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The Pensionnaires

July 25, 2013

Drama. The “Pensionnaires” have a “fiduciary obligation to act in the best interest of plan participants” (U.S. News & World Report, July 18, 2013, Indefensible Decisions by Pension Fund Managers). However, the imperative “best interests” has no meaning because it could mean anything – it could mean burning our money so that the office staff is not frozen on a cold day in Minnesota – and we would look for specifics in the contract to specifically say what is not allowed as well as what must be done. Recourse, remedies, and enforcement ought also to be guaranteed so that “fiduciary obligation” has teeth that bite.

Plan Participant Gary Cooper In Beau Geste 1939
Courtesy: Paramount Pictures

For example, we would say that it is not in our best interests that we, or our heirs, should get back less money than we put in, or paid for, adjusted for inflation.

To put it another way, are we, as plan participants and potential beneficiaries, in a position to demand, at all times, a non-negative real rate of return on our contributions and plan payments from our employer or trade organization?

Nor does it matter whether the plan is of the “defined contribution” type or of the “defined benefit” type. If the “defined contribution” plan is not self-administered (in which case only we are responsible for the results), then we can ask the question, or make the demand, on the plan administrators and fiduciaries; and if the plan is of the “defined benefit” type then we can ask the question of whether the defined benefit of 66% or 75% of our final years average salary, plus other benefits, is really worth the cost. That is, did the plan accumulate at a non-zero real rate of return and what is the plan really worth? Can we sell it?

Wealth Management And The Volatility Defence Against All Odds
Courtesy: Paramount Pictures

That’s not too much to ask of our plan sponsors and administrators because these benefits are readily available from Real Return Bonds (RRBs) in Canada and Treasury Inflation Protected Securities (TIPS) in the US, or like-minded government and sovereign funds, and these plans can be administered by our secretary rather than a battalion of investment advisers, consultants, and portfolio managers who seem unduly anxious to attack the problem of managing our wealth but provide no guarantees of anything, not even to not steal the money, let alone a promise to increase it.

We say that despite the societal benefit provided by the employment of legions of portfolio managers and investment advisers on Wall Street and on every corner of every city, town, and suburb, who are living on and spending our money, on themselves, their families, and good publicity works in the community.

But, on balance, we would prefer to make and spend our own money, our way. It doesn’t matter whether it’s the butcher, the baker, and the candlestick-maker who are sitting on our Board and have a fiduciary responsibility. If the capital is not provably 100% guaranteed and there is not a hopeful, but not necessarily guaranteed, return above the rate of inflation, then it’s not an investment. It’s a gamble and we’re not paying them to gamble with our money.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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