When I was fresh out of school, I worked for a person who gave me this advice: “Paul, work where you can make the most money, regardless of the job and its effect on your personal life [i.e., soul, joy and well-being].” That advice never really made sense to me, but my faithful and happy nature is such that it takes a lot for me to not think that there is a “pony in the manure somewhere” (to paraphrase former President Reagan). So I stuck it out and did not look at many options. Eventually, opportunity and circumstances caused my “former boss” to move on, and only then did I realize how dreary it was working under his “style.” His behaviors toward service providers, employees (especially women) and customers were chauvinistic, selfinvolved, one-sided, manipulative and downright mean. Setting aside ethics, courtesy, compassion and virtue, he would openly rationalize his behavior by asserting that “the end justifies the means.” Since parting over 30 years ago, I’ve watched this man go through bankruptcy, move from company to company, and polarize his friends, family and former co-workers.
Thankfully, I was raised by “values-driven Puritans” who believed ethics, virtue and values matter. More important, they were diligent about instilling in me the idea that “you do the right thing because it is the right thing.” I’ve watched bankers try to become [financially] rich by setting ethics aside and raiding their depositors’ and shareholders’ funds. Not unlike my Ethical Investing – A Strategy That’s Right and Safe By Paul Sutherland, CFP ® April 2013 former “boss,” it seems that many in the investment and business community assert that “ethics, virtue and values” do not belong in their management and decision making process.
I have differed with this theme for my entire 30-year career and honestly believe that a significant reason FIM Group has thrived is because we have let values influence our process. For many, it is easy to not invest in companies that produce pornography, prostitution or cigarettes – but after that it gets more subjective and requires judgment. How much pollution is too much, can coal be clean, is fracking next to someone’s home or ground water source ok? What about food additives, genetically modified food, violent graphic video games? When is a video game too violent or fracking too risky? This is all judgment and opinion and values drive the actions and decisions. So what guides FIM Group? Well, our own moral compass and we embrace the values and behaviors outlined in guiding principles like the Caux Round Table’s principles for business (reprinted with a link to their website on fimg.net).
We are now seeing more concrete (and less anecdotal) evidence that ethics and doing the right thing are a profitable strategy. CLSA recently published a white paper titled “Ethical Asia” that reports extensively on the challenges of corporate governance and the tension between society, ethics, and shareholders. The bottom line, however, is that it appears that companies guided by ethics are profitable. As it states in the report, “Across our coverage universe, we note that companies exercising higher CSR [Corporate Social Responsibility] standards have marginally outperformed those that are lagging in the practice, especially when markets are in decline. Our analysis ties in closely with our corporate-governance scores.”
It may seem that this idea that ethics only improve performance “marginally” supports the thesis that “ethics and values don’t matter” much. I will contend, however, that the group that believes ethics and virtue are silly antiques should consider their own personal compass. It seems that when it comes to personal decision-making we favor hanging out and association with people we like and believe will treat us right. Most people believe that the Judeo/Christian value of “as you sow, you shall reap,” or Hinduism’s “karma” is, in fact, “fact.”
FIM Group is not alone in this ethics matter arena. For many years, other organizations have sprouted up, personalizing their values and championing their ethical vision. These organizations are following in the footsteps of non-religious, Rotary International for example, and religious organizations (such as the Catholic Church, Methodists, Quakers, and some Jewish, Buddhist 2 and Muslim congregations) who have championed that ethics do matter in business. A good example would be sharia law used by some Muslim organizations to guide their investing.
Reprinted below is the Belief/guidance statement for our team regarding values, ethics ad virtue and how it influences our decision-making process. (inspired by upstream21/portfolio21)
FIM Group believes that ethics, virtue and values matter, and our team strives to invest in a manner that is consistent with this belief. In most publicly traded corporations, the majority of shareholders are absentee owners who purchased their shares in the secondary market. They are economically interested, usually passive investors who expect the company to prioritize their financial interests “above all else,” which, sadly, includes placing shareholder interests above:
In addition, it is evident that many “public” companies have often (but not always) served their shareholders’ short-term financial interests (a riskier strategy) over their long-term interests. In contrast, FIM Group avoids investing in companies whose short-term interests override the long-term best interests of their shareholders, investors, employees, stakeholders and the environment. We favor a long-term investment strategy and believe that a balanced, longterm, engaged, values- and ethicsbased approach to investing is more sustainable, rewarding and resilient.
Several weeks ago I had the pleasure of interviewing Deepak Chopra MD, a Prolific author (44 books), and grandfather. We discussed how society has changed from the 1960s and ’70s, through today. He touched on subjects such as the Vietnam War protests, political assassinations, presidential impeachment and the general angst of the 60s and 70s. He said he feels like the goals that our “Baby Boomer” generation tried to champion – e.g., ending nuclear proliferation, promoting global peace, justice, democratic rule, effective government, etc. – did not take hold because we were coming from a place of anger and moral outrage rather than a place of peace, compassion and love (or, as his daughter Mallika would call it, “coming from a place of positive intentions”).
Dr. Chopra asked me to compare the 60s to today’s world. We’ve still got war, disparity, malevolent dictatorships, religious strife, intolerance, famine, etc. today. I must add, however, that there has also been a steady march of change and many signs of hope and progress (one sign I see today, personally which gives me hope is the new Catholic Pope). That chat with Dr. Chopra helped me to understand that if corporations and their managers come from a place of greed and unexpressed values (like my old boss), they will most likely end up on the heap of failed investments, failed lives and failed companies.
I heard a TED talk about the value of maintaining and nurturing “reputation” as the most important business asset you can possess. The presenter said reputation is your “value” and is a currency you use in life. Today, things are much more transparent – it is easier than ever to see what managers, governments and companies are doing.
This brings me to the last point I wish to chat about this month: reputation. Regardless of whether doing right is the right thing to do, there is value in keeping promises, being responsible, acting ethically, and championing values and virtue in today’s world. Dr. Chopra’s children Mallika and Gotham discussed how social media, Facebook, blogs, Twitter, YouTube and such are changing our society, adding immediacy to events and allowing people to mobilize much more quickly than we have ever seen. Mallika, a web and social media consultant (intent.com) said, “Just look at what happened in the Arab spring [social media and cell phones tying people together], or how ordinary Indians mobilized around women’s issues after the brutal rape in New Delhi.” With all that is going on in society I think that searching for investments that are managed by ethical, virtue-driven people is a safer and more effective investment strategy. Most important, it’s the right thing to do.
If you are like the majority of parents with children approaching college age, you might find yourself scratching your head and trying to determine how to best fund their education. According to the most recent college cost figures released by the College Board, the annual average cost for tuition, room and board for a public college in 2012/2013 is $22,000 for in-state students and $35,000 for out-of-state students; the average cost for private colleges can reach close to $43,000. Also take into account that these expenses have been increasing annually at roughly twice the normal rate of inflation.
Several companies have conducted studies of the college saving habits of parents with children under age 18. The following are among the more common findings from these surveys:
Even though we strongly encourage clients to start saving for their children’s college education as soon as possible, we recognize that life happens and conflicting financial goals sometimes hamper even the best intentions. In this article, I will cover some of the funding options used to supplement any current college savings, such as loans, grants and scholarships, either through financial aid programs or other sources, and tax deduction or credits that might be available. One of the first hurdles your child needs to get across is selecting the college(s) he or she is interested in. Once this is done, the best way to determine if you qualify for any needs-based financial aid – including Federal Pell Grants, Subsidized Stafford Loans or Work-Study Programs – is to complete the Free Application for Federal Student Aid (FAFSA) form each year. Be aware, however, that there is a deadline to complete the FAFSA (e.g., March 1 for Michigan residents). Grant aid beyond financial need is more likely to be offered by more selective public and private schools looking to attract students with strong academic credentials and other qualities. Students can also increase their chances of receiving money by applying to smaller private or off-thebeaten- path schools instead of the larger universities that most families focus on.
The good news is that four educationrelated tax deductions or credits were extended as part of the recent American Taxpayer Relief Act (ATRA) earlier this year. The first is a full extension of the American Opportunity Tax Credit (through 2017). This credit is $2,500 and applies to the first $4,000 of out-of-pocket qualified tuition and related expenses during the first four years of college. The credit is completely phased out at $90,000 of income for single and $180,000 for joint filers.
The second is the above-the-line deduction for Qualified Tuition and Expenses of up to $4,000 for taxpayers whose modified adjusted gross income does not exceed $65,000 for single or $130,000 for joint filers, and $2,000 for taxpayers whose modified adjusted gross income did not exceed $80,000 for single or $160,000 for joint filers. Third, ATRA permanently extended the 60-month rule for the $2,500 above-the-line student loan interest deduction.
Last, ATRA permanently extended the Bush-era enhancements to the Coverdell education savings accounts, continuing the $2,000 maximum contribution amount and taxpreferential treatment for withdrawals for both elementary and secondary school expenses in addition to qualified
college expenses. The Lifetime Learning Credit is still in place, which allows for a credit of up to 20% of qualified expenses up to $10,000, phased out completely at income of $63,000 for single and $127,000 for joint filers. Even though these credits and deductions can save you tax dollars, care needs to be given, since some of these credits and deductions cannot be combined in the same year. It is very important that you coordinate these to maximize the tax savings for your situation.
If you find yourself short of your college funding goals and would like to explore any of these college funding opportunities further, we would recommend that you contact one of our financial professionals to review your unique situation.
There are certain things I remember from my childhood with great clarity, and there are other things that, well, I just plain forgot. One solid memory I have is hearing my dad say, “Now, that’ll cost ya a pretty penny.” The reason I remember the saying so vividly is that I recall myself diligently searching for pretty pennies and ever so discreetly delivering them into my dad’s pockets. Of course, the penny searching and pocket stuffing was done by the child who had learned how to excite her parents with chuckles and smiles. The smile came from my dad because my interpretation of “pretty” meant that the penny was brilliantly shiny. On the other hand, my dad’s meaning of “pretty,” plain and simple, was that whatever he was referring to was quite expensive.
Lately there has been a great deal of talk in the financial arena regarding practices referred to as “risk-off trade” and “risk-on trade.” These terms root back to the market highs of 2008 and the market lows of 2009, and have become part of the lexicon of these two periods. How can we forget the financial credit crisis when investors curled up into the fetal position and desperately tried to dispose of all investments that carried any amount of risk without regard to valuation? Investors during the credit crisis wanted to sell just about everything. During this time, everything even included selling shares of common stock that were trading at extremely discounted prices. Common stocks were being sold without any regard to a company’s actual financial condition. This massive selling reaction was termed “risk-off.” After the markets hit a low in March 2009, many assets began increasing in value and investors were again willing to add risk to their investment mix. As such, the term “risk-on” was born.
I am raising this risk-off/risk-on topic in today’s financial marketplace for two reasons. First, I hope to shed a small window of light on what these buzzwords mean. Second, and more important, I wish to explain how these types of movements in the market can provide investment insights. The market herd can move with colossal force. At times these movements can result in considerable pricing dislocation. The misalignment in pricing without regard to the financial condition of a security is when opportunities and/or actual risk can be identified.
Yield is the income return received from either interest and/or dividends on an investment. Currently, yield is expensive – or, as my dad would say, “Yield! Now that’ll cost ya a pretty penny” (and in this context, he surely didn’t mean a shiny one).
Interest rates being as low as they are today have created a demand for investment yield. High-yield (non-investment-grade) bond funds are a favorite among “yield-seeking” investors. Dollars piling into high-yield bond funds without regard to the understanding of risk is a perfect example of the “riskon” mentality. Taking inflation out of the equation, most bonds today are simply too expensive. Bond prices and yields move in opposite directions – as the yield on a bond shrinks, the price of the bond rises. In reviewing the Barclay’s High Yield Bond Fund (ticker: JNK), we see that the high-yield bonds (a.k.a. “junk bonds”) held in this exchangetraded fund have an indicated yield of 6.29%, as of March 12, 2013. On the same day, the 10-year U.S. Treasury is yielding 2.01%. The Barclay’s High Yield Bond Fund is yielding 425 basis points (4.25%) over 10-year U.S. Treasuries. In today’s world of yield-hungry investors, the 6.29% yield is dangerously enticing. In keeping my eye on value, I typically would consider high-yield bonds as a group to be attractive when the spread is 800 basis points or more over 10-year U.S. Treasuries. This information tells me that high-yield bonds as a group are expensive.
However, it’s not merely junk bonds. Many types of income-generating securities will “cost ya a pretty penny” in today’s market. The price paid for a given investment is a key component to understanding risk. Unfortunately, some members of the investing herd often do not consider how much they are paying for an investment. If they did, they surely would not be putting their shiny pennies into high-yield bonds.
Successful investing requires a thorough understanding of the amount of risk being incurred. Investment risk is the probability of a projected return being lower than the investor’s expectations. A key element in making a sound investment decision deals with a strong understanding of the factors on why an investment may either increase or decrease in value.
What may seem obvious, but is often overlooked by the investing herd, is the initial price paid for an investment. The price paid for any investment is a dominant risk factor, and there is no such thing as an asset that cannot become too expensive and too risky to own. So, while many of my childhood memories may be a bit fuzzy, my dad’s “pretty penny” saying will always remain crystal clear and remind me to understand the value of a dollar. One of the vital goals at FIM Group is to keep more pretty pennies in our clients’ pockets. This means we adhere to a disciplined approach in our investment strategy to mitigate major risk.
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