I enjoyed your article. Here are some further thoughts it inspired. Never believe a fact until you have a theory. Everyone in asset management is a Bayesian, but only a very few use rigorous Bayesian methods. Principles of modern statistical practice are largely unknown in finance.
Here are some examples: a backtest without a prior is nonsense and data mining is one of the most dangerous things any asset manager can do. Will asset managers finally take the time to learn good statistical practice? The benefit for those who do is that we are likely to be able to outperform those who don’t over time.
We should consider asset-management Darwin awards.
Dick Michaud
President and Chief Investment Officer
New Frontier Management Company, LLC
Boston, MA
Michael Skocpol’s article was interesting, but he misses the boat.
In his article he states, “But no one this side of famed anti-tax crusader Grover Norquist would deny that raising taxes is one way to meaningfully reduce the deficit.” We have a $1.1 trillion budget deficit and if Obama gets 100% of his ask for raising taxes on the “rich,” we would only generate $82 billion in revenue, according to the Joint Tax Committee, still leaving us with a budget deficit over $1 trillion.
The only way to bring our budget in line is to drastically cut spending. Obsessing over taxes is no better than arranging the deck chairs on the Titanic. Even if you raise taxes to 100%, the ship is going down without a change of direction in the form of massive spending cuts.
Consider what a former senator from Illinois said on March 16, 2006:
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.
Over the past five years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.
Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and the State Children’s Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.
And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.
Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.
Mr. Friedman’s comments were helpful. It’s too bad he omitted an opinion on what will happen to the step-up in basis on inherited assets.
With an estate tax exemption currently at $5 million and likely to be no less than $3.5 million going forward, there are at least some stepped-up pieces of an estate that escape taxation all together. I’m not arguing for an end to the stepped-up basis. Rather, with last-minute tax-code writing possibly taking place behind closed doors in conference, I’m nervous about what might take place.
Andy Friedman replies:
As long as we have an estate tax in some form, we almost certainly will keep stepped-up basis at death. It would be unfair to impose a double tax at death – one on the estate and another when the transferred assets are sold. Typically the only time stepped-up basis disappears is when there is no estate tax, as was the case during the unusual year a few years back. Because no one is realistically predicting the repeal of the estate tax, stepped up basis should remain.
The following was directed to Dan Richards:
Dear Editor,
Thank you for your contributing articles. I have found them very insightful and full of practical ideas (where I come away with “why didn’t I think of that”).
I am writing to get your advice. I have met with an acquaintance who is a partner at a local law firm (someone I see occasionally as he is a good friend of my brother-in-law). He stated one night that he wasn’t happy with the service of his current advisor. I offered to help and he took my offer to meet. We had a nice chat as to how I help clients. I reviewed how I am different from the traditional approach to managing money, focus on managing risk, and the investment options I use.
At the conclusion of our meeting, he requested more information, which I sent him, along with educational material and an investment hypothetical. I have followed up with him a few times via emails asking if he needed any more information, had any questions and what he thought of it. I have not heard back and wanted to seek your advice on a viable approach to either move forward or decide not to do business together.
Thanks in advance,
Anonymous
Retirement Planning Specialist
Dan Richards replies:
Thanks for your note – I’m delighted that you find my articles of value.
The scenario you describe is a very common one. In an article in February 2011, “Four Ways to Get Prospects Off the Fence,” below is an approach that you might consider.
Let’s suppose that you’ve met with a prospect, had a good meeting …. and then they don’t respond to your voice mails and emails.
At that point, you could call the prospect and leave a voice mail along these lines:
Hi Jim, it’s Dan Richards. Sorry we haven’t been able to connect.
I have capacity for four new clients in the next quarter. After our last meeting I thought we’d work well together and you might be someone I could help.
It sounds like you’re busy right now … I’ll touch base in about three months. Feel free to give me a call if you’d like to talk in the meantime.
This says you’re busy too and it lets the prospect know that you’re interested but not desperate. And whether or not the prospect calls you back, you’ve set the stage for your next contact in 90 days.
I mentioned this idea on a conference call with advisors in November. Three days later I got an email from a participant who’d spent five years on the board of a local charity with the CEO of a public company. Through persistent low-key contact, earlier in the fall he had obtained the opportunity to sit down for a fact-finding meeting with this guy and then present a proposal. He’d identified several ways to improve his portfolio and the CEO seemed interested and promised to get back … and then nothing. In fact, this advisor had spoken to the CEO’s assistant on three different occasions about trying to book a follow-up call or meeting without success.
Knowing that he had nothing to lose, he left the CEO a voice mail along the lines of the lines of the script above. The next morning he got a call from his assistant looking to book a meeting.
We have to accept that prospects will made decisions in their timeframe, not ours … but that doesn’t mean we can’t do things to help the process along.
The next time you’re talking to a prospect, consider these four strategies – sell the benefits of working with you clearly, minimize pressure, build momentum into the meeting process and communicate scarcity.
And then see if that helps move the prospect to a faster decision – doing this and this alone may be your most productive resolution for the next year.
