then shut down any unneeded apps and turn your phone to a power saving mode. Note that turning it off isn’t necessary. An unused phone without background apps running uses very little power.

The last big problem with batteries is heat. Lithium-ion batteries do not like heat. They are fine with cold (although their short-term power reduces when cold) but heat is all bad. Keep them out of the sun and out of a hot car. Heat is one of the reasons to avoid fast charging.

After this, there are potentially dozens of things you can do to extend a battery’s life a bit more, such as monitoring applications, keeping your software updated, limiting the use of camera flash, turning off vibrations and reducing screen refresh rates.

But now you may find yourself more engaged in not using your phone than in trying to help its battery do its job well.

If you prefer, there can be some value in considering having a battery replaced, and possibly even doing it yourself.

But in the end, a battery and your phone will both eventually die. In my case, the manufacturer quit providing security updates, forcing me to replace it. Fortunately, I got over a 50% rebate for an old phone, so all was well.

How I Pick Stocks

Most investment advisors share a similar opinion on buying individual stocks: Don't do it, but if you do, keep it small and be careful. I’ve followed little of their advice, although I’m well aware of the dangers that come with owning stocks.

I bought my first stock when I was in college and my second one some years later. One worked out OK, the other a bust. 

Regardless, I never quit and for most of this century I've had up to a third of my equities in individual stocks. Here’s the method to my madness.

For my early years, I mostly drove blind, quickly learning that this isn’t easy. I was amazed at my confidence when making a buy and my humility when the stock didn’t perform well, which was common.

Then I learned about stock ratings. This gave me some justification for purchases. During the Great Recession crash of 2008, though, I learned that the ratings were mostly useless.

But I never gave up. My next stop was to read The Intelligent Investor by Benjamin Graham, the bible for value investing. I’ve since stayed close to his basic theory that you can do well buying stocks at less than their true value. And there are well-known fundamentals that can help determine a stock’s value.

One of my key insights regarding investing was to learn that people – including me – have too much confidence in their judgment, specifically with forecasting. 

And investing is largely about forecasting market returns. Instead of trying to forecast, like our forefathers, if the fish are biting for others, we tend to move into the same waters.

The data is overwhelming that even professional money managers tend to run in herds, although chasing returns mostly doesn’t work. For various well-documented reasons, the professionals lag the market indexes. 

As much as we may know that a low price to earnings (P/E) ratio is one of the best indicators of future performance, we're still convinced that a rising stock will rise forever, P/E be damned.

Another of my guiding principles for living but especially for buying stocks is Occam’s Razor, also known as The Law of Parsimony. 

It recommends finding explanations that have the smallest possible set of elements. For buying stocks, this means limiting the data that I use to some key indicators that are generally available.

In summary, I’ve come to believe that picking stocks requires keeping your natural human emotions removed from the process as much as possible, primarily by limiting decisions to mostly verifiable data. 

And second, I don’t overcomplicate the process. There is an overwhelming amount of financial data available for a stock. It is critical to limit what of it is used.

So why could stock picking be this easy? Because although the principle is easy, its execution is very difficult. For example, today I own none of the big meme stocks driving much of the market, such as Netflix, Tesla and Nvidia. 

This is hard to do because the fishing has been great in this pool. But by most measures, these stocks are wildly overpriced, regardless of how well these stocks have done recently.

My buying approach is to establish some quantifiable indicators that suggest a stock may be undervalued. Then, when considering a stock, score it on each of these items, add up the scores and buy the winning stocks. 

You can do it on a napkin. The idea is to quantify your beliefs and then use this analysis instead of your emotions.

For example, historically stocks have had a P/E ratio of around 15. The S&P 500 today has a P/E nearly twice this. So looking for stocks with a P/E under 15 is a great starting point for quantifying the value of a stock. It’s easy to find another 3-4 similar type indicators.

Note that in recent decades, average P/E has risen due to an emphasis on so-called 'growth' stocks, fast growing stocks that are expected to be worth much more in the near future, rather than stable companies that are growing at a slower pace with a more mature (and lower) P/E ratio.

While it's possible to make a lot of money picking a winning growth stock, you are essentially betting on whether and how well the company will succeed, something that depends on many factors that are far more difficult to quantify. 

Alternatively, ‘value’ investing is done with companies that have already succeeded but whose current price does not reflect that success.

These are my basic steps. First, I have various ways to identify stocks that I may be interested in buying, sometimes because I know their product but often by using a stock screener available at many brokerage firms. 

I also consider what other equities I already have, working to maintain a level of diversification, whether in market sectors, market capitalization or location (US vs foreign).

Then I rate any stock I am considering by each of the following four fundamental measures: dividends, valuation, debt and financial strength. I score each item 1 (poor) to 5 (excellent), average the scores and then only consider a high scoring stock. That’s it!

Here’s the details behind each of my factors, all items well-known in investing and easily available to any investor.

Dividends are a good measure of a mature and healthy income producing stock. For this measure, I may consider its dividend return, recent growth rate and payout ratio, with some consideration to the type of stock it is. 

For example, a stock may not even have a dividend, which could make sense for a fast growing company that needs to reinvest all of its cash.

For valuation, I mostly consider its P/E ratio and its cash equivalent, price to free cash flow. P/E and free cash flow should be under 15 and they should be somewhat consistent. The lower the P/E, the higher the score.

I score debt based on its debt-to-capital ratio. Low or zero debt is great. A figure over 100% is a warning flag. The rest is somewhere in-between. The logic is simple: It’s hard for a company with little debt to go bankrupt.

Financial strength is a measure of how well it handles its money. For this, I again consider debt but I also check its current ratio plus a variety of profit returns, including return on equity, gross margin and net margin. 

High margins and low debt is good. High debt and low margins is not good. The rest is in the middle.

Four measures, four scores, average them and if it’s anywhere near 4 or higher, it could be an underpriced stock that will eventually rise.

Once I’ve considered a stock as potentially underpriced, I do some internet searching to understand what the company does. This includes a look through its most recent 10-K report. 

One of the fundamentals of investing in anything – funds, bonds, stocks – is that you have some idea of what it is and why it may increase in value.

There are many other considerations that can be used in selecting stocks, including sentiment, inertia, technical analysis or analysts’ ratings. But in time, none has much predictive power to where the price of a stock is heading. 

The algorithms used to backtest ideas become exceedingly complex, and in the end, mostly gives us some excuse to fish with the rest, which is where our emotions want to go.

Does this work? If we trust the complicated reporting out of Quicken, yes. But I am quite confident that it weeds out the market noise and instead finds solid investments that continue to perform well. 

But picking a stock is half of the battle. The other is when to sell, which in general is when a stock is something you wouldn’t buy. That is, update its score.

So if like me you want to own some individual stocks, some variation on what I’ve described is a good place to start. The process is straightforward: Use some standard measures to quantify the value of a stock, ignore the endless extraneous data and keep it simple. 

Finally, monitor what’s happening to any stock you buy, whether often or annually, to help learn from what you’ve done.

Still, I don’t recommend that anyone own stocks unless they are willing to work at it and feel comfortable with hard decisions and volatile returns. Human emotion will buy what’s hot (high-priced) and sell when things don’t feel good (low-priced). 

This runs counter to what works in stocks which is just the opposite, buying low and selling high. But that’s our human make-up, and it’s hard to fight.

Christmas 2023

Merry Christmas, if you can call a green one merry. OK, I admit that I don’t really mind Duluth warming up a bit. If their predictions are correct, we’ll eventually own some of the most valuable real estate in the world.

This is the time of year we look back a bit and maybe ponder the recent changes in our lives. However, last March 14, Ann and I went out on the 40th anniversary of our first date. In this case, we pondered forty years! 

It was great fun. We discussed things we had never talked about before. It was especially fun sharing our first impressions of each other, and how those panned out.

Let’s just say that 2023 has been an “interesting” year. I’m still unemployed, looking for My New Frontier, whatever that is. I’m taking cues from 80-year-old Mick Jaguar, who just released a new album. 

He once couldn’t imagine turning 45! Interestingly, his peers, including Bob Dylan, Paul McCartney, and Eric Clapton—artists I appreciate—also appear to have missed that memo.

ChatGPT says that here is where I tell you what I’ve learned and where I’m going. But I really don’t have an answer to those $64,000 questions. Maybe next year’s Christmas letter.

While I was wondering what I do, Ann spent months as the portable nanny caring for two grandchildren. It started later in 2022 and ended this August, with some time off for good behavior. 

She had a wonderful time getting to know our grandchildren. She especially enjoyed spending extended time with our daughter-in-laws—and with our sons, too.

We also got in a couple of trips. We spent nearly two weeks this spring in the French Quarters of New Orleans. That was an adventure into a substrata of American society, a place steeped in history that never shuts down. 

One of our favorite stops was Café du Monde, a large cash-only outdoor doughnut shop where we stopped after our morning walks.

More correctly, it’s a coffee and beignet shop, which is about all that you can get there. A beignet is a fried fritter covered with powdered sugar, an item brought to New Orleans from French who had settled loosely in New Brunswick (Acadians) and then made their way to New Orleans. They are only served in orders of three. Did I mention that New Orleans is its own land?

We also did our 2nd annual vacation in Seattle. Again, Ben rented an Airbnb (his employer) near Mt. Rainier. We hiked and hung out at a wonderful place, complete with half-tamed elk walking down our street. It was fun just to throw Azzie into her stroller and take a walk through the very small town we were staying in.

Ann and I spent the last half of this year working out a new house routine for both of us. We’re normally up early with fresh coffee followed by a five-mile walk. 

We’ve reserved specific days for ourselves, whether hanging out at the house, catching lunch or running some errands.

We continue to run Celebrate Recovery, just completing our 15th year. Ann leads several women’s groups, including some at area group homes. I still run the band. 

I also oversee basic administration, whether scheduling activities, balancing our money or chasing down outreach materials, such as the great new banner we have up at our church.

We’re still rebuilding since the COVID debacle. Just recently, we restarted our program for teenagers. We’re tracking at least as well as the rest of the country.

Ann and I also work one lunch a week at Union Gospel Mission. Ann works with food prep and serving. I run the dishwasher. It’s mostly several of our friends from church working alongside a small group of young people employed by Union Gospel. It is a nice and physical break to our week.

I’ve resurrected a couple of old interests of mine. The first is working on cars. I did my first oil change in over twenty years. I’ve vowed that I’ll never run another truck into the ground, but my current one is into its thirteenth year.

I replaced the cracked rear taillights, got fluid levels adjusted and put in a new battery. Once I found the replacement part, it took a friend of mine ten minutes to repair my heater fan. The truck’s like brand-new!

My surprise this year was getting back into camping. I went four times, all in the Superior National Forest, twice into the Boundary Waters with David and his dog Freyja. We used the same canoe I bought in college.

The highlight of the year came very early one morning in June at a forest service campground. I crawled out of the tent to a gorgeous blue sky. I turned on the propane grill to brew my coffee and then got a fire going.

Soon I was sitting in this wonderland of peace with a hot drink and a crackling fire, a sort of transcendental moment. Oh, and it was 35 degrees out. We eventually packed up, drove into town and got a local breakfast.

I also resurrected my interest in birding, a hobby I started in college. How things have changed! There are now amazing online tools to help with finding and identifying birds. I dusted off my old life list and got myself e-listed into the birding world.

I’ve been to Hawk Ridge several times to watch the spectacular fall migration of hawks and other raptors. I saw dozens of eagles, including a couple of goldens. I’ve gone to Sax-Zim Bog, a famous birding place an hour west. 

The birding is incredible. Let’s be clear—this is two tiny ghost towns set within 300 square miles of bog that is good for little but boreal birding. In the worst of winter, there will be huge Great Gray Owls sitting in trees, bothered little by your presence.

Ann’s always been an amazing cook but she’s gone into overdrive since returning home. All three of our sons enjoy cooking, trying new foods. 

Ann is following suit. She is now making more artisan breads, plus Thai, Chinese and Indian cuisine. They are all fun, but Indian may be her favorite. We both like spicy foods and this has been wonderful!

David hosted the Midwest Anderson Thanksgiving dinner at his house in St. Paul. He served smoked beef ribs, potato salad, homemade baked beans and blackberry cobbler. It was all good but the beans and the cobbler were to die for.

Another of our routines is connecting up with the kids. About once a month, either we’re in St. Paul or one of them is in Duluth. Jason et al. came up the weekend before Christmas, David is coming here for Christmas, and after the holidays, Ben is coming here with Azzie to introduce her to a real winter.

It’s a challenge to teach Azzie everything she needs to learn about life in the Northland—OK, let’s say real life—in just a week but we’re up to the task! Jyri’s an easier sell—we see him a lot.

The kids are all good with their jobs. Only one of the three ever goes into an office. Five years ago, one was in Texas and two were in San Francisco. Since then, two own homes in St. Paul along the Mississippi River an hour walk from each other, and Ben owns a home outside of Seattle.

We’re wishing all a Safe, Healthy and Blessed Christmas.

Ann and Jon

Social Security plus

The U.S. provides diverse retirement options, from 401(k)s to Social Security. This system can work very well, providing even those who have earned a modest income the ability to retire financially secure.

It works especially well for people who understand money and investments enough to make reasonable financial decisions. If you work most of your adult life, save 10% of your income and invest heavily in low-cost indexed equities, you are virtually guaranteed to be able to maintain the lifestyle you had while working.

But life is messy. Even successful people will not save and invest well; they divorce, lose their job or become disabled; and to add insult to injury, they then take Social Security at their first opportunity. But even with the best of planning, one may just outlive their savings.

One of several problems with this system is that it puts too much responsibility on the employee to essentially manage a life-long personal pension plan with some vague promise that with some luck, they will survive.

Often one is asked to estimate how long they will live and what their expenses will be. Yeah, no problem here - my electric bill will be about $4,000 a month and I expect to die at 83, hit by a Greyhound bus.

They're mostly ridiculous questions for a thirty year old - or anyone. What happens when one lives another twenty years longer that life-expectancy tables predicted? I guess they're just out of luck.

And if you do it right, you will probably die with a large amount of money for your heirs. Like I said, it's a crazy system.

Today's retirement system faces a fundamental challenge. We've transitioned from employer-managed, risk-bearing defined-benefit plans to employee-controlled defined-contribution plans, requiring that workers fund their own retirement, shouldering most of the associated risks.

For example, today's system provides little opportunity to take your life savings and lock it up so that you can never lose it all. For all its problems, Social Security does just that. Benefits are inflation adjusted and last as long as you live.

My thoughts for fixing at least some of the problems with these defined-contribution plans is that the government establish a voluntary, self-sustaining Social Security-like pension. I call it Social Security plus. It’s not in place of Social Security, but rather an additional saving alternative. Here’s how it might work:

• Pays out a fixed, inflation-adjusted income for life based on your contributions, a sort of hybrid defined-pension, defined-contribution personal pension plan.
• Contributions are voluntary and tax-deferred. Employers may choose to match donations, as they often do for 401(k)s.
• Benefits can only be taken at a high minimum age (I suggest 70) regardless of employment, health or other circumstances, and contributions can never be withdrawn, just as Social Security is today.
• Independence is critical. The agency receives no government funding and is actuarially sound, similarly to a defined-benefit pension plan. And the agency is free to invest as private pensions do.

It's also critical that the fund can't morph into funding other needs. Organizations struggle to keep their hands off any pot of money, but this system is doomed if if becomes another social equity funding for the latest meme injustice. This is a personal retirement pension savings plan, not a redistribution program.

For those who are comfortable with savings and investments, they may well do better doing it themselves via 401(k)s and IRAs. Remember, there is a lot of good in today's system, such as the ability to maintain control of your savings.

This system has drawbacks, most notably that due to its undefined payout period, its payouts will be conservative. And regardless of intentions, the Federal government becomes its the insurer of last resort, which in reality is about the only way to ensure it never fails.

Ensuring lifetime security for people that could live decades longer than imagined is difficult and expensive. But this model is a means to avoid some of the bigger problems with today’s defined-contribution system that requires workers to spend a life-time preparing for their later years. 

For those who struggle to save and invest - a majority of workers - this is a way that one can easily save money that virtually guarantees a better retirement.

Fathers, Sons and the Land in Between

I recently read a book by Hisham Matar, “The Return: Fathers, Sons and the Land in Between.” I was very excited to read his story about him and his father.

He tells us how at age 8, his family was forced to leave their homeland, Libya, a place they deeply loved. At age 20, his father, a vocal critic of Muammar Gaddafi’s regime, was kidnapped and imprisoned in Libya. Mr. Matar spent most of his adult life on a relentless quest to find his father, not knowing whether he was alive or dead.

Lloyd's Pool Hall, Michigamme, Michigan

“The Return” is an intriguing story of how a boy lives being separated from both his father and his homeland. He writes passionately about his love for both, with his father becoming an almost mythical figure in his life. The pain of his absence is a constant companion, an inconsolable emotional state.

He seeks any morsel he can find about his father, any input from someone who once knew him or maybe had seen him since his arrest. He remembers things his father said or was, small details such as the look of his hands.

He articulates the very nature of grief, questioning whether the dead can ever truly be gone.

“I think this because absence has never seemed empty or passive but rather a busy place… The body of my father is gone, but his place is here and occupied by something that cannot just be called memory… (Grief) is an active and vibrant enterprise. It is hard, honest work… My father is both dead and alive. I do not have a grammar for him.”

He also reflects on the idea of leaving one's homeland, an issue that many struggle with. Some have said that one should never leave their homeland. He ponders the question, "what do you do when you cannot leave and cannot return?"

I so relate to his question. I grew up in the Upper Peninsula of Michigan, a region rich with family history. My Nordic grandparents immigrated to the Upper Peninsula, where they built their lives around the local iron ore industry, still one of the largest in the world.

I, too, was separated from my father. At the age of 8, he died suddenly. Then years later after completing college, for economic reasons I made the difficult decision to leave my homeland. These events have left an indelible mark on my life. This is my own experience with fathers, sons and the land in between.

Now in retirement, I reflect on three pivotal moments in my life: the loss of my dad, my sojourn in Minnesota and my marriage that brought me three sons of my own. I say 'sojourn' because although I'll probably never return to the Upper Peninsula, in another way, I've never left.

For instance, the master passwords I use are mostly places I cherished as a child, such as remote towns or rivers I was introduced to by my dad. They are etched into my memory, often unintentionally.

Sturgeon River, Michigan

One of my sons has my dad's middle name. Another’s middle name is my dad’s first name.

Up until my dad died, I believe that I lived an unimaginably wonderful life. My left brain tells me this cannot be true. But that's another world. I'm talking about fathers and sons.

I could go on all day about this past life. My dad built us a sandbox that was the envy of the neighborhood, and in winter, he constructed a saucer slide that all the kids enjoyed.

Our house served as a hub of activity for both our extended family and the neighborhood, where we heard endless stories from the past, particularly of the Great Depression and the finer art of fishing.

He built our house himself (he didn't but he designed it and did some of the work), he and our family also built our cabin (neither is true, but so what), he walked to work when the roads were closed due to horrendous winter storms—and he didn't wear a hat. That's what real men do. And my dad did them all.

Our cabin was in a nearby town, Michigamme, a very small mining community that died decades earlier along with its mines. It’s one of my most memorable places that I associate with my dad, a place he loved as did I.

The most devastating day of my life is still the day my dad died, August 10. We had plans to spend the weekend at our cabin. As he often did, my dad arrived early to set everything up, and later, my mother brought us there, stopping along the way at our favorite swimming hole, Champion Beach.

But this time, we were suddenly hurried out of the water, packed up quickly and drove to neighbors just down the road from our cabin. They served my sisters and me ice cream at the dining room table while adults huddled in the kitchen. Something didn’t feel right.

Eventually, I was told that my dad was "very, very sick." I could do sick. I remembered that my sister had been in the hospital once, and she was fine. 

But it didn't take long for me to learn that he wasn't sick – that he was dead. He had died outside our cabin from a heart attack. I remember returning home to a houseful of people, crying on my bed with a kind neighbor consoling me. I had no idea what to think. And I had no sense of the changes coming.

I remember the funeral home, his casket and where I sat at the graveside service. My Uncle Bill assured me, "Don't worry, Jonnie, I'll take you fishing." They say orphans wonder who is going to teach them how to drive. My fear was who was going to take me fishing. I loved to fish.

Had someone told me then that my dad would be absent for even ten years, I could have handled that. But I couldn’t comprehend forever. Forever he was gone. 

And as much I wanted to believe I’d see him again in another life, I knew I could dig down into the dirt and run my hands through his rotting remains. I struggled to come to terms with the permanence of this loss.

The grief I felt during those days was indescribable. I would lie in bed, practicing holding my breath. I was going to hold my breath until I died. And then I decided to try living one more year.

No one can truly replace a father. I remember what I was doing August 10 ten years later, the summer after I graduated from high school. It was like his death had happened yesterday, the pain as raw as ever. A decade later, working at my job, the pain had dulled a bit.

Tens year more, I was married with identical twin sons. But even then, I remember when they were born, thinking, “Wouldn't dad be proud.” He was never far away.

There’s a flower’s scent that I associate with my dad’s funeral. Occasionally I smell it, and in an instant, I’m back at the Bjork & Zhulkie funeral home, and I can hardly breathe. Yes, I get over the flower in a few minutes but I never get over his death.

Some may insist that we should "get over" our losses. One of the many things Mr. Matar and I have learned is that you can't simply "get over" everything, that some scars run too deep to ever fully heal.

I once suggested organizing a family reunion on my father's side, much like the multi-day gala we had held for my mother's side. The idea was met with stone-cold silence. It wasn't a topic that could be discussed. There would be no reunion.

Leaving the Upper Peninsula was one of the most difficult decisions I’ve ever made. I mostly had to leave to pursue a career in software engineering. Soon after college graduation, I relocated to Minnesota, where I’ve been since.

Mr. Matar describes his eternal struggle with having left his homeland. Me, I've never really left. A part of my soul will always remain there.

For example, just a year after starting work in Minnesota, I bought a half acre of land on a small lake in the Upper Peninsula, Little Brocky Lake. On a cold, rainy, miserable fall day, I signed for the property. 

Years later, I accepted an unsolicited offer to sell it. While it made logical sense, it left me feeling like I had sold off part of my soul.

I remember the day my mother told me she was selling our cabin in Michigamme. This was the practical thing for her to do and I couldn't afford to buy another piece of land. But feelings aren't logical and dads are eternal – I felt awful all day. My grasp on my dad and my homeland kept slipping further away.

I've been away from the Upper Peninsula for over forty years, and I have no intention of returning permanently. One sister owns the house I grew up in and another resides nearby. 

Despite the decades that have passed, I continue to traverse the roads from Minnesota to Michigan, each journey feeling like a new adventure. My heart longs to keep exploring the Upper Peninsula, to visit any of its lakes or hills or small cafes.

And on and on, a feeling I can’t turn off. There's no end to the land I came from, a land that has had 32 inches of snow fall in 24 hours and once had nearly thirty feet of snow in a winter.

In L. Frank Baum’s “The Wonderful Wizard of Oz,” the Scarecrow asked Dorothy about her home in Kansas, and she told him about how gray everything was there, and how the cyclone had carried her away. 

The Scarecrow said, "I cannot understand why you should wish to leave this beautiful country and go back to the dry, gray place you call Kansas." And Dorothy answered, "No matter how dreary and gray our homes are, we people of flesh and blood would rather live there than in any other country, be it ever so beautiful. There is no place like home."

I agree. And as Mr. Matar states it, can anyone ever truly leave their homeland. There's no place like home.

It's an interesting process how humans work together to help each other, especially in tragedies. I had many people who looked out for me, including relatives, teachers, pastors and neighbors. My uncle Bill was one of many.

Remembering my wonderful relationship with my uncle, I wanted to pay it forward. After settling into Minnesota, I joined the Big Brothers organization. I was paired with a nine-year-old boy who, like me, was growing up with an absent father. 

We were inseparable for years and I'm still close to him. Once, I told him what a wonderful friend he was and that if someday I had a son half as nice as he is, I'd be thrilled. In fact, I have three sons, and they're all at least half as nice as he still is.

They say that men marry their mothers. Maybe. But my wife, Ann, who I fell madly in love with reminded me of my dad. Ann and I had a tumultuous dating cycle over years. After a long breakup, we got back together again. Her friend wrote me that Ann was interested in trying one more time. 

It was a nice summer day in Minnesota. I sat on my couch reading the note, and in an instant, I felt like my dead father had walked into the room. I just sat there and enjoyed the moment. I didn’t know what to do with my feelings.

Mr. Matar eventually returned to Libya for a visit, part of his long search for his father. I’ve thought that I’d never return to Michigan. 

But lately, I’ve been thinking of buying two burial plots in the cemetery four blocks from the house my dad built, where my dad, his brother, sister and parents, my mother and many others of my family are buried. Maybe I too will return home.

The Struggles of Investing With Funds

Jason Zweig recently wrote a post on how relatively easy it is for amateur investors to beat the pros (Wall Street Journal, April 14, 2023 https://www.wsj.com/articles/active-vs-passive-index-fund-beat-the-stock-market-58e8bd83). 

I couldn't agree more. But as I've written before, I also think amateurs can beat the indexes, although it's considerably more work.

Here's some of what Mr. Zweig says, with my thoughts.

Essentially, Mr. Zweig points to the handicaps fund managers work under, handicaps that, according to a recent 30-year study of thousands of U.S. stock mutual funds, results in most funds underperforming the market.

The first problem is their insidious fees. I used this word deliberately. According to the Online Etymology Dictionary, it comes from a Latin word insidiae meaning “ambush, snare, plot.” 

It is derived from the Proto-Indo-European term sed, “to sit,” usually with a suggestion of lying in wait with the intent to entrap. This is fitting, as “insidious” often carries the meanings “deceitful,” “stealthy” or “harmful in an imperceptible fashion.”

This is just how fees work in the financial world. Generally speaking, financial instruments are far better at finding ways to get more money out of you than they are at managing your money. And I do mean “far better.”

Today's online world has an abundance of low-cost offerings that with their low fees offer you a significant advantage over an actively managed fund. 

Unfortunately, this is not where financial firms guide your investments, simply because they make a lot less from these offerings. It’s a sort of bait-and-switch tactic.

There are many indexed funds charging 0.03% to own most of the U.S. stock market. This is not 3 percent, not 3 tenths of a percent, but 3 hundredths of a percent, about $30 a year in fees on a $100,000 investment. 

The typical actively managed fund charges over 1%, or $1000 a year on this same investment, 33 times more than you can easily find online. And many funds charge significantly more than the 1%.

The typical fund analyzed in this study returned 7.7% a year after fees. However, the funds’ investors earned only 6.9% annually because of the compulsion of clients to chase hot performance and to sell when things go bad. 

This is your classic buy high, sell low problem where you should instead do just the opposite: buy low and sell high.

For the fund managers, though, they are forced to buy high priced stocks with the flood of money that comes in from investors chasing high returns. And in reverse, are then forced to sell stocks when they are low to generate the cash needed for their investors who are selling out of their fund when prices drop. 

Mr. Zweig states it well that "the managers can perform only as well as their worst investors allow them to." And that is not a good return.

The total cost to the fund that is forced to buy high and sell low is nearly as high as the drag from annual fees. What do these actively managed funds cost investors? 

From 1991-2020, investors lost about $1.02 trillion dollars, money they could have saved if they had instead bought a low-cost index fund tracking the S&P 500.

Mr. Zweig then repeats a supposed axiom of market returns, and that is "in the long run, nearly all the market's return comes from a remarkably small number of stocks—giant winners that rise in value by 10,000% or more over decades."

He cites other research that shows that only 4.3% of stocks created all the net gains in the U.S. market between 1926 and 2016. 

This suggests that winning requires finding these very few stocks, and this is mostly a matter of luck. Which then gets you back to buying indexes that mostly ensure you get at least some of these gains.

I've never accepted the argument that very few stocks are good investments. First, almost no one buys stocks and holds them forever. So what an individual stock does over a lifetime is of little interest to most. 

I have all my stock transactions for over two decades available to search and analyze. I have not found it to be true that a very small proportion of my stocks have created most of my gains. I grant you that I also haven’t owned thousands of stocks so my example may be a poor one.

Yes, it's true that there's usually one hot stock for any given period that brings in a lot of my returns. But when I measure longer time periods, the number of stocks that bring in most of my returns gets quite large. 

I've drilled further into my stocks. When I eliminate the one or two best stocks and the one or two worst stocks (that is, the extremes), I find that the middle ground returns about the same as the edges. And this holds as I eliminate more of the extremes.

I did a quick test on Mr. Zweig's claim. I downloaded performance data from the largest 500 stocks as of April 24, 2023, which roughly approaches the S&P 500, and calculated their total return (gains, losses and dividends) for the prior 12 months. The stocks had lost about 5.6% of their total value in the prior 12 months.

However, the average stock lost only 2.6% during this same period, and the middle 50 stocks lost 4.6%. So the most middling stocks did slightly better than the entire index, and the average stock did 3 percentage points better than the entire index. 

This hardly suggests that over a defined period of time, such as one year, one needs to find a very few hot stocks to keep up with the indexes, and in fact, in this one look into a random 12 month period, the middle and average stocks both outperformed the index.

What I am saying from this simple test is that it doesn't matter if Apple or Tesla or Amazon or even Exxon-Mobile bring in an outsized lifetime return. I'm not buying stocks for a lifetime. I'm owning them up to several years, and I have no evidence that I need good luck to keep up with the indexes. I can buy average stocks and do quite well.

Indexes by their nature buy high and sell low. By their design, their simplicity, by their very nature they function well. Yes, they perform better than almost any actively managed fund—which is well documented—but not great.

I'm fairly convinced that an individual with a basic understanding of finance and math, with the emotional ability to see beyond the past year or two, and to accept some occasional deep drops such as we had in 2022, by owning several dozen stocks can beat the indexes—both with lower fees and with better returns. 

And they can do this by avoiding overpriced stocks that the indexes (and everyone else) love, that in the end do not do as well as perceived.

Mr. Zweig gives some additional good help for investors that want to try their luck with individual stocks. Avoid big, household-name companies and avoid following crowds into the latest meme stock.

He suggests that investors instead look for winners among smaller firms with good financials. Limit yourself to a handful of possibilities and don’t put more than a total of 5% of your money in them. 

Further, never add new money to a winner. This will help you win well when you’re right, and will limit your losses when you’re wrong.

And if you do find a winner, hold it as long as you can. Small potential fortunes are lost selling after a stock doubles or triples, watching on the sidelines while it continues to double and triple still again. By then, of course, you’ve lost this opportunity.

Against common advice, I’ve kept about 30% of my equities in individual stocks and the rest in low-cost indexed funds. Since the market peak before the Great Recession to today, which includes two bear markets, my individual stocks have performed significantly better than my index funds. The gains seems to be quite widespread, and not because of a couple of lucky purchases.

My additional suggestions with individual stocks is to be slow to buy and slow to sell, regardless of where their price is going. Keep an eye on the stock’s fundamentals: margins, debt and dividends. 

And don’t be afraid to check out an annual or 10-K report. If something smells bad, it may be time to sell it.

Although I generally recommend indexes over individual stocks, for someone who is willing to put time into stock research, there are a lot of fees to be avoided and a lot of money to be made following some basics with individual stocks. 

As my analysis on the S&P 500 shows, using a dartboard to buy a dozen stocks from the S&P 500 will probably outperform the S&P 500. And this is probably because you’re passing on overpriced stocks that are overallocated both by individuals and indexes.

My Move Out of Index Funds

I have struggled for years with the logic behind both asset allocation models and indexing, two tenets of modern investing, ideas I’ve used most of my investing life. Unfortunately.          

I recently posted my arguments against asset allocations. My frustration has been that asset allocation eventually got me to invest almost half of my wife’s and my life savings in bonds.

Bonds historically barely keep up with inflation, and then in 2022 lost over 13% of their value. I’m already moving away from that model.

My next move is away from index funds. The very reasonable argument for index funds is that they may be your best bet for investing in equities rather than trying to “beat the market” by owning individual stocks. 

I agree that the easiest way to win in the stock market is owning low-cost index funds. A reasonable person can establish an allocation formula for their equities. For example, put 70% of stocks in the US and 30% international, balance back to this allocation every year or two, and do little else for decades. It works and I highly recommend it.

But I have a major issue with index funds. By their design, when you buy an index fund, you are overallocating to overpriced stocks, and underallocating to underpriced stocks.  

What is overpriced and what is underpriced is subject to great debate, a debate index funds settle by declaring nothing is ever over or underpriced, a tenet of indexing, and that the best estimate of what a stock is worth today is what it is selling for today.

I disagree with this. Stocks often get overvalued and undervalued by almost any valuation measures. Great examples are the Dot-Com Bubble of 2000 and the Great Recession of 2008. 

But what the intrinsic value of a stock is at any given time is an endless and emotional discussion, a little like religion, and it won’t get settled here.

Let’s just say that I don’t buy this argument that stocks always trade at a price that best represents the value of that company at that time. A live example (and there are endless more) is Tesla. It recently had more market value than the market value of all other automobile manufacturers in the world combined.

Read that last sentence again slowly. No rocket science or deep financial analysis is required to recognize that this is either an overpriced stock in the long term, or all other automobile manufacturers in the world are collectively underpriced.

During 2022, from high to low, Tesla lost over 70% of its value without any significant change in the company. That’s how much variation there can exist in a stock that supposedly is trading at its fair value. And my bet is that at its low, it’s still way overpriced.

The most basic investing maxim that I learned in high school is that you should buy low and sell high. But indexes, by their design, buy high and sell low. 

It’s not intentional but it is part of their design, a design that is simple and easy, but causes other problems. An index fund mimics the composition and performance of a financial market index, such as the S&P 500 index.

So if in early 2022 you bought an index fund that tracts the S&P 500 index, you are overallocating your money into many overpriced stocks like Tesla, and underallocating your money away from many underpriced stocks, the opposite of what one should do.

There are other advantages to owning individual stocks besides this issue of index funds overbuying overpriced stocks. Although it is easy to find low-cost, low-turn index stock funds, stocks have even lower fees. Many brokerage firms have zero fees for their accounts and zero fees for buying and selling stocks.

So by owning stocks you can reduce any fees to zero sans spreads. If you then hold your stocks for long periods, real fees approach zero. 

You can have your entire life savings maintained online for years, with full access to the firm’s tools and services, and never pay a fee, directly or indirectly. How these firms make a profit is another discussion.

The arguments against owning individual stocks are many and valid. It takes a lot of time. It requires research and knowledge, although not necessarily any special cognitive skills. 

The best argument against it comes from Daniel Kahneman, the author of “Thinking, Fast and Slow.” He convincingly suggests that people have too much confidence in human judgment, specifically with forecasting.

His research on stock picking, a form of forecasting, shows overwhelming evidence that professional stock pickers have awful track records doing what they’re purportedly paid to do. It supports his claim that human are terrible forecasters, whether it’s stocks or anything else requiring a long-term view.

Finally, one more strong argument against owning individual stocks is that most money in the stock market is made in very few stocks. 

Therefore, regardless of one’s skills, the chances of hitting on these few stocks is slim, no matter how good one might be at their trade, and success mostly comes down to luck. And the best way to counter luck is to own all the stocks in a low-cost index fund.

Acknowledging these challenges, people have endless ways to try to make money in the market. I’ve already mentioned buying underpriced stocks and selling them when they return to their intrinsic value or higher. 

There are strategies for out-smarting other bad investors, such as the ones who bought Tesla in the last several years. These approaches are sometimes known as the “bigger fool,” assuming there will always be people willing to pay yet more for an already overpriced item.

Timing and technical exercises are endless, including the Santa rally and the "sell in May and go away" theory that tries to beat the historical underperformance of stocks from May-October. 

Apparently, there’s an argument for buying and selling anything based only on the day of the week or even the time of day. And technical analyses are endless, a little like reading tea leaves.

Most have some merit and for sure, someone has always made money doing all of them, which countless articles give undue attention to.

I bought my first stock while in college, Niagara Mohawk Power, a utility that still operates, now owned by a British utility. 

My next purchase was Manville Corporation, the manufacturer of asbestos-containing building products. That ended badly. I bought some stocks during the Dot-Com Bubble. They ended like most of the market. Ditto the Great Recession.

I mostly learned what’s often stated: It’s hard to beat indexes. I purchased stocks with full confidence they would rise quickly. But it was based on a lot of emotion and little information.

I never quit, probably for the reasons many buy stocks. It’s a little like gambling but with a far better chance of success. I’ve continued to entertain myself, randomly buying stocks based on various valuation theories, and then holding them as long as I can stand it. 

Since the Great Recession, I’ve usually had about a third of our equities in individual stocks, about as much as I could tolerate. I’ve had some disasters (e.g., Peabody Coal), some close calls and some wins, most notably Ford Motor that I bought during the Great Recession fire sale.

How have I done with these stocks? It’s hard to say because it’s hard to know what I would have owned if I hadn’t purchased them. And for various reasons, it’s hard to make an apples to apples comparison with comparable index funds I’ve had. 

For example, my 401(k)s have normally been funded by bimonthly purchases from my salary, commonly known as dollar-cost averaging. My stocks are purchased randomly. Comparing collective returns is difficult.

But as part of my look through the carnage of 2022, I noticed that my individual stocks dropped about half of what the S&P 500 did. Again, comparisons are hard because I own some international stocks and funds.

So I looked a little further and found that over the past many years, my individual stocks have performed nearly twice as well as my index funds have. Further, it held true for most of these calendar years. 

A look further back has more mixed results but in total, since the peak before the Great Recession to today, my individual stocks have performed significantly better than my index funds.

I considered whether I got lucky. So I looked at returns over several periods excluding the best and worst stocks. The middle ground held about the same as the extremes.

I’ve searched returns for a single year across the entire S&P 500 and contrary to what I’ve read, I don’t find it true that the vast majority of returns come from a very small handful of stocks. These winners make a lot of press, but that’s not the only place money is made. And it’s also where a lot of money is lost.

I did a backtest of what would have happened the past ten years if I had had all of our money in only the same stocks I owned at the time. That is, what would have had happened if I had not owned any stock funds or bonds. 

Again, it’s a mixed picture – higher volatility but the returns are significantly higher than what I experienced, and in only one year would our total portfolio value have dropped lower than what we actually experienced with our mix of bonds, index funds and stocks.

Another common mistake investors make is focusing on market extremes, the rises or falls from recent highs and lows, rather than long-term returns. For example, the S&P 500 dropped 56% high to low in the Great Recession. 

But if you limit your analysis to 12-month or other longer term views, the extremes are much less. So when I look through returns, I normally only look by calendar year, or other long periods. 

This removes so much of the noise that causes such emotion. These short-term variations don’t have nearly the actual impact to your portfolio that your emotions respond to.

Which brings me back to the same place. There is a high price for higher stability, and if one can ignore the noise, there is significantly more money to be made owning individual stocks than there is in either stock index funds or in bonds. 

As an aside, this is one of the reasons (along with paying their own salaries) that professionals struggle to do well – their clients respond quickly to this noise forcing them to respond accordingly, too, which often includes selling underpriced stocks.

This is where I’ve been stuck for years. I don’t trust indexes and I don’t trust professionals, but I’m never confident that I or anyone can pick stocks well. 

But there’s little evidence that my stock picking is any worse than index funds. And in fact, I’m reasonably confident that beating the indexes isn’t that hard, which has always been my theory.

To use stocks as long-term investments, I generally rely on three well-known factors: what the stock valuation is using some common metrics; the financial health of the company; and finally, some cautious consideration for what analysts might say about a company. 

I mostly ignore sentiment, inertia or any technical analysis, other common factors considered in selecting stocks.

Please note that I don’t trust analysts either. They have a Lake Wobegon tendency to rate most stocks above average. But they can highlight some issues. I trust their poor reviews more than their good reviews.

As for valuation, I try not to put much into a stock’s most recent numbers, and instead look closely at its last several years. In addition to profits, I also look at free cash flows and dividends. I also consider their book and enterprise values.

For a company’s financial health, I look at its return on equity, its margins and its liquidity, and very closely at its debt. It’s hard for a debt-free company to go bankrupt.

There’s no secrets to what I’m doing. This information is widely available online. And although it’s time-consuming, it’s not nearly as complicated as it sounds. 

My usual procedure for buying a stock is to first use various ways to come up with a large number of stocks that I may be interested in, whether something I hear about or see on a list.

However I get there, if I like what I’m seeing, I chase down several pieces of information on the company, and then score it across a half-dozen measures. The scoring is to help contain my emotions, which like most humans are terrible at predicting where a stock price may go. 

If it all adds up to a good score, then I’m serious about buying it, which I still may or may not do.

Most of my life, whether investing or anything else that requires time and work, I’ve leaned heavily towards the law of parsimony, a principle that recommends searching for explanations constructed with the smallest set of elements. 

Although my stock analysis can seem a little overwhelming, I suspect one could probably come to the same decisions with half of the information I use. Maybe debt, margins, dividends, and price to cash and earnings, with a look at any warnings from analysts.

I painfully hold to stocks I own whether they’re doing well or poorly. I consider selling when the same analysis doesn’t add up to buying a stock. But even then, I still give it some time. And time is one of many tricks I use to keeping my emotions out of these decisions. My default is to do nothing.

Yes, I miss out on Google and Apple and Netflix. But I also missed out on Tesla last year. Cummins, Emcor, Ryder, Amgen and Teck aren’t nearly as interesting, but I trust them a lot more. Index funds trust overpriced stocks much more than I do.

How far will I stray from index funds? I don’t know. I don’t make fast moves. After combing through scores of stocks over several weeks, I recently made a couple of new stock purchases. As I normally do, they’re a broad mix across sectors, capitalizations, and value and growth.

And that may be all I do for a while as I wait, watching what happens with the recession “everyone” is predicting. If I do beat the market, doing little or nothing will get me closer to where I want to be. If I’m wrong, I’ll find myself making some changes. And confessing my mistakes to you.