Late Night Thoughts Listening to Mahler

Reality and Reflection

Gustav Mahler, the profound composer who died over a century ago, was known for his emotionally intense symphonies that have been associated with late-night listening and existential reflection.

Maybe I’m a little dramatic but investors would do well to now spend a little time in such reflection of their investments and strategies. Like his symphonies, today’s markets feel both grand and unsettling. 

What Could Go Wrong?

To be kind, markets are at least volatile and into uncharted territories. A lot of investment writings the past several months have been on whether or not we're in a bubble, and what we should do about it. 

Price to earnings ratios, a common measure of stock valuations, are very high. Other troubling signs include the huge capitalization levels of the largest handful of stocks making up the S&P 500 index, largely centered on technology.

These giants—known as the Magnificent Seven—dominate the S&P 500. Is this wrong? Not if their earnings skyrocket over the next several years. But that could be an expensive bet.

One of my favorite current indicators of trouble is the people now getting into stocks for the first time. Even more concerning, they’re often buying investments they may not understand.

We have amateurs who should be cautious buying into high priced stocks and sometimes into unknown investments. How about autocallable structured notes? My word checker can't even find the term.

Lessons From Three Crashes

What could go wrong?

Lots. I have lived through three market crashes: the 1987 Black Monday when the Dow dropped over 22% in one day, the largest one-day drop by percentage in the index's history. 

Then came the dot-com bubble, when the NASDAQ rose sevenfold before collapsing nearly 80%. It took over a dozen years for investors to gain back these losses.

And, finally, the housing bubble of 2008 where the S&P 500 dropped 56%. I lost about half of my life savings in this train wreck.

I'm writing today to tell you two things. First, we're probably in some kind of bubble and second, if you haven't experienced losing a lot of money in a short period of time, I have no words to tell you the pain. Mahler's 9th symphony would feel upbeat in comparison.

Tips For Today’s Investor

I lied. I have one more thing to tell you, and that is to share some tips for surviving whatever the markets are doing right now.

As painful as these three bubbles and crashes were, I had few regrets during or after. We always know what we wished we had done but that is of little help for the future. So what might you do in today's markets?

I always remembered something I heard when I was a kid: Buy low, sell high. People argue this maxim endlessly but it is mostly true.

So my first tip is to not move more money into what are almost surely overpriced markets. Buying into the Magnificent Seven could look like a bad strategy down the road.

Conversely, rather than buying into overpriced equities, you may want to consider selling some of your high priced equities. But I wouldn't suggest any big market timing.

That is, selling everything while waiting for the Big Crash could look like a bad move years from now while you’re still waiting for it to happen.

This is a good time, though, to consider your market allocations. You may want to rebalance back to what you once claimed as your ideal allocation.

Of course, that probably means selling winners and buying losers, which is always hard. And if you can't, consider what you might do if your winners dropped in half in the next month.

Regardless of the promises we make to buy low and sell high, when those times arrive, we find it hard to actually sell something that has done well and buy something that isn’t doing well. People's instincts are to assume the last 2-3 years of returns will continue forever.

This is poor thinking, our Neanderthal brains. A friend of mine told me in January that he had sold most of his international funds and moved them into US equities.

Internationals have done poorly for years but have far outpaced US markets so far this year. It was a bad move this year but would have been a great one several years ago. Market timing is a proven loser.

Stay the Course

My final recommendation is that you consider staying the course. It's what my hero Ronald Reagan did early in his presidency when the US was deep into one of its worst recessions. His advisors were strongly recommending big changes.

But he believed in what he was doing, regardless of what we thought of that plan then or now. Largely because of this strategy, he went on to become one of the most popular presidents ever. It worked.

Like Reagan, investors sometimes need conviction—not because they know the future, but because they believe in their long-term plan.

Staying the course—that is, doing nothing—is often your best plan with investing. A natural response to change, good and bad, is to do something. Activity with markets is not a good default.

If you have followed some basic investing principles such as keeping to an allocation, understanding what you own, not trying to time markets, keeping five years of income you may need in a money market or other short-term fixed income assets, you are probably just fine.

Then when the markets do crash—and they will someday—be very cautious about selling anything. Remember: Buy low, sell high.

Mahler knew how to end in silence. Investors should too—sometimes the wisest move is to do nothing and let the music resolve on its own.

Seven Days Inside America’s Healthcare System

I spent last Christmas in the hospital, my first stay since I was born. Although not an emergency, I needed my operation sooner than later. It was a humbling experience in one of the most complex, high tech sectors of modern life, much of which didn't exist when I was born.

I have a long relationship with heart disease. My father and his brother both died from it in their forties. Although older, their parents also both died from it.

Since I was young, I have been keenly aware of my bad genes. Wanting to live a long life, I never smoked, watched my diet, ran and developed other life habits to minimize my exposure to heart disease. 

It mostly worked. The kids are grown, we have grandkids, I'm safely retired and we’ve been walking five miles a day for years. 

Since my first physicals after college, I was encouraged to watch my diet, to run and to take medications to lower my cholesterol (even though my cholesterol numbers were good). 

In their zealous determination to keep me healthy, I once failed a treadmill test. They assumed that I had probably already had some heart attacks. But on further review, they cleared me to do anything I wanted. It was a false alarm.

But last year my luck ran out. I woke up a couple of times feeling short of breath. I wasn't sure what was a virus and what was more serious, but I reluctantly went into the clinic.

Once they heard my symptoms, they immediately sent me to the emergency room, offering me a ride in a wheelchair. (They let me walk.) For the first of several times, they told me to plan on spending the night—or a week.

But every time they sent me home. It's hardly an exaggeration to say that it took two general practitioners and four cardiologists a month to diagnose my problem. I had a bad heart valve and I would need it fixed.

And that means open heart bypass surgery, the "big one" as multiple people reminded me.

Open heart surgery for a valve problem is a non-trivial medical procedure. I had once read that if you ever saw open heart surgery performed, you'd wonder how anyone survives. 

Although it's safe and quite common, I knew enough to not want to hear what they were going to do to me. 

When writing up my health care directive years earlier, I repeatedly stated that in the end-of-life world, I was most afraid of pain. Dying isn't a fear of mine. 

So when they had me lying flat on a gurney and asked if I had any questions, I had one: What pain could I expect over the next several hours. 

I was told that I'd be unconscious before I left that room and I wouldn't feel anything. As for dying, I wouldn't know it if it happened. 

Open heart surgery for a valve replacement requires a team of at least seven people. It started with making a 7 to 8-inch incision down the center of my chest. They cut through my breastbone and spread my ribs apart to reach my heart. 

They connected me to a heart-lung bypass machine which takes over for my heart and lungs, both of which are stopped during the surgery. Finally they were able to repair my valve, which probably took about thirty minutes of the four hour surgery. 

Once my valve was repaired, they restored the flow of blood to my heart, got my lungs and heart working again and disconnected the bypass machine. Finally, they wired my ribs back together and closed me back up.

My first memory waking up was hearing my sons, a welcomed sound. I couldn't see yet but I could point and name which one was talking, which got them laughing. The nurse was right—I had felt nothing.

All went well sans a common complication that extended my stay a bit. Before they operated, I heard repeatedly that I will "do well." But after not eating for days, I didn't feel well. Early one morning, a nurse was making a routine visit.

Talking to her, I started to cry. I told her that I was confident that I would be well, but it sure didn't feel well then. I was on emotional overload. She was so kind. She gave me two hugs.

This was mostly my experience with the people that cared for me, whether the surgeon, the nurse who I talked with last before my surgery, or the one who gave me a hug when I needed one. They were very kind, very professional and most notably, very busy.

I was intrigued by the number of people who were involved in my recovery: nurses, doctors, pharmacist, maintenance and cafeteria people. They did their best to accommodate me for anything I asked for.

I was also high in a brand new glass medical facility overlooking Lake Superior. I had a private room with a gorgeous view. Sometimes I'd awake in the middle of the night and just look out over the quiet city and lake. It was stunning.

For years, I've been intrigued by the healthcare system. I realized long ago that healthcare is expensive, consuming about 20% of everything the U.S. spends today, nearly four times what it was when I was young.

My general observation from the outside has been that the system is exceptional in its output but is bloated and mismanaged.

I'm reminded of it when I receive two conflicting arrival times for the same appointment, when I provide the same information repeatedly or when I'm mailed indecipherable multi-page statements, often with "do not pay" stamped across them. 

Although I stand by many of my criticisms of our healthcare system, I admit that after my stay, I am quite amazed at it, and I have a new appreciation for why it is so expensive.

Having worked my life in IT operations, I quickly came to an understanding of where the money goes in healthcare. It's not in the $200 drugs, the overpaid specialist or our modern facilities.

Roughly, two-thirds of healthcare is labor, the people I saw all day long, plus many more.

And there's no AI or robotics that are going to straighten out my bed, which happened every several hours for days. No automated valve replacement. Ditto drugs, IVs or food.

After some days I realized I hadn't taken a shower. I put together a plan to get myself into the shower seat, turn on the water and wash myself up enough to feel better. This was the plan of a man who couldn't get out of bed without help. 

Good luck with that! I asked my nurse if I could take a shower. No problem, he said. "I'll be back in ten minutes." 

When he returned, his first words were that he would help me get undressed and onto the seat in the shower, but he would do all the work. My only job was to tell him what I wanted cleaned.

I'm still traumatized! I wondered what you have to pay a nice young person to give an old man a shower. But I soon realized that this is his career, and it was less work than washing his dog. 

Any pride I still had was gone! But I was clean and felt good. When he was done, he just asked if I needed anything else and then went on to his next task.

So what does open heart surgery, including seven days in the hospital, cost? This brings me to the most intriguing question of my stay, and that is what I call healthcare's imaginary money. 

The list price for my stay was $200,000, more than the median life savings of a retired person. Where did that price come from?

But my insurance said the price was $62,213. The surgeon billed me $17,110 but my insurance paid $2,112 as full payment. And for me? I paid the surgeon nothing and then $1,828 for everything else, a fraction of the total cost. 

The internet says that the average cost for my procedure in my area is between $80-200,000. How does a logical mind wrap themselves around figures like this? 

I now doubt that there is any silver-bullet for fixing healthcare and its costs. But here are a couple of thoughts. 

Start by getting the costs into real numbers that can be compared and challenged. What does something actually cost? Does anyone know?

Then build on the existing healthcare exchanges. They can seem burdensome but they live with real numbers and provide individual options. Nearly half of Medicare is already processed through their own exchange. Why not employers and Medicaid, too? 

And finally, let’s acknowledge that it’s the price for modern life, and that price is high: about 20% of everything you earn. We can argue all day about who pays for it, but in the end, collectively we all are.

While in the hospital, I listened carefully to every recommendation for a good recovery. They emphasized exercise and diet, and I intended to follow all that they said. 

I shared my plans with the staff, telling them that I loved them all but my goal was to never see them again.

Gold: Yesterday, Today and Tomorrow

Recently, in order to get through a sensitive metal detector, with some pain and effort I removed my wedding band. I hadn't had it off in years. 

I later had it resized and polished, and was quite surprised how nice it looked. It all reminded me of an old gold mine that I grew up near. Let me explain.

Rings have a long history, often used to signify power and status, and more recently, achievements and love. 

Not one to care much about marking myself with symbols, I tried to pass on a wedding ring. My wife convinced me otherwise.

Researching rings, I learned that I could have our rings made using gold that had just recently been mined and processed from the Ropes Gold Mine.

This is the old mine just a few miles from the house I grew up in in the Upper Peninsula of Michigan. The mine had recently reopened. 

I ordered two rings. We both have our rings. And each other. And three boys. And four grandchildren.

I recently saw an ad pushing the sale of gold. Yes, it's climbed a lot lately, up nearly 7 times in the past 20 years. 

Note, though, that in the same period the S&P 500 index is up five times (excluding dividends). In recent years, gold has not been a bad investment but history suggests it's not what it's said to be.

Back to our rings. When I was a kid, we occasionally brought our garbage to an open dump that was on the same gravel road as the old Ropes Gold Mine. There was a small sign recognizing this mine from the 19th century. It had been closed for decades.

The Upper Peninsula is known for its iron ore mining, which has been mined continuously since it was first discovered in 1844. Copper was once a big industry, too. But there were also over a dozen gold mines in the area.

The Ropes Gold Mine was the most notable of these gold mines. It was started by Julius Ropes, a chemist from Vermont who had searched for gold and silver on the west coast and in the south.

In 1862, at age 27, he came to the Upper Peninsula working for a local druggist. Mining had already been active in the area for years.

Mr. Ropes married a local girl, settled in my hometown, Ishpeming, Michigan, had four children and eventually opened a drugstore. He was very involved in the city, becoming postmaster and a school board member.

They lived in a house just a few blocks from the family home my great-grandfather bought about the same time, a home both my grandfather and dad grew up in.

Mr. Ropes continued his prospecting for gold and silver, and eventually discovered both in what became the Ropes Gold Mine organized by him in 1881. Mining began shortly afterwards.

It continued operations for fifteen years until it was closed due to financial difficulties. It produced $645,792 worth of gold, worth about $90 million today.

Note, though, that had this same amount of money been invested in the S&P 500, it would be worth tens of billions of dollars today. 

During this time, after accounting for inflation, gold went up about 4 times while the S&P 500 went up over 2000 times. Ok, enough of this. But I will carry this point out later to show just how bad of an investment gold is.

The Ropes Gold Mine remained closed for most of the 20th century. I remember as a kid walking through the mine ruins many times, looking through the history that sat overgrown with trees. Mounds of ore and equipment lay about, the former obscured by brush, the latter more rusted with each passing year.

Gravel roads eroded into trails, now as frequented by deer as man. But gold won't rust or be washed away, and beneath 100 years of shrubbery, it still coursed through the land's veins.

During these years the Ropes Gold Mine changed hands several times. As is usually the case, finances and investing were the drivers.

The big breakthrough came in the 1970s. Gold prices spiked, going up nearly 15 times while the S&P 500 about doubled (including dividends). Callahan Mining Corporation bought the mine and reopened it in 1983.

They ran it again for nearly ten years when it again closed primarily due to the rising cost of operating the mine while the price of gold fell. It’s during this second run of the Ropes Gold Mine that I bought our wedding rings.

Our marriage has been very good. But as an investment, the gold in our rings didn’t do so well. When I had my ring resized, I asked for an estimate on what it is worth. 

They said it was worth about $1100, three or four times what I paid for it nearly forty years ago. How does that compare with the S&P 500? Including dividends, that same money would be worth $18,000 today, more than ten times what the gold is worth.

Gold has a long history going back thousands of years. There's a reason it is considered a timeless item with an inherent value. But gold doesn't do much other than make nice jewelry. 

Although it's backed by more than crypto currency, it’s not by much. They both are mostly only worth what someone else will give you for it. It's the same with most commodities. But in this case, there's emotion and history, unlike natural gas or wheat.

That's quite different from money invested in companies. Almost all stocks are backed by companies with products and facilities, with many paying dividends. 

There's not a lot of emotion to Proctor & Gamble or Apple Computers or Ford Motor. Nothing to share at a wedding or to carry on your finger for decades.

But from a cold financial perspective, these companies make and sell things that people want, and as an investment they lap gold again and again.

By how much? According to Stocks for the Long Run by Jeremy Siegel, after accounting for dividends and inflation, the S&P 500 has averaged nearly 7% a year return since 1800, rising over 23 times in this period. 

During the same time, gold has averaged less than one percent a year, rising only 4 times after inflation.

Yes, gold occasionally goes up fast as it did in the 1970s and as it has again this century. But from 1980 to 2000, it hardly moved while stocks went up by multiples. And even in this century, gold hasn't done much more than keep up with stocks.

They claim gold is a hedge against inflation. Maybe and sometimes. It worked in the 1970s. But, no, it doesn't normally track with inflation any more than bonds or stocks.

Gold is wonderful. I like my ring. I like its history, both through ancient times and into the Ropes Gold Mine. I like what it symbolizes.

But an investment? No. If you own the actual gold, you have to store and secure it. If you buy it electronically, whether directly or through a fund, you're open to all the same issues that come with trusting others' commitments to you.

People rarely do well with gold. But in the long run, buying and holding stocks, whether individually or in low-cost funds, it is hard to lose. 

At the same time, love, history and sentiment can’t be measured purely in financial terms. I’m still glad that I have my wedding ring.

What Goes Around Comes Around

I have spent my career working with computers. I still enjoy using new gadgets or learning how something like AI (artificial intelligence) works. Yet, not everything in tech is new, even in computers. I recently learned that mainframes, a relic from the 1950s, are alive and well, and in fact, their sales are increasing, presumably because they are quite suited for AI. Mainframes and AI are not words that should coexist! Here’s what has happened.

I learned to program decades ago writing in Fortran. Fortran was one of the first high-level programming languages, written before I was born. It was designed primarily for scientific and engineering calculations.

My programs ran on an IBM mainframe, a powerful computer that easily processes huge amounts of data, known for their speed, security and reliability. The name comes from the large cabinets (main frames) they were once stored in. Mainframes could weigh tons, living in large, temperature and humidity controlled spaces with maintenance personnel always onsite.

I also knew COBOL, another early high-level programming language, designed for business applications. Since then, I've programmed in an endless number of languages and hardware configurations. Both grow like weeds, each addressing some special situation or need. Since their start, new notable programming languages have been developed at the rate of about one a year.

Over time, mainframes dropped off in use as computing moved to servers, personal computers and smart phones, the hardware now generally used in today's internet.

I’ve known for years that COBOL has some residual holdings in business applications such as payroll processing, most notably Walmart. But I was surprised when I heard of someone who had recently used Fortran.

I continued searching, and yes, what goes around may come around. Mainframes, Fortran and COBOL are all alive and well.

Mainframes were the first commercially available computers. Because of their expense, originally they were only available to large organizations, including the government. They are essentially "black boxes,"  an environment that does not interconnect well with the outside world, a sharp contrast to today's tech environment that is essentially an endless interconnected network.

But this closed design that encapsulates processes has some benefits. It is easier to control both the hardware and the software, giving it a high degree of reliability, availability and security. Further, because most of the processing happens in a physically small area, processing can be very, very fast, able to complete computations in a fraction of the time they may take running on multiple servers and workstations, a common configuration today.

So, yes, there are not just a few mainframes hanging around but instead they are a viable industry, nearly all run by IBM. A majority of the companies in the S&P 500 have at least one mainframe, and many industries such as banking, airlines, insurance and government rely heavily on mainframes for their core functioning.

And now they are coming into use for AI, primarily because of their core competencies: fast, reliable and secure. And they can be cheaper to run, too.

I also found that millions of lines of COBOL code runs daily. It's estimated that more than half of all business transactions globally are processed using COBOL. And for similar reasons: It's fast, secure and it works.

Many of these business processes still handled by old languages have changed little. Payroll does about the same as it did fifty years ago: hours, rate, total pay, deductions and net pay. Process once every week or two, or once or twice a month. In payroll, there's really nothing new under the sun.

And what about my Original Language, Fortran? It is still widely used, a top choice for heavy number-crunching in scientific and engineering fields such as meteorology and physics. It has survived for some of the same reasons other old technologies are around: It is fast, has lots of libraries accumulated over decades and there’s just not a compelling reason to move to something else.

To be clear, these ancient tools have changed dramatically over the years. A mainframe today, almost exclusively built by IBM, is millions of times faster than their forebearers, and much smaller. Their architecture has changed little but the individual components are made using the most modern technology.

Although less so, old languages still in use today often have many of the modern constructs so common in newer languages, such as object orientation, parallel processing and recursion.

The world of technology changes at lightening speeds. New ideas and possibilities are endless. But like so much in life, there are functions and needs in technology that were solved decades ago, and there hasn’t been a compelling reason to change.

There might be a life lesson buried somewhere here.

Delayed Gratification

One of my life tenets is delayed gratification, a concept where I’m surely out of sync with much of the developed world. I learned early that instant gratification is expensive and that the ability to hold off on the endless purchases that are heavily pushed will get one ahead of the curve. And once that happens, a whole new world of opportunities opens up.

I recently heard from the opposing side. The Wall Street Journal had an enlightening article on just the opposite - why we shouldn’t delay the “extras” in life that can make us happy. Oh, pity the hundreds of generations that preceded us who didn’t have these options for a good life.

My wife and I are now living the advantages of our delayed gratifications. Both children of Depression-era parents, we share a disdain for debt. I grew up in a new house that still has never had a mortgage and is still in our family. Neither of my parents had college educations; my dad was a miner, my mother a bookkeeper.

But this counter-culture has its challenges. I remember early in my career making a meal for my friend at my townhouse, a new home that I purchased with a mortgage. It was quite nice, with vaulted ceilings and a garage that I had never had access to before.

My friend noticed my manual can-opener. It was an upgrade from the camping one it had replaced. I probably used it once or twice a month. It took me a few seconds more to open a can than the modern electric can-openers that I didn’t want to spend money on, but also didn’t want cluttering up my countertop.

“Why do you suffer with things like this?” she asked me. “Suffer?” Only in the U.S. would I have been seen as someone who lives with hardship. How do I respond to this question? OK, let’s begin by saying that this is probably our last date.

Today, my wife and I live in a beautifully renovated hundred year-old home on a hill near Lake Superior. We have more than we’ve ever needed and most of what we want.

Yes, we’ve often held-off on purchases, delaying gratification. Our first summer place was a three-season lake cabin without indoor plumbing. I’ve driven more than one truck until it was virtually worthless. We’ve never carried credit card debt, never financed a car since we married and paid off our home before turning fifty.

“Suffer?” I loved our cabin. I remember rising before sunrise, starting a fire outside, sitting with my wife in the quiet morning, drinking coffee while the kids slept. I had won the lottery.

We live in a world that pushes us to spend every dollar we have, and then charge the rest up on a credit card. Who can enjoy the outdoors without a new SUV, a toy I first got in my forties. The media never mentions what happens if you lose your job, or the shackles these debts put on your life.

Don’t be deceived. You won’t have more in your life by borrowing money to get it early. Delayed gratification is a key ticket to a secure and comfortable life.

So I can hardly contain myself reading the Wealth Management section in the Wall Street Journal. Jacqueline R Rifkin shares the downside of delayed gratification. She eloquently talks about her experiments where people are asked to imagine buying a bottle of wine. The study examines the impact of opening the wine now or delaying opening the wine.

Ms. Rifkin concludes that “in reality” some go too far, putting off the “sweet things in life” (e.g., a bottle of wine or a nice-smelling candle) until it’s “too late.” She speaks longingly of this bottle of wine, of “drinks with friends, birthday dinners, celebrating a promotion.”

I painfully read through the article just in case there was some wealth management help here, but, no, it grinds on, noting the “high price” and “stress” we pay for putting off such basic needs.

I acknowledge that there is a reasonableness to delaying purchases, that hoarding for some unknown future has its limits. I’m not recommending a miserly and selfish life isolated from your community. But we are mostly unaware of how expensive it is to take on debt for things that are hardly critical to survival. In the long run, spending less than you earn has huge financial benefits for you.

No surprise that Ms. Rifkin is a professor of marketing. She’s in the right place, trying to justify our first instincts. But this is no help for wealth management. Or happiness.

If you’re interested in getting ahead of the debt cycle and building a net worth that gives you vast freedom to enjoy life your way - rather than the ways sold by marketeers like Ms. Rifkin - delayed gratification is one of the keys to getting this done.

And about your “suffering” along the way, consider for a moment that nature and its wonders don’t require an SUV. Relationships don’t require some special bottle of wine. Wonderful gatherings are as close as your kitchen and pantry. Love and art and humanity are available wherever you are.

And it doesn’t require an electric can-opener. Yes, delay your gratifications, because in reality, you need little of them to find contentment, happiness and security.