Investing Simplicity Is the Wave of the Future

Investing Simplicity Is the Wave of the Future

I suspect that the concept of simplicity will become increasingly popular in the coming years.  This may take many forms, including simplicity in eating, working and living.  But one of the most important aspects of this trend will be investing simplicity.

As it stands now, most of the world’s investment vehicles are ridiculously byzantine.  Against a more benign economic backdrop, this financial complexity might not be a big drawback.  Unfortunately, we live in an era rife with excess, corruption and incompetence.  All of this means that investing complexity, a trend that has grown exponentially over the last four decades, is rapidly becoming a global headwind.  Your financial future will be much, much more secure if you get a head start on the trend toward investing simplicity.

Most of today’s popular financial vehicles, including mutual funds, ETFs and pensions, are not actually assets themselves.  Instead, they are best described as empty shells that are filled with assets – usually stocks, bonds or real estate.  Notice that most retail investors (that’s you and me) don’t own any assets directly, only these shell vehicles filled with assets.  This layout exposes average investors to a host of risks that are omnipresent, yet poorly recognized at the present.

Pensions, for example, are at the mercy of a board of trustees.  These board members may or may not know anything about investing.  They may also be motivated to approve or deny pension investments based on peer pressure, political leanings or even outright bribery.  This can cause pension funds to be stuffed with complex derivatives or illiquid, poorly vetted venture capital positions.

These situations can easily lead to rapid investment losses that can quickly drive a pension fund into insolvency.  Indeed, pension funds are so underfunded at the present that they are experiencing an existential crisis.  The Pension Benefit Guarantee Corporation, a Federal agency that insures corporate pensions, may go bankrupt within the next decade due to the number of insolvent corporate pensions it must bail out.

Unfortunately for pension holders, a pension’s board members all get to drive home in their German luxury cars to their gated communities regardless of how poor their decisions may have been.  Meanwhile, average people like you and me are left to pick up the pieces of our shattered retirement dreams.

“Actively managed” mutual funds are another financial vehicle in dire need of investing simplicity.  “Actively managed” simply means that a professional money manager makes the decisions about what individual securities will be held in a mutual fund.  It could range from shares of Proctor and Gamble to mortgage bonds to anything in between.

Now, you might be wondering what the problem is.  After all, the money managers making these decisions are “professionals”, right?  Unfortunately, most money managers are subject to a psychological force known as “performance anxiety”.  This is a fancy way of saying that they are under a lot of pressure to match the returns of their performance benchmark.  This is important because a money manager who underperforms his benchmark for a year or two is at great risk of being fired.

The major effect of performance anxiety on money managers is to force them to buy assets that are similar to those contained in their benchmark index.  This phenomenon is known as “closet indexing” and it is a bad thing.

Why?  Well, closet indexing is terrible because you are theoretically paying for the seasoned opinion of an experienced financial professional.  But what you are actually getting is the opinion of an index.  Even if your money manager thinks investing like the index is a bad idea, he really can’t deviate from it very far if he wants to keep his job.  And your money manager really, really wants to keep his job.

Of course, when the benchmark index inevitably plummets later in the economic cycle, your mutual fund will also plummet.  However, as the famous British economist John Maynard Keynes once wrote, “…it is better for reputation to fail conventionally than to succeed unconventionally.”  And your mutual fund’s money manager wholeheartedly agrees.

But perhaps the biggest reason to pursue investing simplicity is because all of these complex investment vehicles cost money.  Mutual funds, ETFs, 401-Ks and pensions all charge fees.  Worse than that, sometimes these investment shell vehicles hold other shell vehicles within them.  For instance, an actively managed mutual fund might hold some ETFs or a pension might hold a hedge fund.  In these cases, you will be charged double fees, usually without even knowing it!

I think the argument for investing simplicity is self-evident.  Complex corporate or investment structures are never created for the benefit of average investors.  Instead, they are always intended to either obfuscate risk or suck extra fees out of the unsuspecting.

This is one of the reasons I like precious metals, gemstones and fine art and antiques as investment vehicles.  They are items you take direct physical possession of.  And they are tangible, meaning they can’t be squandered by an inept board of directors or plundered by a self-interested money manager or lost in a market crash.  Art and antiques are the very embodiment of investing simplicity.  And that is something we desperately need more of today.

French Mother of Pearl and 18K Gold Antique Cigar Holder

French Mother of Pearl and 18K Gold Antique Cigar Holder
Photo Credit: Antiques-Uncommon-Treasure

French Mother of Pearl and 18K Gold Antique Cigar Holder

Buy It Now Price: $206.25 (price as of 2017; item no longer available)

Pros:

-This stunning French antique cigar or cheroot holder from the Victorian era is made from opulent mother of pearl and rich 18 karat gold.  A cheroot is a type of cigar that is untapered and cut at both ends.

-This antique cigar holder measures 2.38 inches (60 mm) long by 0.5 inches (13 mm) in diameter.  This is a typical size for cigar holders from this era.

-Cigar or cheroot holders were extremely popular among refined gentlemen smokers in the late 19th and early 20th century.  It is easy to imagine this antique cigar holder gracing the lips of a cosmopolitan British, French or German man in a bar, coffeehouse or salon in turn-of-the-century London, Paris or Berlin.

-In this period, before the widespread adoption of synthetic plastics, many high-end antique cigar holders were made from luxury organic materials such as amber, mother of pearl or tortoiseshell and then accented with solid gold or silver trim.

-Considering it is between 100 and 140 years old, this antique cigar holder is in superb condition.

-This French antique cigar holder is absolutely imbued with Continental European Fin de siècle spirit.  Fin de siècle translates from the French as “end of the century”.  It was a movement around the year 1900 characterized by material decadence along with a cynical, fatalistic belief in impending social upheaval.

–Tobacciana is one of the great sleeper niches of the investment grade antiques market.  This could translate into enhanced future appreciation potential for our antique cigar holder.

-It is amazing that this 120 year old French objet d’art, expertly crafted from premium materials, is available for just over $200.  To put this into perspective, as of July 2017 this antique cigar holder costs about the same as 1/5 of a share of Amazon, 3/5 of a share of Tesla or 1 and 1/10 Netflix shares.  I know which one I would rather own as a long-term investment.

 

Cons:

-The mother of pearl body of this antique cigar holder has a very minor hairline crack running partway along its length.  However, it does not detract structurally or visually from the item, and I think it has very little impact on its value.  Antique mother of pearl items frequently have these kinds of tiny flaws because, as the material ages, it becomes more sensitive to dramatic changes in relative humidity and temperature.

-The seller has acid tested the gold trim and determined that it is 18 karats (75%) fine.  France had a well developed precious metals hallmarking system at the turn of the 19th century.  Therefore, we would expect the piece to be hallmarked with an eagle’s head indicating solid gold construction.  One of the photos shows what may be a hallmark on the gold band at the tip of the cigar holder, but the photo is at the wrong angle to make a definitive determination.  Nonetheless, every aspect of this antique cigar holder screams high-end; I would be shocked if it wasn’t solid gold.

-The affixed gold plaque has an elaborate monogram that is contemporary with the vintage of the piece.  Some collectors dislike antique items that are monogrammed, believing that it “brands” them.  However, I feel that monograms are part of the history of a piece and should have a neutral impact on value.

The Chinese Antiques Market and Japan’s Cautionary Lesson

The Chinese Antiques Market and Japan's Cautionary Lesson

The Chinese economy has been booming for the better part of 20 years now.  From ignominious beginnings in the 1980s, China has evolved into the manufacturing powerhouse of the world.  One consequence of this development is that a large number of consumer goods available in the West are made in China.  Another is that Chinese GDP has skyrocketed, increasing from about $1.2 trillion in 2000 to around $11.2 trillion in 2016.  As the Chinese economy has flourished, its stock, bond and property markets have also boomed.

For now, the money is flowing like water.  And one of the things wealthy Chinese love to spend their money on is fine art and antiques.  However, they tend to be fairly particular about the type of antiques they buy.  Specifically, they have gone on a spending spree for Chinese antiques.

For most of the 19th and early 20th centuries, China was under the influence (or occupation) of the great Western powers.  This era is referred to as the “Century of Humiliation” in China.  It spanned the period from the start of the First Opium War against the British in 1839 to the final defeat of the occupying Japanese forces at the end of World War II in 1945.  Many Chinese are deeply sensitive about the indignities suffered under foreign imperialism during this time.

One side effect of the Century of Humiliation is that large quantities of fine Chinese antiques and art were exported wholesale from the country.  The British, French, Germans, Americans and Japanese all variously looted or purchased some of China’s finest art works during this time.  These included superb Chinese ceramics, bronzes, jade carvings and lacquerware from the Tang, Song, Ming and Qing dynasties, among others.

Now that the Chinese economy is the second largest on the globe, rich Chinese are reclaiming their national heritage by buying back many of these Chinese antiques from abroad.  For instance, a 17th century Chinese porcelain moonflask sold at Christie’s auction house in 2011 for a stunning $2.65 million.  In the same year a Chinese scroll painting looted from the Forbidden City during the Boxer Rebellion sold at auction for a jaw-dropping $31 million.  An unassuming late 15th century Ming dynasty ceramic cup decorated with chickens sold at Sotheby’s in 2014 for an almost unbelievable $36.2 million dollars.  All of these works were repatriated back to a resurgent China.

Demand for fine Chinese antiques is even more frenetic than it would have been otherwise because of China’s Cultural Revolution between 1966 and 1976.  During this dark time in Chinese history, Mao’s communist government attempted to stamp out traditional Chinese values, philosophy and culture, especially anything connected to the pre-1911 imperial era.  Not only was collecting antiques impossible for Chinese during the Cultural Revolution, but innumerable pieces were mercilessly burned, defaced, shattered or otherwise destroyed during this shameful period in Chinese history.  As a result, modern Chinese antique collectors are desperately buying the only traditional Chinese art that survived the Cultural Revolution unscathed – art from abroad.

Demand for Chinese antiques from the nation’s nouveau riche is so high that China recently surpassed the U.S. to become the world’s largest antiques market.  Right now China appears to be an unstoppable art juggernaut.  But while it might be fashionable to predict eternal Chinese dominance in both the economic and antiques sphere, the sad saga of Japan sounds a cautionary note for those willing to listen.

In the 1980s, Japan experienced its own economic miracle.  At that time, the island nation was a major global exporter, delivering massive volumes of advanced consumer electronics and vehicles to countries all over the world.  By the mid 1980s, this corporate success had morphed into a bubble of epic proportions.

The Nikkei stock index more than quintupled between 1980 and 1990.  Japanese real estate also skyrocketed in value.  The grounds of the Imperial Palace in Tokyo were reputedly worth more than the entire state of California.  A high denomination, 10,000 yen banknote laid on the sidewalk in Tokyo’s posh Ginza neighborhood was worth less than the ground it covered.

Japan quickly became legendary as a land of financial excess.  Rich Japanese housewives drank tea infused with gold leaf.  Japanese salarymen spent lavish sums of money on food, alcohol and entertainment in Tokyo’s most exclusive nightclubs.  Japan’s corporate titans used their great wealth to purchase trophy properties abroad, like Pebble Beach golf course in California and Rockefeller Center in New York City.

They didn’t limit themselves to just buying high profile foreign real estate, however.  The Japanese also indulged their taste for expensive Western art.  A Japanese insurance company bought a version of Vincent Van Gogh’s famous “Sunflowers” painting for $40 million in 1987.  They were later outshone by a Japanese billionaire who paid $82.5 million for another Van Gogh painting.  The sums of money involved were both surreal and utterly detached from reality.

And, predictably, the domestic Japanese antiques market also experienced a boom during the 1980s.  How could it not?  Both the stock market and real estate market were relentlessly rising.  Money was meant to be spent and the future looked bright.

Then the unthinkable happened; the Japanese bubble burst.  The economic malaise that followed is sometimes called “The Lost Decade”.  This is an odd epithet because Japan’s economy has been limping along for over 25 years now, which is substantially longer than just a decade.  Perhaps the Japanese engaged in wishful thinking when they originally named their economic disaster.

If Japan’s bubble experience in the 1980s sounds hauntingly familiar, it should.  Japan’s bubble is almost a carbon copy of the Chinese experience today.  While few people can spot the economic parallels between present day China and 1980s Japan, the similarities are glaringly obvious to those willing to look.  Unfortunately, none of this implies good things about the future direction of the Chinese stock, property, or antique market.

In Japan’s case, all three of those markets collapsed and then stagnated for decades.  As a result, Japanese antiques are currently some of the best values in the entire asset class.  I highly recommend you snatch up some of these bargains if you have the means and inclination.  However, while the situation has been great for bargain hunters that fancy Japanese antiques, it hasn’t been so great for people who bought Japanese antiques in the 1980s.

China, unfortunately, faces a very similar economic trajectory to post-bubble Japan.  Those multi-million dollar auction results for Chinese antiques today will eventually look just as excessive as Japan’s art buying spree of the 1980s.  Yes, the money is flowing like water right now in China.  But reality always catches up with a bubble. Of course, the good news is that you’ll be able to pick up some great Chinese antiques for cheap in about 20 years.

International Antiquities Law in the Age of Jihad

International Antiquities Law in the Age of Jihad

One widely covered news story recently has been the systematic destruction of the archeological remains of ancient temples and monuments by ISIL, the Islamic State of Iraq and the Levant.  The radical Islamic group ISIL believes that these buildings and statues are all idols, and thus forbidden under their strict interpretation of Islam.  As grotesque as this opinion may seem to Western observers, I fear the truth of the matter is even more terrifying.  In reality, I suspect ISIL believes any artifacts from pre-Islamic societies are idolatrous and, therefore, subject to righteous desecration by the faithful.

ISIL wasn’t the first Islamic fundamentalist group to destroy priceless ancient monuments that offended their delicate religious sensibilities.  The Taliban infamously dynamited Afghanistan’s massive Bamiyan Buddha statues in 2001 in spite of international diplomatic protests.  Even according to the Taliban’s ridiculously strict interpretation of Islamic sharia law, the demolition was religiously unwarranted, as Afghanistan had not had a Buddhist population for almost a thousand years.

The Taliban and ISIL’s continuing destruction of ancient cultural treasures strip away humanity’s rich history, one artifact at a time.  Although this pointless devastation is a great tragedy, there is another, even greater danger lurking in the shadows.

In 1970, the UNESCO Convention on antiquities was passed.  This agreement was the first multi-national attempt to regulate the international antiquities trade.  The original intent was to give government the theoretical framework to disrupt and prosecute the illegal looting of important ancient cultural items.

Since 1970, almost every developed nation has implemented the recommendations of the 1970 UNESCO Convention in one form or another.  The 1970 UNESCO Convention signatories include France, Canada, Australia and the United States, among others.  However, although international antiquities law was undoubtedly founded with noble intentions, it has gradually evolved into something very different over the decades.

The 1970 UNESCO Convention and the body of international antiquities law it spawned have turned into tools of political and nationalistic control.  Many nations, including Italy, Turkey and Egypt have adopted the stance that they are the sole rightful owners of any antiquities excavated from their soil.

This malignant ideology has progressed to the point that many nations have demanded the return of important ancient artifacts from foreign museums on the basis that they belong “to the motherland”.  Some noteworthy antiquities have already been unconditionally repatriated due to international pressure, while others, like the British Elgin Marbles from the Greek Parthenon, still hang in legal limbo.

A few countries even claim that antiquities – sometimes even minor antiquities of minimal archeological or monetary value – are so integral to the identity of the modern nation-state that they implicitly belong to the state.  Turkey, for example, improbably declares that antiquities excavated from ancient Greek cities along its Aegean coast somehow reflect the core attributes of the modern Turkish people.  This is absurd in light of the fact that the Turkish state forcibly evicted its entire Greek population of about 1.2 million people at the end of the Greco-Turkish War in 1922/23.

China has also adopted a similarly inane policy stance on antiquities, asking the United States to ban the importation of any pre-1911 Chinese artifacts.  The assertion is that these artifacts are the permanent property of the Chinese state, regardless of who currently owns them or where they now reside.  This is obviously a jingoistic attempt by China to manipulate international antiquities law to its own political ends.

It is also somewhat laughable because 1911 was hardly more than a century ago.  No item from the 18th or 19th century could even remotely be considered ancient.  The farce becomes doubly ironic when one learns that countless numbers of pre-1911 Chinese Imperial-era artifacts were intentionally destroyed by the Chinese Red Guards during the country’s brutal Cultural Revolution from 1966 to 1976.

International antiquities law has devolved into a corrupt attempt by sleazy politicians, government technocrats and ivory-tower academics to seize total control of humanity’s shared cultural history.  It encourages the worst kind of political nationalism, asserting unconditional state ownership over every tangible shred of ancient culture.  In addition, if taken to its logical conclusion, this philosophy of exclusive state ownership of all antiquities would result in incredible risks to the world’s cultural heritage.

Regardless of how secure or developed a nation might seem, natural disasters, wars or civil disturbances are bound to happen eventually.  Even first world countries solidly governed by the rule of law, like Great Britain, Japan, France and the United States, will one day see unexpected political or military tumult.  Physically disbursing important antiquities to museums, universities and private collections all over the globe is the only way to mitigate these existential risks.

Less developed nations in geo-political hot spots are even more exposed to these destructive situations.  The barbaric rampage of ISIL and the Taliban through the Middle East are prime examples of the dangers antiquities face in less developed countries.  These recent experiences only reinforce the necessity of widely distributing antiquities are all over the globe.

But an enlightened approach to international antiquities law would require politicians, museum curators and archeologists to all abandon the idea of strictly controlling the world’s antiquities trade.  Although I believe it is improbable in the current, politically-charged climate, I sincerely hope that reason will eventually prevail.  International antiquities law needs to be reformed.  It is vital to the future survival of ancient treasures of all types.