Bogle on Ethics

John Bogle, the founder of the Vanguard Group, is one of the grand old men of the mutual fund industry, so when he speaks, as he did last week at the annual Morningstar Investment Conference, people pay attention. As beaten-down and battered as mutual funds have been, of course what everyone wanted to know was how the industry was ever going to recover. Bogle's prescription: Tougher ethical standards.

"There are some things that one just didn't do," Bogle said. "That's the way I was brought up. It was black and white. Now, ethical standards seem to be 'if everybody else is doing it, I can too.'" He was talking about the way the fund industry, and too many other investment professionals, have been selling dubious subprime mortgages and derivatives so confusing even Wall Street's rocket scientists didn't fully understand them.

Bogle also blamed the hectic trading pace of some professionals for slicing off ever more of investors' money to Wall Street. He noted that a buy-and-hold investor will keep nearly 100 percent of his or her earnings, as opposed to a more active trader who ends up paying fees constantly.

I would add that ethical behavior itself is a long-term strategy. Poor ethics will always, sooner or later, catch up with you. Shady operators can cut corners to try to make a few extra bucks, but if you are in this for the long haul, as I am and my clients are, there is no substitute for honest aboveboard behavior.

A Lesson from the Godfather of Soul

James Brown, the Godfather of Soul, died two and a half years ago, on Christmas Day 2006. But his estate wasn't settled until this week, when his surviving widow and six children agreed on how to divide up his remaining assets and, more importantly, income from future sales of his records and uses of his likeness.

Brown did some reasonable, prudent planning for his heirs' future. For instance, he had set up a trust to help pay for his grandchildren's education.

But there was one big mistake he made: After marrying for the final time in 2001, Brown neglected to update his will and other documents to reflect that. The courts don't look too kindly on widows being left with nothing in their husband's will. It took two and a half years to unwind that little bit of unfairness.

Brown's case is a useful reminder that your life situation is changing all the time, and so must your estate planning. If you have any concerns at all that your will or estate doesn't reflect your current situation, please give me a call so we can review it.

Trouble at the Bank

The FDIC has just released its latest assessment of the number of banks it considers in trouble, and it's a record: There are 305 American banks that are thought to have serious financial troubles or problems with management that might threaten their continuing operations.

This figure isn't exactly good news for the American economy, but again, there are some caveats. (The FDIC doesn't release the names of the individual banks for fear of causing runs at any of them.) For one thing, as with a lot of these newly released figures, they are old: this is the number for the first quarter of 2009, which ended in March. Thirty-six banks failed in the first quarter, and all of them were presumably troubled, so we can subtract those from the overall figure.

But that leaves 269 troubled banks, which would still be a record. And the number of assets controlled by those banks is up to $220 billion, whereas it was a mere $159 billion at the previous report. That suggests that more large banks are facing trouble.

The banking sector is uniquely significant to our economy. We need to see a drop in these "troubled bank" figures before we can be sure we're on the road to recovery.

Reading the Credit Card Bill

The Library of Congress has compiled a quick list of the most important aspects of the Credit Card Bill that passed the Congress and was signed into law by President Obama last week. Here are some of the ramifications that might affect you:

* Creditors cannot increase the annual percentage rate (APR) during the first 12 months after a cardholder opens an account.

* Creditors must provide consumers with a 45-day advance notice of changes in rates and significant contract changes, not including changes resulting from a change in the index that the rate is based on.

* Promotional rates need to be in effect for at least six months from the beginning date of that promotion.

* Creditors are prohibited from providing credit to people under 18, unless their parent or legal guardian is designated as the primary account holder.

* Creditors are prohibited from opening a credit card account for any college student who does not have any verifiable annual gross income or already maintains a credit card account with that creditor.

A full list of the bill's impact on consumers, in clear, comprehensible English, can be found here.

The Oracle of Omaha Speaks

Warren Buffett lost $25 billion from his net wealth last year, according to Forbes magazine. Losing that much money might put a dent in the household budget for someone like you or me, but it really wasn't all that significant for the Oracle of Omaha. Consider that his investment vehicle, Berkshire Hathaway, had some $44 billion in cash lying around at the beginning of last year, waiting to be invested.

Buffett held his annual shareholders' meeting for Berkshire Hathaway's investors earlier this month in Omaha. As always, he took some hard-earned wisdom and offered it up in a way that made it seem both obvious and profound. Some sample quotes from this year's performance:

“If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”

“Leverage is what causes people real trouble in this world. You don’t want to be in a position where someone can pull the rug out from under you or, emotionally, where you pull it out from under yourself.”

“If you have a 150 I.Q., sell 30 points to someone else. You need to be smart, but not a genius.”

"Stocks go up and down; there were three times before when Berkshire shares went down more than 50 percent. This country will do wonderfully over time; it always has."

A Thought for Memorial Day

"I have never been able to think of the day as one of mourning; I have never quite been able to feel that half-masted flags were appropriate on Decoration Day. I have rather felt that the flag should be at the peak, because those whose dying we commemorate rejoiced in seeing it where their valor placed it. We honor them in a joyous, thankful, triumphant commemoration of what they did." ~Benjamin Harrison, America's 23rd President. Memorial Day was known as Decoration Day until after World War II.

Looking Backward

The story in yesterday's Wall Street Journal looks pretty dire: World Economies Plummet! Steep declines in the economies of three of the U.S.'s biggest trading partners!

But let's take a closer look: the story focuses on reports of shocking declines in the economies of Mexico, Japan and Germany. Those nations posted their worst quarterly declines in anywhere from 14 years (for Mexico) to 44 years (for Japan). Mexico's economy contracted at an annualized rate of more than 20 percent.

All that news results from the economic figures being posted for the first quarter of 2009. So these drops aren't something that those countries are living through right now; they reflect their economic performance through the end of March.

We already knew that the world economy was in serious trouble in the beginning of this year; the WSJ article simply confirms that. It doesn't say anything about what's been going on in the world economy in the past couple of months. Whether or not the Japanese and German economies have rebounded yet is something no one knows.

Remember, economic statistics are mostly backwards-looking. Most of the reports you see in the papers concern things that have happened in the past.