Investing guru Doug Casey on the morality of selfishness and money

Sunday February 12. I just ran into this (and I am a great lover of philosophy, logic, semantics and word games!) Investing guru Doug Casey on the morality of selfishness and money:

“Let me say one more thing about the issue of selfishness – the virtue of selfishness – and the vice of altruism. Ayn Rand might never forgive me for saying this, but if you take the two concepts – ethical self-interest and concern for others – to their logical conclusions, they actually are the same. It's in your selfish best interest to provide the maximum amount of value to the maximum number of people – that's how Apple became the giant company it is. Conversely, it is not altruistic to help other people. I want all the people around me to be strong and successful. It makes life better and easier for me if they're all doing well. So it's selfish, not altruistic, when I help them.”

I think there’s some truth to that, and yet selfishness and altruism are not the same, nor are dark and light, good and bad, up and down. It’s quite possibly not in my self-interest to give up my life for another, unless you redefine “self-interest”, is it? “Self-interest” is very close to “self-preservation”, and I can hardly be said to be “preserving myself” by giving up my life, without redefining “self”. If we consider self to be my human life, then it is not. We would need to say “self” is my eternal self. Then we could argue that it might be possible to “serve myself” by “denying myself.” But then we are dealt a paradox that it required Jesus to rectify for us.

May you enjoy your boredom!

I remember once I heard that there is an old Chinese saying that is said intending to be a curse on the person: MAY YOU LIVE IN INTERESTING TIMES. Ooo. I guess the implication is that we should enjoy our boredom. Haha..

Wikipedia expands on the concept this way:

"May you live in interesting times", often referred to as the Chinese curse, is reputed to be the English translation of an ancient Chinese proverb and curse, although it may have originated among the English themselves. It is reported that it was the first of three curses of increasing severity, the other two being:

"May you come to the attention of those in authority" (sometimes rendered "May the government be aware of you"). This is sometimes quoted as "May you come to the attention of powerful people." (Alternately, "important people".)

"May you find what you are looking for." This is sometimes quoted as "May your wishes be granted."

Creating a Climate of Health, Wellness and Safety in the Workplace.

Since it widely believed, and many studies support, the idea that unhealthy workers cost more than it would have cost to keep them well, why are so many people opposed to universal health care in the United States?

I personally believe that universal health care would pay for itself in prevention and worker productivity and also by enlarging the middle class and its purchasing and spending capability in the economy.

"A stitch in time saves nine." Right now we are continually paying nine and gasping, "It's too expensive!" It's too expensive, that's right, but it's too expensive NOT to do it!

And just to show you what I mean about the worker productivity issue, I will attach below something written not to address universal health care, but which, inadvertently perhaps, gives the issue away upon perusal of its content.

The article says obesity costs American businesses $153 billion a year. If that is the case, or anywhere close, imagine what all employee health problems cost!

How Much Are Unhealthy Workers Costing You, and What Can You Do About it?

It's reported that unhealthy workers cost employers billions every year. NIOSH has some ideas for developing programs and policies that can improve worker health and cut costs.

Full-time workers in the United States who are overweight or obese and have other chronic health conditions miss about 450 million more days per year than healthy workers. According to a Gallup poll, this results in an annual productivity loss of $153 billion.

The Gallup-Healthways Well-Being Index finds that full-time workers of normal weight without chronic health conditions make up 13.9 percent of the U.S workforce and average about 4 days a year of absence. Workers of above normal weight with three or more chronic conditions average about 42 days of absence per year.

Another report, the "Thomson Reuters Workforce Wellness Index" finds that a decline in overall population health is contributing to rising healthcare costs and lost productivity for U.S. employers. The report cites an annual cost of unhealthy behavior of $623 per employee.

The index uses six behavioral risk factors to tract collective health of workers who have employer-sponsored health care. The risks are:

•          Body mass index
•          Blood pressure
•          Cholesterol
•          Blood glucose
•          Tobacco use
•          Alcohol use

In 2010, about 14 percent of direct healthcare costs for these employers was directed linked to the six factors. The single biggest factor was body mass index, which is used to measure obesity.

NIOSH Identifies Strategies

In a report entitled "Essential Elements of Effective Workplace Programs and Policies for Improving Worker Health and Wellbeing," NIOSH identifies four key areas employers need to address to improve worker health. We'll present two today, and two tomorrow.

1. Organizational Culture and Leadership

•          Develop a "human centered culture." Effective programs thrive in organizations with policies and programs that promote respect throughout the organization and encourage active worker participation, input, and involvement.

•          Demonstrate leadership. Commitment to worker health and safety, reflected in words and actions, is critical. The connection of workforce health and safety to the core products, services and values of the company should be acknowledged by leaders and communicated widely.

•          Engage mid-level management. Supervisors and managers at all levels should be involved in promoting health-supportive programs. They are the direct links between the workers and upper management and will determine if the program succeeds or fails. Mid-level supervisors are the key to integrating, motivating and communicating with employees.

2. Program Design

•          Establish clear principles. Effective programs have clear principles to focus priorities, guide program design, and direct resource allocation. Prevention of disease and injury supports worker health and well being.

•          Integrate relevant systems. Program design involves an initial inventory and evaluation of existing programs and policies relevant to health and well-being and a determination of their potential connections. Programs should reflect a comprehensive view of health: behavioral health/mental health/physical health are all part of total health. Integration of diverse data systems can be particularly important and challenging.

•          Eliminate recognized occupational hazards. Changes in the work environment (such as reduction in toxic exposures or improvement in work station design and flexibility) benefit all workers.

•          Be consistent. Workers' willingness to engage in worksite health-directed programs may depend on perceptions of whether the work environment is truly health supportive. Individual interventions can be linked to specific work experience. For example, NIOSH says that industrial workers who smoke are more likely to quit and stay quit after a worksite tobacco cessation program if workplace dusts, fumes, and vapors are controlled and workplace smoking policies are in place.

•          Promote employee participation. Ensure that employees are not just recipients of services but are engaged actively to identify relevant health and safety issues and contribute to program design and implementation. Barriers are often best overcome through involving the participants in coming up with solutions.

•          Tailor programs to the specific workplace and the diverse needs of workers. Effective programs are responsive and attractive to a diverse workforce. One size does not fit all—flexibility is necessary.

•          Consider incentives and rewards. Incentives and rewards, such as financial rewards, time off, and recognition, for individual program participation may encourage engagement, although poorly designed incentives may create a sense of "winners" and "losers" and have unintended adverse consequences.

•          Find and use the right tools. Measure risk from the work environment and baseline health in order to track progress. For example, a Health Risk Appraisal instrument that assesses both individual and work-environment health risk factors can help establish baseline workforce health information, direct environmental and individual interventions, and measure progress over time.

•          Adjust the program as needed. Programs must be evaluated to detect unanticipated effects and adjusted based on analysis of experience.

•          Make sure the program lasts. Design programs with a long-term outlook to assure sustainability. Short-term approaches have short-term value. There should be sufficient flexibility to assure responsiveness to changing workforce and market conditions.

•          Ensure confidentiality. Be sure that the program meets regulatory requirements (e.g., HIPAA, state laws, ADA) and that the communication to employees is clear on this issue. If workers believe their information is not kept confidential, the program is less likely to succeed.

Econ 101: Comparative Advantage versus Absolute Advantage

In economics, comparative advantage means you can produce something for the lowest cost. Absolute advantage means you produce the best product. It helps to know that what it costs someone to produce something is the opportunity cost—the value of what is given up.

But basically what you have here is a good example of the economists taking two incredibly simple concepts and messing them up so badly that nobody (in their right mind) can understand what they are talking about. I sometimes nowadays find help on You Tube.

In this case, I think any one of the following will do quite nicely:

http://www.youtube.com/watch?v=VVp8UGjECt4

http://www.youtube.com/watch?v=Z3xd8bXlzeU

http://www.youtube.com/watch?v=qSk-ugSizY4

Forecasting 101

We all make investment decisions based on some kind of forecast of the economy. We might look to certain professionals or rely on our gut instincts. But one way of the other, we require some kind of forecast of the future in order to invest in it.

“Therefore … , why not go after it and make it the best I can?” was my thinking. And test it by recording it and sharing it with others.

A year ago, we tried to forecast the Dow. I "surmised" it would end 2011 and start 2012 at 12,700. It turned out to have been amazingly accurate, the index closing at 12,723 today (February 1, 2012.

Actually, it closed the year at 12,217, and I had said it would test 13,000 the first of the year, which it hasn’t done (yet), although it is close.

But getting the forecast fairly close indicates to me that the market does follow certain fundamentals after all, those being:

·         corporate earnings (the tangible) together with revenues and perhaps market share plus cash position - which is considered relative to the competition in same industry,

·         corporate leadership (the intangible) in terms of personnel and corporate structure and operations, and

·         multiple of earnings, which is what investors are willing to pay to own that stock and be entitled to receive, through dividends plus increase in the value/ price of the stock, based on the corporation's reinvestment of those earnings in itself.

Perhaps the "most fundamental fundamentals" then are 1) earnings, 2) the company's ability to sustain or grown those earnings in the mid-term future (2-6 years) based on micro-economic (internal to the company) and macro-economic (external to the company) factors.

It is said that investors buy the market six months in the future, that is, they invest based on about as far as they think they can see into the future and what the company's situation would seem to them to be at that point in time.

So putting this all together, we can pose and illustration: my target investment earns $2 per share. My assessment tells me that this company can continue at this pace and earn the same in six months.

I am willing to pay 12 times earnings for those shares, that is, $24 per share, based on my assessment of the risk. If I do in fact, purchase shares at 12 times earnings, I am investing in something based on my personal Price/ Earnings ratio of 12.

Flip that fraction over, that is put the denominator on top and the numerator on the bottom, and it gives Earnings/ Price = 1/12. 1/12 in decimal notation = 8.33%. 8.33% is my expected Yield from my investment.

Now I have a basic or FUNDAMENTAL piece of information, which I can now use to compare my investment with other (and competing for my capital) investments that are available.

Finance teaches us that risk and return are inversely related, that is the greater the prospective return, the greater the risk that will be associated with that investment. And conversely, the lower the expected return, the lower the expected risk.

My investment has an expected return of 8.33%, but I could have invested in say, for example, a piece of real estate with an expected return of 15%, but I thought it was too risky for me. Or I could have invested in an oil well drilling consortium that "expected" a 23% return, but that one was way too risky for my taste.

On the other end of the risk/ return spectrum I have a choice of bank CD's yielding between .5% and 2.5% based on the term, the .5% CD having a six months term and the 2.5% CD being a ten-year term. But I chose my investment because I felt I needed to at least try to earn a higher rate of return than that, especially considering that it is probably not going to keep with inflation.

But after analyzing my investment options and choosing the one I did, I was willing to pay 12 times earnings for my stock, which gave it a price of $24 in the market.

Throughout the investment world, millions of decisions are being made, very similar to mine, and the Market will be determined, IN TERMS OF FUNDAMENTALS, by the aggregate of these decisions.

All these investment decisions combined will price my stock at $24 a share, unless of course, the market is not reacting to FUNDAMENTALS, like when there is a major event that inspires either "unwarranted" optimism or the same "unwarranted" pessimism among us investors.

An event like that could be almost anything, but recently we have seen political gridlock in Washington really throw the market for a loop. These events, when combined with computer-generated trading has led to the markets having greater volatility and greater up and down swings that ever in its history.

As investors, we must ask ourselves, when it seems that the market is "in the grip" of excessive optimism or pessimism, "What are the FUNDAMENTALS?" that is, what are corporations earning, what are their expected earnings, what are the micro-economic and real macro-economic risks that apply.

As investors, we can see wild market swings almost daily, but what guides the market in the long term? I would say THE FUNDAMENTALS do; they SHOULD, and most of the time they do.

So going back to our little game of trying to predict the DJIA one year into the future, we would want to disregard all the temporarily unsettling events that throw the market for days or even weeks at a time and focus on the things that we feel determine the value of the market long term.

That is why I predicted the DJIA at 12,700. The DJIA was around 11,700, but I felt there was an excessive degree of pessimism acting on it: all the news was bad, and investors were discouraged.

But the world is seldom all bad or all good. When we feel it is all good, it is probably actually worse than we think. And when we think the world is all bad, it is most likely better.

The prediction was based on my feeling that the Fundamentals were actually not that bad and that the DJIA should really be around 12,300. Then it seemed that we were not out of the woods in the recession, so any real growth that the economy had, which would eventually be reflected in the equity markets, would be slow, probably in the range of 3% GDP.

So applying this 3% growth to the 12,300 figure gives a figure of around 12,700. Now a year later, that is just about where the DJIA is today.

So all this is not meant to really be an inane game or an irrelevant hypothetical, or worst an exercise in gambling or gamesmanship. It is intended to be a minimal effort at creating a "backdrop” for making my investment decisions.

I have, in fact, acted upon this prediction over the past 12 months, not because I felt it was certain, but only because it was the best I could do. And I felt it was necessary for me to at least make the effort.

My investments have done OK, but measured against what? Measured against complete disaster, they have done great. Against any one of a number of POSSIBLE investment scenarios, they have done perhaps poorly.

One of the things that this forecast led me to, because it portrayed an extended period of such slow growth in the economy, was to consider buying bonds instead of stocks. And this has turned out to have been an immensely popular alternative for many investors during 2011.

I have tried to invest conservatively and based on my best projections, and then live with the consequences and, perhaps learn from them.

I am encouraged to at least have some sort of primitive methodology. I can at least now work with this method in the future, looking, of course to indications that it could be improved or altered in any way.

That brings me up to the present. Looking forward to 2012, the “experts” are forecasting another year of perhaps 3% growth in GDP. If corporate performance follows this figure, all things remaining constant, our DJIA of 12,700 should also increase by 3%, taking it to around 13,100 by year end 2012.

Now I try to stand back and look at that, and I just simply feel in my gut that we have had too much bad news for too long. “Been down so long, it looks like up to me.” And guessing a little about the chartist in us all, I just felt that the DJIA would go up to just short of 13,500.

That seems like a nice number that we will not be too frightened of. Then, just short of 13,500 is 13,450. So 13,450 is my forecast for the DJIA for 12/31/2012.

Now I can settle down and see what, in fact happens. Hmmm, that’s it for now, I think. I guess I will not be accused of having been laconic.

I thought the first rule of investment was, "If you can't understand what it is, don't buy it!"

Credit default swap. From Wikipedia, the free encyclopedia

A credit default swap (CDS) is an agreement that the seller of the CDS will compensate the buyer in the event of a loan default. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.

In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDSs contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan. The European Parliament has approved a ban on naked CDSs, since 1st December 2011, but the ban only applies to debt for sovereign nations.

Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion [ !!! ], falling to $26.3 trillion by mid-year 2010.

Most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), although some are tailored to meet specific needs. CDSs have many variations. In addition to the basic, single-name swaps, there are basket default swaps (BDSs), index CDSs, funded CDSs (also called a credit-linked notes), as well as loan-only credit default swaps (LCDS). In addition to corporations and governments, the reference entity can include a special purpose vehicle issuing asset backed securities.

CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency. During the 2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the multi-trillion dollar size of the market, which could pose a systemic risk to the economy.

Credit default swaps and other derivatives are unusual--and potentially dangerous--in that they combine priority in bankruptcy with a lack of transparency. In March 2010, the DTCC Trade Information Warehouse (see Sources of Market Data) announced it would voluntarily give regulators greater access to its credit default swaps database.

A number of financial professionals, regulators, and the media have begun using credit default swap pricing as a gauge of the riskiness of corporate and sovereign borrowers, and U.S. Courts may soon be following suit.

For more punishment, go to http://en.wikipedia.org/wiki/Credit_default_swap