Notes, Views, and the Occasional Provocation November / December 2012 

As I write, the S&P 500 Index is up almost 15% year to date, and many other stock asset classes are even higher. The uncertainty about the so-called fiscal cliff and tax negotiations, however, is making it hard for many people to appreciate the returns.

In fact, the predominant sentiment I'm hearing is deep skepticism about the markets and a slow-burning frustration with the continued global economic uncertainty. This month's article is a meandering meditation on this state of affairs, and I hope you'll let me know if you have any comments to share.

The Bloomberg television interview, linked below, was an interesting experience, with questions being asked by four different hosts sitting three-thousand miles away in New York. I assume the video recording will remain posted for a little while, but am unsure for how long.

Here's to a very Happy New Year,

Milo Benningfield

Blaming the Markets
Positive investment returns, negative investor sentiment sums up 2012. But is the cynicism really justified? more

BFA Media Quotes
Recent media quotes. more

Blaming the Markets
After yard work and other weekend chores as a child, the reward was watching afternoon football games on t.v. Sprawled on the couch, I'd watch the teams move the ball up and down the vast expanse of green field, running, passing and scoring in a familiar rhythm of successive plays. Years passed, and I lost my weekend football habit. But I always enjoyed recollecting the large green field on the screen, calming in its own way as a morning lake or ocean sunset.

Recently, I checked out a professional football game for the first time in years and was dismayed. The soothing green turf had been replaced with an overlay of graphics and data so thick it was hard to focus on the players themselves. There was an artificial yellow line superimposed over the first-and-ten line and a bright blue bar marking the line of scrimmage. A stream of text flashed in the upper left corner, below the box showing the downs and yards to first. Across the center of the field was a huge translucent arrow indicating, I know not why, the direction of play. "Somewhere," I thought, "under all this blather, there's a football game."

I suspect many people feel the same way about their investments these days: why does it all have to be so complicated? The instructions in the past were fairly simple: you worked, saved, invested, and some years down the line you began to reap your rewards. Investment options were straightforward: stocks, bonds, and cash; maybe a rental property for good measure.

But these instructions seemed to stop working somewhere. Perhaps it was in the late 1990's, when the Internet first offered the promise of trading one's portfolio like the pro's and a host of investment choices were thrown at people. The "smart money" seemed no longer restricted to high-grade commercial buildings, but to exist next door, with the neighbor who'd just made a killing in their bathrobe off an IPO or a foreign-currency trade. Otherwise rational people suddenly dove headfirst into the investment pool without taking a single swimming lesson.

The bear market of the early 2000's sobered a lot of these traders and sent them back to worthier pursuits. I know one former day trader who used what he'd learned from his introduction to the Internet to build an extraordinarily useful jazz-education website that today helps aspiring beboppers all over the world.

Meanwhile, the explosion of investment products and data continued. Hedge funds, exchange-traded funds, new strategies and asset classes arrived. It all worked for a while, until the crash of 2008, when many people lost their investment footing and never regained it. They missed the historical recovery in 2009 and 2010, then were rattled enough by volatility in 2011 to completely miss the bull market in 2012.

Is it any wonder they complain that the markets are a casino with operations rigged in favor of the house? The increasing abstraction of financial assets doesn't help either. Electronic 0's and 1's have replaced paper stock certificates and bond coupons. Brokerage-account statements are filled with gobblygook, but not performance data, breeding further cynicism.

And yet, like the football game, underneath all the abstraction and the news feeds, charts, and real-time quotes on the screen, there's something very real: people organized to innovate and compete, taking risks to push new services and products to market; consumers receiving delightful solutions; seemingly intractable problems solved every day.

Similarly, underneath all the fund choices and the statistical sound and fury, the fundamentals of the investment game are, roughly speaking, the same as ever. Risk is still intertwined with reward, as evidenced by the yield spreads of corporate bonds over safer U.S. Treasuries, or by the higher premiums smaller, riskier companies have offered over their larger, safer brethren. There's rarely something for nothing anywhere in the investment world, and when there is, it doesn't last for long.

Far from being rigged, the capital markets still appear to do a pretty good job of allocating capital throughout all the tsunamis, debt crises, and asset bubbles that the real and economic worlds can throw their way. As long as market complexity remains, however, and as long as investors continue to demonstrate little tolerance for uncertainty, they'll probably continue to punish the markets, rather than themselves, with deep-seated cynicism for some time to come, no matter how good the returns.

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BFA Media Quotes
Bloomberg Surveillance TV, December 26, 2012
Milo was interviewed at length on the Bloomberg Surveillance program regarding investment insights for 2013. See the video.

BusinessWeek, December 20, 2012
Milo was quoted in an article by Nick Summers and Karen Weise, "The Financial Planning Flowchart," which provided an overview of the planning process as part of the magazine's 2013 investment guide. Milo noted that "[i]t's painful to be looking at financial resources, because often what you are talking about are constraints." Read the article.

Thank you for reading. Please look for our next newsletter in February.

Best regards,

Milo Benningfield

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