After finding my post about “lazy investing”, a reader of The Third Pig suggested following such an approach would eventually lead to financial ruin. The reader suggested to be a successful investor one had to be unnaturally gifted in analytic ability and/or spend countless hours researching and trading his portfolio. I cannot speculate on where this reader developed his point of view but what I can say is the evidence does not support him. Warren Buffett has often said that successful investing requires three things: a 5th grade understanding of mathmatics, a sound investment philosophy and the right temperament. Never does he say you have to be a genius or you have to stay up all hours a night trading your portfolio.

Legg Mason Capital Management performed a study in an attempt to find the common characteristics of mutual funds that beat the S&P 500 Index during the period of 1992 to 2002. What was found was a few common attributes of the outperformers which are strickingly similar to a lazy investing approach. Those funds were/are/have:

• Portfolio concentration: These portfolios have, on average 37% of assets in their top-10 holdings, versus 24% for the S&P 500 and a 28% median for all U.S. equity funds.
• Portfolio turnover: As a whole, this group of investors had about 30% turnover, which stands in stark contrast to turnover for all equity funds of 110%. They are truly, lazy investors (how we like to define it).
• Value Investment Style: Most if not all of the funds listed seek stocks with prices that are less than their value. These fund managers recognize that price and value are not the same, often diverge and then converge again. They take advantage of this consequence of investing in the stocks of companies.
• Off Wall Street: Only a small fraction of high-performing investors are located in the financial centers of New York or Boston. There location allows them to quiet the noise of Wall Street, dampening the temptation to trade frequently or with reckless abandon. They can take a more methodical and rational approach.

The chart below shows how some of those funds have fared against the S&P 500 in the 10 years ending September 30, 2009. As you can see, most of them beat the market and had positive returns in a period that experienced the worst economic times since the great depression. Oakmark Select in particular had a bad run as a result of owning a large piece of Washington Mutual during the subprime crisis (article) but it hardly mattered over the long term. The funds that didn't have been a little more volatile than the market and measured over different but similarly long periods, also outperformed the market. Although I cherry-picked the funds I follow most, the sample is representative of the group listed in the Legg Mason white paper.

Following this approach, our Core Model Portfolio Average has performed well over a similarly long period of nearly 7 years (ending 9/30/2009) returning an annualized 10.7% versus the S&P 500's 3.8%. Bottom line, it pays to be lazy when it comes to investing.

Disclosure: I and the clients of Brick Financial Management, LLC did not own shares in any of the the companies or funds mentioned in this post at the time of this writing. But positions may change at any time.

Dear friend,

On September 26th, CrossFitters across the nation will unite for the fourth consecutive year to honor and support our injured service men and women and the thousands of people fighting and living with prostate cancer: Fight Gone Bad IV. One day. One workout. One Purpose.

Fight Gone Bad IV benefits Athletes for a Cure and the Wounded Warrior Project. There's no stopping us from making a difference and I hope you will support our efforts with any contribution you see fit. Last year we raised $627,000. This year, we are going for $1million. This goal will be reached one dollar at a time, in amounts ranging from $1 to $1000.

Please take a moment to give what you can to this important event. Click on the link below to connect to my personal fundraising page. http://tinyurl.com/bensfgb

I would also like to invite you join our Facebook community and come meet all of the participants who are taking part and supporting Fight Gone Bad IV. You can join us here: http://fgb4fans.org

Thank you for your support. One Fight at a Time.

This past January, about the time of Obama's inauguration, Warren Buffett gave an interview to PBS corresspondent, Susie Gharib. In the interview Buffett was asked to give his greatest and most important business lesson. He responded:

The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don't know enough to evaluate it as a business you don't know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy.

When thinking of stocks as more than just pieces of paper, but actual representations of underlying businesses, the investor is led to a more sensible approach. If as an investor you were considering buying a business that you would own, operate and would provide the majority of your income, it is likely you would not contemplate selling that business within seconds of purchasing it. Just as you would not think of buying a home in the morning and selling it in the evening, if your intent was to live in it.

A great example is Google (GOOG). Google is the dominant player in the search engine world commanding more than 64% of internet searches and is rapidly becoming a threat to longtime tech behemoth, Microsoft (MSFT). Google also produces and obnoxious amount of free cash flow and seems to grow that cash at will (see chart).

With market dominating performance and consistent operating results, it is safe to assume Google's business value is stable and steadily growing. But if you were to look at the stock price, you'd never know it. In the past 52 weeks, Google's shares have gone from a high of $510 to a low of $247 and now sit at around $430. Do these wild fluctuations make any sense given Google's performance? Nope. But for those of us who are more concerned with the underlying business, we can just sit still and only move when to buy when the market greatly undervalues our business and sell when they overvalue them. This is why I don't trade very often and prefer the "lazy" approach to investing.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Google at the time of this writing but positions may change at any time.

We continue to believe that today’s long-term investors will increase their capital more by investing in stocks than by investing in other assets. Further, we believe that the long-term return for stocks purchased today is likely to be higher than historical average returns. Here are a few of our main reasons for such optimism.

In his letter, Nygren sites three factors that influence his position - valuation, historically high levels of cash, and lots of skepticism amongst investors. In regard to valuation, Nygren points out that with the S&P 500 trading at about 900, and operating earnings in 2009 expected to be in the $60s, stocks appear reasonably valued with a mid-teens P/E ratio. But Nygren strongly suggests a $60 range for earnings is not normal. Nygren argues that operating earnings were nearly $90 in 2006 thus normal earnings are probably somewhere north of $60.

Nygren also talks about cash, the amount of money market balances which remain historically high. These funds have to go somewhere and the stock market is its most likely destination. The following graph illustrates this point:

In regard to the market's skepticism, Nygren says:

As value managers, we’re used to having people disagree with us. In fact, we prefer it that way. The consensus opinion, almost by definition, is usually reflected in current prices. So when we differ from consensus, we’re excited by the opportunity. We believe that today’s consensus stock market opinion is that the magnitude of the market increase since March has not been matched by fundamental improvement in the economy. The implication is that an investor should wait for the market to fall before increasing their investment in stocks. While we applaud the effort to tie stock price movements to fundamentals, we have to ask, where were these fundamentalists when the market was in freefall?

All in all, Nygren makes for a good fundamental argument to be an investor in today's market.

Disclosure: none

At the extremes, the bottoms of bear markets and the tops of bull markets, you will undoubtedly hear that buy and hold is dead. We find ourselves in the former market (we hope) thus that old refrain has returned. Over the last 10 year, the S&P 500 has seen a -2.5% annual yield (ending 4/30). Those who become disenchanted with the buy and hold strategy are folks generally uncomfortable with what feels like doing nothing. Alternatively they set to a course of frenetic trading at what seem to be opportune times. Unfortunately this approach leads to very little except frustrated investors.

The Journal of Finance published a white paper by two Cal Berkeley professors, Brad Barber and Terrence Odean which chronicled the folly of the active trading approach. Right from the abstract of the paper they write:

Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors.

So how does an investor beat the market?

Relax: The first thing to do is to simply take a chill pill. Most of what you need to beat the market comes down to your temperment. If you can keep a cool head while all the world is losing theirs you will have a tremendous advantage. Fear and panic cause investors to make bad decisions more often than not. So stay cool.

Stop trading: Transactions costs, the least of which is commission, eat away at returns. As damaging is the bid-ask spread as well as the capital gains taxes paid on any small gains made. According to Barber and Odean:

The investment experience of individual investors is remarkably similar to the investment experience of mutual funds. As do individual investors, the average mutual fund underperforms a simple market index. Mutual funds trade often and their trading hurts performance. But trading by individual investors is even more deleterious to performance because individuals execute small trades and face higher proportional commission costs than mutual funds.

Control your emotions and your ego: Consistently beating the market is difficult. For this very reason it pays to take your emotions and your ego out of it. Do you really think you will create some investment approach that is somehow smarter and more fantastical than the methods used by Warren Buffett or John Templeton? It's foolhardy to chase the latest fad in investing (or to think you'll create it) when the tried and true works like a charm.

Hold just a few positions: The investor would do well to select only the stocks of companies he understands well. By doing so he will reduce his portfolio's risk by steering clear of permanently weak companies and avoiding overpriced firms, not by excessive diversification. Increasing portfolio positions past 20 to 30 positions does very little to reduce volatility any further. Interestingly though, increasing positions past this point will continue to reduce returns. According to mutual fund manager Robert Hagstrom, concentrated portfolios of 15 securities are 13 times more likely to outperform the market than portfolios of 250 securities. In other words, excessive diversification fails to effectively reduce volatility risk yet greatly handicaps the investor’s ability of beating the market.

Buy at the right price: Even the greatest company will not make a good investment if it is overpriced. Determining the correct price for an investment is difficult as it requires many assumptions. But it is essential to a sound investment process. If bought at a price below the company's real value, all an investor really needs to do is wait until the price of the stock reflects the true value of the company. Eventually, it will.

If an investor follows these few steps, he can relax on the beach and let others worry about the ups and downs of their portfolios.

Disclosure: none

In a recent interview with CNBC (video) Nygren says (actually he's quoted as saying):

"Almost everything in the stock market sells below our business value estimate."

Quite a statement. It's a great time to invest.

Disclosure: none

Tisa Silver over at Bizzia noticed a post I did a while back regarding Robert Kiyosaki and his questionable math skills. She republished the article there and gave her own take on it as well. That article underscores why investors should always question, always investigate and always think for themselves.

Check out some of Tisa's other stuff as well here, here and here.

Below is an exerpt from the original post I wrote: 

Dear Robert Kiyosaki,

I've read a few of your books. I must say that when I first read Rich Dad, Poor Dad I loved the general premise of “become financially literate”. That made sense to me. But I must tell you, my feeling on all the subsequent books that have come out of the Rich Dad camp has been that the books (as well as your advice) have become more and more absurd. For instance, what's up with the figures in your book, Who Took My Money?. ...

... Throughout Who Took My Money?, you suggest that simply by heeding your advice, an investor can achieve returns of 180% per year. Forgetting, that we don't know how you came up with that figure, let's look at what an annualized return of 180% would mean.

Let's say a 25 year old has $20,000 to invest and is able to receive an annualized 180% return over his investment lifetime – about 50 years. At that rate of return, and at the end of that period that 75 year old would have a comfortable nestegg of…drum roll please…

$455,965,058,160,294,000,000,000,000!

This is not a misprint. That investor, by investing in single family homes, would be a SEPTILLIONAIRE 455 times over. Now, Rob, are you really telling me that I can be 455 quadrillion times richer than someone who is a mere billionaire? Seriously? If you are, I just have to say that that seems a little far fetched to me. Especially when you consider that, according to the Federal Reserve's 2001 Survey of Consumer Finances, there was only $44 trillion dollars of wealth in the U.S. that year. If we applied an extraordinary rate of growth of 5% to that $44 trillion, in 50 years total U.S. wealth would reach,

$502,905,811,102,164.

Now Rob, are you telling me that by following the investment program you lay out in your book, that in 50 years, with one $20,000 investment, I can be 907 billion times richer that the entire U.S. population? I have to say Rob, I'm not buying this. But I'm sure this letter is falling on deaf ears. However, if the New York Times Bestseller list is any indication, a lot of people are buying it.

Sincerely,
Benjamin B. Taylor

The AP reported today that Bernie Madoff will plead guilty to 11 criminal counts including money laundering, perjury and securities, mail and wire fraud and will do so without a plea deal, knowing it carries a potential prison term of 150 years. I find it kind of odd that Madoff would choose not to try and get a plea deal. But just another thing in an odd set of circumstances.

Adding to the weirdness is Madoff's lawyer, Ira Sorkin, and his family were investors with Madoff and lost nearly $1,000,000. Is Sorkin the best to represent Madoff? I know most out there don't really care about this potential conflict in interest. But I will always be a believer that everyone (even accussed money launderers) should be properly represented in court.

I have no idea if this is justice. Madoff seems to have stolen people's trust as much as he's stolen their money (now a reported $20 billion instead of the $50 billion first thought). More and more investors are going the do-it-yourself route because their trust has eroded. The tragedy is most investors going this route will fail. The most comprehensive study on the subject of individual investor performance was conducted by Professors Brad Barber and Terrence Odean. They found:

"Of 66,465 households with accounts at a large discount broker during 1991 to 1996... After accounting for the fact that the average household tilts its common stock investments toward small value stocks with high market risk… …the underperformance of average individual investor household is 3.7 percent annually.

The average household turns over approximately 75 percent of its common stock portfolio annually. The poor performance of the average household can be traced to the costs associated with this high level of trading.... Our most dramatic empirical evidence is provided by the 20 percent of households that trade the most often [with a turnover of 115%]… …the underperformance of hyper trading households averages 7.6 percent annually."

While prosecutor's have recovered about $1 billion for investors so far, how can they recover the trust that was lost? Not an easy question to answer. For our part, we will, over the next couple of days, get back to going through the10 red flags for spotting financial crooks. In the meantime check out parts one and two.

Disclosure: none

Today Warren Buffet appeared on CNBC for 3 hours answering a multitude of questions from Becky Quick, Joe Kernen and a slew of emailers. One emailer from Cincinatti asked "How do we know that you are not another Bernie Madoff?" In response Buffett said:

"Well, that's a good question. I would say this. I--it is a problem with investment advisers. I mean, it--there are going to be a certain number of crooks in the world. And sometimes they're smooth-talking, and the best ones are the ones that kind of don't look like crooks... it is a problem who you put your trust in."

He then later agreed with Joe Kernen that an investor cannot rely totally on government regulation to catch these crooks. So what is an investor trying to protect herself to do?

I wrote a post (Part 1) back in September of last year with the intention of answering this question. This was before the Bernie Madoff or the R. Allen Stanford stories broke. In the post I promised 10 red flags which might alert an investor that his advisor is not on the up and up. I'm finally getting around to listing them. Today I'll do just a couple and get to the rest at a later date.

As a side note, The Wall Street Journal reports that the client list of Bernie Madoff became available to the public. The list contains well known and not so well known folks running the wealth spectrum. The one thing they all have in common is they are all considered sophisticated investors. The list should once and for all prove that "sophisticated" means little in the investment world and underscores my personal pet peeve with the restrictive accredited investor law. I digress.

1. Returns that (nearly) always go up:

If your advisor is reporting returns that always seem to go up, then you should regard his numbers with great skepticism. The markets are controlled by unpredictable human emotion and its movements simply can't be predicted. Madoff's firm produced returns of positive 1% to 2% in gains per month with only five negative months covering a period of 12 years. These types of returns are so improbable that an investor can almost stop here and safely speculate that they've encountered a ponzi scheme or at least an investment manager that is not telling the truth about his returns. But we'll go on.

2. Complex strategies that cannot be duplicated:

When and an advisor has to start using greek letters in formulas to explain his investment strategy, it's time to be concerned. Madoff used an investment strategy consisting of purchasing blue-chip stocks and then taking options contracts on them - a split-strike conversion or a collar. The strategy itself is not complicated. In fact, it's pretty plain vanilla. What was extraordinary are returns Madoff reportedly received with the strategy.

A few individuals attempted to perform due diligence but were unable to replicate the Madoff's past returns. Harry Markopolos was among those that tried. In an interview with 60 Minutes he said:

"As we know, markets go up and down, and his only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately... No one's that good."

The above represents a stark contrast to the investment approach employed by Mr. Buffett - value investing. Unlike the method employed by Mr. Madoff, it is niether complex nor does it produce returns that are always favorable. In fact, sometimes years go by without positive results. That's why it is so important to have a long term view as Buffett reiterated today in his interview with CNBC.

BECKY: Yeah. And on a serious note, there are people who look at the stock market and wonder how do they know the whole thing's not a Ponzi scheme?

BUFFETT: Well, the whole thing's not a Ponzi scheme.

BECKY: What--how do they know who to trust?

BUFFETT: We're talking about, you know--we're talking about American businesses that employ, just the ones on the stock market, tens and tens and tens of millions of people. They're real companies... in the 20th century, the Dow went from 66 to 11,000, you know, 400. And we had all kinds of problems during that period. Business works overall. It doesn't work every day or every week or every month, and sometimes it really gets gummed up. And then you need government invention sometimes to get the machines back working smoothly. But the machine works.

JOE: Warren...

BUFFETT: And equities, over time, are the way to do it.

Disclosure: none.

Last week I did a video saying that I thought we were still in a new bull market. This was a follow up to a video I did in January listing some of the indicators I follow as reasons I thought we were in the early stages of a bull market. I pointed out that even with all the bad news about the economy, and jobs, and bailouts, the S&P 500 remained above 800. I saw this as a positive sign.

Since last week, the economic news has gotten worse. There have been renewed talks about nationalization of our banking system. [Psst. We’ve basically already nationalized the banks.] In response, the Dow reached a new 6-year low, penetrating the bottom it reached this past November. The S&P 500 broke through the 800 price barrier and threatens to challenge the low of 752 it reached last year. As of this moment (9:55 a.m.) the S&P 500 is trading at 769.

So was I wrong about this being a new bull market? Technically, no if the market holds where it is. Unless the S&P 500 falls below 752 (the November 20, 2008 price), this will still (technically) be considered a bull market. Recall I pointed out in the in first video that only once has the market declined 20% or more, rebounded 20% then, broke through the previous low. Could that happen now? Well we’re very close. It’s definitely possible.

Does any of this matter? Not really. The overall point I was trying to make in the videos and the past few posts on the topic is that stocks are cheap. They remain cheap. As I pointed out in the last video, we don’t know what the market or the economy will do in the next or any six month period. But it is highly probably the stock market will generate very good returns over the next five to ten years. And an investment in stocks now makes a lot of sense at these valuations. I’m still optimistic.

Next week I will be doing another video highlighting why I’m still optimistic about the market using some specific company examples. Stay tuned.

Last month I posted and videoed about whether or not we were in a bull market based on five market indicators. I said that one way to tell if we’re in the beginning of a bull market is to try to ascertain whether or not we had seen a bottom. I concluded that we had seen a bottom in the market (November 20th, 752 level in the S&P 500) and that we’re in a new bull market trend. Today I’d like to look at another three:

1. Worst GDP decline in 25 years

On January 30, 2009, the BEA reported that GDP shrank 3.8% in the 4th quarter of 2008 (chart below). This was the worst showing in 25 years. The last time the economy shrank this severely was the 1st quarter of 1982. What did the market do the day these figures came out? It declined 2.2%, falling from 845.1 to 825.9. Not much of a move considering the news.

2. Job losses skyrocketing and unemployment trending toward double digits

February 5, 2009, the Labor Department reported 598,000 were lost bringing the total since the beginning of 2008 to 3.6 million. The unemployment rate went up to 7.6% making it the highest it’s been in decades. What did the market do that day? It went up 2.7% from 845.9 to 868.8.

3. Market price to GDP ratio

Back in 2001, in a Fortune magazine article Warren Buffett presented a chart comparing the total market value of U.S. based business as a percentage of GNP. An update of that chart is presented below. In the article Buffett said, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you." Currently this ratio sits below 75%.

I compared the market value of U.S. equities using the Wilshire 5000 index which comprises all stocks traded on the major exchanges in the U.S. I then compared it to GDP, a decent proxy for GNP. At the November 20th low, the percentage relationship between the two figures was 64% (Wilshire 5000 = 7.4 trillion and GDP = 11.7 trillion) and by the end of December remained below 80%.

Even if the market breaks through the 800 level, which who knows, it might, I am still on the side of this being a new bull market.

Disclosure: I and the clients of Brick Financial Management, LLC are own shares of iShares S&P 500 Index ETF but positions can change at anytime.

I would like to make you aware of a great new blog I think will be of interest to many of you who read The Third Pig. It is the Tao of Talani. In the About section of the blog you'll find Talani's story. He writes:

How does a skinny New York City kid grow up to rub elbows with Will Smith, Magic Johnson, Denzel Washington, CEO's, Politicians and other prominent figures? Simply, never define anything as IMPOSSIBLE. I didn't mention high profile names to impress but to impress upon you that anyone can create there reality.

He goes on to tell us his purpose for the blog:

In The TAO OF TALANI blog I share my experiences as a humble student, emphasizing there is no wrong or right way to achieve your goals. The blog is specifically designed for self-empowerment, entrepreneurs and lifehackers seeking to create a productive new reality. My objective is to be an asset to the collective by sharing knowledge from leading thinkers and doers.

Tuesday I contributing a post to the Tao of Talani titled, "You Ought To Be Rich". The post provides 10 simple but admittedly not easy steps to follow toward wealth. Please visit the blog and leave a comment there, or here, and let me know what you think.

Disclosure: none

Two weeks ago I posted a video on YouTube declaring that I thought we were in the midst of a new bull market. I went on to say, in order to tell if we have entered a new bull market it is best to try and determine if we have seen a market bottom. November 20, 2008 was the day the S&P 500 reached 752. As of January 6, 2009 when the S&P 500 reached 934.7, it represented a 24% advance from the November 20th low. Technically, once an advance of 20% or more is underway that is a new bull market. But in an effort to be thorough, I went through five criteria I look at to determine if we were in fact in a new bull market.

Truthfully, I stole the criteria from Benjamin Graham’s The Intelligent Investor. In the book, Chapter 8, “The Investor and Market Fluctuations”, Graham explains how to recognize market tops. He gives five criteria. I simply turned those criteria on their head and replaced one with another I think is more relevant (at least to me). The criteria were:

1. A significantly low price in the market index.

From Oct. 9, 2007 through Nov. 20, 2008, the S&P 500 declined 52%, making it the third-worst bear market since the 1929-32 crash which saw a decline of 54%. The only other decline more significant than the ones just mentioned was 89% during the Great Depression. Additionally, the calendar year decline of 39% was only surpassed two other times in (1931 and 1937) in over 180 years. In other words the severity of the decline indicates that we are at a significantly low price.

2. A significantly low P/E on the market

At the 752 level, the S&P 500 was trading at a P/E ratio on trailing operating earnings per share of 11.5x. This is equal to the lowest operating P/E ratio in the 20 years that S&P has been tracking operating results and significantly lower than the average operating P/E ratio of 19.3x since 1988.

Another P/E measure is the Graham P/E (named for Benjamin Graham) which uses an inflation adjusted 10-year average for earnings. For the nine previous bear market bottoms the Graham P/E averaged 14.4x. At the 752 level in the S&P 500 the Graham P/E clocked in at 12.3x. This was lower than even markedly low P/Es.

3. High Stock market dividend yields versus relative to long-term bond yields

Dividends paid by Standard & Poor’s 500 Index companies in the 12 months prior to December of 2008 amounted to 3.5% of the benchmark’s closing value yesterday. In early December, the 10-year yield fell as low as 3.4%. Intuitively, stocks should yield more than bonds as they represent the more volatile investment. However since 1958, 10-year notes have yielded on average 3.7% more than stock dividends. The present condition, dividend yields higher than bond yields, serves as an indicator stocks are priced the lowest they have been relative to bonds in 50 years.

4. Low Level of margin accounts

Margin is commonly used in a speculative manner. When the market is rising, buying stocks with borrowed money can and does juice returns. But in a declining market, they can be a death certificate. Margin accounts declined 47% from July of 2007 to November of 2008.

5. High volatility in the market

The best measure of volatility we have today is the CBOE VIX. The VIX, is also called the fear index. When it is high it indicates there is a plethora of panic selling in the market driving prices down. Market prices and the level of the VIX move in opposite directions. Historically, a VIX above 20-25 meant there was a lot of selling. Since the high of October 2007 to date, the VIX has averaged almost 32 and even reached an intraday high approaching 90. Warren Buffett himself even indicated he had never sell panic like this in all his years of investing. Panic selling usually means market bottoms.

Although we have seen the market pull back from the 934 price it reached on January 6^th, it has not dipped below 800 since then. If history is any indicator, we are in the first few days of a new bull market.

Disclosure: I and the clients of Brick Financial Management, LLC are own shares of iShares S&P 500 Index ETF but positions can change at anytime.

I just wanted to take a moment away from writing about personal finances and investment to simply be an American today.

The inauguration of Barack Obama as our 44th president is a monumental event. I feel proud grateful to have witnessed an event that gives people the feeling of inclusion, possibilities and hopefulness. Those are the exact elements the country needs to move forward in this difficult time and in difficult times to come.

I want to congratulate President Obama on what he has achieved. I want to wish him luck on what lies before him. And I want to thank him for having the fortitude and the courage to take on the task of the Presidency of the United States of America.

Today I am very proud to be an American and I hope you who are reading this feel as I do.

Disclosure: none

A few happenings with CEOs had me thinking. Valuing management in the investment decision is important as management has a lot though not ultimate influence over the success or failure of a business. Thus much attention needs to be given to who is at the helm of the businesses in which an investor has placed his money.

Some stories that caught my attention over the past couple of days: 

• Wednesday, Apple Computer (AAPL) founder and CEO, Steve Jobs, announced he would be taking a leave from the CEO post due to pre-existing health issues that suddenly became more serious than he had originally thought they were. The stock had to be halted in trading for a time and ultimately dropped from $85 to $81 on Thursday. Prior to this Jobs and Apple had insisted he was in perfect health.
• Late last year, Ken Lewis, CEO of Bank of America (BAC) offered to buy Merrill Lynch and insisted his bank was financially stable. According to the Wall Street Journal, Lewis was simultaneously negotiating $20 billion in TARP funds with the Treasury department. 
• American Eagle Outfitters (AEO) had a conference yesterday in which CEO Jim O’Donnell assured investors the company was well positioned for the coming future despite the tough holiday season. About a year ago, O’Donnell said he did not think we were in a consumer led recession. 

Candor is among the rarest of traits amongst people and CEOs  and management of large corporations are no exception. Sometimes it is simply not being forthright. Other times it is outright lying. Even the most sophisticated of investors can succumb placing more trust in the CEO than they ever should. I can recall an article in which managers of mutual fund company Janus had to explain why the firm as a whole owned over 40 million shares of Enron even as the company filed for bankruptcy. Their answer essentially came down to they believed the pack of lies Enron management told them.

Bottom line is while an investor should assess management, everything management says should be verified in the numbers. If management’s words do not show up in performance of the company, then their words are meaningless. And if management cannot be honest about its CEO’s health, or deals they are negotiating or is eternally optimistic despite the evidence of a tough market, then they should be viewed with even greater skepticism.

Disclosure: I and the clients of Brick Financial Management owned share of American Eagle at the time of this writing. But positions can change at any time.