MONEY Shopping

Controversial Abercrombie CEO Steps Down

Michael S. Jeffries, chairman and CEO of Abercrombie & Fitch.
Michael S. Jeffries, former CEO of Abercrombie & Fitch. Mark Lennihan—AP

The CEO who called his brand "exclusionary" and only for "cool kids" is retiring.

Michael Jeffries, CEO of Abercrombie & Fitch, is retiring effective immediately, the clothing retailer announced on Tuesday.

Jeffries, who made headlines with tone-deaf comments about the company’s business practices, was relieved of his duties as chairman in January after investors became dissatisfied with his leadership.

Abercrombie stock—which rose more than 6% on the news—is down more than 60% from its highs in 2006-2007 and down almost 20% in the last year.

Jeffries, who during his 20-year tenure with the company turned it into a trendy powerhouse with more than $1 billion in sales, took heat in recent years for failing to keep up with “fast fashion” brands like Forever 21 and Zara and falling out of favor with its primary teen demographic. But the now-former CEO also tarnished the brand through a series of poorly conceived public statements and business decisions that alienated potential customers.

In an infamous 2006 interview with Salon, Jeffries bragged:

In every school there are the cool and popular kids, and then there are the not-so-cool kids. Candidly, we go after the cool kids… A lot of people don’t belong [in our clothes], and they can’t belong. Are we exclusionary? Absolutely.

And:

That’s why we hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don’t market to anyone other than that.

That interview later resurfaced in 2013, along with news that Abercrombie was refusing to offer plus-size clothing, even as competitors like H&M began to make their sizing more inclusive. Together, the revelations caused renewed backlash against the brand.

According to the company’s announcement, a management team led by Executive Chairman Arthur Martinez will manage the company until a new CEO is appointed.

 

MONEY investing strategy

Warren Buffett Does Things That You Shouldn’t Try at Home

Berkshire Hathaway Chairman and CEO Warren Buffett talks to television journalists
Nati Harnik—AP

Not everything Buffett does can be easily replicated by ordinary investors.

Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway are the single best road map for success in the stock market that have ever been written. But it’s important to appreciate that Buffett’s personal road to success has included some detours that aren’t suitable for the average investor.

The origins of Buffett’s philosophy

Generally speaking, Buffett’s core philosophy is to buy great companies at reasonable prices. To use his words, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Take one glance at Berkshire’s portfolio of common stocks, and it’s clear Buffett means what he says. Among banks, for instance, he has common stock positions in the three best lenders in the country: Wells Fargo, US Bancorp, and M&T Bank. These companies are in no way mediocre. They are the best of the best, the cream of the crop.

However, Buffett doesn’t always abide by his advice to only invest in top-shelf stocks. This isn’t because he’s intellectually inconsistent — a flip-flopper, if you will — but rather because he uses different strategies at different times.

By his own admission, Buffett’s approach to investing has been influenced most heavily by three people, each of whom approach the discipline from a slightly different angle. Benjamin Graham stood for buying cheap stocks somewhat irrespective of quality. Philip Fisher believed in buying great companies somewhat irrespective of price. And Charlie Munger adopted the hybrid approach of buying wonderful companies at reasonable prices.

Buffett’s decision to invest in a company could be grounded in any one of these philosophies, or in all of them combined. To complicate things further, he has also been known on occasion to enter into a variety of sophisticated transactions that only someone with his resources, knowledge, and expertise should contemplate.

Parsing Buffett’s bet on Bank of America

I say all of this because it’s easy to misconstrue the rationale behind Buffett’s decision to invest in a specific company. Take Berkshire’s position in Bank of America BANK OF AMERICA CORP. BAC 0.5134% as an example. When Buffett wrote his latest letter to shareholders, the Charlotte, N.C.-based bank was Berkshire’s fifth-largest equity investment. You’d be excused for interpreting that as a ringing endorsement.

But Buffett’s decision to invest in Bank of America was not grounded in the philosophies of either Fisher or Munger, both of whom only condone investments in great companies. It was grounded instead in the philosophy of Graham, Buffett’s original mentor — who, it’s worth recalling, emphasized price over quality.

I would argue that the evidence for this is irrefutable. In the first case, Bank of America has proven time and again over the last few decades that it is not an elite bank. It has a bloated expense base — something Buffett despises. It overpays for acquisitions, some of which turned out to be complete disasters. And it’s horrible at the core competency of banking — namely, managing credit risk.

In the second case, the structure of Berkshire’s investment in Bank of America hardly suggests that Buffett holds it in the same high regard as he does, say, Wells Fargo. Keep in mind that Buffett did not buy common stock in Bank of America; he bought preferred stock, which carries significantly less risk but also offers little upside. To make up for this, Buffett demanded that Bank of America gratuitously include warrants to purchase 700 million shares of common stock at $7.14 per share — a total value of $5 billion — at any time before the middle of 2021.

To the uninitiated, it might seem like I’m splitting hairs here. After all, $5 billion is $5 billion. What difference does it make that Berkshire’s position consisted of $5 billion of preferred stock plus warrants, rather than a commensurate amount of common stock?

This is a rhetorical question, of course, because it matters a lot. Consider that Buffett will ultimately emerge with the same roughly 6.5% stake in Bank of America, regardless of how the deal was structured. But by structuring it in the manner that he did, the 84-year-old financier shifted all of the risk onto Bank of America’s shareholders. If its shares failed to recover, then so be it; Berkshire would still get its 6% interest payment on its $5 billion preferred stake. But if the share price improved, as it indeed has, then Berkshire would exercise its warrants, make a fortune, and markedly dilute the bank’s shareholders.

And in the third case, all you have to do is compare Buffett’s effusiveness regarding his initial position in Wells Fargo to his much more restrained remarks about his sizable investment in Bank of America.

Here’s Buffett in his 1990 shareholder letter talking about Wells Fargo:

With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another — Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts, and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt.

And here’s the extent of Buffett’s substantive comments about Bank of America in his 2011 letter:

At Bank of America, some huge mistakes were made by prior management. [CEO] Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten.

If this were an awards presentation at a high school track meet, Bank of America would have earned a participation ribbon while Wells Fargo took home a 5-foot-tall, bedazzled trophy for first place. The point is that Buffett didn’t invest in Bank of America because he thought it was a great company along the lines of Wells Fargo. He invested in it because it was weak and vulnerable and he could write the terms of the deal in such a way that, short of financial Armageddon, Berkshire simply could not lose.

If you follow in Buffett’s wake, proceed with caution

The lesson here is that if you’re going to follow Buffett into a stock, or if you’re going to cite his investment in a specific company to confirm or counter your opinion of it, then it would be well worth your time to investigate why he likely bought it in the first place. If he was under the influence of Graham’s philosophy, then you might not want to follow in his wake. But if Buffett was applying the philosophies of Fisher or Munger, then the company might indeed be worth a look.

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

MONEY stocks

The Stupidly Simple Reason That Apple Stock Is Overrated

Studio shot of letters A, B and C
Chris Hackett—Getty Images

New research suggests we're too busy — or lazy — to get all the way through the alphabet.

It may not surprise you to learn that our investing decisions are often the result of irrational behavior. But the findings of a new study suggest that many of our stock selections are systematically wrong-headed.

It turns out that the first letter of a company’s name exerts undue influence on our investing behavior. Specifically, stocks starting with letters in the beginning of the alphabet are valued higher and traded more often than late-alphabet stocks, according to a November paper from business school researchers at Seton Hall and Yeshiva University.

“Back when people used phone books, they were more likely to choose companies with names like ‘AAA Avocados’ or ‘Acme Pest Control’ than those later in the alphabet,” says Jesse Itzkowitz, a marketing professor at Yeshiva University’s Sy Syms School of Business. “The same is true today for retail investors reading through stock information they get from brokerages like Fidelity or TIAA-CREF.”

That’s because humans have a tendency to choose the first satisfactory option available, rather than taking extra time to make an optimal choice, says Itzkowitz.

The upshot of such “satisficing”? Stocks with early-alphabet names are traded 1.7% more often and are valued 6.1% higher by investors than late-alphabet companies, according to a measure that compares the underlying value of a business to its market price.

Screen Shot 2014-12-02 at 11.49.29 AM
Source: Jesse Itzkowitz, Yeshiva University’s Sy Syms School of Business

 

Other than knowing that this tendency artificially boosts the stocks of early-ABCs companies like Apple (and presumably inflicts a penalty on Zynga, for instance), what’s the takeaway for investors who buy shares in individual companies?

For one, says Itzkowitz, be sure to sort through potential stock investments using valuation and fundamental metrics to narrow the options, rather than just reading through an alphabetical list.

“Human beings are able to expend only so much mental effort before making a decision, so it’s best to focus on a manageable quantity of information,” says Itzkowitz. (You can check out MONEY’s advice on choosing stocks and play around with a free stock screener like the one at finviz.com.)

Perhaps more importantly, recognize that we all have limitations, and can all act irrationally, when it comes to choosing stocks. That’s a case for letting professionals handle your money or—better yet—for investing in a passive index fund. That way you get you diversification without the risk of human error, since even experts make mistakes.

 

MONEY Financial Planning

7 Pre-New Year’s Financial Moves That Will Make You Richer in 2015

champagne bottle with $100 bill wrapped around it
iStock

Before you pop the champagne this December 31, get your financial house in order.

Didn’t 2014 just start? At least that’s the way it feels to me. Well, regardless of how things seem, the reality is the year is just about over. But that doesn’t mean you can’t make a big impact on your financial future before the big ball drops in Times Square.

You can still achieve some very important financial goals before Dec. 31.

1. Make a Plan to Get Out of Debt

You may not be able to get out of debt between now and the end of the holiday season but you can set yourself up now so you’ll be debt-free very soon. Of course the first step is to watch your spending over the holidays. Don’t overdo it. That only makes it harder to solve your debt situation.

Next, create a system to eliminate debt by first consolidating and refinancing to the lowest possible interest rate. Once you do that, put all the muscle (and money) you can towards paying off the highest cost debt you have and make the minimum payments towards other credit card balances. As you pay off your most expensive debt continue to keep your debt payments as high as possible towards the next highest-cost debt. Repeat this process until you are debt-free. Believe me it won’t take that long. But you won’t ever be done if you don’t start. Why not begin the process of lowering your cost of credit card debt today? (You can use this free calculator to see how long it will take to pay off your credit card debt. You can also check your credit scores for free to see how your debt is affecting your credit standing.)

2. Track Your Spending

Even if you aren’t in debt, it’s important to know what you spend on average each month. Once you know where the money is going, you can decide if you are spending it as wisely as possible or if you need to make some changes.

Many people think they know how much they spend on average but most of us underestimate our monthly nut by 20-30%. You can use a program, a spreadsheet or simply look at your bank statements and track your total withdrawals for the month. It doesn’t matter how you do it. But if you aren’t tracking your spending, I recommend you start doing so now.

What’s great about starting to track spending before the new year is that you get used to your system and if you use a program or spreadsheet, it will also simplify your tax reporting for next year. This is especially helpful if you do your own taxes.

3. Review Your Estate Plan

Things usually slow down at work during the holidays. That gives you time to get to important items you may have been putting off. Estate planning is one of those items that people often procrastinate on.

I’m not asking you to get your will or trust done by Dec. 31 (although you could). But at the very least do two things:

  1. Educate yourself about the difference between wills and trusts.
  2. Find a good estate planning attorney or legal service and start the process.

My parents completely ignored this topic. When they both died young and unexpectedly, it made it monumentally more painful, difficult and scary for my siblings and I. Don’t take chances. You can and should start taking care of your estate planning now.

4. Review Your Life Insurance

As long as we’re talking about estate planning, we might as well dust off your old life insurance policies and give them the old once over. Some people have outdated and overly expensive life insurance they no longer need. Others walk around woefully under-insured, exposing their loved ones to great risk that is completely avoidable.

Pull out your old policies today. Do you still need those policies? If not, cancel them. If you do need insurance, start comparison shopping to make sure you have the right coverage at the right price.

5. Start Investing

If you’ve been on the fence about investing it’s time to stop thinking and start doing. If you don’t know how to get started, there are plenty of great resources on the Web. You need to understand the basis, of course, but you don’t need a Ph.D. in economics before you leave the starting gate. Once you read up on the basics of investing, be prepared to start slow and learn as you go. You will be fine.

And remember: You don’t need a pile of dough in order to start investing. If you are a DIY investor, there are plenty of good online brokers who will open an account for as little as $500. Can you think of a good reason to wait until next year to start investing? I can’t either. Let’s go.

6. Maximize Your Retirement Contributions

Before year-end, make sure you have maximized allowable contributions to your retirement plan at work. Unless you are in debt, you want to take advantage of employer matching if at all possible. Even if there is no matching program at work, try to maximize your plan contributions. This will give you the benefit of tax deferral and a forced savings plan.

Call your HR department today to find out if you can bump up your retirement plan contributions for the year.

7. Get in Front of Your Finances

You have an amazing opportunity right now. Make sure you are on top of your financial game now, next year and beyond. Take out a calendar right now and schedule when you are going to begin and follow through on the items on this list.

Look at your calendar for the next seven days. When are you going to:

  1. Inquire about refinancing your debt?
  2. Set up your spending tracking system?
  3. Start asking for estate planner referrals?
  4. Review your life insurance?
  5. Set up your investment account?
  6. Call HR and make sure to bump up your retirement contributions to max out for the year?

Taken all together, the list above might seem overwhelming. But if you do one task each day, you can really change your financial life this week. Each task above will take you between 15 minutes to three hours to complete. Are you going to do one item each day this week? How will you feel once you’ve begun? Or are you going to wait until “after the holidays”?

More from Credit.com

This article originally appeared on Credit.com.

MONEY alternative assets

Lending Club’s $4 Billion IPO Puts Peer-to-Peer Lending in the Mainstream

IOU note
Getty Images

Lending Club priced its IPO on Monday, putting it in the ranks of the biggest public offerings ever for an Internet company. Here's what you need to know about peer-to-peer lending.

UPDATE: On Monday, peer-to-peer lending company Lending Club announced it would be pricing its upcoming IPO at $10 to $12 a share in an effort to raise as much as $692 million. (Click here to read the filing.) At the midpoint of the range, that would value the company at around $4 billion. Now that P2P lending has firmly entered the mainstream (and then some), it’s worth looking again at the advice we published in August, when Lending Club filed to go public, on how P2P lending works and how best to use Lending Club and similar services.

Your bank makes money off borrowers. Now you have the opportunity to do the same. One of today’s hottest investments, peer-to-peer lending, involves making loans to strangers over the Internet and counting on them to pay you back with interest. The concept may be a bit wacky, but the returns reported by sites specializing in this transaction—from 7% to 14%—are nothing to scoff at.

Investors aren’t laughing either. Lending Club, one of the leading peer-to-peer lending companies, filed to go public on Wednesday. The New York Times reports the company is seeking $500 million as a preliminary fundraising target and may choose to increase that figure.

Such lofty ambitions should be no surprise, considering that the two biggest P2P sites are growing like gangbusters. With Wall Street firms and pension funds pouring in money as well, Lending Club issued more than $2 billion of loans in 2013, and nearly tripled its business over the prior year. In July, Prosper originated $153.8 million in loans, representing a year-over-year increase of over 400%. The company recently passed $1 billion in total lending. “A few years ago I would have laughed at the idea that these sites would revolutionize banking,” says Curtis Arnold, co-author of The Complete Idiot’s Guide to Person to Person Lending. “They haven’t yet, but I’m not laughing anymore.”

Here’s what to know before opening your wallet.

How P2P Works

To start investing, you simply transfer money to an account on one of the sites, then pick loans to fund. When Prosper launched in 2006, borrowers were urged to write in personal stories. Nowadays the process is more formal: Lenders mainly use matching tools to select loans—either one by one or in a bundle—based on criteria like credit rating or desired return. (Most borrowers are looking to refi credit-card debt anyway.) Loans are in three- and five-year terms. And the sites both use a default investment of $25, though you can opt to fund more of any given loan. Pricing is based on risk, so loans to borrowers with the worst credit offer the best interest rates.

Once a loan is fully funded, you’ll get monthly payments in your account—principal plus interest, less a 1% fee. Keep in mind that interest is taxable at your income tax rate, though you can opt to direct the money to an IRA to defer taxes.

A few hurdles: First, not every state permits individuals to lend. Lending Club is open to lenders in 26 states; Prosper is in 30 states plus D.C. Even if you are able to participate, you might have trouble finding loans because of the recent influx of institutional investors. “Depending on how much you’re looking to invest and how specific you are about the characteristics, it can take up to a few weeks to deploy money in my experience,” says Marc Prosser, publisher of LearnBonds.com and a Lending Club investor.

What Risks You Face

For the average-risk loan on Lending Club, returns in late 2013 averaged 8% to 9%, with a default rate of 2% to 4% since 2009. By contrast, junk bonds, which have had similar default rates, are yielding 5.7%. But P2P default rates apply only to the past few years, when the economy has been on an upswing; should it falter, the percentage of defaults could rise dramatically. In 2009, for example, Prosper’s default rate hit almost 30% (though its rate is now similar to Lending Club’s). Moreover, adds Colorado Springs financial planner Allan Roth, “a peer loan is unsecured. If it defaults, your money is gone.”

How to Do It Right

Spread your bets. Lending Club and Prosper both urge investors to diversify as much as possible.

Stick to higher quality. Should the economy turn, the lowest-grade loans will likely see the largest spike in defaults, so it’s better to stay in the middle to upper range—lower A to C on the sites’ rating scales. (The highest A loans often don’t pay much more than safer options.)

Stay small. Until P2P lending is more time-tested, says Roth, it’s best to limit your investment to less than 5% of your total portfolio. “Don’t bank the future of your family on this,” he adds.

MONEY mutual funds

Why Mutual Fund Managers Are Having a Bad Year

140618_money_gen_9
iStock

Eighty-five percent of stock-pickers at large-cap funds are trailing their benchmark indexes — likely their worst performance in three decades.

Stock-picking fund managers are testing their investors’ patience with some of the worst investment returns in decades.

With bad bets on financial shares, missed opportunities in technology stocks and too much cash on the sidelines, roughly 85% of active large-cap stock funds have lagged their benchmark indexes through Nov. 25 this year, according to an analysis by Lipper, a Thomson Reuters research unit. It is likely their worst comparative showing in 30 years, Lipper said.

Some long-term advocates of active management may be turned off by the results, especially considering the funds’ higher fees. Through Oct. 31, index stock funds and exchange traded funds have pulled in $206.2 billion in net deposits.

Actively managed funds, a much larger universe, took in a much smaller $35.6 billion, sharply down from the $162 billion taken in during 2013, their first year of net inflows since 2007.

Jeff Tjornehoj, head of Lipper Americas Research, said investors will have to decide if they have the stomach to stick with active funds in hopes of better results in the future.

“A year like this sorts out what kind of investor you are,” he said.

Even long-time standout managers like Bill Nygren of the $17.8 billion Oakmark Fund and Jason Subotky of the $14.2 billion Yacktman Fund are lagging, at a time when advisers are growing more focused on fees.

The Oakmark fund, which is up 11.8% this year through Nov. 25, charges 0.95% of assets in annual fees, compared with 0.09% for the SPDR S&P 500 exchange traded fund, which mimics the S&P 500 and is up almost 14% this year, according to Morningstar. The Yacktman fund is up 10.2% over the same period and charges 0.74% of assets in annual fees.

The pay-for-active-performance camp argues that talented managers are worth paying for and will beat the market over investment cycles.

Rob Brown, chief investment strategist for United Capital, which has $11 billion under management and keeps about two thirds of its mutual fund holdings in active funds, estimates that good managers can add an extra 1% to returns over time compared with an index-only strategy.

Indeed, the top active managers have delivered. For example, $10,000 invested in the Yacktman Fund on Nov. 23, 2004, would have been worth $27,844 on Nov. 25 of this year; the same amount invested in the S&P 500 would be worth $21,649, according to Lipper.

Even so, active funds as a group tend to lag broad market indexes, though this year’s underperformance is extreme. In the rout of 2008, when the S&P 500 fell 38%, more than half of the active large cap stock funds had declines that were greater than those of their benchmarks, Lipper found. The last time when more than half of active large cap stock managers beat their index was 2009, when the S&P 500 was up 26%. That year, 55% of these managers beat their benchmarks.

Unusually Bad Bets

In 2014, some recurring bad market bets were made by various active managers. Holding too much cash was one.

Yacktman’s Subotky said high stock prices made him skeptical of buying new shares, leaving him with 17% of the fund’s holdings in cash while share prices have continued to rise. He cautioned investors to have patience.

“Our goal is never to capture every last drop of a roaring bull market,” Subotky said

Oakmark’s Nygren cited his light weighting of hot Apple shares and heavy holdings of underperforming financials, but said his record should be judged over time. “Very short-term performance comparisons, good or bad, may bear little resemblance to long term results,” he said.

Shares of Apple, the world’s most valuable publicly traded company, are up 48% year to date. As of Sept. 30, Apple stock made up 1.75% of Oakmark’s assets, compared with 3.69% of the SPDR S&P 500 ETF.

Investors added $3.9 billion to Nygren’s fund through Nov. 19, Lipper said.

Still, some managers risk losing their faithful.

“We have been very much believers in active management, but a number of our active managers have let us down this year, and we are rethinking our strategy,” said Martin Hopkins, president of an investment management firm in Annapolis, Md. that has $4 million in the Yacktman Fund.

Derek Holman of EP Wealth Advisors, in Torrance, Calif., which manages about $1.8 billion, said his firm recently moved $130 million from a pair of active large cap funds into ETFs, saying it would save clients about $650,000 in fees per year.

Holman said his firm still uses active funds for areas like small-cap investing, but it is getting harder for fund managers to gain special insights about large companies.

For those managers, he said, “it’s getting harder to stand out.”

MONEY Warren Buffett

The Surprising Lessons Warren Buffett Learned from a Candy Company

Berkshire Hathaway's Warren Buffett at the See's Candies booth Saturday, May 3, 2014, at the Berkshire Hathaway Annual Shareholder's Meeting, in Omaha, Neb.
Berkshire Hathaway's Warren Buffett at the See's Candies booth Saturday, May 3, 2014, at the Berkshire Hathaway Annual Shareholder's Meeting, in Omaha, Neb. Dave Weaver—Invision for See's

Instead of seeking great bargains, Buffett learned to find great businesses.

Warren Buffett’s success in business is well chronicled and nearly unparalleled. But you may not know he attributes a healthy dose of his success to a candy shop in California you may never have heard of.

The history

In 1972 See’s Candies was purchased for $25 million by Buffett and longtime Berkshire Hathaway lieutenant Charlie Munger through Blue Chip Stamps, a business controlled by Buffett and Munger.

Although Blue Chip Stamps has faded into obscurity as Americans stopped buying stamps, Buffett has gone on to say that See’s Candies is actually his “dream business.”

So what has made See’s so successful? First, although it hasn’t been a world-beater in growing its sales, it has been incredibly profitable and a cash-generating machine. From 1972-2011 it contributed a staggering $1.65 billion to the bottom line of Berkshire.

Knowing it brings in roughly $85 million annually in pre-tax profits, there will soon come a day when the total contribution of See’s to Berkshire will top $2 billion. And what has Berkshire done with all that cash?

In 2007 Buffett answered that very question by revealing, “After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”

Undoubtedly Buffett is thankful for the financial contribution See’s has made to Berkshire.

But it turns out through See’s Candies, he learned something even greater.

The gratitude

Buffett was very much an avid devotee of the value-investment philosophy predicated in the teaching of his former professor, boss, and mentor, Benjamin Graham. Graham spoke to the inefficiencies rooted in financial markets, and how there were always bargains to be had that Wall Street overlooked.

But thanks to his friendship with Munger, Buffett’s mind-set on investing began to shift. Instead of seeking great bargains, Munger continued to tell Buffett about to the need to find great businesses. A 1988 article in Fortune Magazine notes:

So in conversations with Buffett over the years [Munger] preached the virtues of good businesses, and in time Buffett totally accepted the logic of the case. By 1972, Blue Chip Stamps, a Berkshire affiliate that has since been merged into the parent, was paying three times book value to buy See’s Candies, and the good-business era was launched. ”I have been shaped tremendously by Charlie,” says Buffett. ”Boy, if I had listened only to Ben, would I ever be a lot poorer.”

Graham’s teaching doesn’t run contrary to this — he said, “Investment is most intelligent when it is most businesslike” — but it also wasn’t the principle focus. And through Munger and the resulting acquisition of See’s Candies, this insight was all the more affirmed.

When asked about See’s Candies at the Berkshire Hathaway Annual Meeting this year, both Warren and Munger chimed in on how grateful they were for buying it more than 40 years ago:

Buffett: “See’s has provided us with lots of cash for acquisitions and opened my eyes to the power of brands. We made a lot in Coca-Cola partly because of See’s. There’s something about owning one [brand] to educate yourself about things you might do in the future. I wouldn’t be at all surprised that if we hadn’t owned See’s, we wouldn’t have bought Coca-Cola.”

Munger: “There’s no question about the fact that See’s main contribution to Berkshire was ignorance removal. One of the benefits of removing our ignorance is that we grew into what we are today. At the beginning, we knew nothing. We were stupid. If there’s any secret to Berkshire, it’s that we’re pretty good at ignorance removal.”

The 400 million shares of Coca-Cola Berkshire now owns cost $1.3 billion to acquire between 1988-1994, but at the end of September they were worth a remarkable $17.1 billion. And that is to say nothing of the billions worth of dividends Berkshire received over the last two and a half decades.

Buffett openly admits none of that would’ve likely been available to Berkshire (and its shareholders) were it not for See’s Candies. As a result, it is clear the benefit of See’s extends well beyond the $2 billion contribution it has made to the bottom line.

What this reveals

Examples like this show us how we must always seek to learn from things both great and small, and give great credence to the Proverb “Let the wise hear and increase in learning.”

Few would guess a small candy shop would’ve taught Buffett so much.

Above all, this story reminds us to always be thankful of those things great and small, because we never know where they shall lead us.

MONEY investing strategy

Nobel Prize-Winning Economist Explains How to Dramatically Improve Your Investment Performance

rolling dice
Michele Galli—Getty Images

Stop thinking that you're smart enough to beat the market.

Beating the market is very difficult, and most investors are incapable of doing it. I’m extremely confident that I can beat the market, however. I know I’m better than the average, and am pretty sure my investing results would support that view, if I were to tally them all up.

Over the years, I’ve heard variations of the above response countless times whenever I’ve asked investors if they could beat the market. This composite response illustrates perfectly a main theme from Daniel Kahneman’s Thinking, Fast and Slow. All of us – whether you’re Warren Buffett or a struggling day trader – tend to overestimate our own investing abilities, while being extremely capable of assessing the weaknesses in others. Grasping this simple insight alone could dramatically improve your investment performance.

Being more humble isn’t just an admirable personality trait – it can literally save you money. Below are nine investing insights from Nobel Prize Winner Daniel Kahneman’s classic book Thinking, Fast and Slow:

1. “The best we can do is a compromise: learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high.”

Here, Kahneman is saying that we too often rely on our intuition and routine thinking for big decisions when we should actually slow down and become more analytical. This is especially true of those investors who are quick to trust their gut and overestimate their pattern recognition skills when deciding to buy or sell a particular stock.

Kahneman helps us better understand our thought processes by using the framework of System 1 thinking and System 2 thinking. The former operates automatically and quickly “with little or no effort and no sense of voluntary control.” System 2, on the other hand, “allocates attention to effortful mental activities that demand it.” Quite simply, System 1 is fast thinking, and System 2 is slow thinking. For investors, it’s very important to know that System 1 is our default thinking style, and it can be a “machine for jumping to conclusions.” Knowing this will encourage you to try to shift to System 2 when faced with a difficult decision.

2. “There is general agreement among researchers that nearly all stock pickers, whether they know it or not – and few of them do – are playing a game of chance.”

Kahneman is skeptical about whether it’s possible for ordinary investors to beat the market. As an academic steeped in statistics and economics, he points to 50 years of research that shows “the selection of stocks is more like rolling the dice than like playing poker.”

Obviously, many of us might disagree, and that’s fine. I still believe it’s important to consider his view on this issue, however. Anyone who truly thinks they can beat the market, should be able to provide evidence of that skill by objectively analyzing their returns over a long timeframe. System 1 thinking is quite good at allowing you to fool yourself into thinking you might be better at stock picking than you really are.

3. “Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and the goals we adopt as more achievable than they are likely to be. We tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence. In terms of its consequences for decisions, the optimistic bias may well be the most significant of the cognitive biases.”

Here again, we see how our System 1 thinking can play tricks on us. According to Kahneman, we often have a very unrealistic sense of our abilities and future prospects. This may explain why so many political and financial analysts are out there confidently making bad predictions on a daily basis.

The interesting part of this quote, for me, is Kahneman’s take on optimism. He believes that being optimistic is a good thing to be – many entrepreneurs are more confident than mid-level managers, according to one study, for example. The danger, Kahneman argues, is that optimists tend to underestimate risks. This might be a good thing for spurring action, but might not always be the best thing for your portfolio.

4. “Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes.”

This is one of the most helpful pieces of advice for investors in the entire book. Kahneman points to compelling research showing that checking individual investments on a frequent basis will lead to poor decision making. So why not save time and improve performance by turning off the daily market noise?

5. “The research suggests a surprising conclusion: to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.”

This quote is potentially very helpful for investors. Remember, Kahneman believes that stock picking is a classic “low-validity environment.” So he’d likely argue that an inconsistent investing process would hurt performance over the long run. For illustration purposes, your belief that you know exactly when to increase (or decrease) your cash allocation might be a delusion that is hurting your overall returns.

If Kahneman is right about this, then relying on rules could be helpful. Putting money to work every single month, for example, regardless of what the market appears to be doing at that particular moment could be a smart technique. Holding stocks for five or even 10 years without selling could also be wise.

6. “Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.”

I know I’ve been guilty of this many times in the past. We see a successful business from the past, and assume that’s the magic formula for the future. Kahneman challenges us to be more skeptical. The excellent management book The Halo Effect makes a similar point.

Kahneman believes the key variable that is never considered by observers is “luck.” Because luck is so important, “the quality of leadership and management practices cannot be inferred reliably from observations of success.” Another important principle is regression to the mean. He notes a study of Fortune‘s “Most Admired Companies” showing that the worst-rated companies actually earned higher stock returns than the most admired firms over a 20-year timeframe.

7. “Success = talent + luck; Great Success = a little more talent + a lot of luck.”

These formulas illustrate an important theme in the book. Kahneman feels that luck “plays a very large role in every story of success.” A big challenge for investors, of course, is distinguishing between skill and luck. I’ve noticed that the most successful investors rarely acknowledge the latter as playing any role whatsoever until they have a bad year.

8. “The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do.”

As a former history teacher, I believe this to be true. Our knowledge of the past is imperfect at best, and yet, we often make important decisions based on this imperfect understanding.

This insight is very important for investing. Is 2014 really like 1938? Or is it more like 2007? Does that mean you should sell or buy stocks or load up on gold? Kahneman would urge you to be careful here — each of us has an “almost unlimited ability to ignore our ignorance.”

9. “The satiation level beyond which experienced well-being no longer increases was a household income of about $75,000 in high-cost areas…The average increase of experienced well-being associated with incomes beyond that level was precisely zero.”

This is such a great insight for me. Beyond a certain point, earning more money won’t make you any happier. For investors, it’s encouraging to know that growing a realistic pot of capital over a long timeframe will likely be enough to result in a happy retirement.

I can’t recommend Thinking, Fast and Slow enough to all investors. For me, it’s one of the best investing-related books that I’ve ever read.

MONEY Investing

The Easy Fix for an Incredibly Common and Costly Retirement Mistake

New proof that just showing up is half the investing game.

Writing about retirement inevitably turns you into the bearer of bad news. But last week brought a positive development: The downward trend in the percentage of workers participating in an employment-based retirement plan reversed course in 2013. The number of workers participating is now at the highest level since 2007, according to the Employee Benefit Research Institute (ERBI).

Which means, unfortunately, that from a wealth-building perspective, the timing of the nation’s workforce is actually pretty terrible.

The ERBI has only been tracking participation rates since 1987, a relatively short window, but still a bad pattern has clearly emerged: Workers are less likely to participate after the stock market drops, so they lose out when the market recovers.

The participation of wage and salary workers peaked in 2000 at 51.6%, right before a 3-year bear market that saw the compound annual growth rate (the CAGR, which includes dividends) of the S & P 500 declining 9.11% in 2000, 11.98% in 2001, and 22.27% in 2002. In 2003 however, the S & P rebounded up 28.72%, but retirement plan participation rates continued to decline, hitting a low of 45.5% in 2006 before finally beginning to rise.

Then the same thing happened again after the financial crisis. Participation rates had peaked at 47.7% in 2007, before declining in 2008 when the S & P 500 dropped a whopping 37.22%. Even though the market began to bounce back immediately in 2009, participation rates continued to decline down to 44.2% until that trend finally reversed in 2013 according to the EBRI data released last week. With each stock market shock, the participation rate fell but never fully reached its previous high, so that the 2013 rate of 45.8% is still lower than the 46.1% participation rate seen in 1987.

This bears repeating: The participation rate in an employment-based retirement plan in 2013 was lower than it was in 1987. I don’t think I need to tell you what has happened to the S&P 500 from 1987 to 2013.

Now of course one could argue that it’s harder to save for retirement if your salary has been frozen, or your bonus was cut, or especially if you were forced to take a lower-paying job, as many who were able to stay employed throughout the recession experienced. Employers have also been scaling back or eliminating entirely company matches, which further disincentives workers from participating. But waiting until you start making more money to save for retirement is a losing game, especially if you subscribe to the new theory put forth by Thomas Piketty in his much-discussed but I suspect less-widely read book Capital in the Twenty-First Century.

Piketty’s thesis is that the return on capital in the twenty-first century will be significantly higher than the growth rate of the economy and more specifically the growth of wages (4% to 5% for return, barely 1.5% for wage growth.) Furthermore, the return on capital has always been greater than economic (and wage) growth, except for an anomalous period during the second half of the twentieth century when there was an exceptionally high rate of growth worldwide. It is the inequality of capital ownership that drives wealth inequality, a phenomenon that cannot be reversed as long as the rate of return continues to exceed the rate of growth, or as Piketty helpfully provides, R>G. (Full disclosure: I only read the introduction and then used the index to find sections that most interested me.)

If you apply R>G to retirement planning, it follows that it’s more important to be in the market than to wait for a raise or to reach the next step on the career ladder to start participating in a plan. The usual caveats apply: First you must get rid of any high-interest debt and create a three-month cushion for emergencies. But once you’re in a plan, if the economy—and your income along with it—hits some major bumps, it’s even more important to continue to contribute lest you miss out on the upside. Just remember: R>G.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

More on retirement investing:

Should I invest in bonds or bond mutual funds?

What is the right mix of stocks and bonds for me?

How often should I check my retirement investments?

Read next: Why Americans Can’t Answer the Most Basic Retirement Question

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