Book Proposal: Investing For Cash Flow

BOOK PROPOSAL March 3, 2009

Subject/Market Investing, individual and institutional

Description Individual and institutional investors have been badly burned in the last decade. Many are on the verge of ruin because of poor investment practices based on bad advice from Wall Street and lax regulatory oversight. This book explains what went wrong and how to invest in the future to ensure a reliable cash flow. The book is finished; the Contents and Chapter Outline are included here; (161 pages in Microsoft Word using 12pt Times New Roman font, single-spaced; 40,000 words, 50 images, 22 tables). Title: “Investing for Cash Flow”. SubTitle: “Individual and institutional investors must change their investment style to survive financial crises”.

Author Economist and Certified Financial Planner™ who has spent 30 years on Wall Street … Managing Director at Morgan Stanley; EVP and CIO at Fidelity Investments; on the Board of Prudential Securities responsible for their merger with Wachovia. George R. Fisher 5 Pier 7 Charlestown, MA 02129-4225 Cell 917-514-8204 Fax 215-689-4880 email [email protected]

Similar books Asset Allocation Common Sense on Mutual Funds The Four Pillars of Investing The Intelligent Investor Unconventional Success Winning Investment Strategy

Roger C. Gibson John C. Bogle William Bernstein Benjamin Graham David F. Swensen Larry E. Swedroe

Why is this book different? Many books on investing are filled with the mathematics of Modern Portfolio Theory or recount the history of the markets, and most give general advice; but none actually tell investors what they should do in practice. This book provides a step by step process investors can and should follow to produce a reliable cash flow; the book uses academic analysis and detailed statistics/charts but it is accessible to all experienced investors.

Portions have been posted on the web and have received a very favorable response.

Contents •

Introduction The purpose of investing is to produce a reliable cash flow.

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Modern Portfolio Theory (MPT) A primer on the basics of portfolio construction.

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Process The steps to take 1. 2. 3. 4. 5. 6. 7. 8.

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Choose the asset classes Active management or indexing? Specific security, closed-end, mutual fund, ETF? Pick the specific investments Choose the asset allocation Manage the investment portfolio using Portfolio Rebalancing Produce a Reliable Cash Flow Become a Lobbyist

Appendixes o o o o o o

Geometric vs. Simple Average The Cost of Costs What good are bond funds? Writing Options as an Alternative to Market Orders Protection of Assets: SIPC and Excess Coverage 1975: Landmark Year

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Notes For Individual Investors  Choose the brokerage firm  Set account options  Taxable and retirement accounts  How much can you withdraw from a portfolio?  Why not buy an annuity?  Effective Tax Rate  Rollovers: Why Not & How To  Estate Planning: a call to action  Time Value of Money Bibliography Disclaimers Index

Chapter Outline •

Introduction The purpose of investing is to produce a reliable cash flow. Of the thousands of books and conferences on investing not one reflects on this vital fact: every investor needs to produce a reliable cash flow. This applies to charitable foundations, university endowments and municipal pension funds just as much as it does to individuals. While chasing yields during bull markets, most investors forget that come the inevitable downturn they will still be required to cover their expenses. Starting in 2007, this lesson was brought brutally home (again) to the whole world. Every single major financial institution failed its clients and the regulators were entirely absent. Successful investing seems like a bad joke during such a time but it always does when the market turns down. Investors need to take an entirely new approach going forward to establish their independence from the financial services industry and to focus on producing the one thing that ultimately matters: reliable cash flow.

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Modern Portfolio Theory (MPT) A primer on the basics of portfolio construction. MPT teaches us to diversify widely, to hold uncorrelated assets and to keep our eyes on the long term rather than the momentary gyrations of the markets. The theoretical work was done in the 1950s and there is recent empirical evidence that it will work to every investor’s benefit if sensibly and conservatively applied.

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Process The steps to take: there is a logical sequence of steps every investor must take to construct a portfolio that will produce a reliable cash flow year in and year out. The basics are drawn from Modern Portfolio Theory and avoid any reliance on the financial services industry. There is nothing revolutionary in all of this, except for the fact that very few investors have actually followed these precepts. Much of this process involves following the advice of Benjamin Graham in 1939, updated for modern circumstances & products and with the benefit of 70 more years of experience and academic study upon which to draw. 1. Choose the asset classes You must decide what you will own, what you will invest in. Equity, debt, real estate, commodities and cash cover most of the viable options pretty comprehensively. We need to look at the pros and cons of each asset class,

both in the US and internationally. 2. Active management or indexing? Will you try to beat the market or “settle” for just being average? It turns out that just being average will consistently beat anything offered by the financial services industry which always promises to do better but never does. 3. Specific security, closed-end, mutual fund, ETF? What “vehicle” should you choose to invest in? Index Viper and iShare ETFs will provide the best results for your investment portfolio; for your cash portfolio, you need to look somewhat further afield. 4. Pick the specific investments You’ve decided on the asset classes and you’ve decided on the investment vehicles, which specific securities are best suited, and how many positions should you hold? 5. Choose the asset allocation Beebower, Brinson and Hood’s famous 1986 study convinced most of the world that fine-tuning the exact asset allocation of a portfolio would have a significant effect on returns. It turns out that not only does it not do this, but the study wasn’t even about returns in the first place. Asset allocation is about risk, not return. A variety of current portfolios are presented to provide perspective. 6. Manage the investment portfolio using Portfolio

Rebalancing Portfolio Rebalancing is one of the most vital and the most misunderstood techniques in all of investing. Done correctly, portfolio rebalancing holds the key to capturing investment gains as well as providing the most taxefficient way to produce cash, which is (after all) the purpose of all this effort. 7. Produce a Reliable Cash Flow The purpose of any investment is to produce a reliable cash flow. That cash flow may not be needed until sometime in the future; or the operating needs of an organization may depend upon it for daily functioning. In any event, a portfolio must consist of two parts: investment and cash; and the establishment and maintenance of the cash portfolio is the key to longterm investment success. 8. Become a Lobbyist Capitalism may not be dead but it has become anesthetized recently. For over a decade the risk-free US Treasury has produced a better total return

than any equity market. The risk/return tradeoff of MPT has not been working. This is upside down and it is the result of the twin failures of the financial services industry and Governmental oversight. If equity investing does not start producing a better return than Treasuries, what rational person would invest? Investors must insist that certain basic principles be enforced going forward or investing will wither. •

Appendixes o

Geometric vs. Simple Average How are investment returns measured?

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The Cost of Costs The financial services industry’s primary purpose is to generate fees; an investor’s primary focus must be to eliminate them. Costs eat up an average of 50% of an investor's returns ... for absolutely nothing.

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What good are bond funds? Why hold a bond fund instead of a bond portfolio? The answer has to do with the inner workings of the yield-to-maturity calculation.

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Writing Options as an Alternative to Market Orders Portfolio Rebalancing offers investors the opportunity to increase their returns slightly by writing options instead of executing market (or limit) orders. Not for everyone, but a viable alternative for some investors once their portfolios are established correctly.

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Protection of Assets: SIPC and Excess Coverage The collapse of several titans has focused attention on various forms of asset insurance. The Government’s guarantee is probably pretty good (if you’re not in a hurry) but private, “excess” insurance coverage is not. Diversify among institutions as well as among securities.

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1975: Landmark Year Most investors don’t know it but May 1, 1975 marked their Independence Day … if only they would take advantage of their freedom.

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Notes For Individual Investors Most of the advice of this book applies equally to institutional as well as individual investors. Individuals do have some special requirements, however. 

Choose the brokerage firm Never put your money in a “full service” brokerage account. Never

put your money in a mutual fund or insurance account. Never turn your money over to someone else to manage. It may seem déclassé or unsophisticated to use a “discount broker” but such pride is badly misplaced. Which ones are best? 

Set account options There are several options that should be set for your brokerage account for the best results. Set them upon establishment if possible.

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Taxable and retirement accounts “Asset location” refers to the problem of deciding what to put into a taxable account or a retirement account. The answer has to do primarily with taxes (which change from time to time) and cashwithdrawal needs.

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How much can you withdraw from a portfolio? It is vitally important that you not run out of money once you are living off your investments. Based on 30-years’ history, studies have concluded that 4% adjusted for inflation is the maximum prudent withdrawal rate for a portfolio diversified among equity and debt.

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Why not buy an annuity? An annuity can provide a level of peace of mind and as such a well-chosen immediate annuity can be a valuable component of a retiree’s portfolio. But understand the tradeoffs before you run out and buy one.

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Effective Tax Rate The IRS wants everything it’s owed but the rules require of you no more than the minimum. Don’t be unintentionally generous.

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Rollovers: Why Not & How To The financial services industry is desperate to get you to roll over your retirement plan into an IRA. This is not always in your best interest.

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Estate Planning: a call to action Little mentioned except in political campaigns, estate taxes are the most onerous in the whole tax code. If you think a simple will can protect you, think again.

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Time Value of Money If you don’t understand the basics of compound interest, present value and so on, you should take the trouble to learn.