One Feather in the Active Investor's Cap..

During the plane ride back from SFO to Manchester, I read Allan Roth's book "How a Second Grader Beats Wall Street," which uses a gimmicky sort of backdrop (Roth's lessons in finance to his second-grader, who possesses a mind uncluttered by most modern marketing pitches to adults) to explain why passive investing is far superior to active investing -- seven days a week, and twice on Sunday.

Roth's basic premise is hard to beat -- by saving the money you'd spend on the management fees, the taxes generated by frequent transactions, and the initial loads charged by mutual funds, and by investing instead with broad-based index funds, you'd earn far superior returns in the long-term. And that's without even factoring in the sub-par performance of many actively-managed funds.

Roth uses tons of charts and mini-spreadsheets to prove his points, and I'd say he does so pretty conclusively. He frequently references an Einstein quote -- "If you can't explain something simply, you don't understand it well enough," and earns the right to use it with his down-to-earth explanations.

Throwing a bit of psychology into the text, and several well-deserved nods to Burton Malkiel and Jack Bogle, Roth cites the Lake Woebegone bias of almost everyone who has ever held an equity -- the fallacy that the pitfalls faced by the *average* investor obviously don't apply to him or her, who is clearly above average. Of course, mountains of data show that trading frequency is negatively correlated to yields, in part due to transaction costs and taxes, but perhaps more due to individual investors' equal-parts-steadfast-and-irrational belief in their uncanny ability to time the market.

Roth also made me laugh out loud on the plane when he talked about how everyone he knows comes back from Vegas claiming to have won money. For me, substitute 'Foxwoods' or 'Mohegan' in there and you have a blog entry I've been meaning to write for some time -- the incredible effect of mental accounting that really means people aren't actually *lying* when they talk about how they're "up" in their lifetime of casino gambling...they really mean it!

Anyway, I don't doubt for a minute the accuracy or the soundness behind an Allan Roth or a Burton Malkiel. I do, however, want to chime in with one argument in favor of active investing that I haven't come across from either of them (or from Jim Cramer, for that matter) -- the personal education that comes from active investing in publicly-traded companies.

Let me explain.

Think back to when you were a kid. You learned about fairly complex and arcane rules in sports, like what can happen on dropped third strikes, or what happened when a shooter was fouled from beyond the three-point arc, or when the whistle blows for icing, not by burying your nose in a text, but by actively following something with a rooting interest. Some of the information just sort of rubbed off on you, but other parts of it worked into what made sense because they happened in a context you understood and cared about.

Something similar and even greater might apply with investing.

To take a balanced approach, let's say you're indexing with half your portfolio, but you're taking the other half of your portfolio and you're actively playing the market with individual equities.

While your index fund boringly works away for you (over the LONG-term that is, you'd have to have the intestinal fortitude to make it through years like 2008 and not panic), let's say you've got 10 other plays, spread out across sectors like energy, consumer staples, big pharma, entertainment, defense, automobiles, and the financial sector.

All of a sudden, you've got a personal stake in all these things. You've got a rooting interest that's much more vested than the one you'd have in something extremely broad-based like the Russell 5000 or even just the S & P 500. By following these companies' ups and downs, the shake-ups to their managerial staffs, and the ways things like developmental drug patents or looming defense contracts might affect share values, you're learning about business, which is what really makes this country run.

I would even say that if you took a legendary investor like a Warren Buffett or a Charlie Munger, they'd probably be one of the most interesting dinner party guests out there -- not because they could regale you with stories about yachts or wintering in St. Tropez (they wouldn't, anyway) but because these are truly our modern Renaissance Men -- their career-long scrutiny of countless annual reports, prospectuses, and business summaries has brought them so much intimate familiarity with so many sectors of the economy, not to mention the way the captains of industry intersect with political leadership, that they could probably speak intelligently on just about any topic that could reasonably come up. Even amazingly impressive experts within single fields of study probably couldn't do it as well.

Remember that old joke about how the New York Times is read by people who think they run the world, but the Wall Street Journal is read by those who actually do? There's probably a little bit of truth to it (though not to any follow-up jokes about USA Today readers being illiterate -- those are all unfair and untrue).

I don't for a minute doubt all the wisdom and hard math that go into what people like Malkiel, Roth, and Bogle have developed in their studies. Nor do I think I'm about to fall into the trap of the self-styled 'exceptional investor,' which is almost as dangerous as the 'exceptional roulette player.'

But I think that allocating a portion of your portfolio to stocks that you actively choose and then track is a lot more fun than indexing alone. And as that personal stake draws you away from your usual TV fare to a little more CNBC, and from your usual political blabber news sources to more exposure to things like Forbes, Fortune, and the Wall Street Journal, you're coming away from the experience a bit better-rounded.

And that alone is a good thing, and that alone has value.

*Value* I Wouldn't Pay For..

As an up-front disclaimer here, I'll say I have absolutely no stock or other investment of any kind in hotels.com.

That said, I'm out of town for a friend's wedding right now and staying at the Ritz-Carlton in San Francisco, completely thanks to a promotion run by hotels.com, whereby any 10 nights that you stay ANYWHERE earn you 1 free night ANYWHERE else. So, let's say you travel for work a bit and you happen to stay at sub-one star hotels for $40 a pop. 10 of those gets you into the Ritz. Do it enought times and you can make it your home for your super-long weekend mini-vacation.

I've been looking forward to the trip for quite some time, and so far it's been great. One quick observation I'd share for anyone who cares to know, or is planning a trip just about anywhere, however, is that I would never in my right mind pay the market price for this hotel room.

If you're visiting San Francisco, there are tons of options right in the heart of things that have perfectly adequate beds, TVs, and bathrooms, but would cost you less than a hundred bucks. Add that up over the course of a multi-night stay, factor in the absurdly high hotel taxes you're going to incur as a percentage of your bill, and then consider that the sign of a great trip is probably how little time you spend cooped up inside your room, and it just seems crazy to drop the extra several hundy on a five star hotel.

I know there's no shortage of financial planning books out there that can give you sage advice about how your daily $5 latte habit is really costing you $482,281, when calculated as money that didn't make it into your Roth IRA, and therefore didn't earn magnificent returns with dividends over four decades of tax-free growth.

I also know you could get hit by a bus tomorrow, and you might really enjoy that latte today. It also might improve your productivity, or bring you utility for the here and now in some other way. If I were ever writing a personal finance book, I wouldn't be filling it with a lot of thou-shalt-nots about lattes and Chinese take-out.

But having seen the inside of some perfectly adequate $40 rooms, and now having seen the inside of a marginally more adequate $400 room, I'm not seeing a whole lot of difference.

I won't look a gift horse in the mouth and wouldn't pass up a free five-star opportunity in the future...but now I also know there's nothing about such a place that would justify dropping half a paycheck for a few nights' stay.

Who is Ray Weicker?

Ray Weicker is a 39 year-old lawyer, License Commission member, Iraq Vet, and Army Reserve Major. At his campaign kickoff event tonight at the Old Court, he spoke about city issues including crime reduction, property tax relief, and citizen involvement.

Weicker deployed to Baghdad for twelve months in 2005-06 in a Psychological Operations (PsyOps) capacity, having been dual-hatted as a Judge Advocate General (JAG) and PsyOps Captain at the time. He was promoted to Major during the deployment. He is now affiliated with a Reserve Unit based out of Boston that handles criminal defense for Reserve and National Guard members.

Merrimack River Watershed Council Social

Who: MRWC members, volunteers, friends and staff for an informal get-together
What: Light appetizers, thoughts, ideas, conversation, laughs, and the latest news
When: 5-7 p.m., Wednesday 26 AUG
Where: At the Lowell Beerworks 201 Cabot St, Lowell, MA - 978-937-2337
Why: Stop by and say "hi", meet new people, share or listen to a story, learn about a new discovery on the Merrimack River or new MRWC projects.

Who is Leland Cheung?

[Full Disclosure: Leland Cheung is a friend, a former roommate, and someone to whom I will make a nominal donation this year. Okay, I said it].

Leland Cheung is pursuing joint Master's Degrees in Business Administration (Sloan School of Management, MIT), and Public Policy (Harvard Kennedy School). He lived in Cambridge before returning for these graduate degrees and noted the wide town-gown disconnect in the city, something that almost anyone who has lived or worked in Cambridge can identify, but something too few in Cambridge politics have seriously tried to address.

He is currently running for the Cambridge City Council with the slogan "Uniting Students and Residents to make Cambridge #1."

There is plenty of substance to his policy proposals. If you've got a few minutes to check it out, I recommend you give his website a look: www.electleland.org.

6 Candidates at LDNA Tonight

Besides the mention of a Downtown Newsletter that may be hitting the presses (literally, as it'll be primarily a hard-copy thing) within the next month or so, the highlight of tonight's LDNA meeting at the Revolving Museum was the set of speeches by Lowell City Council candidates.

The order of the speeches was sort of haphazard; it had more to do with where candidates were sitting or standing than anything else. The following summaries are presented in the order that the candidates spoke:

First, Franky Descoteaux addressed the fact that she was speaking to the home crowd, noting that she is, of course, "very invested in the downtown," literally and figuratively. She stated her strong feeling in favor of professional government, noted the need to "treat the taxpayer with respect," and added that the more local businesses can help swell the city's coffers, the more tax relief the average household will feel.

The next candidate to present was Ben Opara, another local entrepreneur who described himself as "an ambassador of the city." He emphasized that all his personal care products are marked "Made in USA" for his export audience, but also that each carries the label "Lowell, Massachusetts" as a marker for both domestic customers and the world writ large that they're made right here in Lowell. Opara talked about the great untapped potential that exists here in the relationship between the local community and the world-class research university sitting within the city limits. He also spoke about a lack of congeniality at City Council meetings, and how he could help to counter that.

The reference to the lack of congeniality made a perfect, if unintended, segue into the speech made by current CC Jim Milinazzo, who in recent memory was told in a most un-congenial manner by CC Alan Kazanjian that Kazanjian was "ashamed" to call him a colleague (this was in the wake of the Assistant City Manager's firing). Milinazzo made references to the strong support he received from several downtowners in the wake of his dissenting votes in re Andy Sheehangate and the lack of a primary. Milinazzo, the only sitting Councilor to make it to tonight's meeting, also talked about some of his past and present involvement with several private businesses, city offices, and subcommittees.

Next to speak was Joe Mendonca, a former City Councilor and multi-term School Committee member. He joked about having blown-in to Lowell as a six year-old 43 years ago and described some of his past involvement with the Citywide Parent Council, the School Committee, and the Pawtucketville Citizens' Council. Mendonca then explained his vision for Lowell -- that of a regional economic hub (as opposed to just a residential/bedroom community for those who work outside the city). The idea is that if Lowell had more commercial and office space, especially for high-tech sectors, it could better serve as the area hub that it can be. He talked about how, as a high-tech worker, he was previously able to work right here in town (Wang Towers), but was now located out in Manchester, NH for work.

Ryan Berard, a previous attendee at several LDNA meetings, talked about the importance of individual neighborhoods to the overall composition of the city. He spoke about the need for Councilors to be responsive to all of the city, working hand-in-hand with the City Manager. Berard talked about how the basic premise of the broken windows theory could be applied to the current improvement initiative going on in his native Centralville -- once the area is physically beautified, the area will look less inviting to criminals and more friendly to prospective new residents and business patrons.

The last candidate to speak was Paul Belley of the Rosemont section of Pawtucketville. He stated his support for the City Manager and also emphasized the importance of neighborhoods, which he called "the heart and soul of the city." He talked about the system of "Street Captains," which his neighborhood implemented in the wake of the Mother's Day Flood of 2006. The basic thrust of this idea is that you're creating a de facto hyper-local government, with one preson on each street accountable for knowing who the residents are and what they would need in the time of an emergency (i.e. critical prescription drugs for seniors). Belley talked about some of the positive spillover effects the Street Captain system has created, such as preparation for the subsequent 2007 flood (so much for that 70 year thing, right?) and nipping some minor criminal activity in the bud. One of the main ideas of his campaign is taking this initiative city-wide.

The next LDNA meeting will definitely be on September 27 at 7:00 p.m. The location is still TBD, but I'm told there's heavy action at 3-2 odds being put on the Athenian Corner (207 Market).

Also, the Ray Weicker for Lowell event at the Old Court is going to be tomorrow night from 5:30-8:30. I'll try to remember my camera for that one. I know photos would've helped people with the candidate summaries from tonight (of the six who spoke, only Joe Mendonca and Paul Belley had handouts with their pics).

And one more sidenote -- I usually veer away from the strictly personal stuff here on the site, but wanted to mention that Ratriey and I really made the engagement official today at the Public Garden, third bench down from the Beacon and Charles entrance.

Feet on the Furniture...Already?

A summary of last night's Move Lowell Forward kickoff can already be found here, but I want to use this entry to say how impressed I was with the restaurant itself (Garcia-Brogan's).

The prospective missus and I left after having two cocktails so we could grab dinner over at New Great Taste. Unfortunately, however, there's some type of plumbing problem there, so our go-to eat-in/take-out/delivery locale is temporarily down for the count. Unsure of where to grab chow, we just circled back around and headed back to Garcia-Brogan's to eat.

The place had already started filling up, but by the time we headed back, it was packed (and this was even after most of the MLF folks had taken off). The Irish bar side was nearly full of patrons, the Mexican restaurant side was about 2/3 full, and the high energy level made it hard to believe that it was only the first Friday in the restaurant's history. To anyone visiting for the first time (such as us) there was no sign or other indicator that there was any kind of forced buzz related to the place's newness. On the contrary, it just seemed like a lot of natural laughing, drinking, and general carrying-on that you'd think would come from people used to a place -- one sign of which was a twenty-something female patron in one of the booths with her feet up on the booth bench.

This made me think of the unwritten rule among friends about refrigerators. There are many variants to it, and probably a few sitcom episodes dedicated to it, but the general idea is that a sign that someone is a truly close friend is when he or she can walk into your house and immediately open the fridge to scour for food or drink...without having to ask your permission in the first place.

There's got to be some pub or restaurant variant to it, and what I'm reaching for here is the idea that only when you reach a certain comfort level with a place are you going to just make yourself so at home as to throw the hush puppies up on the furniture just like the place is yours.

Besides being strategically located in a part of Lowell's downtown that can really use an economic/entertainment anchor such as this, Garcia-Brogan's impressed me by being able to pull together a crowd like it did on just the fourth day in its existence.