Madoff Investors and White Shirts

It's becoming fashionable for Madoff investors to share their stories. One investor, Alexandra Penney, shares her tale of woe here.

For the thousandth time, the lesson is “diversify”:

More than a decade ago, when I was in my late 40s, I handed over my life savings to Madoff’s firm...

It's also clear the elite were the ones connected to Madoff:

I was brought up in very comfortable circumstances in a Waspy Connecticut suburb. My mother was a descendant of Greek royalty, an intellectual grande dame who wore elegant shaded glasses. But my father, a Greek immigrant, was a product of the Depression. He was a smart, strict Harvard lawyer who had seen bad times...I asked around and talked to my smartest friends with Harvard and Wharton MBAs. There appeared to be a secret society of Madoff investors. A friend who was older, wealthier, and more established somehow got me in.

It's still difficult to identify with Madoff investors, partly because there's an element of self-exploitation involved. Ms. Penny, for example, uses her article to promote a sex book she wrote years ago. She also unconsciously reveals how insulated she is when she talks about her forty white shirts, ironed by an immigrant named Yolanda:

I wear a classic clean white shirt every day of the week. I have about 40 white shirts. They make me feel fresh and ready to face whatever battles I may be fighting in the studio to get the best out of my work.

The language is shockingly out-of-touch. "Battles" fought "in the studio"? Is she forgetting that Americans, mostly poor and middle class, are fighting real battles right now? Also, who has 40 white shirts? I'm an attorney, so I actually need white collared shirts. Yet, I own only three--one from Gap (GPS), one from Macy's (M), and another from Nordstrom (JWN). I also specifically look for "wrinkle-resistant" shirts to save money on drycleaning.

Other readers picked up on the "white shirt" phenomenon, too--here's a comment from "Hammett":

Hey, you're worried about clean white shirts. So, you're going to have to learn how to iron and stand there until your back hurts, like most people. That's life. Get off your [arse], and get to work. And stop feeling sorry for yourself.

More on Madoff here and here. Public outrage isn't going to go away anytime soon. Scott Burns, one of my favorite finance writers, received 3,000 emails/letters when he asked readers how Madoff should be punished. What do you think, readers? What would be an appropriate punishment for Madoff?

Salary Info and the Middle Class

From The Atlantic's Jan/Feb 2009 issue (p. 77):

[T]he median household income in the United States is $48,000... [but] the median-household-income statistic is too blunt an instrument, because it contains households headed by 20-year-olds (i.e., students), as well as 90-year-olds (i.e., retirees). If you earn $48,000 at 20, you're doing fine and don't need government help; at 90, you're on a fixed income and have different needs (and more options) from government than someone younger. According to an analysis by The Third Way, the median household income for people ages 25 to 60, the prime working years, is about $68,000; if they're married, it's about $78,000. If both spouses earn income at some point during the year, the number rises to $85,000.

Makes you reconsider the definition of middle-class, doesn't it?

Out of the Fire and Into the Frying Pan?

The WSJ's Greg Hitt reports that the stimulus plan isn't really going to taxpayers--much of it is going right into the hands of government workers. See January 13, 2009 article, "Stimulus Proposal Aims to Aid State, Local Governments."

In a nutshell, President-elect Obama has asked Congress to give him more taxpayer money--more than the $700 billion already printed. Purportedly, this new money would be used to stimulate an economic recovery. The problem is, much of it will go to a new "education stabilization fund," or into the pockets of government workers. Under the proposed plan, $80 billion would go towards programs benefiting teachers' unions.

Is this change, or just maintaining the status quo?

Anthony Bourdain on the Decline of Meritocracy

I don't usually recommend television shows, but Anthony Bourdain's "No Reservations" is just too good to keep to myself. When I first saw Bourdain's show, I couldn't stand him. Fortunately, Bourdain is a quickly acquired taste, and by the second show, I couldn't get enough. Some people see Bourdain as a snarky alcoholic who gets paid to go around the world and eat for a living. Others, however, see him as confident America personified--unafraid of the foreign, friendly to all, direct, irreverent, and eager to socialize (preferably where alcohol is involved).

If you, like author Chuck Thompson (Smile When You're Lying), are disenchanted with the sanitized media, check out "No Reservations." In one of his best shows, Bourdain travels to Colombia. In between bites, we are treated to stories about Pablo Escobar, a local rap group, and the evolution of Colombia itself. (Other fans praise the Vietnam show as his best, but I haven't seen it yet.)

Bourdain's funniest moments seem to take place in cold weather. In Sweden, after a night out on the tundra, Bourdain goes on a hilarious 30 second monologue about how he wants to be called "Giver of life," because his cigarette lighter provided fire for his crew. In Iceland, Bourdain is looking forward to an annual party, and when it's nothing like promised, he gets drunk and proceeds to mock the entire event. At one point, he busts out his lighter in tribute to an Icelandic a capella group. Later, he names a horse Sarah Jessica Parker (she has a long face).

Mr. Bourdain also has a blog. [Update: looks like link has changed to here: https://www.travelchannel.com/shows/anthony-bourdain/articles/]

Bonus: here is a fantastic salon.com 2006 interview with him. My favorite excerpts are below:

On Bourdain's intense dislike for Rachael Ray:

Q: Will we see you in a year saying, "Oh, I had drinks with Rachael Ray, and actually, she's all right"?

A: Yeah, right. "After the hot-tub incident, I've changed my mind." You know, listen, like I said, I could be wrong. Unlikely. But maybe she's nice to puppies...[Anyway,] If I ever saw her getting trashed on Old Crow, pistol-whipping a vegan after a bar crawl, I would think, "That's an interesting woman. I would like to know her."

[Bonus: https://www.salon.com/2006/10/05/ruhlman_bourdain_foie/]

On immigration:

Listen, in 25 years, I don't remember ever seeing an American-born kid of any income level walk into my restaurant, or any restaurant owned by any of my friends, and ask, Do you have a dishwasher job, or a prep job, or a job for a kitchen porter? We're not willing to do it. If somebody else wants to come over here and do it, that's fine with me...

I also like the idea of people from other places coming to our country and multiplying. It makes for better food, higher expectations, more diversity and cuter people. Foreigners should come to our country and have sex with our womenfolk.

On how laws, P.C., and regulations are driving Americans apart and reducing merit-based values:

I think it's great that kitchens are maybe the last meritocracy, the last workplace where men and women can speak to each other honestly, however offensively that might be, where your value is only in how well you do your job and how well you can talk shit back at somebody. I see that as an admirable quality. I don't like the idea of tiptoeing around each other. I think that if you say something stupid and offensive, somebody should get right up in your face and say, "That was incredibly stupid and offensive, and f**k you too!" Once you enforce it, bring in the human resources department, everybody goes home to their own neighborhoods, and we never really talk.

[More on kitchens as meritocracies here (Judy Joo, 1/22/09, WSJ, "Out of the Fire, Into the Frying Pan").]

Author's note: Bourdain's paragraph above really appeals to me. I am usually non-confrontational, so it's hard to tell my stance on most issues. However, despite my generally flexible nature, I am steadfast when it comes to the idea of meritocracy. Judging people based on their work, not their beliefs, should be the norm, not the exception. As a lawyer, for example, I don't care what a judge's political affiliation is, as long as s/he reads the pleadings. I don't even care if I lose, as long as the rationale makes sense. But give me a judge who's lazy, who got his/her job through charisma rather than hard work, and who relies entirely on law clerks, and it's all I can do not to have a Tourette's "incident" during oral argument and an anger-induced aneurysm afterwards.

Unfortunately, many judges, because of the political nature of the appointment process, got their jobs through charisma rather than a widely-acknowledged work ethic. Once on the bench, judges are given highly trained staff who prepare advisory legal memos on each case. Because of these law clerks--who initially have more overall substantive legal knowledge than the judge--the incentive to read litigants' pleadings is removed. Predictably, most judges lapse into a titular position, where they rubberstamp their clerks' opinions or memorandums of law.

In fact, if you were to put a camera above most judges during oral argument, you'd see only a legal memo prepared by a law clerk. The judge usually doesn't open any of the case files, unless an attorney specifically mentions an exhibit or particular page. Also, a judge knows that if s/he changes a law clerk's proposed opinion, either the clerk or the judge must spend time drafting a brand new opinion. As a result, changing a clerk's proposed opinion creates work (and trouble) for everyone. In this way, the "memo" system fundamentally changes oral argument and the legal system. Rather than seek the truth or a just result, the judge's job becomes corralling the attorneys into the confines of the law clerk's memo.

Inevitably, the "memo" system results in a clash between hard-working lawyers and judges who don't read the pleadings. That's because the "memo" system is fine if you're a bad or lazy lawyer--you get treated the same as a lawyer who's spent hours reading every single case cited in the papers and who knows every detail of his/her case. It's like going to a class with a teacher who doesn't prepare for a lecture and who treats all the kids the same--regardless of whether they did their homework perfectly or didn't bothering opening a textbook. If you're a student in that class, you can't help but be upset.

First, your teacher just got paid taxpayer money for showing up unprepared. Second, your teacher is wasting your time because s/he has nothing to offer. You could have spent the day doing productive, money-generating activities, but you can't, because you have to spend time preparing in case the teacher does have questions, and you have to spend time attending the class. Third, even if the best students don't get discouraged, they are less motivated to do their best. Good students like being pushed--lazy ones don't. Fourth, anyone who cares about the schooling system as a whole should get upset. By failing to work hard, your teacher is incentivizing his/her students to be unprepared or to submit shoddy work. Predictably, everyone starts slouching towards mediocrity, because unprepared teachers discourage students who ask questions or who are passionate about a topic. There's no point in having any substantive interaction anyway, because the unprepared teacher's job isn't to get the truth or the proper result--it's to get the students to be quiet and accept the findings in his/her research assistant's memo. (Some teachers, if they're particularly devious, will try to embarrass vocal students by having arbitrary decorum rules. Such rules allow teachers to divert attention from substantive matters when in a tough spot, while also making well-prepared students appear ill-mannered.) Thus, the purpose of the schooling system--to create an environment that encourages achievement and well-informed debate to maximize accurate results--is perverted, all on the taxpayer's dime. Change teachers to judges, research assistants to law clerks, and students to lawyers, and you might have an accurate metaphor for how our current judicial system works.

To be fair, most law clerks are quite good (almost all of them graduated at the top of their class). They're usually sitting in the back of the courtroom, silently viewing oral arguments. In the current judicial system, good lawyers learn that their job is to divine what the semi-invisible law clerk wants, not the judge. There are at least two major problems with this delegation of judicial work:

1. There is no way for an attorney to question the clerks; in fact, one federal court refused to even give me a clerk's name after I protested the court's refusal to have a hearing.

2. Most clerks usually have no law firm experience, so they don't know much about the actual practice of law. This can result in a new or pusillanimous clerk making a credibility determination based on the size or prestige of a firm rather than the merits of the case. It also results in a system that is disinclined to take any risks, no matter how small. (Better to "split the baby" and award something to each side, even if one side is completely correct. No one will protest too much, except perhaps the client--who is mostly invisible until trial.) Good lawyers quickly learn they need to prepare their clients for settlement--no matter how good or bad the case.

As for judges, they continue to have little incentive to read any of the pleadings. For example, I had one case where a judge got the name of my client's supervisor wrong--even though I had quoted her numerous times in my papers, and her testimony was our main source of evidence. Lest you think this was a routine motion, it was a dispositive motion that eventually dismissed my client's entire case. (This judge's colleague once said the judge isn't enamored with "motion work," and prefers to spend his time on trials. That's fine, except if your law clerk is the only one reading the pleadings, s/he decides whether you have a trial.) I've had a case where a judge pointed to my PO Box mailing address on my pleading caption, thinking I didn't have an office address. (After the first page, my papers actually listed my office address.) I could go on, but I'll spare my readers.

In any case, judging people on their work ethic is the clear solution to solving the timeless issues of racism, sexism, etc. I don't mean we should have a nation of Orwellian Boxers--the result counts, too. But make no mistake--without affirming work ethic as our primary value, we will rely on our prejudices and lesser angels to make decisions, leading to a decline in merit-based progress. Down the road, we'll realize that when meritocracy goes, down goes any nation--and by then, it will be too late.

And on that note, here is a paragraph attributed to Bourdain I can relate to, sans the Mary Jane:

I know there's deep inside (me) some lazy hippie who'd be perfectly happy to lay on the couch, smoke weed and watch The Simpsons all day - I'm really afraid of that guy. I don't like him. I don't want him around. And my whole life is kind of constructed to avoid reverting to that guy: Stay busy. Stay focused. Try not to mess up.

Update on February 4, 2009: I forgot an essential element that needs to accompany work ethic--self-restraint. Without self-restraint, having a wonderful work ethic could mean Germany gearing up for WWII.

Intel Makes its Numbers, and My Deja Vu Experience

Looks like my hits are coming early this year--as I predicted, Intel (INTC) made its earnings numbers today. See my prediction here, and the AP earnings summary here. If the presidential inauguration goes well, Intel stock may rise above $14/share next week (Monday is a holiday). If I am correct in this follow-up prediction, I should achieve a 5.7% gain in less than one week. (If you're interested, you can view the results of my 2008 predictions here.) (Update on January 28, 2009: Intel stock today increased above $14/share, making my prediction true, but a few days later than I expected.)

If you read the first article linked above, you'll notice that two analysts downgraded Intel, even assigning a $10/share price to Intel recently. (Intel is trading around 13.58/share in after-hours trading.) Analysts came under fire because they were overly optimistic during the subprime crisis, so expect a reversal of sentiment--analysts will now become too pessimistic. In over a decade of investing, I've rarely seen any analyst issue "sell" ratings or assign prices to blue-chip companies below current trading levels. If you're a contrarian investor, you may be encouraged by these overly pessimistic signs. I know I am.

I just re-read a Money "special report" issue from September 2002, another turbulent time. The cover page had the following deja vu titles: "When will the bear market end?"; "Where should I put my cash?"; and "Who can I trust?" As I flipped through the pages, I began smiling. If Money magazine re-issued its September 2002 issue today, no one would notice any outdated information. Indeed, most stock prices and indices are back to where they were in 2002. In addition, Americans had just suffered through the Enron and Worldcom debacles, which reduced not only investor confidence, but faith in the entire capitalistic apparatus.

Let me share with you some lines from Money's 2002 special report--see if they look or feel familiar:

Stock prices in free-fall: "There's a disconnect between how these businesses are doing and how their stocks are performing," says one manager. (p. 36)

Anger over corporate irresponsibility: Nell Minow has developed some very clear ideas of how to cure what ails corporate America. To her, it boils down to one thing: Change the way boards of directors operate. Yes, reform of the accounting profession is needed. Yes, it ought to be easier to put corporate fraudsters in jail. Yes, something has to be done about those insanely outsize options packages that have given so many executives the motive to commit fraud. But to Minow, all of this is secondary to reforming corporate boards. (pps. 57-58). [Author's note: someone get Ms. Minow an SEC position pronto.]

Anger over inadequate government oversight: But after 2 1/2 years and a market loss of nearly $7 trillion, the White House and Congress still don't get it. (p. 63)

No commentary needed: Whoever said crime doesn't pay obviously never ran a big corporation. (p. 64)

Bargain hunting: Is General Electric (GE) stock a bargain? It looks like one to us. (p. 68) [note: GE was selling for around $28/share at the time. It is now selling for $13.77/share. I liked it at $14.66/share and look forward to averaging down.]

Nuff' said: Is Our Financial System Broken? (p. 79)

What's the lesson? Just this: the more things change, the more they stay the same. I will leave you with some reassuring words from experienced investor Peter Lynch, circa 2002 [warning: PDF file]:

RUKEYSER: If you could give one sentence of advice to scared investors right now what would it be?

LYNCH: I think you ought to see some kids. You know, hire an eight-year-old. Hire a six-year old. Just watch them. They don't know who Alan Greenspan is. They don't know about the shape of the curve. They're optimistic about the future. We'll be fine for the next 30 or 40 years.

When I heard Mr. Lynch on the Louis Rukeyser show in 2002, I remember thinking, "He gets it." I coach youth basketball to get away from the vicissitudes of my legal practice and investing. There's something about seeing a bunch of happy, healthy kids coming together as a team that inspires faith in the human race. This year, I'm coaching 4th graders at the Campbell Community Center. My favorite current NBA player is the San Antonio Spurs' Tim Duncan. Yet, in some sort of cruel cosmic joke, my assigned team this year is the Spurs' nemesis, the Lakers. Fittingly, our team uniforms consist of hideously bright yellow t-shirts. Oh, well. Things on the outside may look bad right now, but deep down, our future is bright, we have plenty of land, a new president, and peace within our shores. I don't know when we'll get a market recovery, but just like post-September 2002, it'll be here before we know it.

Disclosure: I own shares of GE and Intel.

Yahoo: Decker Out, Bartz In

As most of you already know, Carol Bartz is Yahoo's new CEO. Unfortunately, Susan Decker is no longer with Yahoo. I don't know anything about Carol Bartz, but I am happy to see at least one female CEO at a major Silicon Valley company.

Manuel Acuna's Wonderful Poem

Here are some lines from Manuel Acuna's "Before a Corpse":

...for out of nothingness we are not born,
and into nothingness we do not die.

Existence is a circle, and we err
when we assign it for measurement
the limits of the cradle and the grave.

The grave holds nothing but a skeleton;
and life within this mortuary vault
continues secretly to find its substance.

Beautiful, isn't it? The entire poem can be found here.

For whatever reason, it reminds me of John Donne's "Death Be Not Proud."