It has been a tough five years for the “expert” class. The anti-expert narrative got a huge boost with the Covid pandemic – total shutdowns were a disaster, and it was especially hard on school-aged children. The vaccine did not live up to the hype. Most embarrassingly, debate on what would be the best path was silenced and any view that did not align with the approved narrative was labeled as “misinformation.” That was a huge mistake, and the ramifications are being felt today.

We now have a significant group who are convinced that the experts are always wrong. This is human nature, that we always seem to overcorrect from the most recent problem. It brings to mind one of my favorite quotes from Benjamin Graham, “The stock investor is neither right or wrong because others agreed or disagreed with him; he is right [or wrong] because his facts and analysis are right [or wrong].”

One night I was sitting at a bar in Midway airport having a drink with a friend and colleague who works for a large 401(k) provider (I note this to emphasize that he was not a naive person with limited financial understanding). Somehow the subject of Roth retirement plans came up, and he was thinking about converting some or all of his 401(k) into a Roth. His neighbor had just been to a multiple-day presentation put on by a self-described “expert” who had a detailed presentation on why conversion to Roth was the right path. (I’ll get back to our “expert” in a moment.)

I blurted out, “Are you crazy?” (In my defense this was a colleague…I am much nicer to clients than I am to colleagues.) He was startled because he had not heard anyone push back so forcefully on the folly that is the Roth. Roths are popular and the world is full of “experts” who will tell you how wonderful they are, but they are not right or wrong because they are popular; they are right or wrong because their analysis is right or wrong. In this case, it is wrong.

Quick reminder: traditional retirement plans give the investor a tax deduction on her contribution, the money grows tax-deferred, and then she will pay taxes when she takes the money out in retirement. With a Roth, she pays taxes today and is promised tax-free income in retirement.

What is their analysis? A quick Google AI search will give you the highlights. The number-one argument for Roth is that the investor expects higher tax rates in retirement. If one believes that they will pay a higher rate in retirement, then he would be better off paying the lower rate today, or so the argument goes. The problem with this argument is that it defies reality. According to the Center for Retirement Research, four out of five retirees pay little to no income tax. So, for the vast majority of the population, if one chooses to contribute to a Roth instead of the traditional plan, then he is giving up a tax deduction now to save on a small to nonexistent potential future tax bill. If he converts, then he is giving himself a large tax increase today to avoid a small or nonexistent bill in the future.

Back to my colleague’s neighbor’s multi-day seminar on the virtue of Roth. The “expert” started his Roth presentation as most Roth devotees do, with the sad analysis of our country’s fiscal situation. The runaway government debt, he argued, meant that taxes are all going up in the future. Ultimately everyone who believes in Roth gets to this point: “Taxes are going to be higher in the future.” Really? Who are these politicians who are going to raise taxes across the board, especially on retirees?

Most politicians want to avoid raising taxes on anyone, but those who are not afraid of the T word always want to tax only one group of people. You know who I’m talking about – “the rich.” Who are these rich? In the Secure Act 2.0 of 2022, they would be any employee making $150,000 or more (it was originally $145,000, but they adjusted for inflation). Anyone in that group who makes a “catch-up” contribution to their retirement plan must put that contribution into a Roth. This was explicitly used to pay for other benefits in the act. In other words, that is how politicians raise taxes – force retirement savers into Roth.

This gets to the other unspoken issue with Roth: The investor is trading a known tax deduction for a promise. If the tax situation is as bad as my colleague’s neighbor’s expert claims, then what is more likely: an across-the-board tax increase on all, or the removal of the tax-free status on those rich folks who have Roths? In the 1980s when Social Security had to be saved, they did so primarily by taxing the benefit which had been previously promised to be tax-free. Keep I mind that the overwhelming majority of retirees are in a lower tax bracket in retirement, so the increase would have to be large enough for that lower bracket’s rate to be higher than the higher bracket’s rate while working. Never say never, but the odds of that occurring are incredibly remote.

Finally, the question everyone asks is whether a Roth is better than a traditional retirement plan, but a more interesting question is whether a Roth is better than a regular brokerage account. This is a hard question to answer because it will depend heavily on how the account is invested. If it were invested in our core equity strategy over the last five years, the experience would be as follows: In 2020 the gain was 23.39%, but only 3.6% was realized; 2021 gained 15.09% with a realized gain of 9.7%; In 2022, we had a loss and took a tax deduction; 2023 saw a gain of 12.8% and a realized gain of 1.8%; 2024, a gain of 31.52% and a realized gain of 4.4%. Realized gains were all taxed at long-term capital gains rates, not income tax rates.

This is just an example for educational purposes. The point of this real-world example is that in a prudently managed brokerage account, the taxable consequences are not great and therefore the benefit of the Roth is not great. It is more than nothing, but does it outweigh the strings that are attached, like five-year lockup and other retirement plan rules?

That answer is not as clear as Roth vs. a traditional retirement plan, but there are many who might argue the added flexibility of the brokerage account outweighs what small tax benefits one would get in a Roth. With the Secure Act 2.0 Roth provision taking effect in 2026, many plans that did not previously offer Roth will be forced to do so. Does that mean you should switch? Being popular doesn’t make it right. The facts and analysis say you shouldn’t, regardless of what “experts” might say. At least that is my perspective.  

Warm regards,

Chuck Osborne, CFA

~Roth – Are the Experts Wrong?

It was a mid-December afternoon when the phone rang as we were wrapping up the year, signing Christmas cards, and planning the firm’s Christmas party. On the other side of the line was a voice telling me that he was with the Securities and Exchange Commission (SEC), and he and his staff would be paying us a visit that next week. 

It is part of the job. We are regulated by the SEC, and they will periodically come to inspect our operation. I was not worried, but I was a little miffed, since an SEC exam does not exactly get one into the holiday spirit. From the SEC staff’s perspective, this was great – they were from the Atlanta office literally one block away from us. They could get in one more exam and still be home in time for Santa. 

The exam went smoothly and was done in time for our firm party. During the standard wrap-up briefing they went over all their findings, and I will never forget the interaction about our website. They found no issues with it but reminded us that we are not allowed to make exaggerated claims. I jokingly said, “So I can’t claim to be the greatest investor who ever lived?” The agent laughed and said that’s right, “besides, I have already met him.” I thought he was joking, but he wasn’t – they had actually found an adviser who claimed on his website to be the best investor ever. 

Years earlier, the head of sales for Invesco’s retirement division liked to say that he was often wrong but never in doubt. I would always respond that the investment team was seldom wrong but always in doubt. Overconfidence is a death knell to investors. It is one of the first life lessons anyone in this business learns. I didn’t need to meet “Mr. Greatest Investor Ever” to know that eventually his clients would regret they ever did. 

Of course, overconfidence was not this gentleman’s only sin. Hyperbole: “Exaggerated statements or claims not meant to be taken literally,” according to the Oxford dictionary. Today we swim in an online ocean of hyperbole: People begging for attention, posting about their lives, and then anxiously waiting to see how many likes they get. Experience in the real world will teach you that humility is the better path, but humility doesn’t excite the algorithm. Hyperbole, on the other hand – that gets people’s attention. 

As an investor, one needs to learn to sniff out hyperbole. Management is always putting the best foot forward, and a good analyst needs to be able to read through that when listening to earnings calls. However, hyperbole has become so prevalent today that many forget about not taking it literally; some people are not capable of discerning the difference between hyperbole and fact. 

The only thing more common online than hyperbole is the ever-present “straw man.” When I was a young analyst, many investment teams would assign two analysts to work up a specific company. One analyst would build the case for investing while the other would build the case for selling. They would debate each other in the investment committee meeting, and the arguments had to be sound and strong. Sadly, this is not what happens in our divided world today. Today, the algorithm will find someone – anyone – making the claim it thinks you want to hear. That person will then tell you what the other side’s argument is, except what he really tells you is what is known as a straw man. 

The best example I remember of the straw man was during the 2010 great debate over the Affordable Care Act (ACA). There were lots of good arguments against the ACA – cost, complexity, unintended consequences. However, ACA’s proponents did an amazing job of creating a straw man to beat them all: if one were against the ACA, it meant she didn’t want people to have health care. In my memory, this was the first time that people really started to believe that the “straw man” they had created was actually the real argument of the other side. This was the beginning of the other guys not just being wrong, but being evil; who could possibly want people to be denied health care? Any rational person would know that no such person exists, but not everyone who reads posts online is rational. 

This brings us to the tragedy of Charlie Kirk. Last Sunday he was the subject of our adult Sunday School class. He wasn’t meant to be, but how could he not? We noticed something frightening about our world: the more liberal members of our group found nothing in their social media feeds but references to Kirk being evil and hateful, while the more conservative members of our group found nothing but references to him being the greatest citizen this country has ever seen. The algorithm constantly feeds what we want to hear.

What are good people to do about this? The biggest obstacles to investing success are the psychological traps: We overestimate risk; we believe that whatever is happening at the moment will keep happening; we are too quick to sell winners to lock in gains, and too slow to sell losers because we want to get back to even and not take a loss. I could go on and on. The most important thing for the professional investor to remember is that he is just as human as his clients and has all the same flaws. We can’t magically make them go away, but we can be aware of them and guard against them. 

“Let your yes be yes and your no, no. For whatever is more than these comes from the evil one.” Matthew 5:37. We need to recognize that most of what we hear and read online is hyperbole, and while we can’t stop it, we can be aware of it and refuse to participate. We can also learn to recognize straw men, and again, stop participating. You and I might recognize that these are exaggerations not meant to be taken literally, but not everyone is as mentally well. 

I have been writing about economic issues for a long time. I always kid that I must be doing a good job, because I get yelled at by both sides. The truth is that I mostly get positive feedback, and I get it from both sides. When we actually talk about policy and the real-world impacts, we discover that the online myth of a divided country is hyperbole. If we can just stop the hyperbole and burn down all the straw men, then we will find a much better world – a world in which we can once again debate solutions to our problems with substance. At the end of the day this is what Charlie Kirk tried to do, and the world would be a better place if we followed his example. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA 

~Lessons From a Career Investing Other People’s Money

The more things change, the more they stay the same. I was recently approached by a marketing firm who promised to increase activity on our website. I usually ignore such calls, but for some reason I agreed to hear them out. 

They suggested that if we wanted to increase traffic to our website, then we needed to produce more articles than we are currently publishing. They had an AI tool that would write articles for us so we could spend our time “wining and dining” with prospective clients. Obviously the gentleman I was speaking with believed in stereotypes and spent no time actually getting to know us, but that didn’t really matter. 

At that point I knew the conversation didn’t need to go any further. If he actually spent five minutes on our website, he would have known have no intention of ever using AI to create content for our clients. We often hear that our clients appreciate our Insights and Perspectives. They like that we are willing to tell them exactly what we think on a subject, even if they disagree. They especially like that we communicate like humans, with stories and anecdotes that teach lessons. According to Google research, the two most popular searches that lead some to our website are, “Did Henry Ford invent the automobile?” and, “How many Tootsie Rolls are too many?” Any functioning AI could have answered those questions, but could it have understood that Henry Ford’s story demonstrates the function of capitalism that leads to innovation and not invention? I don’t even need to ask if AI would teach the economic law of diminishing marginal utility by revealing a traumatic childhood memory that has led to me not being able to even think about Tootsie Rolls without gagging since I was 10 years old. 

However, I was curious. What would the AI bring back? We chose a subject from a list – Trump’s tax cuts – and the marketing firm gentleman clicked a button. A few minutes later he emailed me a complete article ready to send out to you, our clients and friends. It was complete garbage. To the extent it proved any insight at all, it ranged from translating plain English to plain English (“A tax cut is when the government cuts taxes.”) to politicized nonsense (which doesn’t even deserve repeating). Evidently this particular AI was “trained” on social media posts of the extreme left. It could have been just as bad if it had been the opposite, but in this specific case the AI in question was under the influence of communist propaganda.  I want to be clear: these were not the arguments of left-leaning economists; that might have created a one-sided piece, but at least it would have had substance. No, this was the stuff one sees in the comments section, if he is dumb enough to look. 

At first I thought this was just incompetence, but then I realized it was indeed what the AI was trying to do. The marketing firm promised more clicks on our site. Substance doesn’t lead to clicks; radical statements lead to clicks. This AI wasn’t trying to actually educate someone on tax policy, it was trying to write an article that would generate clicks. If that is the goal, then the crazier the better. 

Heidi Mitchell of The Wall Street Journal wrote an interesting article on June 25, “That Chatbot May Just Be Telling You What You Want to Hear.”  It turns out that AI is like all technology that came before in the sense of garbage in, garbage out. To the extent that it is more human than technology of the past, it might be so in the not-so-good way of it being human nature to not tell the boss anything the boss doesn’t want to hear. 

Will AI take all of our jobs? I think not. It will be a great tool, like the technology that came before, but the need for human judgement is still there. Meanwhile, rest assured that no content from us will be AI-generated, and we won’t be publishing for clicks. We need more substance in our world, and that still comes from the human experience. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA

~Artificial Stupidity?

“I promised I’d never let anything happen to him.” ~ Marlin
“That’s a funny thing to promise…Not much fun for little Harpo.” ~ Dory

Beware of politicians offering protection. An interesting statistic came across my desk earlier this week: Empower, a large retirement plan recordkeeper, is attempting to add private equity options to 401(k)-type retirement plans. An executive from the company claimed that 87 percent of U.S. companies with revenues above $100 million annually are now privately owned. That is an astounding statistic.

That was the first time I have ever heard it put that way, but it makes sense. In the year 2000 there were approximately 2,000 companies owned by private equity; today there are more than 11,500. During this same period, the number of companies publicly owned and listed on a major stock exchange has gone from roughly 7,000 to 4,500. This century has seen an explosion in private investing and simultaneously a decline in publicly traded companies. Why?

In the 20^th century, going public was the goal of almost every fast-growing corporation. This is how entrepreneurs finally realized the fruit of their labor: They started the company with their own blood, sweat, and tears. If they were initially successful, they could find private investors who would provide the capital to take the company to the next level. Then, if the success continued they would go public, listing on a stock exchange and selling the stock of the company to anyone and everyone who wished to invest.

The company would then enter the realm of the small company stock. If the success continued, it would grow into a mid-cap stock and finally a large-cap stock. This led to the phenomenon of small-cap stocks outperforming large-cap stocks over long periods of time. Any investor who could participate in a company 401(k) or simply save some money to put into a mutual fund had the opportunity to invest in these companies.

That all changed in July of 2002, when George W. Bush signed the Sarbanes-Oxley Act into law. Enacted in response to the corporate scandals involving Enron and WorldCom, it was the largest single increase in corporate regulation since the Great Depression. Its goal was to protect investors; after all, we can’t let anything happen to them.

For our younger readers, Enron and WorldCom were both guilty of fraud. They basically lied in their financial statements. Investors in the companies lost most if not all of their money. The key executives went to jail and their auditor, Arthur Andersen, went from being one of the largest accounting firms in the world to ceasing to exist.

Sarbanes-Oxley is, in my opinion, the worst piece of legislation in U.S. history. It made the accounting requirements for being publicly traded so onerous that today we have fewer public companies since its inception after 23 years of economic growth. Investors were “protected” from countless opportunities as companies now stay private much longer than they did historically.  Instead of average 401(k) investors getting the opportunity to invest in companies at an early stage in their growth, that honor is reserved for institutional and accredited investors. In other words, the rich get richer. No regulation has contributed to inequality quite as effectively as Sarbanes-Oxley.

Was it necessary? Well, the villains went to jail because what they did was against laws that already existed. Bethany McLean, the reporter who broke the scandal, had little to no financial expertise; she leaned on her BA degree in English to see accounting irregularities that Arthur Andersen chose to ignore. Yet, Congress and the W. Bush administration determined that accounting fraud needed to be more illegal than it already was, and accounting rules needed to be far stricter so the accounting majors who went to work at large accounting firms could analyze financial reports as easily as an English major who wrote for a major magazine.

Milton Friedman noted in his 1962 masterpiece, “Capitalism and Freedom,” that there is a direct link between inequality in a society and the amount of regulation. There is no greater example of this than Sarbanes-Oxley. Thousands of companies that would be available for investment for anyone are kept in the private market in the name of protecting investors. Dory, the reef fish with a memory disorder in Disney’s classic “Finding Nemo,” knew better: “Well, you can’t never let anything happen to him. Then nothing would ever happen to him. Not much fun for little Harpo.”

Hopefully this administration is serious about regulatory reform. We don’t need private equity in 401(k)s, we need those companies to go public so all investors have access. We would be better off if we had a little less Marlin and a little more Dory. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA

~Dory Was Right

Elon Musk is wrong: Peter Navarro is not a moron. Navarro is one of President Trump’s economic advisers and the one most closely associated with tariffs. Navarro, who has a Ph. D. in Economics from Harvard, holds extremely strong beliefs in the positive power of tariffs. So, what are the arguments in favor of tariffs? Let’s break them down.

If tariffs are so bad, why do all these other countries have them?
This is a popular argument, especially from Scott Bessent, the current Treasury secretary. This has certainly stumped more than one interviewer, but the answer is simple: Other countries have tariffs because their politicians are corrupt. Rent-seeking is the economic term. Hyman Roth said it best in “The Godfather 2” when explaining why he wanted all his fellow mobsters to invest in Cuba. “We have now what we have always needed, real partnership with the government.” Let’s not be pollyannish, this type of rent-seeking happens in the U.S. all the time, but it is still frowned upon here where there is greater belief in free markets. In other countries, this is just an accepted part of society. Russia may be extreme, but no one is surprised in Russia when the number-one attribute of business leaders is their close personal relationship with Vladimir Putin.

Tariffs protect special interests, and that is why other countries do it. It is also why you will hear entrepreneurs in the U.S. cheer the tariff strategy; what is bad for the consumer is good for the businessperson seeking “real partnership with government.”

We must protect certain industries for national security reasons.
There may be some truth to this argument, but the devil is always in the details. Do we need to be protected against China or Russia? Arguably that may be true. What about Canada?

Completely ignored in this argument is one of the primary justifications for cooperative trade between countries: Trade produces peace. Put another way, one does not bite the hand that feeds him. Since Adam Smith first discussed the concept of comparative advantage, the promotion of trade has brought both economic growth and peace.

The Smoot-Hawley tariffs, which triggered a global trade war and were a primary factor in the Great Depression, led to a rise in nationalism and ultimately to War World II. It is not a coincidence that after War World II, the United States led the world in a move to freer trade. We had learned our lesson.

It is also no coincidence that the post-Cold War move closer toward free trade led to the longest period of global peace in modern history. Nothing supports national security as much as a world dependent on the American consumer.

We need to bring back the good blue-collar jobs that have been lost by deindustrialization.
No one could possibly argue against this one, if only it were factual. Here are the facts:

Manufacturing output as a percent of real GDP has varied only 2 percent (13% – 11%) since 1947, according to the St. Louis Fed.

According to data from the U.S. Bureau of Labor Statistics (BLS), manufacturing employment peaked in 1979. Since then we have lost 6.7 million manufacturing jobs, yet we have gained 9.4 million jobs in trade, transportation, and utilities. I am not sure why the BLS lumps utility workers with trade and transport, but the point remains that for every good-paying, blue-collar manufacturing job that has been lost since 1979, 1.4 good-paying blue-collar jobs have been created in trade, transportation, and utilities; and no-one talks about it. They don’t talk about it because we have also added 13.9 million jobs in professional and business services, and another 17.3 million jobs in education and health services. So, we have the narrative that we have gone from manufacturing to services, and those jobs may not be a great fit for the same worker. While that overall narrative is roughly accurate, it ignores the actual growth in good blue-collar jobs.

Finally, there are more automotive manufacturing jobs in America today than there were in 1993 when Bill Clinton signed NAFTA. In the BLS data as of June 2024 there were 308,000 automotive jobs in America, up from roughly 270,000 in 1993 and the previous peak of 298,000 in the late 1990s. Does that surprise you?

Tariffs do not cause harm; we had them in the late 19^th century and did great.
I find it difficult to believe that anyone makes this argument with a straight face. In the late 1800s, we were just exiting the age of sail and the steam engine was the cutting edge of technology. Comparing trade in this era to trade today is like comparing the Pony Express to the Internet.

Still, this is one of Navarro’s main arguments, so let’s take it seriously. The economy is more powerful than any government policy. At that time in history in the U.S., we had reconstruction in the South, the great Western expansion, and the industrial revolution in the North and Midwest. The labor needed for all of that was supplied by a surge in immigration from Europe. There is hardly any economic policy that could have been implemented that would have stopped growth in the face of those combined organic forces. Besides, while tariffs were much higher then, they were dropping, not rising.

Additionally, this was the era of the “robber baron,” which brings us back to the first argument. Tariffs are a rent-seeker’s dream. If a businessperson can get the government to limit competition, then he can create great wealth, but that wealth primarily goes to the top.

When you break it down, the arguments for tariffs are a house of cards. So why do I believe that Elon Musk is wrong about Navarro being a moron? It actually takes a very strong intellect to convince oneself of something that is so obviously wrong. To do that with tariffs Navarro must be a genius. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA

~The Case for Tariffs: Solid Arguments or a House of Cards?