The notion of social benefit is interesting. Does anyone have any obligation to even consider social benefit? Is it better to assume that no one cares about social benefit instead caring only about themselves or their bonus or their clientele or their own account as the case may be?
Everyone needs to answer this sort of thing for themselves as there are plenty of right answers.
For individual investors I cannot imagine why anyone would have social benefit in the context of financial matters as a priority. Between benefiting society and not benefiting society I would prefer the former (I've been a volunteer firefighter for seven years and counting, been giving away content on the internet for five and half years and my wife is a full time volunteer in animal rescue) but where personal finances are concerned the typical individual does not have the opportunity to be an agent for social benefit or the like.
Making a high priority out of social benefit for individuals becomes even less important if the typical social safety nets (entitlements) end up not being there. perhaps a little Ayn Randian looking out for your own makes the most sense--that is making sure you can take care of what benefits you first and foremost and if you have time left over for the other so be it. Let me be clear that I believe in a living a life of service but successfully protecting your finances from dishonest people, overly flawed investment products and your own emotions is what makes the other stuff possible.
I will tie this in to properly understanding what is important financially. For most people it is simply giving yourself the best chance possible for having enough money when you need it. A point I make often is that beating the market in a given year means a whole lot less than having enough when the time comes. The best way to come at this, IMO, is to save a lot and have some strategy to avoid the full brunt of down a lot (smooth out your ride).My personal priority is our clients for the selfish reason that is is where my bread is buttered. Thanks to a low overhead we save more than we live on and I have no intention of retiring from this which means very little of our savings needs to be exposed to risk assets so doing anything to jeopardize this dynamic would be sheer lunacy. I am acutely aware of our good luck.
To the original point, taking care of your own yoga mat first and then sorting out everything else will help you solve a lot of this for yourself. I can appreciate the extent to which this sounds preachy but I am very personally motivated to eliminate stress and negative energy from my life and I think this happens by figuring out priorities and avoiding certain situations like being down 50% in your portfolio.
25 comments:
There is, of course, the option of investing via socially responsible funds. Personally, I've avoided tobacco, even though the dividends would supplement my cash flow nicely. Some of my neighbors feel that they should only invest locally, and fortunately, there are enough options to give them a fairly diversified equity portfolio.
The problem with derivatives is it just seems like betting not investing. I understand the concept of insurance and some derivatives serve that purpose.
But while it is legal for an insurance company to sell you insurance to benefit your wife if you wanted insurance, it is not legal for my cousin in NY who does not know you to have insurance policy on your life.
These need to be on an EXCHANGE so we know whats going on. What exists, what risks financial institutions are taking, etc.
They do not want that because they charge 2 to 3% for these silly things. If they were on an exchange the cost would be closer to 0.1% and risks would be better understood. The exchange would not risk the US from being the financial capital of the world, a vibrant exchange would enhance the US position.
I don't believe there's an obligation to ensure social benefit to trades. But when there's nothing that can be gained from a trade, it's gambling--no different than blackjack. Let's not call it investing.
not sure how an exchange would function given the lack of standardization across the many types of derivatives that exist.
Roger, what you described is capitalism at its finest; something Adam Smith called the "invisible hand" (http://en.wikipedia.org/wiki/Invisible_hand). We all work to maximize our own and take care of our own, and in so doing, maximize the allocation of the resources of society. The result is the highest possible standard of living for all; a sharp contrast to the lesser standard of living that is provided by socialism or other central planning gov't schemes. Another way of thinking of it is that one is always more careful when spending his own money than when spending someone else's money. Soro's comment was political-spin and should be discounted accordingly.
I am in a mood this morning, so let me just toss this out. A few days ago, someone compared the credibility of Obama's press secretary (Gibbs) to that of an anonymous internet commenter. As an occasional anonymous internet commenter, I am offended by that comparison and think the person who make that comment should apologize to all anonymous internet commenters for the comparison. Anonymous internet commenters are expressing their own opinions and they stop when they run out of opinions; Mr Gibbs is expressing the opinions of Obama, the DNC, and other socialists, and they will never run out of opinions as we the tax payers are unwillingly funding the development of those opinions.
'Nuf said. Thanks for your blog, Roger. Wishing only the best to you and this community.
This is Anon 6:51, again. Credit to Ronald Reagan for the thought on the comparison.
Just back to phx after being stranded in Europe. Great to read your sound logic and insight again. I have tried in past to complete your survey but there must be a sort of technical problem, but I read, and appreciate your blog daily. Amid the anxiety and price gauging that began over "there", here are accounts are up. More importantly, our animal and human families are fine. Best regards and hopefully a contained fire season. K. Bell
thanks for the kind words all.
anon 6:51 you say something that really caught my eye
Another way of thinking of it is that one is always more careful when spending his own money than when spending someone else's money
To the extent we can stretch that to be about privatizing social security I think I have changed my mind on that. Personally I would love it. 10% equities, 15% bonds and 75% cash and hope for the best but sadly I think the widespread 401k results are an indicator or warning of how many people would wipe themselves out and be left with nothing which would be disastrous.
I think my comment is more about people not being financially literate enough more than anything else.
I guess you answered your own question Roger, they will have to standardize these along with getting a listing on an exchange.
are you saying the existing contracts out there can be standardized? that is my point. the problem, whatever the actual magnitude is, lies in existing contracts many of which were customized for clients with all sorts of things that I think makes standardizing derivatives either difficult or impossible.
going forward yes a framework might be able to be created to allow putting them on an exchange but what about the old ones?
Roger,
This sentence in your post surprised me:
"Thanks to a low overhead we save more than we live on and I have no intention of retiring from this which means very little of our savings needs to be exposed to risk assets so doing anything to jeopardize this dynamic would be sheer lunacy."
1) Does "we save more than we live on" mean that you save greater than 50% of your income, even taking taxes into account? That's pretty amazing..
2) Does "very little of our savings needs to be exposed to risk assets" mean that your personal portfolio is almost entirely in cash or government bonds? That would really surprise me...
- aagold
1) yes--no mortgage, no car payments, no credit card debt.
2) no-- low equity exposure not no equity exposure.
I agree with your comments about a person's investments, but I think the Soros article is more about the "professionals" in the financial services industry.
To me, being paid and treated like a professional brings with it some responsibility to use your skills to try to provide some good for the world in your field. A doctor should strive to heal, a lawyer to bring justice, etc. The same applies to financial services professionals who hold key portions of the economy in their hand. Bankers should provide banking services, investment bankers should allocate capital and traders should trade within some ethical guidelines. I'm not saying professionals should not profit from their skills and services but when their actions and products become more about their profit than good to the world....there is a big problem.
As I understand Goldman transaction..professionals at Goldman creating a product to allow two other professionals to invest/bet on either side of the trade. I realize these positions may be justified as hedges to other positions...but it seems very far removed from adding goodness to the world. In fact, it really sounds like a bookie establishing a betting line and two players laying down their money ...morethan a professional activity. It seems the SEC and press is concerned about if Goldman clearly communicate all the details about "the bet" to one side or the other? interesting ...but it does seem like some professionals in the industry should take a step back and be questioning if the game is really adding value to the world
I think those in the financial services industry who are trying to "do good" (like yourself) should be the most outraged and concerned over what seems at best minimal value activities at worst unethical/illegal activity. They have blacken the industry and will make it harder to do real, good, business in the future. Where is the outrage from the good professionals in the industry?, why are they not trying to remove some of the less valuable activities?, why does it appear these professionals can not self police themselves...but rather need "regulation" from above.
Sorry...if these thoughts are a little off track....but I think the reaction to the past "crisis" has too much focus on the specifics of a market/transaction/action and we would all benefit from a broader look at what the professionals in the industry should be doing.
I realize it's none of anybody else's business, but could you be any more specific on what "low equity exposure" means? Does that mean, for example, something like 25% or less? If so, then I'm kinda shocked, given that I'm guessing most of your clients have a much higher percentage of their net worth in equities (I'm not a client, by the way). Also, given that your equity exposure is very low, do you follow the 200-DMA rule on your own equity portfolio? Seems unnecessary if your equity exposure is very low, because even if equities drop 50% your net worth would not decline significantly. Sorry to ask personal questions, but given the topic of your blog and your proffession, I'm surprised that such a small percentage of your own net worth is at risk in the stock market.
- aagold
i can't disagree with you but taking on outrage would, the way i look at things, result in straying very far off my yoga mat (so to speak). I have been criticized for this before but worrying about things beyond your control seems like a fast track to negative energy and all that goes with it.
aagold i have addressed this before, the last thing a client of an RIA needs is for his portfolio manager to be actively trading his account at the expense of minding the clients' accounts or RIA ever getting emotional about their account.
any value i might add would be diminished by trading a lot or creating the possibility of my getting emotional. Our clients are my financial future and anything the jeopardizes that, to repeat, w/b sheer lunacy.
Only one client has ever asked about this (quite a few years ago now) and this is exactly what I told him.
Soros was probably answering the question from a socioeconomic rather than a personal perspective: What individuals do as investors is not really the issue, it is what institutions do and whether their business is productive at the social level; i.e., financial sector profits and position in the economy have become inconsistent with the financial sector's contributions to the economy.
Adam Smith only mentions the "invisible hand" once in Wealth of Nations and there it is stated with something like disgust -- "In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose ... be the gratification of their own vain and insatiable desires" -- and more in that vein, but he develops the idea more fruitfully in his Theory of Moral Sentiments.
Hard to give a shorthand version of this w/o doing violence to the concept but Smith elevates the idea of exchange or barter to a means by which we learn of and understand each other while also satisfying our individual wants. The condition being of course that the act of exchange itself should be ethical; e.g., the ideal contract is one in which both parties leave satisfied, believing they got the better of the deal.
Finally, there is a real difference between requiring exchanges for derivative and requiring all derivatives be cleared centrally. Economics of Contempt runs this down in detail at http://tinyurl.com/36otp8y and I agree: A centralized clearinghouse is the essential reform, exchanges are optional.
I remember listening to someone explain that derivatives were simply illegal betting according to the law between two parties. Probably a bloomberg pod cast about a year ago but i am not positive.
Simply pass a law that all derivatives held by financial institutions must be settled within 3 years or transferred to an exchange. Since they are viewed to meet the definition of illegal gambling to start this should not be to difficult.
I am not that concerned that these could not easily be wound down if congress was motivated to do so.
i am pretty sure that many OTC derivatives are customized such that arbitrarily slapping an expiration date on them would cause a lot of problems.
i am not defending any of this just pointing out that "fixing" it will have repercussions.
If I understood the context of Soros comments correctly regarding GS structuring a shortable financial product out of non-shortable MBSs - then I completely disagree. Short selling provides a vital check on asset bubbles, and aids in price discovery. This is a clear social good.
However I do agree that looking for some social benefit is a useful rubric to determine if a market is healthy or if there is just government sponsored graft changing hands.
I understand there will be repercussions, but letting it spiral further out of control is not the solution either. Not deciding is deciding!!!
These can and should be moved to an exchange where there is transparency and the risks taken by financial institutions can be evaluated.
I think Roger is missing Soros' point here. As RW said, Soros is talking about this from a socioeconomic perspective, not from an individual investor's perspective. Just because GS traders might see it in their best interest to make these trades does not mean we as a society have to allow these trades to take place if they cause risks to society.
To use a metaphor that Roger might appreciate, we don't allow individuals to start open fires in national parks during burn season. The good of society outweighs the rights of the individuals. We shouldn't let these guys burn down our forest (financial system) just because they want to play with fire (synthetic CDOs, naked credit swaps and the like). If these traders are not going to police themselves (and as Roger's logic demonstrates, of course they're not) we need better regulations.
Or to reverse Roger's metaphor, perhaps we should be paying *more* attention to GS's yoga mat after what happened in 2008. If these types of trades hadn't played a role in bringing the financial system to its knees we wouldn't even be having this discussion. It becomes necessary to consider social benefit when an individual's actions threaten other individuals.
Soros.
I suppose his far-left projects such as Media Matters are socially beneficial.
From the guy who made billions shorting, and negatively impacting, entities around the world!
Perhaps in his twilight years he wants to make amends. To do "good". Well, so did Heinrich Himmler, trying to trade Jews through the Red Cross in Sweden in 1944-45 to sweeten his reputation.
Soros may play nice to the socialist camp now. Only after he made a killing as a vulture capitalist.
Quick, call Colbert and tell him he'll never top this, we've got a guy here willing to argue moral equivalence between a hedge fund operator and a genocidal mass murderer.
ROFL
Without hearing the entire Soros interview, I can only guess at the context. But when people talk about "social benefit" they are usually not talking about individual investors. Instead, perhaps he means that when contemplating government regulation, markets that have a social benefit should be given more deference than those that don't.
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