Earlier this week, Kathleen Pender wrote an article titled "Dodd bill punts on strict rules for brokers" in the Net Worth column of the San Francisco Chronicle addressing the lack of a fiduciary standard for stockbrokers.  It's a quick read, and sums up the reality of why it is hard to be optimistic that there will be meaningful regulatory reform in this area.  If you're not familiar with this issue and are currently using or seeking financial advice from a professional, it makes a lot of sense to educate yourself on compensation arrangements for financial advisors.

The article concludes with a recommendation to ask a prospective advisor whether he or she is required to act in your best interests.  Good advice.  To that I would add:  "How are you being paid to provide me with advice, and by whom?  Please list all sources".

Read the article here:  http://tinyurl.com/SFGateFidArticle.

Intuit has decided to leverage its considerable data to provide an anonymous, aggregate view of employment trends for small business in the United States.  The index focuses on small businesses that employ fewer than 20 people, which they say make up more than 87% of all American employers.  It pulls data from approximately 50,000 US businesses.  Intuit views small businesses as a sort of bellwether for overall employment, as they see small businesses hiring earlier than larger employers.

So what can we learn from the data this month?  In short, small business is on the comeback trail.  Employment in this space has been gradually trending upward since June, 2009 and accelerated a bit in February.  Although I have no reason to discount the statistical validity of 50,000 businesses, any representative index like this will have a margin of error.  The "acceleration" indicated in February still translates to a .2% rise in employment; in other words, we're not experiencing a surge in employment at this point.  Nonetheless, the upward curve seems to be steepening slightly, and I think the stats are positive, if muted.

Full Disclosure:  Foothills Financial Planning uses Intuit’s payroll service.  Although we’re perfectly happy with it, the point of this article is not to offer an opinion for or against the service.

Much has been made recently about the story of Grace Groner.  For good reason.  If you're unfamiliar, Ms. Groner died last week at the age of 100.  While working at Abbott Labs, she bought 3 shares of stock in 1935, reinvested the dividends, and lived within her means for the rest of her life.  That investment is now worth $7 million, which she has donated to her alma mater.

There are a couple of interesting story lines associated with this.  Most of them center on frugality and charity.  Again, deservedly so. This is a great lesson in both.  Although she doesn't perfectly fit the mold, Grace Groner's behavior would have made her a good subject for Thomas Stanley's The Millionaire Next Door series.

There are a couple of other vectors here that are interesting, though.  In his Wealth Report column, Robert Frank highlights one of them, which involves the power and risk of putting all one's eggs in one investing basket, especially when that basket belongs to your employer.  He points out that luck played a big role here.

In reality, though, if she had invested in the broader market, she would have enjoyed impressive returns as well.  But how impressive?  That is the story line that is most instructive, and it involves the power of compounding, which is coincidentally a favorite topic of this blog.

Let's look at some data.  In 1935, stocks were up 46.74%.  That's a nice way to launch a long-term investment.  The next year, the market was up 31.94%.  In other words, if Grace Groner would have invested in a broad stock index fund on January 1, 1935 (had they existed then), she would have almost doubled her money after two years!  Of course, the market is a volatile beast, and 1937's 35.34% drop was undoubtedly a good reminder.  Nonetheless, from 1935 through 2009, the average broad stock market return was 12.23%, according to the Federal Reserve's numbers.  What was Grace Groner's return?  By my calculation, it was just under 15.4%, with full reinvestment of dividends, etc.  That is what allowed Ms. Groner to donate $7 million to Lake Forest College.

But what about Robert Frank's assertion that luck played a huge role in her investing success?  How much would she have been able to donate to Lake Forest if she had instead been able to invest in the broad market for 75 years? $919,042.85!  In other words, the difference between a 12.2% and a 15.4% per year average return on a $180 investment for 75 years is more than $6 million and almost 87% of the final value of the investment.

That leads me back to two fundamental points:  1) the power of compounding cannot be overstated, and investing early is a huge advantage if one is hoping to build wealth, and consequently 2) finding inexpensive investment vehicles makes a huge difference, provided the associated returns are similar.  If Ms. Groner had paid 100 basis points, or 1%, for management of her Abbott investment, she would have ended up with a bit less than $3.8 million.

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On Saturday Warren Buffett released the Berkshire Hathaway annual report for 2009, accompanied by his customary shareholder letter.  It won’t hit mailboxes in printed form for a little while, but undoubtedly many people will read it online long before it gets to them.  I thought I’d dedicate a post or two to sharing what I see are some key points emanating from the brain of Buffett via his shareholder letter.  I’ve always felt this was an entertaining and informative read, and this year has not been a disappointment.  You might wonder why you should care what Warren Buffett thinks.  Like anybody else, he has made some good calls and has been off base about some things.  (I should point out that when he's wrong it's usually a matter of timing, and it happens much more infrequently than when he's right).  Regardless, through the companies he owns and the people he knows, he has an almost unequaled perspective on the American economy.  He also has a very rational view of the world, unencumbered by politics, and to a large degree, personal political ideology.  The engine of Berkshire is the insurance business.  They own banks and other financial services companies, as well as having major exposure to residential real estate.  The roots are based in basic, industrial companies.  In other words, Berkshire is directly exposed to pretty much all of the areas of the economy that have caused great concern over the past couple of years.  Although Buffett may be hands-off to a large degree in the operations of most of his businesses, he knows precisely what is going on in all of them.  The last obvious point in favor of lending credence to his views is simply that his investing performance has been unparalleled.  

One thing about the letter that is clear right off the bat is the fact that he felt the need to restate the basic tenets of owning Berkshire Hathaway.  The Berkshire Owner’s Manual is posted online on an ongoing basis.  Recently, however, Berkshire’s B shares have split 50 for 1 to facilitate the purchase of Burlington Northern, and there has been a huge influx of new shareholders.  For that reason, Buffett seems to give more attention than in most years to reiterating the overall philosophy of Berkshire Hathaway.   While it’s true that he reinforces basic concepts every year – and really every chance he gets -  this remains valuable information whether you’ve owned shares for several decades, or you are merely interested in learning from a great investor.

Perhaps the most universally interesting topic Buffett addressed was the state of residential real estate.  He may not typically be associated with this industry.  However, as he points out in the letter, Berkshire-owned MidAmerican Energy in turn owns HomeServices of America.  HomeServcies owns a broad collection of regional realty firms that combined make them the second largest real estate brokerage firm in the US.  Additionally, their website specifies that they are the “largest brokerage-owned settlement services (mortgage, title, escrow and insurance) provider in the United States.”  Berkshire also owns Clayton Homes, which has become the largest maker of modular and manufactured homes in the US.  This is all a long-winded way of saying that Buffett has a pretty good vantage point from which to view the problems and opportunities facing residential real estate.

First, some numbers.  Total industry output of manufactured homes has dropped from 382,000 in 1999 to 60,000 in 2009.  That has led to the bankruptcy of 1999’s top three manufacturers.  More generally, housing starts in the US have dropped to a fifty year low, at 554,000. (For some context on the trend of housing starts, see the chart at the bottom of this post.)

At last year’s annual meeting, Buffett talked at some length about the supply and demand dynamics in real estate, and how prices will start to pick up again when we work off the excess inventory that existed then in the system.  Typical, rational view of things, and of course he had the numbers at the tip of his tongue. 

The big news coming out of this discussion?  Warren Buffett believes that within the next “year or so” our housing problems should be largely behind us.  Of course, housing is overwhelmingly a local phenomenon, and there will be regions that continue to feel the effects of overbuilding well beyond 2011.  Furthermore, the upper end of the spectrum in many areas may still be years away from real recovery.  For instance, I recently saw data for the Phoenix area that indicated that inventory for homes under $400,000 was actually approaching neutral, meaning that it didn’t particularly favor buyers or sellers.  However, above $3m (I think…may have been $2m) there was enough inventory to serve buyers for over five years!  Note:  don’t hang your hat on these numbers as they are approximate and a couple of months old.  The point remains, though.

We may still be in for some bumps, but I suspect it’s comforting for most people to hear one of the most rational players in American business state that there’s light at the end of the tunnel.

Housing Start Data, courtesy of the US Census Bureau