Rethinking his ira

Eric Haglund:  “I don't know if you’ve had a chance to read the recent New Yorker piece on Paul Krugman (it’s a great read, as you’d expect from the New Yorker), but I was rather startled to find out that Krugman and his wife ‘pulled out of the stock market ten years ago and never went back.’  I know it’s not his particular area of expertise and that you shouldn’t allow yourself to get spooked by one guy’s opinion, but Krugman is a pretty damn smart guy and tends to be right a lot of the time.  And there’s something to be said for the fact that somebody like me, whose knowledge of the stock market comes from books like yours and whose participation in the market is almost entirely limited to index funds, still really doesn’t know what the heck he’s doing with this stuff.  Are P/E ratios way out of line with what they’ve historically been, as Krugman says?  Search me!  It occurs to me that if somebody challenged me on why my Roth IRA is entirely invested in index funds, all I’d be able to say in response is, ‘because guys like Andrew Tobias say that’s what you should do.’  Suddenly the ground beneath my feet doesn’t feel all that sturdy.”

☞  I don’t know how close you are to retirement, or any of the other factors that could affect your asset allocation; but with the Dow back at 11,000, I don’t think you’d be crazy to reassess a bit.

For example, you might diversify with a little gold – GLD, which trades like a stock, is the simplest way – despite the fact that, for the long term, gold will surely not be as productive an investment as . . . well, actual productive investments. 

But the more intriguing shift might be into a Roth IRA under the management of my friend Joel Greenblatt’s Formula Investing.  It’s sort of like index investing, but with a significant twist (namely, picking a basket of just the best businesses selling at the lowest valuations); with still-modest costs and, because this is a Roth IRA, no tax drag.

There’s no guarantee, his method will beat the index funds.  But Joel is a pretty smart guy.  For example, if you read Michael Lewis’s The Big Short (do!  do!), you’ll notice that Joel spotted Dr. Mike Burry (the one-eyed medical student whose phenomenal investing success, as written up by Lewis, was excerpted in Vanity Fair) and gave him $1 million for 25% of his aborning hedge fund before anyone else did. 

Clearly, rare people like Dr. Burry can beat the indexes by spotting value.  And rare people like Joel have done very well spotting value themselves.  His Formula Investing won’t make you rich; but I’d be surprised if, over time, it didn’t outpace the index funds, especially when sheltered from tax consequences inside a retirement account.

Then again, how big is your IRA?  If it’s large enough, me-mail me about a couple of small private managers who may be able to do even better still.  (Or may not.) 

INCREASED CORPORATE POWER

Corporations tend to back Republican Presidents, and Republican Presidents from Reagan on have been nominating justices like Scalia and Thomas – who gave us George W. Bush, who in turn gave us Roberts and Alito, who in turn decided recently in Citizens United to give corporations still more power to influence elections. 

As reported by ProPublica – here – that added influence can be easily hidden.  And it extends far beyond national elections.

. . . Businesses must reveal their identities on public [2] reports [3] to the Federal Election Commission if they buy advertising on their own. But one popular and perfectly legal conduit for companies wanting to influence politics under the radar is to give money to nonprofit trade groups such as the U.S. Chamber of Commerce.

The Chamber and its national affiliates spent $144.5 million [4] last year on advertising, lobbying and grass-roots activism -- more than either the Republican or Democratic party spent, according to a Center for Responsive Politics analysis of public records -- while legally concealing [5] the names of its funders. The Los Angeles Times reported this week [6] that the Chamber is building a grass-roots political operation that has signed up about 6 million non-Chamber members.

Some of the positions the Chamber has successfully advanced on behalf of its donors include a nationwide campaign to unseat state judges [7] who were considered tough on corporate defendants and opposition to a federal bill that would have criminalized defective auto manufacturing [8]. . . .

CHOCOLATE

Bob Diem:  “Regarding your recent chocolate [reduces the risk of stroke and heart attack] post, your readers might be interested in cocoa nibs.  I mix them with raisins and nuts to make a delicious and healthy trail mix. Keeps me away from the unhealthy snacks.”