Financial Professionals

Financial Professionals Winter 2025

This is my quarterly agglomeration, intended primarily for my fellow financial professionals. It’s simply a way to share things of possible interest that I have read or thought about this quarter. Enjoy!

First, there are some excellent flowcharts mapping RMDs from inherited retirement accounts here.

Second, new tax figures came out shortly after the last edition of this, so undoubtedly this isn’t news but see:

Third, I just thought this was funny (from this FT article):

China publicly supports Cuba’s right to choose its own path to economic development “in line with its national conditions”, but privately Chinese officials have long urged the Cuban leadership to shift from its vertically planned economy to something closer to the Chinese model, according to economists and diplomats briefed on the situation.

Chinese officials have been perplexed and frustrated at the Cuban leadership’s unwillingness to decisively implement a market-oriented reform programme despite the glaring dysfunction of the status quo, the people said.

TL;DR: Cuban officials ask China for economic advice, and they suggest (essentially), “Stop being so Communist.” Hysterical.

Fourth, Howard Marks had a good piece here on asset allocation. It’s basically how I have looked at this for decades. (Which is undoubtedly why I liked it!)

See also item #25 infra for another Howard Marks piece.

Fifth, Morgan Housel nailed it on X (née Twitter):

The same people:

2010: “Don’t buy stocks, they won’t go up.”

2024: “Don’t buy stocks, they’ve gone up too much.”

Sixth, similar adages on generational wealth from around the world:

Acquire, inherit, ruin. (Sweden)
First generation traders, second generation gentlemen, third generation beggars. (Mexico)
From stalls to stars to stalls. (Italy)
No rich man goes beyond three generations. (Korea)
Peasant’s shoes to peasant’s shoes in three generations. (India)
Rich dad, noble son, poor grandson. (Portugal)
Shirtsleeves to shirtsleeves in three generations. (United States)
The father buys, the son builds, the grandchild sells, and his son begs. (Scotland)
The father creates it, the son receives it, the grandson ruins it. (Germany)
The first generation builds, the second strengthens, and the third spends it all. (France)
The third generation ruins the house. (Japan)
There’s nobbut three generations atween a clog and clog. (United Kingdom)
Wealth never survives three generations. (China)

Seventh, I wrote this to clients the morning after the election. The subject line of the email was “Who Knows?”

All,

Last night and this morning as I watched and thought about the election results, I was reminded of a Chinese parable from the second century BCE.

Here is the translation of the fable from wiktionary:

It can be difficult to foresee the twists and turns which compel misfortune to beget fortune, and vice versa.

There once was a (father), skilled in divination, who lived close to the frontier (with his son). One of his horses accidentally strayed into the lands of the Xiongnu, so everyone consoled him.

(But) the father said, “Why should I hastily (conclude) that this is not fortunate?”

After several months, the horse came back from the land of the Xiongnu, accompanied by another fine horse, so everyone congratulated him.

(But) the father said, “Why should I hastily (conclude) that this can not be unfortunate?”

His family had a wealth of fine horses, and his son loved riding them. One day (the son) fell off the horse, and broke his leg, so everyone consoled (the father).

(But) the father said, “Why should I hastily (conclude) that this is not fortunate?”

One year later, the Xiongnu invaded the frontier, and all able-bodied men took up arms and went to war. Of the men from the frontier (who volunteered), nine out of ten men perished (from the fighting). It was only because of (the son’s) broken leg, that the father and son were spared (this tragedy).

Therefore, misfortune begets fortune, and fortune begets misfortune. This goes on without end, and its depths can not be measured.

Some of you are undoubtedly pleased with the election results (you believe it is fortunate), others despairing (you believe it is unfortunate), but either way I think the fable is apt. We simply don’t know yet if, in the long run, the outcome was good or bad.

Eighth, a good list of state inheritance and estate taxes to check if you are doing a financial plan for a client in another state can be found here.

Ninth, a good paper from Rob Arnott on the ERP (Equity Risk Premium) here.

Tenth, a good reminder (source):

I will make an observation: poor people are generally happier than rich people, because when your basic material needs are not met, you don’t have the time or mental energy to worry about your literary agent not returning your emails. If you told poor people your problems, they would laugh at your problems. People lack perspective, which is putting it lightly. The good news: you have food and a house and a TV and a washing machine and a dishwasher and the internet. Everything else is ego.

Eleventh, discussion of long-run asset returns, including sections on real estate and commodities as well as the usual stocks and bonds, here.

Twelfth, a new paper on calendar anomalies is paywalled (here). TL;DR: “Contrary to popular belief, calendar anomalies do not exist in the US and world market indices.”

Thirteenth, Berkshire Hathaway recently issued a press release about Warren Buffett’s estate planning. It’s worth reading his thoughts on this (and most other subjects), but I wanted to point out something you may not realize. Warren notes in the press release, “In 2004, before Susie, my first wife, died, the two of us owned 508,998 Class A shares.”

Of course he has made massive charitable contributions, but suppose he had simply held those shares, and suppose that was all of his net worth (that assumption is probably approximately true). BRK-A closed at $666,280 as I write this. 508,998 * $666,280 = approximately $339.1 billion. Elon Musk is currently considered the richest person in the world with an estimated net worth of $263.8 billion (source). Warren is #8, but if he hadn’t made charitable gifts, he would be about $75 billion ahead of #2.

Fourteenth, the chart below makes worries about the “magnificent seven” share of market cap look a little silly, doesn’t it?

Fifteenth, Gen Z may be a little, shall we say, miscalibrated in their expectations?

Sixteenth, Art Cashin, a legendary Wall Street character, passed away recently; here’s one of his stories:

My father died when I was a senior in high school so I had to pass up the chance for a scholarship to college to work in Wall Street to help support the family. Most of what I learned came from sitting in saloons that had encyclopedias behind the bar – usually to settle bets.

The things I learned in the saloons were not the same things you learn in places like the Sloan School of Management – usually, they were better.

For example, there was a lesson I learned during the Cuban Missile Crisis. At the time I was studying with “Professor Jack” under a Moosehead, in a saloon called “Eberlin’s” down the block from the exchange. The tuition was paid in scotch “old fashions.” Classes lasted until either you ran out of money to buy drinks, or Jack ran out of the ability to stand. Jack was actually a 62-year-old trader in silver stocks, but he had more in his head than is in most university libraries.

Anyway, it was the Cuban Missile Crisis and there were rumors that Russia had launched rockets and the Dow took a dive near the bell.

I cleaned up my desk and raced to the Moosehead, as animated as only an 18-year-old can be. Jack was already there and, as I burst through the door, I shouted: “Jack! Jack, there was a strong rumor that the missiles were flying, and I tried to sell the market but failed.”

Jack said “Calm down kid! First, buy me a drink and then sit down and listen to me.” I ordered the drink and meekly sat down.

Jack said – “Look kid, if you hear the missiles are flying, you buy them. You don’t sell them.”

“You buy them?” I said, somewhat puzzled.

“Sure you buy them!” said Jack. “Cause if you’re wrong, the trade will never clear. We’ll all be dead.”

That’s a lesson you won’t learn in the Wharton School.

(If you want to read a little more about him, see this.)

Seventeenth, interesting data on alternative investments (source):

Passive strategies account for 67% of [BlackRock’s] client assets; even pro-forma for the deals, alternatives contribute 4%. But alternatives are so much more profitable that they will make up over a quarter of BlackRock’s earnings once the latest deal closes, compared with around 40% from passive.

Remember those profit margins are the investor’s costs!

Eighteenth, this is something I did not know: “[I]t’s a felony to file false tax returns but only a misdemeanor not to file a return at all.” So, some people just don’t file!

Nineteenth, Anitha forwarded this to me last month. I don’t know the original author, but it’s good:

Marriage is hard.
Divorce is hard.
Choose your hard.

Obesity is hard.
Staying fit is hard.
Choose your hard.

Being in debt is hard.
Being financially independent is hard.
Choose your hard.

Starting a business is hard.
Working at a 9-5 job is hard.
Choose your hard.

Speaking for yourself is hard.
Being taken for granted is hard.
Choose your hard.

Saving money is hard.
Being broke is hard.
Choose your hard.

Learning new skills is hard.
Staying stuck is hard.
Choose your hard.

Following your dreams is hard.
Living with regrets is hard.
Choose your hard.

Letting go of toxic people is hard.
Living with toxic people is hard.
Choose your hard.

Twentieth, some humor for you: What the Very Rich and the Very Poor Have in Common and Marriage as Tax Arbitrage. Also, as I’ve noted since portability was enacted, extremely rich (single) people should marry terminally ill people who are not rich (and you could do it repeatedly). It’s worth roughly $14mm times 40% or $5.6 million to the kids each time. You could promise that person’s heirs a few bucks to do the deal – there’s a trade here!

Twenty-First, when to buy insurance – mathematically.

Twenty-Second, I recommended The Missing Billionaires: A Guide to Better Financial Decisions a while back (here), but if you didn’t get a chance to read it yet, there is a nice synopsis of the key point here.

I also built a little calculator in Excel a while back to fiddle with this Merton Share formula. With a 4% ERP 18% sigma, and risk aversion of “2” (which is widely considered “normal”) you get roughly a 60/40 recommendation. At “3” you get approximately 40/60, and at “1.5” approximately 80/20. (“1” is completely risk neutral – no risk aversion at all – and would indicate owning risky assets on margin.) If you want a copy of that calculator, simply email me and ask for it. (I’m sort of curious how many people both get to point #22 and are that interested!)

Twenty-Third, someone pointed out to me that two of the pieces of advice I listed in Appendix 2 (“Advice to a Neophyte”) of Ruminations on Being a Financial Professional seem contradictory. Specifically:

It almost certainly isn’t different this time.

And

Past performance is not only not a guarantee of future results, it isn’t even a good indicator of them.

It’s a valid point. Both are referring to very short-term phenomena, and the first refers primarily to psychology and the results of that psychology. The tech bubble in the late 1990’s is a very good example. People thought (metaphorically) that trees could grow to the sky, ( ss metaphorically) that the business cycle had been tamed, and new technology (the internet) was so paradigm-changing that there was no price too high to pay for tech stocks. But this had happened before – repeatedly.

In the late 1960s and early 1970s we had the so-called nifty-fifty stocks that were considered so “blue chip,” so professionally managed, that they were “one-decision” stocks. (It was the era of the conglomerate, where managerial excellence was prized and considered transferable to any company regardless of the management team’s industry experience. It was even considered transferable to war – see the “whiz kids” running the war in Vietnam.) You only had to decide to buy them, you never had to decide to sell them.

It also happened in the 1920’s where the “tech” stocks of the day were “Radio” (RCA), Ford, AT&T, etc. This also had happened in the 19th century with the miraculous development of the railroad (see Railway Mania) and the Canal Mania before that! Those all ended badly for investors (but great for consumers). It wasn’t different in the 1990s. In other words: It almost certainly isn’t different this time, because, as Theodor Reik (not Mark Twain) observed “History doesn’t repeat itself but it often rhymes.” The expectation people have that the current situation is novel and will play out differently this time, is generally wrong. (See also Base Rate Fallacy.) I would also submit that the current crypto enthusiasm “rhymes” with tulip mania and the Beanie Baby craze and will end similarly – though who knows when.

The “past performance” point is also a short-term reference. The CAGR on U.S. stocks from 1926 (when good data begins) through 1999 was 11.0%. The CAGR from 1995-1999 (inclusive) was 27.7%! The past performance reference tends to be people referring to recent returns (the latter), rather than long-term returns (the former) and expecting it to last (roughly) forever. (Those 27.7% average returns from 1995-1999 were followed by -14.7% returns from 2000-2002.) But even the long-term returns were, in a sense, wrong! Valuations matter. The CAGR of U.S. stocks from 2000-2023 (inclusive) was 7.2% because the past performance – over the short-term in particular, but even over the long term – was very misleading. Stocks were incredibly expensive by the end of 1999 so a naïve assumption that past performance (which included running up to those nose-bleed levels) would persist is sheer folly. As economist Herb Stein trenchantly observed, “If something cannot go on forever, it will stop.” (He also famously said: “Anyone? Anyone?” repeatedly – but that’s a whole different topic.)

Refined versions of the quotes might be:

It almost certainly isn’t different this time, because people remain the same.

And

Short-term past performance is not only not a guarantee of future results, it isn’t even a good indicator of them.

As I also said in that appendix: “History is a great guide to what can happen (how bad it can get), but a terrible guide to what will happen.” But remember, “The worst-case scenario in history, was not the worst-case just prior to it occurring.”

[In case you were curious, the CAGR over the 1995-2002 period (so a whole cycle) was 9.8% – which (coincidentally, but amusingly) matches the average from 1926-1994. (CRSP 1-10 data, CAGR 1926-1994 inclusive was 9.76%; 1995-2002 inclusive was 9.83%; so both round to 9.8%.) But at the end of 1999 people expected 20+% annual returns to continue indefinitely, and that expectation has a current analogue. A few weeks ago, an advisor (!) wrote (on the FPA message boards): “I think using 25% as a return assumption for Bitcoin is reasonable at this point.”]

Twenty-Fourth, there was a good article recently in the NYT on private credit. It reminded me of July 1997, right before the GFC, when Chuck Prince (then Citigroup CEO) said: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

See also: Where the next financial crisis could emerge from the FT.

Twenty-Fifth, I highly recommend reading this for some very good perspective from Howard Marks in just 10 pages. (Also, see item #4 supra for another Howard Marks piece.)

Alternatively, you could read:

Manias, Panics, and Crashes: A History of Financial Crises – Charles Kindleberger
Devil Take the Hindmost: A History of Financial Speculation – Edward Chancellor
Extraordinary Popular Delusions and the Madness of Crowds – Charles MacKay

Another nice piece on bubble psychology is here.

You may find it interesting that his second example (John J. Raskob) actually predicted some pretty wild returns in that article, but people miss it because they don’t do the math. Here’s the pertinent portion:

Suppose a man marries at the age of twenty-three and begins a regular saving of fifteen dollars a month—and almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends and rights to accumulate, he will at the end of twenty years have at least eighty thousand dollars and an income from investments of around four hundred dollars a month.

(Full text here.)

You will recognize this as a very simple TVM problem:

N=20*12=240
PV=0
PMT=($15)
FV=$80,000

Solving for I, we get 2% per month – that is a 26% CAGR!

(There’s also an assumed 6% dividend yield at the end, and the dividend yield was not that high in 1929, but the implied CAGR is the more egregious projection. See here for historical yields.)

Finally, my recurring reminders:

J.P. Morgan’s updated Guide to the Markets for this quarter is out and filled with great data as usual.

Morgan Housel continues to publish valuable wisdom.

That’s it for this quarter. I hope some of the above was beneficial.

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Regards,
David

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