Saturday, March 23, 2013

Book Review - Pound Foolish


Anyone vaguely familiar with the stock market, mutual funds and other financial instruments knows the caveat “past performance is not an indicator of future results.” The Great Recession, various “Black” days of the week on Wall Street, the S&L crisis of the late 1980s and other calamities put people on notice that investing money in the “market” is risky, but in her new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, Helaine Olen argues that the financial-services-industrial-complex has failed ordinary Americans, selling them a proverbial bill of goods by providing bad (and often contradictory) advice, all while lining their own pockets with commissions and management fees. 

Some of Olen’s villains are well known personalities – Suze Orman is castigated for preaching market returns while keeping most of her own money in municipal bonds, of emphasizing frugality while she lives a luxe lifestyle and shilling branded products to gullible types who she reproves for spending above their means. Joining Ms. Orman in Olen’s penalty box is David Bach, who is mocked for having made his fortune by advising people to invest money saved by cutting back on small indulgences like lattes, and Dave Ramsey, a folksy deficit scold who declared bankruptcy many years ago but is, in Olen’s view, a hypocrite for warning others against taking the same out when debt becomes too burdensome.

Others are faceless, but no less worthy of Olen’s ire. Mutual fund companies that sell “targeted” retirement investments and companies that automatically enroll you in a 401(k) plan are flamed for failing to draw employees’ attention to the fine print or making automatic paycheck deductions high enough to achieve meaningful returns. The author finds little favor with a parade of obscure financial consultants who traffic in free dinners that are used to hawk annuities or trade show operators whose booths are inhabited by charlatans hawking the equivalent of financial snake oil. Olen frames these individuals as rapacious and unethical, trafficking in the hopes and dreams of gullible sorts (many in their 50s and 60s) who lack the sophistication to know they are being duped. 

This is not to say that this small army of investment gurus does not deserve criticism; clearly, they do. All too often, small investors are at sea. Another Olen target is CNBC's Jim Cramer, who famously told people in early 2009 to get out of the market entirely if they needed money over the next 5 years; fast forward to today and the Dow recently passed its all-time high. Anyone who followed Cramer’s advice likely took a significant hit; however, had they simply held on to their portfolio, most, if not all of their gains would have been recouped. Olen's criticism of Cramer is pointed, calling the idea of shorting his "buy" calls as one of the few stock strategies she considered employing; however, in dinging Cramer, Olen stretches to prove her point. The one stock she cites as a Cramer miss (MGM) may have fallen between his buy recommendation and the publication of her book, but by the time I wrote this, the stock was up from that same initial point. 

One thing Cramer does emphasize, and Olen fails to give due credit to is the need to do “homework.” If people blindly jump into stocks he (or anyone for that matter) recommends, who is to blame?  Mutual fund prospectuses focus on 3, 5 and 10 year averages, and there is ample research available on all but the most obscure over-the-counter stocks, but “the market” is not monolithic; even as it rises, it does not do so uniformly. Some sectors perform better than others and stocks do not march in lock step – whether one is managing her own money or having someone else do it, the Internet has made an enormous amount of information available to people if they care to use it, but Olen does little to note this basic fact. 

And here is where I part company with much of Pound Foolish. The author's points are well taken but not particularly insightful and largely excuse uninformed investors for blame in the shortcomings of their investments. Is it any wonder that a segment of the population that is noted as believing that 30% annual returns are “normal” would have a misguided view of what their actual returns are more likely to be (annualized gains of 5-6% over the long run would be considered quite good). It is also unsurprising that gurus who peddle “get rich” schemes premised on specious ideas like flipping real estate or anticipating hyper-inflation by hoarding gold are able to prey on the masses, but where is the personal responsibility of knowing when something is too good to be true?

The same contradictions Olen highlights are found in her writing. For example, while she rightly bemoans the disappearance of company pensions in favor of the 401(k), she also notes that most people do not have either the wherewithal or financial knowledge to set their retirement deductions at a level appropriate to their future needs. That may be so, but most pension plans require an investment far higher than the 3% default rate she cites as typical for those who have money automatically deducted from their paychecks. So how is it that these workers would be able to survive off the more meager wage they would earn if pensions were still ubiquitous? Moreover, while criticizing mutual fund companies for high load fees or turning their “target” funds into “fund of funds” products that just invest in their own instruments, pensions are also run by someone who makes investment decisions that may or may not end up being good. Don’t get me wrong, I think pensions, with their guaranteed benefits, are a better retirement option than 401(k), but the idea that simply because someone else is managing your money by definition makes them suspect is simply untrue, something Olen’s writing strongly implies.

There are plenty of other pieces of low hanging fruit to pick apart in Pound Foolish, from Olen's “first world problem” of not saving money by cutting her New York Times subscription because the pocketed savings went into other expenses (plus, she really likes reading the NYT and its website put up a paywall) to her overuse of the word "eschew" and odd obsession with referencing the appearance of people she interviews. Late in the book she thinks it obvious that her political sympathies lie with the Occupy Wall Street crowd but there was nothing in the previous 200-odd pages that indicated she was a left-leaning 99 percenter. 

Olen has a particular hard on for Bach's “latte factor” strategy. While she rightly points out that Bach’s figures are probably unrealistic, she poo poos the broader message – that cutting out small indulgences can lead to a decent return on investment. Why throw the baby out with the bathwater? So what if not buying a latte everyday won’t make you a millionaire? Suddenly, we’re sneezing at the more modest $173,000 one would save?  Similarly, in criticizing Ramsey’s hypocrisy regarding bankruptcy, she fails to note recent changes in bankruptcy law that make it harder to discharge debt or the impact declaring bankruptcy has on your long-term credit score. Both of these factors would be important for a person to contemplate before making such a momentous decision, but Olen prefers to hone in on Ramsey’s do-as-I-say-not-as-I-do attitude.

On the other hand, Olen cites a blizzard of data to show that entry and exit points into the market matter for total return, but then uncritically parrots the advice of a (one assumes Olen-approved) financial planner who recommends investing only in Treasury Inflation Protected Securities (TIPS); never mind the fact that investing in only one product, regardless of what it is, is unwise, TIPS are not a panacea anyway. Vanguard’s TIPS fund has returned a negative amount in 2013, and its 10 year return is lower than the company’s S&P 500 fund, even with the massive Wall Street downturn in 2008-9. This is not to say TIPS are bad; indeed, I have money invested in inflation-protected bonds, but it is more to the point that diversification of your investments is the best way to mitigate the risk of loss and increase the chances (not the guarantee) of strong returns.   

The same is true of Olen's lengthy meditation on the housing market. There is no question that "flippers" and banks that made "liar loans" bear a great deal of responsibility for the creation of the housing bubble; however, like any commodity, when one buys into the market matters. Those who purchase real estate at or near a bottom will see a far greater return on investment than those who buy near or at a top. People re-entering the housing market now are, over the long run, far more likely to see an accumulation in equity than those who bought in 2005 or 2006. Of course, for those who view a home not as an investment but as a place to live for 20-30 years, these considerations are less consequential.

The only surprise in this book is having spent 236 pages telling us about all the ways the financial services industry screws us out of our hard earned wages, Olen is silent on what she thinks are proper ways to invest money. This is surprising considering she wrote a recurring column on the subject for the Los Angeles Times. Perhaps this is because there does not seem to be a logical audience for her book. People disinclined to fall for financial scams don't need to be told to avoid them and people who are will not be dissuaded by Olen's opinion. So long as *one* person profited from the Latte Factor or Jim Cramer's stock calls, others will justify following the same advice, even at their peril. 

Not that anyone asked my opinion, but I was always told that the basic foundation of sound financial planning should emphasize investment, savings and diversification with the understanding that even if you do “everything right” you are still not guaranteed a successful outcome. Armed with these facts and having done one’s homework on where (and what) to invest in, the need for advice from financial gurus, much less Ms. Olen's book, is largely unnecessary.

2 comments:

  1. Great article, as always.

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  2. Good job, as usual

    ReplyDelete