Investors are understandably concerned about the implications of the outcome of the November 6 election.  Suffice it to say, the stock market rendered its own judgment on Tuesday, with a decline of 313 points.  Today, we are seeing more follow through on the negative sentiment.  Interestingly, US Treasury bonds rallied, with the 30 year bond up almost $2!  The decline was broad based, with hardly any stocks up on my main quote screen.  Predictably, Energy and Finance, some of the most regulated (and demonized) industries, got hurt the worst.  I read a story in the Wall Street Journal today that said that Exxon Mobil and Johnson & Johnson now pay a lower interest rate on their bonds than the US Government!  This is unprecedented, at least in modern times.  Considering the fact that the US Government normally (and historically  always) has paid a lower interest rate than any other domestic bond (and most foreign bonds), this should be a warning sign and a wake up call to those in power who have an effect on the perceived quality of the US Government and its ability to repay debt obligations.

Harry Reid, the Democratic leader in the Senate, has already said that he is willing to negotiate if the Republicans in the House are willing to raise taxes.  But he says that he refuses to touch or reform Social Security and other such government entitlement programs.  John Boehner, the Speaker of the House, has said that he is willing to raise taxes if the Senate is willing to tackle entitlement programs!   There does not seem to be any common ground here, at least today.

Hang onto your wallets, we are about to be in for a bumpy ride!

Backstage Wall Street: A Book Review

While trolling the Barnes and Noble web site for interesting investment books, I found one written by Joshua M. Brown: Backstage Wall Street:  An Insider's Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments. I knew that the book had to be about scandalous behavior by the brokerage industry that would give an "inside look" at what we think might be happening, but no one will admit to.  Most of it is old news to me.  But for the average investor, it should be a real eye-opener.

I don't know what Mr. Brown studied in school, but do know that he has an undergraduate degree from somewhere. He first worked in a "boiler room", a brokerage house that no one has heard of.  His job consisted of making cold calls to prospective investors throughout the United States, trying to convince prospects to become customers who would execute trades and pay him brokerage commissions.  He eventually walked away from this job, which had become very lucrative, when he met Barry Ritholtz, an independent investment advisor (also known as a Registered Investment Advisor, or RIA), who runs his own business.

I planned to quote a few passages from the book that many of you might find of interest, but there were so many that I gave up trying to bookmark each one and instead decided to concentrate on the most important points that he makes.
___________________
Brokers are required to pass a regulatory exam called the Series 7.  Here is how Mr. Brown describes the exam:

"The Series 7 is the primary license that stockbrokers (called registered representatives in the regulatory vernacular) must attain to begin selling securities to the public.  It is a 250-question exam that teaches the young and aspiring broker absolutely nothing of any utilitarian value.  There is virtually zero knowledge that the broker takes from this test and puts to good use once his or her career begins.  The sections of the test on ethics are obvious to the point of stupidity.  All the securities laws you learn about date back to the 1930's and are totally irrelevant in the context of the abuses that are so prevalent today.  The test itself is merely a six-hour barrier of entry so that not anyone off the street can sell securities.  And as far as barriers go, it is a weak one; I've known people who could not tie their own shoes who have past the test over the years."

That is not to say, of course, that all brokers are clueless.  They do learn on the job, and some of them hold advanced degrees, such as an MBA in Finance.  They may also hold other licenses or certificates of value, such as the Chartered Financial Analyst, Certified Public Accountant, or Certified Financial Planner designations.  All of these rigorous courses of study and exams have relevance to investments, and individuals who hold these titles have gained valuable knowledge that will benefit their clients.

He also does a good job of differentiating between the fiduciary standard (for Registered Investment Advisor) and the suitability standard (for brokers, also known as Registered Representatives)

_______________

Mr. Brown describes his move from being a broker to being an independent investment advisor:


"I was now in a situation where my clients' success meant success for me and for my practice all at once -- a virtuous and symbiotic relationship for all parties involved."  In contrast, brokers make money whether you do or not.
_______________
Mr. Brown does a good job differentiating among the different types of advisors who are permitted by various regulatory bodies to interact with investment clients.  I hesitate to say that brokers are giving advice, because in many instances, they have clients sign a contract that says that the client is making all the final decisions (and is making "unsolicited trades") in order to reduce the likelihood that the client could sue them successfully.  After all, they were only making a suggestion, you made the decision to invest!

He says:

"The vast majority of contact between the investment industry and its individual clients is facilitated by two very different types of 'professionals'.  The irony is that as different as they may be, the American public looks at them as though they are one and the same."  He goes on to describe three different fee arrangements:  fee-only independent investment advisors (who are not brokers), brokers who work for commissions, and brokers who use a mixed model (what some call "fee based" advisors, but he refers to as a "hybrid broker-advisor" model).

A critical issue with "hybrid broker-advisors" is that they will take off their fiduciary hat (a higher standard) and put on their suitability hat (a lower standard) if they decide to sell a client a commissionable product, such as an annuity, rather than charging a fee calculated on a percentage-of-assets basis.  There are clear conflicts of interest, and clients typically have trouble distinguishing when the advisor is acting as an advisor or a broker.
 _________________________

On another subject, Mr. Brown claims that 401(k)s are largely limited to investing in high-cost mutual funds, and he describes how this development evolved and how it is changing.  If you are contributing to a 401(k) plan, I would encourage you to read Chapter 10.

If you invest in mutual funds with a broker, and want to know how the different classes of mutual funds differ in terms of their costs, read Chapter 10.
___________________
Mr. Brown also sprinkles throughout the book reasons why non-professionals should consider hiring an investment advisor.  Here are a few nuggets of wisdom on this subject:

1. "The truth is, there is no more precision in financial services that there is in medicine or architecture or computer science.  Things go wrong, people act emotionally, and not everyone has the best intentions at all times."

I believe this is true.  Investing is part art and part science. It is about assessing and evaluating information gleaned from reading annual reports and regulatory filings of public companies and Morningstar mutual fund evaluation reports.  It is about assessing whether or not individual securities are undervalued or overvalued.  It is about reading newspapers and other publications, researching on the Internet, and deciding which investments should perform better in the current and future economic and political environment.  It is about evaluating what mix of individual stocks, individual bonds, mutual funds, ETFs and possibly other investments will be the best one for each client, or yourself, if you are going it alone.

2. "Hold their hands, be reassuring", Mr. Brown was told at the advent of his career.  He goes on to say "You'd be amazed at how true this statement actually is, particularly in the midst of a crisis. But what good is offering my hand to an investor if I believe, as he does, that we are both about to tumble off a cliff?  It turns out that to that investor, my grasp is more important than oxygen itself, I have come to learn."

It is understandable to worry in the midst of a crisis.  However, the value of the entire stock market will never go to zero, the entire economy as we know it will not cease to exist.  It is important to realize that crises, too, shall pass, and crises always present opportunities for big gains if you are willing to either hold on or jump in when the future looks the bleakest.

3. "The truth about civilian investors is that, in the aggregate, they will almost always enter and exit stocks and bonds at the wrong time.  This has been proved over and over again, whether we are looking at mutual fund inflows and outflows, 401(k) contributions, retail brokerage firm margin debt, or almost any other gauge that tells us what the average investor is up to."

"While there are those who have found success investing on their own, the great majority of what we'll call 'ordinary' people would be better off getting some help.  This is certainly not to say that they should take and pay for the advice of just anyone who is willing to give it!"

4. Mr. Brown also describes as bad investments, including SPACS (special purpose acquisition corporations), Chinese reverse mergers, one-drug biotechnology stocks, private placements and private REITS.  He says that most "civilian" investors are not in a position to properly evaluate these, and that staying away from them is best.

He also describes "Brown's law of brokerage product compensation":

The higher the commission or selling concession a broker is paid to sell a product, the worse that product will be for his or her clients.

He also outlines other investor traps, including one that Bernie Madoff's clients fell into:

"Financial advisors who self-clear or self-custody clients funds.  (Always be sure that there is another pair of eyes on your money, preferably a large corporation's.)"
________________
There are a few sentences in the book about which I take issue.  For example, Mr. Brown writes the following:

1. "The market is made up of buyers and sellers, both of whom believe they are on the right side of a given purchase or sale."

This is not exactly correct.  People buy and sell stocks for many reasons, not necessarily because they think a stock or bond will rise or fall in price in the near future.  For example, some clients invest for income.  Others sell stocks to fund major purchases, such as homes, autos and education, or to pay a major health expenditure.

2. "And if this all sounds futile to you, keep in mind that it's only gotten worse with the advent of exchange-traded funds and the growing realization that active management is a farce anyway."

No, active management is not a farce.  It has a critical role to play in insuring that the income generated from a client portfolio meets a client's ongoing spending requirements.  With exchange-traded funds and mutual funds, it is not possible to accurately predict the amount of income that will be thrown off by the investments in the portfolio, because they are always changing.

It also has a critical role to play in managing a client's tax burden.

I would encourage you to pick up a copy of this book. 





Barry Ritholtz writes a blog that may be viewed at the following link:  www.ritholtz.com.  Mr. Brown writes a blog at the following web site:  www.thereformedbroker.com.

The Differences Among Investment Advisers, Stock Brokers and Financial Planners

This is an excellent summary, written in simple terms, of the differences between Investment Advisers, Stock Brokers and Financial Planners, offered by the Investment Adviser Association.  It explains the type of financial professional might be a good fit for you, depending on the types of services that you require, and the different duties of each.

https://www.investmentadviser.org/eweb/docs/Publications_News/Reports_and_Brochures/Cutting_Through_the_Confusion/cutting_through_the_confusion.pdf

Remembering 9/11: Lessons in Life and Investing

Yet another anniversary of the 9/11 attacks have come and gone.  

Listening to some of the newscasts this Tuesday, I was struck by commentators talking about how people remember where they were when they heard the news about the attacks, much as those of us who are old enough to remember JFK’s assassination remember where we were on November 22, 1963.

Remembering the 9/11 attacks took me back to that fateful day.  This past Tuesday was much like 9/11/01:  it was a gorgeous day with a bright blue sky and few if any clouds, with a temperature in the 70’s.  The morning of 9/11, I sat at the kitchen table as I usually did in those days (before I bought my office property), reading The Wall Street Journal.  In a departure from my normal habit of turning the television on, with CNBC blaring in the background and distracting me from focusing on the newspaper, I decided to turn off the noise and enjoy a peaceful, quiet morning.  All of my attention would be focused on the newspaper, with my yellow Labrador retriever, Sunshine, lying at my feet.

That quiet morning was suddenly interrupted by a phone call.  My father phoned from San Antonio to announce that an airplane had crashed into the World Trade Center.  Being a professional skeptic, I told him that the story was probably a hoax.  He said, “It’s no hoax, turn on the TV!”  And there it was, WTC Tower 1, its top few floors lost in a black, billowing cloud.   My thoughts immediately turned to those souls in the upper floors who were either trapped or had died on impact or shortly thereafter.  I wondered if there was a possibility of a rooftop rescue for the living, and how scary that would be.

Windows on the World, a restaurant that was frequently used for business meetings and conferences, was located on those top floors.  In January 1999, my husband and I had attended an investment conference hosted at Windows on the World.  I shuddered to think about having actually been in that very restaurant just a couple of years before this tragedy.

About 15 minutes later, all of a sudden, Tower 2 burst into flames about mid way down from the top of the building.  I thought it might have been a bomb, since it was not obvious from the CNBC studio’s vantage point in New Jersey that a second plane had crashed into the second tower.  This was a lot worse, since there would be many more people trapped above the impact site, unless they had evacuated the building after the first plane hit.

I thought about how many people might be working in those buildings – 50,000 perhaps?  How would they get out?  How many thousands would die trying to escape?

After that, it was announced that President Bush had ordered all commercial airplanes to land immediately.  I asked myself if this was an overreaction.  Surely the WTC was the only target!  But no, the Pentagon was next.  At that point, I can’t tell you what was going through my mind.   It is unprintable.

Moreover, my husband was in New York City on 9/11, attending an industry conference.  Having been to New York City just a month prior, I knew where he would be, and it was several miles from the Twin Towers.  He had suggested that I might want to go along and be a tourist.   But my instincts told me to stay home.  Obviously, it was a good decision, for more than one reason.

As I thought whether or not to travel with Bob, I had pondered seeing the Statue of Liberty, Ellis Island and the Observation Deck at the WTC!   In August 2001, I had attended a reunion of friends in New York City, and some of them had gone to the Observation Deck on the top of one of the WTC towers.  It was a highlight of their trip.

Back in the 1980’s I had visited the Observation Deck in the express elevator.  Just for fun, I decided to time the journey on the elevator to see if it took the same amount of time to ascend as to descend.  It took about a minute for the elevator to rise to the top floor, but three seconds less to descend back down to the base of the tower.  I thought about going back just for fun to see if the times to ascend and descend had changed.

In any event, Bob’s mother phoned to ask if I had heard from him.  I told her with confidence, “No, but I am sure that he is safe, since his conference is in Midtown and the World Trade Center is Downtown”.  Of course, I knew that Bob was going to meet a salesperson from Keefe, Bruyette and Woods, and there was a small possibility that he had been in the wrong place at the wrong time.  But surely, he would be at the conference in Midtown….

About 10 minutes later, Bob phoned.  He said that he could only get through to our toll-free number that we had at our house.  Phone calls to non-toll-free numbers would not go through.  I told him that his mother had just phoned me, and that I would let her know that he was fine.  

Manhattan was closed off by the authorities.  No one could get on or off the island.   When travel was finally restored, Bob phoned to say that he was taking a taxi to Penn Station and had devised an alternative plan to get home, since all commercial flights were still grounded.  At the time, Bob did not even own a cell phone, so he had to use either his hotel’s phone or a pay phone to get in touch with me. 

Penn Station is a central train station where various railroads (including Amtrak, the Long Island Rail Road and the PATH trains to New Jersey) arrive and depart.  The fact that multiple railroads converged in that central location turned out to be a Godsend.

Little did Bob know when he closed the door to his hotel room that his plan was to change.  When he arrived at Penn Station, the lines at the ticket windows of Amtrak were lengthy.  He immediately knew that there would be no room for him on Amtrak.  Luckily, Bob is a train buff who knows his way around the rails.  He went to another floor where the PATH trains operated.  It was practically a ghost town.  He walked right up to the ticket window, and bought a ticket to Trenton, New Jersey. 

In Trenton, Bob hopped on a SEPTA train to Philadelphia. Before departing from Trenton, he phoned me to let me know where he was.  He told me that his plan involved trying to find a rental car in Philadelphia at the airport.  But if a rental car were unavailable, he knew friends in Philadelphia and would have a place to stay. 

Shortly after he phoned, his assistant at work phoned me to say that she had found a rental car at the Philadelphia airport, and asked if Bob still needed it.  I told her “yes” and she immediately confirmed with the rental car company to set aside the car for Bob.  Rental cars were in very short supply as stranded air passengers were forced to find other ways home.  Had I not been at home (in the right place, at the right time), Bob might well have been stranded in Philadelphia.

To complete his journey, Bob took a taxi to the Philadelphia airport, drove the rental car to the Dayton, Ohio airport, where his car was located, then drove home.  

During his journey, Bob rode in two taxis, two trains on different rail road systems and two passenger cars, one of which was a rental.

Bob and I personally knew 12 people who worked in the Towers, or in Building 7, which collapsed later that evening due to collateral damage.  Only six of those people survived.  One colleague worked in Building 7 and happened to be late to work that day.  Another friend was in Tower 1 and ran when the first plane hit.  He was lucky.  He worked on the 10^th floor.

The second colleague, who worked in Tower 2, ran when the first Tower was hit.  It took some time, but the woman finally phoned Bob about six weeks later to let him know that she had survived the attack.  She was the one with whom Bob had scheduled what turned out to be an after-work get together, and Bob was devastated when he thought that she had not survived.

This is her version of the story:  “I was at my desk.  When the first plane hit, I did not have my purse, my cell phone or my shoes on.  I just ran.”  As it turns out, she worked on one of the floors that took a direct hit from the second plane. 

As she was walking up the West Side highway in her stocking feet, she was thinking to herself, “I hope that Bob understands why I can’t make it tonight!”  Such is the work ethic of the vast majority of professionals on Wall Street.

Many of her colleagues, who worked for Keefe, Bruyette & Woods, stayed at their posts and perished.  I asked Bob why they would stay at their desks when danger was near.  He said that people in our business are used to taking calculated risks, and in this case, they were on the wrong side of the bet.

According to a news account published shortly after 9/11, another colleague was trapped in one of the elevators when Tower 2 was hit, and as a result, the doors were jammed shut as the elevator shaft buckled.  There were two men and two women in the elevator.  The two men pried the doors open so that the two women could escape.  The men were too big to fit through the opening and were in the elevator when the tower collapsed.

The morals to this story:

• Trust your instincts.
• Sometimes, skepticism is unfounded.  Nevertheless, it always pays to be careful and check your facts.
• Sometimes, despite our best efforts, we can be wrong.
• When we take a calculated risk, it should be an informed decision.  But if we take a calculated risk, it should be about a subject about which we are knowledgeable.
• Sometimes, you are in the right place at the right time.  Unfortunately, the reverse is also true.
• There is more than one way to reach your destination.
• Being experienced and knowledgeable can help you (or your client) arrive at the intended destination when others might fail.
• People will do things that may not benefit themselves, but can make a meaningful difference to others.

How Investing is Like Dog Training

Those of you who know me pretty well know that I am a dog lover.  Those of you who know me very well know that I compete at the highest levels of dog training.  My girl, Aspen, has earned 89 Obedience Trial Championship (OTCh) points.  One hundred OTCh points are required for a dog to achieve the OTCh title.  The OTCh , a title granted by the American Kennel Club, is a very exclusive and special title.  Only about 100 dogs per year earn this title. 

Moreover, Aspen has also been invited to the National Obedience Invitational this December.  This dog show is, as the name suggests, an “invitation only” affair.  Only dogs who have met certain very high standards are eligible to be invited to this very prestigious event.

This week, I would like to discuss how training dogs to compete at the highest levels of obedience is similar to investing in the stock market.

In dog training, attention to detail can mean the difference between winning and losing.  The same is true of investing in the stock market.  Likewise, it takes a lot of time and devotion to detail to ensure that I am investing my clients’ money in the very best stocks that are offered for sale.  Importantly, all decisions regarding what I buy and sell for each of my clients are made by me, after a careful review of a company’s financial statements in comparison to where a company’s stock is currently priced.

When I decide to buy a stock, I have personally reviewed the all research reports, issued by brokerage firms, to which I have access.  But that is just the beginning of my assessment.  Having a Certified Public Accountant (CPA) license, and having worked as a financial statement auditor at one of the “Big 8” accounting firms in the mid-1980’s, in my view, gives me an extra level of expertise that other investment advisors (and brokers) do not have.

I also personally review the company’s most recent financial reports, including the Annual Report and 10(K), which is a report that is similar to the company’s annual report, but is mandated by the Securities and Exchange Commission and at times offers additional information than that which is included in the Annual Report.  Depending on the time of the year, I may also review the company’s quarterly statements and 10(Q) reports (which include information for 3-month time periods, but otherwise are similar to the company’s Annual Report and 10(k)).

I will then decide whether or not the company’s stock, based on the information contained in the financial statements, is worth buying at its current price. 

Why does this matter?  A great company may be in a position in which its common stock is overvalued and therefore is not worth buying.  In these cases, I keep my eye on the stock and will buy it when there is a general market decline, and all stocks are cheap.  In this scenario, the stock is undervalued, yet it is a wonderful company worthy of investing my client’s money in.

There are also situations in which a whole economic sector of the market it sold, and other sectors of the market are purchased.  For example, if there are fears of recession, economically-sensitive stocks, in industries such as Chemicals, Papers, Metals and Mining, Energy, Consumer Durables (autos, homes) suffer.  This can create a buying opportunity.

So-called “defensive” stocks, such as Consumer Staples (Wal-Mart, Procter & Gamble) and Utilities (Duke Energy) will perform relatively well during periods in which investors fear that the economy will decline, as investors sell stocks that are sensitive to economic weakness and buy stocks of companies that sell goods and services that are required regardless of the economy’s strength.

In the case of a mediocre or poorly-run company, sometimes, there is an opportunity for improving the management of the company.  Normally, I try to avoid mediocre or poorly-run companies, but if there is an opportunity to buy such a company at a compelling price, I might take the plunge.

Generally, I like to invest in companies that are high quality and can be held for long periods of time.  These companies do well year after year, and slowly, but steadily, will make my clients money, as well as provide dividend income (and dividend increases) that my clients are normally seeking.

Another way in which dog training and investing are similar is that sometimes, our results depend on what other people do.  When you are trying to earn an OTCh on your dog, you do the very best that you can with your dog.  You and your dog are a team, and you cover for each other if one of you might not be working up to their highest level.  There have been times that I have covered for my dog, and there have been times that Aspen has covered for my poor handling.

There are also the other dog and handler teams to consider.  Sometimes, other dog and handler teams just perform better than you and your dog.  In all cases, you and your dog do your best, and where you end up in the placements ultimately depends on how other teams perform.

The same is true as far as investing in stocks.  As a professional investor, I may have done the best research possible and selected the best companies possible in which to invest.  But this quarter, or even this year, other stock market investors, collectively, might have a different opinion.  This may lead to a situation in which an individual stock, or a client portfolio that includes many stocks, might not do as well as “the market” during the period during which investment performance is being measured.

But unlike a dog show, there is not a sure “end” to the measurement period.  Instead, there may be a time during which a client’s investment performance does not measure up to the performance of a stock market index, such as the Standard & Poor’s 500.  In these cases, it is important to understand that this measurement period is not the end.  Ultimately, this may be a temporary situation, and with time, the superiority of the client’s investments portfolio will be obvious.

On a final note, I mentioned the word “team” as it relates to a dog and their owner/handler.  I see investing for my clients as a team effort.  Unless a client communicates to me their true investment objectives, it is impossible for me to put together an investment plan that will meet their objectives.  Being a team requires a level of trust in which we can communicate what must be communicated in order to get the job done.  The same is true with dog training, especially when a dog and handler team is at a dog show and winning or losing is on the line.  And when the client’s future financial security is on the line, trust and an open line of communication is everything.

It Pays to be Optimistic: Musings About the DJIA

My journey in the investment business began in June, 1981 at USAA Investment Management Company as a Portfolio Assistant to the aggressive growth fund portfolio manager.  I don't remember the exact date, but June 14 is as good a date as any to start this historical journey.  On June 12, 1981, the Dow Jones Industrial Average ("DJIA" or "the Dow") closed at 1006.28.  This was the beginning of a long, grinding bear market, during which a recession was weighing on the economy as well as the stock market.  One of my jobs was to record the ending value of the Dow every trading day, along with it's percentage change, and distribute a report to the management team of this and other critical market data.  Recording this every day was a bit depressing: it seemed like the blows would never end as the Dow drifted downward.

One day, one of the portfolio managers and I discussed the state of the stock market.  He wanted to make a bet that in 10 years, the DJIA would close above 3000.    I declined the bet, even though his idea seemed so far fetched that I could not believe that his prediction would ever come to pass, given that the Dow had not even breached  and sustained the 1000 level in ten years' time. (The DJIA had first hit 1000 on November 14, 1972, and had never meaningfully risen above that figure and sustained that level.  Indeed, in 1982, it was mired way below that figure.)

My last day on the job was August 16, 1982.  The DJIA had dropped to 792.43, having flirted with a low of 776.92 on August 12.   I was bound for Rice University to work on a MBA degree.  The following day, I reported to the HR department for an exit interview.  The radio was on in my automobile as I motored to USAA's headquarters.  The reporter was breathlessly reporting that the DJIA had closed up 38.81 points, amounting to a percentage gain of 4.9%, a huge move!

Thus began the great bull market of 1982-2000.

During my time at Rice University's Jesse H. Jones Graduate School of Business, it seemed like the DJIA hardly ever looked back, rising 305.18 points, or 39% to 1097.61 on June 13, 1984 (the day that I reported to Arthur Andersen & Co. ("AA&Co.") as a new Staff Auditor, my first job post-graduation).  During my time at Rice, I was sitting in a study hall one evening, and some of us were talking about the stock market.  The DJIA had just closed above 1100, and we were speculating whether or not the Dow would ever permanently move higher than 1100.  After my experience at USAA, I was not convinced that it would ever happen.  The DJIA peaked during my time at Rice, at 1287.20 on November 29, 1983, but was 14.7% off of this level the day that I reported to AA& Co.. 

I did not get back into the investment game until June 1989, having spent some time at a major regional Texas bank administering corporate bond issues before landing a job at a small independent trust company in Houston, Texas.  From June 13, 1984, to June 12, 1989, the stock market rose 1421.23 points, or 229.5%.

US Treasury Secretary, Don Reagan, formerly the head of Merrill Lynch, said that he felt like a kid with his nose pressed up against the candy shop window but he could not get in.  I felt the same way.

On August 12, 1992, ten years after I left USAA, the Dow had risen to 3320.83, just as the portfolio manager at USAA had predicted.  The Dow had risen 2528.4 points, or 419.1% since I had departed USAA.

During my tenure at the trust company, I read a report from Ed Yardeni, then the Chief Economist at Prudential Securities.  It was, as I recall, entitled "Dow 5000".  Ed predicted that the Dow would rise to 5000 in five years.  Ed's predictions had proved to be pretty prescient, but it was hard for me to believe that Dow 5000 was achievable and sustainable in such a short time frame.  From June 1989 to December 30, 1994, the Dow rose to 3834.44, then to 5117.12 on December 29, 1995.

After leaving the trust company, I joined the trust department of a large regional bank in Cincinnati, Ohio.  My time there lasted until September 29, 1998, when I started my own investment management business.  On that day, the Dow closed at 10213.48, up 9207.2 points, or 914.97% since my first day on the job at USAA in 1981.

As of August 24, 2012, the Dow closed at 13057.46, up 27.85% from the day that I started my investment management firm.  Although it is hard to believe, given all that has happened since September 1998, the stock market has risen.  But it has been a very uncomfortable journey.

My career in the investment management business has been both magical and filled with angst.  In large measure, it has been a journey of discovery and education, and about how the world works.  I have learned over the years that initial experiences can color one's views about something for a long time.  It has also been a revelation:  trends don't last forever.  While we are now in the midst of a very painful economic period, I do feel good about our long-term prospects.

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