October 30, 2007

Couldn’t Help But Notice (103007)

Well, this is a switch (HT Plunderbund) — This is great, but as noted here several months ago when commenting on Ohio’s $700 million carryforward surplus, there’s no good reason why the 4.2% income tax reduction in Ohio’s individual income shouldn’t have gone into effect this year instead of 2008 (further reductions in 2006, as noted at the time, would have been even better). That is, unless Governor Strickland thinks delaying Ohio’s economic recovery for a year is a good idea.

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Cynthia Crossen of the Wall Street Journal dug into history and found some nuggets (subscription required) the fundamentally deceptive Food Stamp Challenge crowd and their co-opted Old Media allies would surely prefer that you not see. It’s the story of the WWI-era Diet Squads, back in the day when “publicity stunts” were designed to help people take control of their lives instead of to help the government assume more:

The diet squad was a publicity stunt by Chicago’s health department to prove that nutritious and satisfying meals could also be cheap. Since the beginning of World War I, food prices had shot up; between 1914 and 1920, the cost of food for an average American family more than doubled. Malnourishment was becoming a public-health problem, especially in cities. And people were starting to complain about “the food pirates who have America by its throat,” as an Ohio newspaper put it.

Chicago’s diet squad was one of the first, but diet squads soon began popping up all over America. The volunteers competed to see how inexpensively they could eat without losing weight. Fifteen students at the University of Pennsylvania tried a 30-cent-a-day diet. A Rutgers College diet squad found that 27 cents a day was the “irreducible minimum.” Beth Israel Hospital in New York concluded that a family of two adults and three children could be adequately fed for $7.31 a week ($138.51 now).

Lo and behold, the current Food Stamp benefit for a family of five is $615 per month, or $141 and change per week — and that’s before taking into account the massive productivity improvements in food production and related real-dollar retail price reductions over the past 90 years.

Those who read here have already learned that Food Stamp benefits are adequate by following the saga of Ari and Jenny Armstrong, as they stayed within the Food Stamp Program’s benefit (before means testing) by a whopping 44% for an entire month.

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Bret Pretulsky on the Coulter-end times-Jewish perfection thing:

Many people, knowing that I’m Jewish, have asked me if I was deeply offended by Ann Coulter’s observation that Jews are unperfected Christians. I could tell that I disappointed them when I said that I wasn’t even slightly upset.

For one thing, I am not religious. What people do or don’t believe, theologically speaking, is none of my business, except in the case of Islamics who want the rest of us dead or at least kneeling to Mecca.

….. It’s by their actions that I judge people. And in my experience, American Christians are essentially kind, tolerant, admirable people. I did not take Ann Coulter’s statement as an example of hate speech. Frankly, I don’t believe she has an anti-Semitic bone in her body. What I do find bizarre is that so many Jews, who side with the Arabs against Israel and whose children applauded Ahmadinejad at Columbia University, are demanding Coulter’s head on a pike.

That is one richly-deserved needle.

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John Fund, writing on the misnamed Fairness Doctrine, blows right past a brilliant strategy by Mike Pence, the Indiana congressman who wants to make its repeal permanent (bold is mine):

In June his first effort to impose a one-year moratorium on any revival of the Fairness Doctrine by the FCC passed, 309-115, with nearly half of House Democrats voting in favor.
But a one-year moratorium was an easy vote, because there is no reason to expect the Fairness Doctrine to make a comeback before 2009, when a new president–perhaps a Democrat–appoints a majority of FCC commissioners.

That’s why Mr. Pence is proposing the Broadcaster Freedom Act, a bill that would permanently bury the Fairness Doctrine. Because House Democratic leaders are unlikely to allow it to come to the floor for a vote, Mr. Pence has launched a “discharge petition,” a device to bypass House committees and move the bill directly to the floor. He needs 218 members–a House majority–to sign the petition. He has collected 185 signatures, but all from Republicans. Democrats are being told by their leadership that signing such a petition would undermine their control of the House.

Those who voted for the one-year extension need to be challenged as to why, if a one-year extension of a fundamental freedom is a good idea, a permanent one isn’t. Their general election opponents should jump all over this. NOT signing such a petition should undermine that representative’s control of his or her congressional seat.

Better question: Why didn’t the last Congress vote in a permanent burial of the Fairness Doctrine when it was still in the majority?

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Sell all your (actively managed) mutual funds? Paul Farrell of MarketWatch writes that this is exactly what Ric Edelman suggests in his new book “The Lies About Money: Achieving Financial Security and True Wealth by Avoiding the Lies Others Tell Us, and the Lies We Tell Ourselves.”

My take (not to be considered investment advice) — Even if the rampant corruption and double-dealing Edelman alleges didn’t exist — Actively managed funds (the ones Edelman is really concerned about0, which are the ones that try to outperform the market, have been shown time and again to fall short of that goal anywhere from 65%-80% of the time (I think it’s really closer to 80% over the long-term).

To find one of the 20% or so that might outperform the market (emphasis on might, unless your crystal ball is better than mine), you have to do a lot of homework, and keep up with the fund managers are doing. That’s way too much work to expect of the average person.

Because of that, most investors are better off in index (passively managed) mutual funds. These funds invest in the same stocks (or bonds) that are in a given recognized index. For example, an S&P 500 fund will invest in the 500 stocks that are currently part of the S&P 500 in proportion to their market values. These funds will perform as the index performs, minus a very small percentage (much smaller than active funds) for expenses.

Unless an investor is extremely fortunate in picking active funds, over the long haul the typical investor will be better off having stayed consistently with index funds.

Unfortunately, the headlines surrounding the book, and the issue, are ignoring the fundamental difference between active and index funds. That’s too bad.

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1 Comment

  1. Over time, index funds (passively managed funds) do outperform actively managed funds – and they also generally outperform them across the spectrum:

    “Finance professors Stuart Michelson of Stetson University in Deland, Florida and Rich Fortin of New Mexico State University at Las Cruces studied active verses index fund returns over two periods, 1975 to 2000 and 2000 to 2005. The study, published in the Journal of Financial Planning, used net return figures, meaning active fund managers had to cover their fees as well.

    The study found that, on average, index funds outperformed actively managed funds across the board, with the exception of two sectors: small capitalization stocks and international funds.

    “If the market is moving a great deal up or down, but especially down, your index funds are going to be moving along with the market,” says Michelson. “It’s just that potentially the managed funds are going to be even worse than that.”

    The link in the quotation above is to the article revealing the results for 1975 through 2000. A commentator cited in the article speculates that an active fund manager may have an advantage in areas where market inefficiencies (or rather, lack of information available to the market as a whole) may exist, such as in small cap stocks or international funds.

    As for the 80% mark, you may be understating how often index funds beat actively managed funds. See Tables 1 and 2 from this 2006 article from the FPA Journal. For large cap funds, it’s a bit shy of 90% for a 20 year period and hovers between 72% and 85% for ten year periods.

    Comment by Ironman — October 30, 2007 @ 9:35 am

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