One frequently hears “if Williams did not have to take time off for military duty, he would have been the greatest hitter of all time”.  Here, I address this point by projecting what Williams would have batted if not for the wars. Specifically, I project: home runs (HR), batting average (BA), runs batted in (RBI), on base percentage (OBP), and slugging average (SLG). Williams is also compared to other “best hitter ever” contenders.

Simulating the Lost Years

Ted Williams lost 6 years to military service in the prime of his career. For WWII, 4 years – 1942-1945; for the Korean War, he effectively lost 1952 and 1953. Williams had just hit .406 and .356 in 1941 and 1942, respectively, before his WWII military service. He also hit .388 at age 39 in 1957 after returning from the Korean War. Clearly, his military service took him away in the prime of his baseball career.

To make the projections for the lost years, I took the average of the two years before he went off to war. The results for the statistics are given in the following table. The years used for the projections are underlined with the projections in bold.[1]

Table 1. – Williams Career and Projections

Source: http://www.baseball-almanac.com/players/player.php?p=willite01

Home Runs

Before getting to the home runs stats, it is worth noting that the home run numbers changed dramatically by era. This is captured in Table 2 where American League home runs are shown for the “Ruth”, “Williams”, and “Steroid” eras.

Table 2. – American League Homers in Different Eras

Note how dramatically the numbers of home runs hit has increased through the eras.

Home run leaders are presented in Table 3. Williams tied for 19^th. My projections suggest that had he played the years spent in military service, he would have hit 711 home runs and ranked 4^th.

Table 3. – Home Runs

Keep in mind that Fenway Park is not friendly to left hand hitters. While it is only 302 feet down the right field line, it drops back sharply to 380 feet in right center. Table 4 provides data on more friendly American League parks in use when Williams played.

Table 4. – Park Dimensions

Source: Clem’s Baseball Blog

Batting Average

Before getting to the stats, it is useful to ask whether different eras were better or worse for batters. Table 5 provides data on average batting averages for the best AL hitter and the average for Major League Baseball. The average for the AL champ was very high for the earliest two periods. The Ruth era had a high overall average, suggesting that Ruth’s averages might have been high because of bad pitching. But the Williams era was not abnormally high or low, suggesting Williams did not get a batting performance break because of when he played.

Table 5. Batting Averages in Different Eras

Data on batting averages are presented in Table 6. Williams’ actual average of .344 tied for 7^th. My projection suggests he would have ranked 4^th had he played in his service years. Table 4 indicates that the 6 players with higher averages played during a high-average era.

Table 6. – Batting Averages

Runs Batted In

Like home runs, RBIs are cumulative, so my projections for Williams will be much higher than his actuals. Table 7 provides data on RBIs. Williams ranked 13^th but I project he would have been 1^st had he not gone to war.

Table 7. – Runs Batted In

On Base Percentage

OBP is increasing accepted as the best single statistic on batters. Getting on base half the times you come to the plate is amazing. At .489 (proj.), Williams is pretty close. Like other dangerous hitters, Williams was given many intentional passes. But he was also a very disciplined hitter with a great eye. He prided himself on never swinging at a pitch not in the strike zone. Williams has the highest on base percentage of any hitter, ever.

Table 8. – On Base Percentage

Slugging Percentage

Slugging average is a common batting statistic. It is defined as the total number of bases resulting from your hits divided by your at bats. The maximum is 4.000, e.g., if you hit a home run in your only at bat, you will have a 4.000 slugging percentage. Williams’ slugging average was second only to Babe Ruth’s.

Table 9. – Slugging Percentage

Overall

Who are the contenders for greatest hitter of all time? Among retired players, there are only two worthy of consideration – Ruth and Williams (Aaron’s lifetime batting average was only .305 and Bonds only .298).

How about people still playing? Albert Pujols and Alex Rodriguez come to mind. Rodriguez is 35, maybe 2 good years left. But his overall batting average is only .303. End of discussion. Pujols is 30, maybe 7 good years left. In Table 10, I project Pujols ahead for 7 years using annual career averages for the projection. The winner in each category is in bold.

Table 10. – Ruth, Williams, and Pujols Comparisons

Williams was the winner in four categories, Ruth in 2. Ruth might have been helped on batting average because of the weak pitching in his era. My sense? Ruth or Williams is the greatest hitter ever.

Reflections

My father took me to Fenway in the late ‘forties/early ‘fifties when Williams was in his prime. He was the most exciting player I ever saw in person. I will always remember the announcement – Now Batting, Number 9, Ted Williams. Whatever the game, a significant number would stand and cheer. Williams would come to the plate, often say something to the ump and catcher, and then the performance would start. Anyone fortunate enough to see him hit a home run or even swing at a pitch never forgot the beauty of the swing[2]. He rarely swung at a bad pitch. Many umps believed if Williams did not swing at the pitch, it was a ball. Just before the pitch came, he would lift up/cock his wrists, and swing at the very last moment.

Williams had excellent eyesight, quick reactions, and very strong wrists. His swing was traditional and classic. He held onto the bat with both hands until the end of the swing. His signature home run was a towering drive into the right field bleachers.

Whomever you think was the greatest hitter, Ruth has to be considered the greatest ball player ever.  In Boston, he won 23 and 24 games in 1916 and 1917, respectively, as a pitcher.

[2] You can catch a glimmer of the beauty of his swing at – http://www.youtube.com/watch?v=lRie0HNJmZY and http://www.youtube.com/watch_popup?v=lRie0HNJmZY&vq=small#t=42.

 This is the second in a two-part series on the economics of US military interventions. The first part provided cost and fatality numbers of past and current wars. This one focuses on the most recent interventions – Afghanistan and Iraq. It asks if these wars have contributed to achieving America’s global strategy objectives.

For this article, I have again asked Jerry Silverman to help me address these issues. Jerry has worked overseas for most of his career and has written extensively on foreign policy issues. He wrote on the Afghanistan situation in a “National Interest” piece.

The following assessments of Afghanistan and Iraq each have two parts: motivation for intervention and what is happening now. The article ends with a broader discussion of what should be done moving forward.

Afghanistan

1.       Motivation

Elliott: After 9/11, the US government believed Bin Laden was in Afghanistan. At the time, I publicly urged that we drop a small nuclear bomb in some desolate area of Afghanistan and be done with it. Why did I take that position? I wanted to avoid a ground war in that country. What happened? It took Bush 6 weeks to launch a ground war and then he lost interest.

I speculate that Obama’s interest in support of the war stemmed primarily from domestic political considerations: he was on record in opposing the Iraq War, and he (or the advisors he listened to) did not want him to appear as a peacenik. So he emphasized the importance of winning the Afghan War.

Jerry: Well, I certainly would not have subscribed to your “nuclear” solution – either then or now. However, your desired objective was spot on. There is a sense in which we won the war in Afghanistan following the expulsion of the Taliban from Kabul and the installation of Hamid Karzai as Head of an Interim Authority at the Bonn Conference on December 5, 2001. As for Osama bin Laden, it is much more likely that we could have successfully found and prosecuted him — or dealt with him “extra-judiciously” — during the few months after our initial success in Afghanistan if we had accepted Pakistan’s view that Afghanistan fell within its sphere of influence. That acknowledgement would no doubt have resulted in closer cooperation by the Pakistani’s early on. And although that would not have been to India’s liking, such a posture toward Pakistan would have been a bigger problem for Iran than for us.  

But that is the past. With respect to President Obama’s motivation in the present, your analysis is plausible as at least a partial explanation of his current policy. Nonetheless, it should still be kept in mind that he inherited a full-blown and complex military conflict in Afghanistan. That said, he would not be the first President to feel the need to prove his bona fides as a “liberal” civilian Commander-in-Chief, as I was reminded while re-reading David Halberstam’s The Best and the Brightest first published in 1972.  It is perhaps not surprising that the narrative fits the situation we face today – all one needs to do is change the names of the principal actors or labels: Obama for Kennedy, al-Qaeda for international communism; the cold war for the war on terrorism; and Viet Nam with Iraq and Afghanistan.

2.                  Current Situation

Elliott: In our last interview, I suggested negotiating our way out by telling both Afghanistan and Pakistan we would leave if they gave us Bin Laden. You made a pretty convincing case that at this point, having Bin Laden in US custody would create more problems than it would solve.

So I pose the following question to you. The Defense Department is spending $9.1 billion per month in Afghanistan. So far, 1,206 Americans have died. In 2010 the death rate is 38 monthly. Is it worth continuing this war? What are the benefits? And what can be accomplished in this politically divided country with corruption out of control?

Jerry: I am neither a fan of Karzai, his Government, or corruption. Nonetheless, whether or not Karzai is corrupt misses the core issue of political legitimacy and distorts our understanding of it. Indeed, being corrupt does not automatically mean the loss of political legitimacy or negate the ability to establish it. Thus, insurgent groups from Colombia to Afghanistan are effective despite, and sometimes because, of their corrupt involvement in, for example, the drug trade. Our own experience of integrating immigrants of many different cultures through “machine politics” in our own cities during the first decades of the twentieth century suggests that exchanging benefits for political support in culturally and politically un-integrated political environments has worked as often as not. Further, Afghan history is replete with examples of short-term alliances among various tribes, clans, and more secular political factions in response to the unifying presence of foreign troops.

Thus, the more relevant question must be — is Karzai’s Government in Kabul viewed as sufficiently legitimate by a sufficient number of Afghan citizens to cause them to obey its laws, rulings, or other edicts and, if necessary, lay down their lives to defend it?  If not, is there any reasonable prospect that Karzai or anyone else in Kabul could achieve such legitimacy while being supported by the direct intervention of American or other foreign military forces? Or are we trapped by the conundrum that our military intervention in and of itself is an important catalyst for unifying a wide-range of Afghan factions against the Karzai or any other possible government in Kabul? If so, the withdrawal of our military forces would be a necessary pre-condition for any future possibility of a stable US-friendly government there. That might not be as far-fetched as it might seem, as illustrated by the dramatic shift in the relationship between the US and Viet Nam between 1975 and today. The withdrawal of our military forces from Afghanistan would almost certainly presage the end of the Karzai Government and increased violence at least during the short-term. But the retention of the Karzai Government surely cannot be the objective of our military intervention there nor does the fall of Karzai presage a Taliban victory. To the contrary, our withdrawal and the fall of Karzai’s Kabul Government would almost certainly increase the intensity of Afghani’s multi-directional competition for power. Nonetheless, our own entry into what is at root intra-Afghani violence has not resulted in reducing such violence either — nor is there any reasonable promise that it might do so.

Iraq 

1.                  Motivation

Elliott: It is pretty clear we did not go into Iraq for the stated reasons – to spread democracy in the Middle East or because Iraq had weapons of mass destruction that posed a threat to the US. I believe I stumbled upon the real reason in doing research on a recent article on energy: Iraq’s oil reserves are huge: second only to those of Saudi Arabia.

Jerry: If oil was the reason, then the Bush Administration’s miscalculation was even more egregious than even I had thought. As it turns out, the primary beneficiaries of Iraq’s increasingly restored oil capacity now appears to be the Chinese state-owned oil companies that are frequently displacing the American and British there. But whatever that case might be, I don’t think there was a single reason for going to war in Iraq. The 9/11 attack was the catalyst for a perfect storm. It fueled explosions of American patriotic machismo and intellectual hubris rooted in growing frustration with the ongoing air war in the skies over Iraq and an increasing number of attacks on American military and diplomatic targets in the Middle East and Africa since the end of the first Gulf War in February 1991. But that is neither here nor there now.  The more important issue is that we were this last week celebrating a supposed “victory” in Iraq defined by the removal of main-force combat units – an action that would not have occurred if we had not inserted those troops into Iraq in the first place. And that, in turn, is once again evidence that we had no clear understanding of America’s core and priority secondary national interests in the first place.

Even now, although asserting that “the Department of Defense balances resources and risk among four priority objectives,” those “priorities” are much too broad to provide useful guidance with respect to strategic security threats or prioritization of secondary interests. If you don’t believe me, read their formulation of the four priority objectives yourself: “prevail in today’s wars, prevent and deter conflict, prepare to defeat adversaries and succeed in a wide range of contingencies, and preserve and enhance the All-Volunteer Force.” 

2.                  Current Situation

Elliott: So far, 4,402 Americans have died. In 2010, monthlies are: 

• death rate 22;
• military expenditures $4.5 billion.

The US is in the process of an orderly withdrawal. When I was in Argentina last November, I regularly listened to once-a-week show on Al-Jazeera where the heads of the various Iraqi power groups were interviewed. In essence, they all said we will wait for the US to leave and then we will resolve things in our own way. At the insistence of the US, Iraq held an inconclusive election in March. And despite US pressure since then, a new government has yet to be formed. By removing Saddam, we destabilized the Middle East where historically, Iraq and Iran focused hostilities on one another. As the Iraq leaders said last November, shortly after the US exits Iraq, the power groups will resolve issues in their own way. The Shiites are the majority in Iraq, so it will come under the influence of Iran, and US access to its oil reserves will end. So what good is served by keeping US troops in Iraq? I don’t see it – retreating in an orderly fashion is the best option.

Jerry: What to say. I only wish that I could agree with the American soldier of the 42nd Stryker Brigade who, upon crossing the border from Iraq to Kuwait just this last Wednesday shouted “We’re out of Iraq. The War is Over. We Won.” Unfortunately, that conclusion is premature for many reasons, not least of which is that we still do not have an unambiguous formulation of our objectives in Iraq, how such objectives might fit into a broader American strategic framework, or even whether or not achieving any such objectives might be possible. Indeed, the most likely outcome for the indefinite future is that Iraq will continue to be governed by a weak authoritarian regime in Baghdad. And whether or not that regime turns out to be relatively benign or actively anti-American — or antagonistic to or allied with Iran — is anyone’s guess. But even in the most benign case, Iran’s position would be better than it was in March 2003 when we actually invaded Iraq (as you point out below).

What Should Be Done?

Elliott: Jerry, to this point, our focus has been on what should be done in Afghanistan and Iraq. In this final section, I would like you to consider these two wars in the context of our broader national security interests.

Jerry: You are correct in thinking we should look beyond Afghanistan and Iraq – both of which are symptoms of our Government’s broader strategic assumptions and objectives. From that broader perspective, it is useful to differentiate between threats that would deprive the United States of its independence as a sovereign-state and threats to achievement of desired, but secondary, interests. Thus, although threats to vital security interests require a state to — at least figuratively — “fight to the death,” threats to secondary interests are discretionary. That does not mean that secondary interests should not be defended – they too enhance America’s global political or economic position. But, determining that the defense of any specific secondary interest is achievable is not enough – calculating the relative cost-benefit of doing so is also necessary. Further, it is also essential to determine the credibility of the potential enemy. It is not enough for Osama bin Laden or others of his ilk to declare his intention to re-establish some mythical Caliphate from Spain to Indonesia unless they have a reasonable possibility of doing so. Thus, strategic threats must be thought of in terms of longer-term outcomes – not shorter-term tactical wins or losses.

But that sort of nuanced approach is not reflected in the Department of Defense’ most recent Quadrennial Defense Review (February  2010), which explicitly characterizes the United States as:

“a global power…deeply intertwined with the fate of the broader international system”…[that] therefore [must] be prepared to support broad national goals of promoting stability in key regions, providing assistance to nations in need, and promoting the common good.”

That view of the role and obligations of the United States, if taken at face value, portends a never-ending escalation in the number of military interventions. That, in turn, raises the question of whether or not Afghanistan and Iraq should be viewed in the conventional way as two distinct wars or, rather, as merely different battles within a single unconventional war of global scope against….. – well against whom exactly? The Review once again provides a clue:

“we must recognize that first and foremost, the United States is a nation at war. In Afghanistan, our forces fight alongside allies and partners in renewed efforts to disrupt, dismantle, and defeat Al Qaeda and the Taliban. In Iraq, U.S. military personnel advise, train, and support Iraqi forces as part of a responsible transition and drawdown. Above all, the United States and its allies and partners remain engaged in a broader war—a multifaceted political, military and moral struggle—against Al Qaeda and its allies around the world.”

Elliott: Al Qaeda is mentioned twice in the above statement. It is not clear to me how ground wars in the Middle East are an effective way to deal with this threat.

Jerry: You are missing the broader point. Getting out of Iraq and/or Afghanistan will not end the “militarization” of our Government’s capacity to pursue, capture, and punish terrorists, provide foreign aid nor, more broadly, respond to national emergencies ranging from hurricane damage relief and reconstruction to damage caused by oil spills. Nor is it likely to curtail the increasing tendency to base our military forces in substantially hostile overseas environments rather than in the more friendly political climes provided by Germany, Italy, Japan, or South Korea.

It is instructive to note that the 2005 Report of the Commission on Review of the Overseas Military Facility Structure of the United States sets forth the clear intention to expand America’s network of Cooperative Security Locations (CSLs), Forward Operating Sites (FOSs), Naval Support Facilities (NAVSUPPFAC), relatively small unconventional warfare bases, and other more conventional military facilities like airbases in locations closer to the world’s “arc of crises.” But basing our forces in ever more politically sensitive arenas is almost certainly viewed as provocative by both neighboring countries and locals who oppose those regimes that have agreed to accept American military contingents on their soil. Even the suggestion that the United States intends to substantially increase its presence in an area generates opposition that might not have arisen otherwise – as demonstrated by the failure to reach agreement with any Sub-Saharan Africa government (other than the mini-state of Djibouti) to locate the headquarters of a proposed American Regional Military Command within one or another of their borders. But that failure has been the exception rather than the rule. Indeed, it has recently been reported that America’s post 9/11 basing expansion into Bahrain, Djibouti, Kenya,  Kuwait, Kyrgyzstan, Qatar, United Arab Emirates, and Uzbekistan has been followed by recent anti-terrorist military and other clandestine attacks on targets in Somalia and Yemen.

An expanding number of interventions will almost certainly result in the generation of yet other new enemies and the increased probability that we will continue to be sucked-into other peoples’ conflicts. That is especially the case since, the rhetoric of international cooperation within the Quadrennial Review notwithstanding, our actions represent a dangerous unwillingness to accept the historical fact that our recent military superiority in a supposedly uni-polar inter-state system is the exception rather than the norm. Instead, the dominant view within the Department of Defense appears to be that, as “the only nation able to project and sustain large-scale operations over extended distances,” the United States must serve as “responsible stewards of the power and influence that history, determination, and circumstance have provided.” That core view is premised on the assumption that American dominance throughout the world is a good, necessary, and sustainable thing. But is that the correct view – or is it a distortion of our national priorities and an unnecessary drain on our human, material, and financial resources?

Beyond fundamental conceptual errors and the emotional desire for continued American military dominance, the all-encompassing and undifferentiated character of current military assumptions reflect plain old-fashioned intellectual laziness. Losing the ability to differentiate among policy objectives and the means employed to achieve them ignores Karl von Clausewitz’s (1780 – 1831) still valid aphorism that “Policy (politics) is the continuation of War by other means” as reinforced by another principle that “no one starts a war — or rather, no one in his senses ought to do so — without first being clear in his mind what he intends to achieve by that war and how he intends to conduct it.” Adhering to those principles require that objective(s) be clearly established, prioritized, understood in relative terms, and articulated.

 A look at the post-WWII history of United States military interventions strongly suggests that successive American governments have not established fundamental criteria for differentiating between vital core and priority secondary interests since the need for “Cold War Containment” policies began to decline during the 1980s. Although United States military forces were directly involved in combat during sixteen of the forty-two years from 1950 through 1991, they have been almost continuously engaged since the collapse of the Soviet Union. Relying on the continual deployment of our military forces in that way is clearly not sustainable for much longer. A more economical approach to defending our vital core and priority interests must be found.

Elliott: Jerry, thanks for your thoughts.

 I end with quotes from another person I respect – Robert Borosage

 The country finds itself constantly at war. New presidents inherit the wars of their predecessors. They are faced not with deciding to go to war, but whether to accept defeat in one already in progress….And slowly, the great power declines from the inside out. The wars are costly, running up national debts. Vital investments are put off. Schools decline. Sewers leak. For a long time, circuses distract from the spreading ruin….Other societies become productive centers, capturing the new industries. Some begin providing better education for their citizens, better support for their citizens. Their taxes, not drained by the cost of wars past and present, can be devoted to what we used to call “domestic improvements.” This is a very rich country, despite the years of conservative misrule. But even wealthy countries must choose. We can afford to police the world – to sustain 800 bases across the globe, to station troops in Korea, in Japan, in Bosnia, in Europe, fight wars in Iraq and Afghanistan, sustain fleets to police the seas….

South Waziristan, Yemen, Somalia, Kosovo, the Taiwan straits, the North Korean border, the seven seas – we can do this. But the result is that we are continually at war. And the wars cost – in money, in lives, in attention. And inevitably, domestic priorities, as well as emerging security threats that have no military answers, get ignored. A rich country, Adam Smith wrote, has a lot of ruin in it. We seem intent on testing the limits of that proposition.

As part of its public info/transparency policy, the Treasury Department invites financial bloggers for meetings with senior Treasury officials 4-6 times a year. A good idea. And as a blogger, I have considerable respect for the bloggers invited. Whatever their views, being invited means the Treasury believes they have a significant following and their opinions matter. One of the bloggers invited to a recent such meeting was John Lounsbury. And John just reported on it. Using John’s report as a backdrop, this piece will comment on some of the issues raised (or not raised) at that meeting.

Confrontational Questions

John reports: A number of guests raised confrontational topics….

It occurs to me there are some confrontational questions that can and should be raised while there are others that would sour the event. I will offer examples of each.

1. Appropriate Questions

I would put the following questions to Secretary Geithner about actions taken by the Federal Reserve Bank of New York (FRBNY) at the time he was President.

Secretary Geithner:

1. In the government’s first meeting with AIG to plan the bailout, do you think it was appropriate to have the CEO of Goldman at the meeting, the only outside party? Whose idea was that?
2. It was widely reported that AIG executives were willing to negotiate the firms they owed money to down to 60 cents on the dollar. Instead, the government insisted that AIG pay 100 cents on the dollar. That decision cost $37 billion. Whose decision was it, and what was the rationale?
3. The government then instructed AIG not to release the names of who got paid. The names finally came out when Jeffrey P. Riedler, Assistant Director of the SEC, send a letter to AIG requesting the details on who got paid. Who made the decision to withhold the names, and what was the rationale for it?

2. Inappropriate Questions

It would not have been appropriate to ask Geithner about the following report that appeared in the Washington Post at the time of his appointment:

Over several years, Treasury secretary nominee Timothy F. Geithner failed to pay Social Security taxes, even though he was advised by his employer to do so, signed an agreement indicating that he understood that such payments were his responsibility and received extra pay from his employer specifically for that purpose.

Mr. Geithner “came clean” only when he was caught, first by an IRS audit that found he owed Social Security taxes for 2003 and 2004 and then when additional tax liabilities for 2001 and 2002 were discovered after his nomination. He has been praised for repaying these additional taxes for the earlier years, which apparently may not have been required under a statute of limitations, but this raises another question: Why didn’t he voluntarily correct his 2001 and 2002 taxes once he found out that he had made the same error in 2003 and 2004?”

This is a clean cut issue: Geithner cheated on his taxes, like former VP Agnew. What point would there be in bringing it up again?

Financial Reform

Lounsbury reports that Treasury was very enthusiastic about the new Dodd-Frank Financial Reform Bill recently passed into law. Why? Depository institutions are still allowed to trade, and it was their trading that caused the bank collapse in the first place. And here is the killer: the bill calls for federal financial regulators to study the measure, and then issue rules implementing it based on the results of that study. The financial lobbyists will be all over the financial regulators. Binyamin Appelbaum wrote a great article in the New York Times on what will happen next. I quote from his article:

…Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion….

Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group’s president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group’s budget and staff. “Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,” said Mr. Hunt….

One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too.

A question for Geithner: What happened to the Volcker Rule to ban trading in depository institutions? I can hear Geithner’s response now: “well, while trading was not banned completely, with our new regs in place….”

Too Big To Fail

Lounsbury was not satisfied with the discussion on this topic:

The sense I took away from this part of the discussion was that much depends on (potentially hundreds of) studies authorized by FinReg. The Treasury is charged with forming an Office of Financial Research to conduct research to guide future regulation implementation. This really translates to me that we are still in the process of conducting a Grand Experiment.

The Appelbaum points made above are relevant here as well. The lobbyists will be ready.

My view of too big to fail? A red herring issue. In the financial world, all we should care about is keeping our depository institutions safe. If we did that by not allowing them to trade and insisting that they manage their own loans, they would be safe. The only reason we had to bail out AIG was that our depository institutions would have collapsed if AIG went under. With Volcker’s rule in place, depository institutions would be safe. Let other financial institutions go under. Who cares? Caveat Emptor.

Conclusion

Despite the above commentary, I think it is great that the Treasury is meeting with bloggers. And I tip my cap to the bloggers who get invitations to the meetings.

The Asset Allocation Approach – we have all heard about how it is the most rational way to invest. But is it? And why do investment managers like it so much? This article reviews the arguments for the approach and why it is a favorite of wealth managers.

The Theory

Today’s dominant investment theory is derived from the writings of the mathematicians and philosophers of the 16^th Century[1]. Paul Samuelson[2] is credited with developing the mathematical theorem that “properly anticipated futures prices fluctuate randomly”. And Burton Malkiel has presented all of this work in a book with direct application to personal investing.[3]

And what does it all mean for the investor? It means that the best assumption to start with is that all available information on companies is reflected in their stock prices. Consequently, the price of every stock is just as likely to go up or down. When you invest, you are making a random bet. When new information comes out, prices will adjust immediately to reflect the implications of this information.

This means the investor has 50-50 chance of picking which way a stock will move – not a good bet because you don’t want a 50% chance that you will lose money on your investment. The sensible conclusion: Don’t bet all your money on one horse: diversify; the more you diversify, the more your chances of losing (or making) money on your investment will fall. And you can diversify by purchasing more stocks, or a mutual fund or an ETF.

There is an important corollary to this: stock recommendations are close to worthless for the retail investor: if new information is almost instantly reflected in stock prices, what makes you think you are going to get that information in time to “cash in”? For more on what the retail investor is up against, see my recent article.

The logic for using an asset allocation strategy is very powerful.

The Sector Scam

The people who want to charge you a fee to have them manage your money have taken the meaning of diversification further. They have developed categories for stocks/bonds. They say proper diversification requires that you have holdings in various sectors/categories. To give a sense of how far the sector/category business has developed, the following are most of the categories used by Morningstar to describe the approximately 25,000 mutual funds in their database:

 Bank Loan, Bear-Market, Conservative Allocation, Convertibles, Diversified Emerging Mkts, Diversified Emerging Mkts, Diversified Pacific/Asia, Emerging Markets Bond, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Growth, Foreign Small/Mid Value, High Yield Bond, High Yield Muni, Inflation-Protected Bond, Intermediate Government, Intermediate Government, Intermediate-Term Bond, Japan Stock, Large Blend, Large Growth, Large Value, Latin America Stock, Long Government, Long-Short, Long-Term Bond, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Moderate Allocation, Money Market – Muni, Money Market – Taxable, Multisector Bond, Muni Single State Interm, Muni Single State Long, Muni Single State Short, Pacific/Asia ex-Japan Stk, Short Government, Short-Term Bond, Small Blend, Small Growth, Small Growth, Small Value, Communications, Financial, Health, Natural Resource, Precious Metals, Real Estate, Technology, Utilities, Ultrashort Bond, World Allocation, World Bond, World Stock.

Indicies and ETFs have been developed for most of these.

Callan Associates, an institutional money consultant, has chosen 8 sector indices. To show how these sectors have performed over the last 20 years, Callan has developed a chart with different colors for different indices. A great marketing vehicle: different colors are at the top in different years – the message – diversify – use our asset allocation method, and pay us for it!

 Assessment

 Boeckh just did a nice, representative piece on asset allocation. The article focused on correlations between different sectors. Their message? Good asset allocation means holding sectors that are not highly correlated with one another. No discussion of specific investment vehicles.

Consider how convenient it is for investment advisors to focus on these sectors/categories. This focus diverts the client’s attention from the important questions:

•  How has the portfolio performed?
• What stocks, funds, ETFs have actually been picked?
• How have these picks performed relative to other possibilities in the same categories?

 A Case In Point

 I recently received “Investment Reviews” from a major bank where I am a trustee on a Trust. The reviews were nicely presented in high-resolution color. The titles for the first four pages were: 

• p. 1 – “Strategic Asset Allocation Models” 
• p. 2 – “Hypothetical Model Portfolio Risk/Return”
• p. 3 – “Strategic Asset Allocation Philosophy”
• p. 4 – “Current Asset Allocation”.

There was nothing in these four pages on performance – nothing!

Only one page of these documents provided detail on performance, and that detail only broke down performance into three categories: “Equity”, “Fixed Income”, and “Cash”. But nowhere in the document was there any information on how each investment pick (stock or mutual fund) had done! Why? Because the Trust manager did not want me to focus on actual investment picks and how each pick actually performed.

The last few pages of “Investment Reviews” gave data on the individual investments, e.g., number of shares, market value, but without performance information on the individual investment.

It turns out that a significant portion of the Trusts were invested in the Bank’s mutual funds. I asked for and received performance data for these funds. I then compared their performance with mutual funds that fall into the same Morningstar categories.

 The essence of my review is contained in the following table. Each of the funds picked by the bank fits nicely into Morningstar categories. Columns 2 provides the annualized 3-year return on each fund. Column 3 provides the three year return ranking of each fund in the Morningstar category. For example, in the Morningstar category of large cap growth, the Large Cap Growth fund of the Bank ranked 500. This means there were 499 funds in the Morningstar category that had better three-year performance than the Bank’s fund. Column 4 provides the best three year return for a fund followed by Mornigstar in the category. For example, while the bank’s large cap growth fund has an annualized three year return of 10.44%, the Morningstar fund with the best return for that category was 24.59%. Column 5 provides the differential between the best return and the return on the Bank’s fund.   

Source: Data provided by the bank and the Morningstar Principia data base.

 This table demonstrates the sub-par performance of the Bank’s funds. The important message? Specific investment choices matter!  Remember that the people who invest your money want to keep you as far away as they can from how your portfolio is performing. And most definitely, they don’t want you to know how well each investment pick is doing relative to other possible investment picks in the same category. Every wealth/pension manager has favorites in the investment management industry s/he wants to give your money to. In the case of the bank example above, the bank wanted to keep the money in-house by putting it in their crummy mutual funds.

 In these circumstances, what to do? 

• Asset allocation logic is quite powerful.
• Picking individual stocks should be viewed as gambling, a form of entertainment.
• Find an investment advisor that has an audited 3-year performance record s/he is willing to share with you (hard to find).
• Once you have decided on an asset allocation strategy, make sure to pick relatively high performing vehicles in each sector.   

[2] Paul Samuelson, “Proof that Properly Discounted Present Values of Assets Vibrate Randomly”, Bell Journal of Economics, 1973, 369-374.

[3] Burton G. Malkiel, A Random Walk Down Wall Street: Including a Life-Cycle Guide to Personal Investing, (New York: W.W. Norton 1973).

 On February 9 of this year, I posted an article calling for investors to put their money in African, Asian (excl. Japan) and Latin American equities. My reasons included: 

• the high growth rates and low debt of these “new world” countries should cause their markets to perform better than those of the “old world” (the US, Europe, and Japan) mired in recession and debt;
• their economies should also outperform the old world because of their growing middle classes, a real engine for growth;
• sooner or later, the US dollar should weaken, so get out of dollars by investing elsewhere.

Some argue that because there is such a high correlation between all markets, it does not matter where you invest. There is some merit to this argument. As I pointed out in a recent article, the stock markets of many emerging nations are quite thin, and Westerners move in and out with great frequency. Also, whenever there is a global panic (there have been many recently), the world sells stocks and buys US dollars. And when this happens, new world stock markets generally fall more than old world markets.  

Table 1 provides the results since my February article. I use a combination of indices, mutual funds and ETFs in this table. It does appear that at least for this period, new world markets are outperforming old world markets. I also include trailing P/E ratios, and the new world P/Es are not outrageously high. Maybe stock market investors are starting to think globally.

 Table 1. – Stock Market Performance

Sources: Yahoo Finance, the Bespoke Investment Group

 On the question of volatility, I calculated the betas for the New World investments in Table 1 – percent change in item divided by the percent change in the S&P 500 for all trading days going back to January 1, 2007. No question – with the exception of India and China, far more volatility in the new world markets.

 Table 2. – Betas

Source: Yahoo Finance