Environmental Boom Ignites Stocks

Earlier today (4/16/08) stocks of companies that address the world's biggest environmental challenges soared more than the market averages. It's as if thousands of investors suddenly read Jared Diamond's Collapse (focusing on agricultural productivity) and the Socolow and Pacala paper (on ways to save the earth seven billion tons of carbon emissions), then invested accordingly today...

...Stocks like Monsanto (+7%) and the agri-biotech sector (+3-4%), First Solar (+4%) and the solar sector (+3-7%), the broader alternative energy sector (+3-15%), Badger Meter (+20%) and the metering sector (+3-7%), Lindsay (+6%) and the water sector (+3-4%), the engine and air filtration industry sector (+3-5%), the green electronics sector (+3-15%), and so on.

We'd still be adding to equity weightings selectively in key industries backed by major secular trends, as suggested by several of our latest posts (including here). See also our post titled "Climate Change -- Investment Waves Will Keep Coming" and our April 4th post after an earlier increase in environment-related equity allocation.

Today it's as if investors were struck harder than ever by the imminent major implications of skyrocketing energy prices and global warming. It makes perfect sense. Crude oil punched to $115/barrel on supply projects. Yesterday, a paper presented at the European Geosciences Union conference predicted a rise in sea levels three times higher than predicted by the U.N.'s Intergovernmental Panel that won the '07 Nobel Prize -- a full 0.8-1.5 meters that would have massive consequences for hundreds of millions of people and economies. Today, Bush, seemingly the last and most important global-warming-denier, finally highlighted the need to constrain greenhouse-gas emissions, in a speech that emphasized the need to invest in technologies (such as carbon capture and sequestration -- see some of the market's inferences, above) and his seemingly increased willingness to sign binding international agreements.

Allocation and Currencies?

How long before currencies are widely treated as an asset class? The question is crucial because finding new asset classes -- shortly before institutions begin treating them that way -- can be a very lucrative strategy. (For example, Energy commodities have skyrocketed in part because of institutions beginning to treat them as an asset class in the past five years).

Most institutional money managers and asset allocation advisories don't count currencies as an asset class, in that they don't apportion a percentage of their assets exclusively for currency investments. Currency is still a crucial part of all international investors' considerations, but it's usually not treated as a separate asset class by investors other than globally-oriented hedge funds.

Why not? After all, currencies frequently provide a source of significant alpha and uncorrelated returns. And some investors do extremely well in currency investing. For example, in Inside the House of Money, the manager of a significant family investment fund, Falcon Management, says:

• [F]oreign exchange is a whole area of risk premia that none of the real money [long only] funds are earning.
• Back to the smart real money (long-only] funds, Yale has seven asset categories where they look to extract risk premia and Harvard has eleven. The question is, why doesn't Harvard throw in a twelfth category? They should be looking at other uncorrelated markets such as foreign exchange for more sources of risk premia. Once they identify new sources, they can allocate X% and, in a Markowitz sense, run an efficient frontier to come up with what the correct allocation should be. But they don't do it. Asset categories like foreign exchange or options are not thought of as an asset category where risk premia can be earned.
• As a hedge fund, we'll look anywhere for opportunities. The currency markets are a place where global macro hedge funds especially earn risk premia. I can name three risk premia in currencies that I don't think any real money manager has ever attempted to earn on a systematic basis: (1) High yielding versus lower yielding currencies.... 92) Short-dated volatility is too high because of an insurance premium component in short-dated options....(3) Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price....

The Falcon manager, Jim Leitner, notes there's significant value to be extracted from currency markets (indeed many asset classes) over time:

• The large inefficiencies do not get arbitraged out because there's very little capital that actually gets allocated toward extracting value over multiple years. Everybod who's allocating money to hedge funds has monthly or quarterly redemption clauses, which force hedge funds to manage to those liquidity paramaters, and that's not at all the way to wealth.

Things are starting to change, and will probably continue to. The U.S. dollar's precipitous multi-year slide versus other major currencies is forcing more money managers to think about creating asset allocations for currency. Moreover, ETFs tracking currencies are rapidly appearing.

The traditional reason why currency isn't regarded as an asset class is that there's no "expected return." The currencies taken together are a "zero-sum" game, versus other asset classes where everyone can win. But for some investors, active management of currencies are creating consistently strong returns that institutional asset allocators (such as pension funds, insurance companies, charitable organizations, etc) may stop ignoring.

Swensen on Volatility

NPR.org, a superb general news & culture website, has posted a very good summary of David Swensen's asset allocation philosophy. He's one of the world's leading asset managers, and has grown Yale's endowment by an incredible 16.8% in the past twenty years.

We've quoted his book "Unconventional Success: A Fundamental Approach to Personal Investment" several times in this blog. We also blogged Yale's latest investment statement, here.

Below is the NPR.org article, titled "Yale Money Whiz Shares Tips on Growing a Nest Egg." See the full link for the graphics.

• The turmoil in the stock market has a lot of people nervous about their retirement savings. If only they had David Swensen investing their money.

  Swensen manages Yale University's endowment. Last year, he made a 28 percent return, adding a whopping $5 billion to Yale's endowment, which is now valued at $22 billion. And that wasn't a fluke: Over the past two decades, under Swensen's watch, Yale's endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund.

  In scary economic times like this, he cautions that individual investors shouldn't trust their instincts.

  "The human tendency in this kind of environment is to do something — to make a change," he says.

  Stocks seem risky, especially since they've been falling. Swensen says most people he talks to get nervous and want to sell stocks.

  "And that's exactly the wrong reaction," he says. "Buying high and selling low is not a way to make money. It's not hard, right? It's very simple: You want to do the opposite."

  Finding the Right Investment Mix

  To share the wealth with everyone, Swensen wrote a book about retirement investing that details his allocation strategies. He advises having the right long-term mix of stock index funds, bonds and real estate investment trusts (see chart below).

  But when stocks tank, that mix gets out of balance: For example, U.S. stocks that once constituted 30 percent of a portfolio may now constitute just 29 percent or 28 percent.

  When that happens, Swensen rebalances, shifting more holdings into stock index funds. Then, if the market comes back up and ends the day flat — where it started — Swensen sells those stock index funds.

  Swensen's ability to buy low and sell high on the market roller coaster has in some instances earned upwards of $1 million in a single day for Yale's endowment — just by rebalancing amidst volatility.

  "So you end up at the same place you started, except a million dollars ahead, that's not bad," he says. "But from rebalancing, not speculating — just sticking with your long-term targets."

  That's the upside: The stock market can end up flat, but investors still make money because they rebalanced when it was down. Sometimes the market keeps going down. But over time – five, 10 or 20 years — as the market keeps rising, Swensen says, investors can goose out extra returns by rebalancing along the way.

  Paying for Investment Advice?

  One of the reasons that Swensen can rebalance so frequently is that Yale, like other educational institutions, is tax-exempt. Before attempting to rebalance their portfolios, individual investors need to understand the tax implications of any trades they might make.

  Figuring out the right mix of what to own can be tricky. Many people seek out professional advice.

  And that's a good idea, says Jim Barnash, the national director of financial planning for Ameriprise Financial. He says in volatile markets like this one, people need quality one-on-one advice to make sure they're properly diversified.

  But Ameriprise's advice comes with a price: up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.

  Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that's better than not investing at all, and a lot of people want an adviser to help them.

  But Swensen says most of these investment services provide pretty mediocre advice, and it's just not worth giving them a percentage of your life savings.

  "That's the wrong path," Swensen says. "And the reason it's the wrong path is it's a very, very expensive path."

  Index Funds or Mutual Funds?

  Swensen says fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper.

  Swensen says the vast majority of professional mutual fund managers fail to beat those indexes.

  "When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there's almost no chance that you end up beating an index fund," he says. The odds, he says, are 100 to 1.

  Swensen, who cautions against trying to pick individual stocks, favors nonprofit funds like Vanguard and TIAA-CREF. There too, the lower fees will mean more money in your pocket over time.

The article finishes with a more detailed listing of the index funds that Swensen recommends investors use to establish their asset allocation.

Asset Allocation: New Paradigms

Finding our efficient portfolio frontier ("Asset Allocation Insights") -- and pushing it outward (with help from "Major Investment Trends") -- is our primary interest in this blog.

A book on the same subject is "Inside the House of Money," by analyst Steven Drobny whose clients are many of the best Global Macro fund managers. It's a fascinating study because it consists of detailed interviews with 13 money managers talking about their approaches and investments.

We'll offer a few quotes from "The Family Office Manager" chapter featuring Jim Leitner of Falcon Management. Leitner employs an endless diversity of investment vehicles that wouldn't be found in any "traditional" asset allocations, but his goal is to construct a higher-performing efficient asset allocation nonetheless. That's why we're interested. And he happens to be a self-made billionaire who is reported to have produced 30% compound annual returns since he founded Falcon in 1997 with proceeds from his successful Wall Street career.

Here are a few snippets from the Leitner chapter that speaks to the point of our post today -- New Paradigms in Asset Allocation and Investment Trends:

• [Drobny asks] If you allocate 6.5% to one strategy, does that mean you generally run about 15 independent strategies in your portfolio at all times?
  
• [Leitner responds] That's where we'd like to get to eventually.... We're trying to get there by learning from what the real money [i.e. long only] funds do so well. Again, just look at the endowments at Harvard and Yale as the prime examples of having done something really intelligent. They have averaged 16% or so annual returns for the past 10 years, which are just phenomenal returns, especially considering they're without leverage! We always want to be a step ahead of them and the market, so we've done a lot of research on how we can take what they're good at and improve on it....
• Yale has seven asset categories where they look to extract risk premia and Harvard has eleven. The question is, why doesn't Harvard throw in a twelfth category? They should be looking at other uncorrelated markets such as foreign exchange for more sources of risk premia. Once they identify new sources, they can allocate X percent and, in a Markowitz sense, run an efficient frontier to come up with what the correct allocation should be. But they don't do it. Asset categories like foreign exchange or options are not thought of as an asset category where risk premia can be earned. As a hedge fund, we'll look anywhere for opportunities. The currency markets are a place where global macro hedge funds especially earn risk premia. [He then names three risk premia in currencies that he doesn't think any real money manager has ever attempted to earn on a a systematic basis.
• [For example, in Leitner's words:] As a family office, we can take the requisite long-term view. I'm doing this with a 30- or 40-year time frame in mind, so I am free to go out and do things like buy Ghanaian value stocks because I think Ghana is an interesting country. I bought them three years ago and guess what --since then the Ghanaian stock market has outperformed almost every other market I know of and is up several hundred percent.
  

That's an example of where Asset Allocation meets Global Macro hedge funds. To us, the combination opens whole cans of new paradigms for money management.

[And for more on Yale, see our post titled "Yale and You"]

Shifting Long-Run Asset Allocation Targets?

Many of the massive, multi-year bull- and bear-moves in asset classes occur when huge institutional investors and big consulting firms change their asset allocation targets. WE WANT TO IDENTIFY THESE, AND REFLECT THAT WITHIN OUR LONG-RUN STRATEGIC ASSET ALLOCATION TARGETS BEFORE SOME OF THE BIG INSTITUTIONS DO.

Dramatically, we've seen this kind of asset allocation shift in the past five years as investors dispensed traditional guidelines of 5-10% weights in Developing Markets (upon seeing demographic shifts, capitalism's emergence, geopolitical stability, and early-stage growth), and near-0% weights in Commodities (upon seeing Developing Economies' demand and inflationary policies, scarcity of commodities, and the potential/reality of declining oil production). These two asset classes have soared, and investors who missed these major shifts in the past few years are paying dearly.

The shifts toward Developing Markets and Commodities may continue in the coming years, albeit with risk of a cyclical pullback in the next year or so.

The question is, what other massive trends could create similarly dramatic changes in big investors' long-term asset allocation targets? We're keenly interested in locating great sources of information.

One great source is undoubtedly 13D Research (see "Sample Reports"), whose founder Kiril Sokoloff offers a few choice reports for non-clients. Check them out. Print and read. They may significantly change your outlook on the world and your assets.

13D's Sokoloff called the Emerging Markets boom in very, very convincing fashion.

He called the oil boom in a report that blew away any doubts I had, and even earlier than that, he table-pounded in 2001 on the coming bull market in commodities.

Those two asset may be due for a cyclical pullback (Sokoloff might rightly say "who cares, the trend is bigger than the cycle"), but look at these two reports as well:

"How To Invest In The Coming Global Food Crisis" and "Water: World's Most Common Resource Could Become Its Most Precious Commodity." These two papers struck a powerful chord after we also read Jared Diamond's Collapse: How Societies Choose to Fail or Succeed.

The reports convince me that TIPS, reflecting CPI inflation, may continue to underperform Commodities for a long time, meaning that investors should apportion some of their inflation-hedge allocation to Commodities. The latter group of reports mentioned above (Food and Water) helps convince us that Agricultural Commodities can play a role in investors' Inflation Hedging strategies because they may particularly to outperform TIPS in the coming decades, especially given the coming soil management trouble and weather volatility induced by deforestation and global warming. It also helps convince us of 13D's compelling reasons to be overweight Brazil in one's Developing Markets allocation (see the 1-31-08 and 1-3-08 reports).

13D reports compel us to pay attention to other trends as well, though it may take some time before a broad "asset class" develops around these trends. They are Infrastructure trends (traditional airports/railroads/ports as well as "the coming biorefinery revolution" and desalination revolution see 1-3-08 and others), Health Care trends (Brain Science -- see his 1-17-08 report -- as well as "The Coming Plagues...Beneficiaries: New Antibiotics, Genetic Testing, and Antiviral Drugs" and Stem Cells), the world's Power shortfalls (see his 1-31-08 report) and shift to nuclear power (1-3-08 report), the need to rapidly build-out Internet infrastructure (1-17-08) and the push into nanotech and need to counter the threat of cyberterrorism (same 1-31-08) report, the investment case for the Gulf States (1-17-08 report), and a heavy sprinkling of data supporting growth trends in High-Tech Military industries as a result of increasing competitiveness among nations in a world with less-abundant resources (see also this Martin Wolf article), and others.

Where Are You Versus Your Center?

When market's roil as they have in recent days, it's key to remember what your long-term strategic asset allocation targets are. That's how you avoid unnecessary trading mistakes and emotional turmoil. (What's more, reacting to a big market move by going with the momentum can often be the WORST decision, as discussed in a paper we highlighted yesterday. The paper shows that rapid market reversals often make investors' reactions very costly.)

Your targets will reflect your personal situation. There are many resources to help you determine what your optimal targets are -- your Fiduciary Advisor's resources, IndexInvestor.com, and a host of others. According to David Swensen in "Unconventional Success: A Fundamental Approach to Personal Investment":

• A generic portfolio based on fundamental investment principles provides a starting point for a discussion of portfolio construction. Table I.1 [Domestic equity 30%, Foreign developed equity 15%, Emerging market equity 5%, Real Estate 20%, U.S. Treasury bonds 15%, U.S. TIPS 15%] contains an outline of a well-diversified, equity-oriented portfolio....Ultimately, successful portfolios reflect the specific preferences and risk tolerances of individual investors. Understanding the quantitative and qualitative characteristics of asset-class exposure creases a basis for determining which asset classes to include and in which proportions to invest.

If an investor is following this generic asset allocation and rebalancing at mid-year and year-end, we'd expect him to now be somewhat underweight equities and overweight Treasuries. We don't see a particularly compelling reason to move-forward one's rebalancing.

That said, several weeks ago we substituted long-term Municipal bonds for some of our Treasury weighting. We took the risk that the financial crisis wouldn't cause further dramatic liquidation of Munis. We're about "even" on that bet, but it has caused more hand-wringing than necessary. All told, we're sticking with that position for the reasons highlighted a few days ago: Munis (tax-free) had sold off sharply and were yielding more than Treasuries (taxable), and taxes probably must rise in the next White House administration.

"I Knew The Bubble Was Bursting" and Asset Allocation

The best market timer on earth is Hindsight. Perhaps most investors saw the current credit crisis coming, but only some of them positioned their portfolios correctly. Those who "just knew it" will try again another day, by getting long with leverage when they see a bottom, or by taking profits and going short after a rally. The question is, how many of them will succeed? Asset allocation is based partly on the premise that very few investors succeed in enhancing long-run gains by trying to time the market over the course of their lives.

So we were delighted that the February issue of IndexInvestor.com summarized some of the latest research on whether market timing is a good strategy for individual investors. Their conclusion: not for the vast majority who have no proven track record. Inhibitors to long-run outperformance include (1) Psychology, such as bias toward paying attention to evidence that confirms rather than refutes one's view (IndexInvestor.com highlights "Do Investors Overweight Personal Experience?" by Kaustia and Knupfer), (2) Volatility (IndexInvestor.com highlights "Black Swans and Market Timing" by Javier Estrada, which shows extreme events to occur more often than theoretical "normal distribution" predicts, (3) Bubbles & Crashes: John Maynard Keynes' maxim that "The market can stay irrational longer than you can stay solvent, (4) Reversals, evidenced by a 2006 paper that showing that severe down-days are negatively correlated by subsequent sharp reversals that make market timing exceptionally tricky over time.

IndexInvestor.com highlights papers on both sides of the debate, such as "Riding Bubble", by Guenster, Kole and Jacobsen that suggests it may be worthwhile to try to ride bubbles, and "On Turning to Market Timing" by Cotton arguing that timing is not a good strategy for most investors. The article particularly touts James Montier's Behavioral Investing: A Practitioner's Guide to Applying Behavioral Finance.

These and other papers remind us of one overall point: professionals dedicate a vast amount of time and energy to timing the market correctly, but only some of them can succeed. Individual investors trying to play the Market Timing game should make as few major timing decisions as possible, and only after they've established a track record of being correct, and only when the evidence they've gathered lines up contrary to "consensus thinking" among institutional investors. It's a tall order. Stick to disciplined asset allocation, but ambitious investors
should continue to study hard in search for rare opportunities.

Munis: They Ain't No Treasuries

Value buyers of Municipal Bonds a few weeks ago seemed to have a lot in their favor. Principal headlines were: (1) After a big selloff, munis were yielding more than similar-maturity treasuries despite munis' tax-free status, and smart money was buying; (2) Investors anticipating U.S. tax increases in the next administration saw the advantage of owning muni bonds only rising, and (3) Warren Buffett was reportedly seeing brisk business for the new muni bond insurer he established, and (4) Muni bonds staged a sharp rally, showing a healthy reaction to positive chatter.

But Asset Allocation Adherents Knew Better

Municipal bonds aren't seen as a reliable way to fulfill one's deflation-hedge allocation. That's left to U.S. Treasuries, aptly highlighted by David Swensen, chief investment officer of Yale University, as he writes in Unconventional Success: A Fundamental Approach to Personal Investment:

• The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversificaton to investor portfolios.

The last few weeks support the point. Long-term munis, which by some measures have underperformed long-term Treasuries by upwards of 25% in the past year, have even slightly underperformed Treasuries since the muni nadir on February 29, 2008. Many investors are still selling munis to raise capital to meet the obligations to their panicked lenders, and some municipalities have cranked up new issuance (new supply to the markets, pressuring prices lower) as their other borrowing vehicles have become far too expensive amid the credit crunch.

Now we turn back to Swensen, who comments on munis:

• Investors who substitute tax-exempt [muni] debt for core holdings of Treasury bonds dilute the value of fixed income's diversifying power by introducing call risk and credit risk to the bond portfolio.
  

The End of the Beginning (That's All)

Bear Stearns' collapse and takeout by JP Morgan Chase for barely more than 1% of Bear's value only 14 months ago ends any hope that the U.S. is in something other than a major financial crisis. Bear is the first major financial intermediary to go down in the current crisis, and so the long beginning of the financial crisis -- when merely certain (albeit major) credit instruments, marginal lenders and hedge funds collapsed -- has finally widened to a period when every investor on earth has little choice but to make defensive preparations, at least as a contingency for when the crisis rolls his way. Denial, and the beginning, of the crisis, are officially at an end. Near-universal recognition of the crisis puts us smack in the Middle of it...

...Not at the Beginning of the End

The boom was too strong, too long, and accompanied by too much financial leverage to work its way out quickly. Erudite observer Yves Smith points out a research paper that makes this clearer than I can in a short space. The paper is titled "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison." The authors provided evidence to convince me that of the 18 post-war financial crises, the current one may well land in the top five. What's worse, the authors point out that the ameliorative steps the U.S. authorities are taking aren't offering the right kind of regulatory reform to set us on a happier path anytime soon.

Not Even Close to "The Beginning of the End"

Before the "Beginning of the End" can be declared, we'll may have to reckon with a few more boots to drop: (1) larger bank balance sheet writedowns (particularly of private equity loans) and (2) larger corporate defaults, (3) substantial further erosion in home prices and another wave of lenders' problems, and (4) investors' full realization that Developing Markets' banks and corporations will be heavily stressed by weakening export markets, weaker domestic demand, a wave of bank problems and significant corporate defaults of their own.

Where This Leaves the Asset Allocator

In the next several years, U.S. asset allocation prescriptions will decline from their typical 25-40% range amid the crisis of confidence in a nation that continually spends (rather than invests) more than it saves. As Developing Markets weaken during the current down-cycle, asset allocators will probably buy the dip, and asset allocation prescriptions will for Developing Markets will probably rise substantially from current 5-10% ranges. Many countries among the Developing Markets will be deemed earlier in their lifecycle, a topic I first encountered in Paul Kennedy's The Rise and Fall of Great Powers.

...And Two Complications -- Major Trends

Two major complicating factor will be to predict which of those Developing Markets are best positioned for (1) the environmental impacts of Global Warming and (2) the emerging national power struggle for scarce resources. Since #1 is more commonly discussed (but far from understood), let me highlight an article on #2 that helped me understand the sub-text behind so many headlines in the past year or two, and why it will become far more important to pick the particular Developing Markets to invest in. I'm referring to an FT article by Martin Wolf entitled, "The Dangers of Living in a Zero-Sum World Economy." I'm a bit more optimistic overall, but here's how the concerning article began....

• We live in a positive-sum world economy and have done so for about two centuries. This, I believe, is why democracy has become a political norm, empires have largely vanished, legal slavery and serfdom have disappeared and measures of well-being have risen almost everywhere. What then do I mean by a positive-sum economy? It is one in which everybody can become better off. It is one in which real incomes per head are able to rise indefinitely.
• How long might such a world last, and what might happen if it ends? This debate on the connected issues of climate change and energy security raises these absolutely central questions. As I argued in a previous column ("Welcome to a world of runaway energy demand", November 1, 2007), fossilized sunlight and ideas have been the twin drivers of the world economy. So nothing less is at stake than the world we inhabit, by which I mean its political and economic, as well as physical nature.

....and continued:

• The biggest point about debates on climate change and energy supply is that they bring back the question of limits.... This is why climate change and energy security are such geopolitically significant issues. If, for example, the entire planet emitted CO2 at the rate the US does today, global emissions would be almost five times greater. The same, roughly speaking, is true of energy use per head. This is why climate change and energy security are such geopolitically significant issues. For if there are limits to emissions, there may also be limits to growth. But if there are indeed limits to growth, the political underpinnings of our world fall apart. Intense distributional conflicts must then re-emerge -- indeed, they are already emerging -- within and among countries.

Asset Allocation: Tough to stay disciplined when markets swoon

With equity indices swooning, many individual investors' "fight or flight" instincts take hold. It's tempting to sell plummeting equity holdings, or jump into skyrocketing Treasuries or commodities. But that shouldn't be the first reaction. Rather, for most investors, now is a time to consider long-term asset allocation objectives rather than speculate on next week's trading activity. Looking to long-term wealth creation, now is the time for an individual investor to: (A) Re-calculate one's exposure to each of four major investment classes: equities, inflation hedges, deflation hedges and cash. (Include real estate equity as a sub-component of the long-term inflation hedge allocation.) (B) Discuss with a Fiduciary Advisor whether one's current asset allocation is consistent with long-term objectives. (C) Consider when one's next re-balancing -- or shifting between asset classes -- will be, in order to bring current allocations more in line with long-term objectives.

Consider words from David Swensen, the chief investment officer of Yale University, in his book Unconventional Success: A Fundamental Approach to Personal Investment (below). Swensen's long-term performance and his references to research findings have made him a highly regarded source for personal investors.

• Evidence points overwhelmingly to the conclusion that active [portfolio] management of assets fails to produce satisfactory results for individual investors. Two factors explain the individual's predicament. The first problem stems from the investment choices available to individuals. High costs and poor execution doom the vast majority of offerings. The second problem concerns responses by individuals to markets. Research shortcomings, rearview-mirror investing, and investor fickleness (in the face of both adversity and opportunity) cripple most investment programs. If the outside investment manager fails to diminish investor assets, then the investor steps in to administer self-inflicted pain." (Page 6, 2005 Edition)