It seems that Dartmouth is in the news again.

On the short list of candidates to run Freddie Mac is Ed Haldeman ‘70, former CEO of Putnam investments and Chairman of Dartmouth’s Trustee Board.

He was asked to run Putnam in the wake of the mutual fund scandal of 2003, where fund traders essentially stole money from fund shareholders. Apparently, those managers missed their lessons on ethics and fiduciary duty.

By all accounts, Mr. Haldeman a serviceable job there, adopting some ethical reforms. But he couldn’t turn around the rolling performance disaster at Putnam’s two biggest funds, which are ranked in the bottom 5% of their peer groups. Hey, somebody has to be at the bottom.

Mr. Haldeman certainly means well, and he kept his Boston firm from imploding in the wake of an ethical PR disaster. He joins fellow Dartmouth alumni in Washington Treasury Secretary Tim Geithner ’83 and Senator Kirsten Gillibrand ‘88. Let’s hope Haldeman can turn Freddie around as well.
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 The Dartmouth Mafia [1:00m]: Play Now | Play in Popup | Download

The quarter is over. How’d we do?

By many measures the second quarter was a blockbuster. The S&P was up 15%–the best performance since 1998. From their early March lows, most markets are up about 40%.And the volatility index fell almost by half: from 40% to 25%.

But of course, we’re rebounding from an historic crash, with five consecutive quarterly losses and a cumulative 46% decline through March. And the kind of volatility we saw recently was truly historic.

Notably, the best performing sector so far this year has been Technology. Apple is up 67%. Google is up 37%. IBM is up 24%.  So far this year, this sector’s earnings account for 16% of the market’s earnings—in line with its market weight. But these companies don’t have a lot of bad loans or other issues. Nor are looking for more bailout funds.

The market’s recovery seems to be anticipating the economy. The strength of the Tech sector just reinforces this. Let’s hope they’re right.
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 Quartering Breeze [1:00m]: Play Now | Play in Popup | Download

Was the grilling of the Fed chair a summer sizzler?

When Bernanke testified before Congress last week, a lot of people were surprised by the rancor. But this is a sensible approach to a newly political institution.

In the fabled days of yore, the Fed used “System RPs” and “Bill Passes” to manage the money supply and regulate the use of the discount window. On a good day, they could oversee a bank holding company exam.

But once the Fed gets involved in saving banks and creating investment vehicles, the central banker has become political in a major-league way. Arranging marriages and re-writing rules has major implications. Someone’s ox will be gored. Those are political decisions, and they requires political accountability.

Now seeing Barney Frank grill Ben Bernanke was distasteful, but I know no other approach. The Fed isn’t all-knowing. If Bernanke can’t handle that heat, he needs to get out of Washington’s kitchen.
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 Fed Food [1:00m]: Play Now | Play in Popup | Download

Is it really so simple?

Jack Bogle, founder of Vanguard, says that most investors should hold the same percentage of bonds in their portfolios as their age. So Bogle, who is 80, holds 80% bonds.

That may work for him, but there are other factors to consider: how much do you make? How much can you put away? What are you saving for? What’s the level of the market? And are there any sources of wealth outside of your control?

It’s good to ask how much money do you need to keep “safe”—not subject to the stock market’s whims. But life itself is risky: any investment can lose money.

And it’s when you look at the full picture—spending as well as saving, debt as well as assets—that you get a true idea of your finances. And it’s in that full context that you should decide how much to invest in stocks and bonds.

Asset allocation is an important decision—some say the most important investing decision you’ll ever make. It’s too important to leave to a general rule.
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 Simple Pleasures [1:00m]: Play Now | Play in Popup | Download

Sometimes it helps to have a belt and suspenders.

The recent tragedy aboard a Continental Airlines flight illustrates this. The captain died halfway through the transatlantic flight. But this emergency was handled efficiently and professionally: the first officer and a reserve pilot, both well-qualified, took over and completed the flight. The passengers never knew there was a problem.

This principle can be applied to investments. If your portfolio is managed by a single individual, you don’t have a backup in place. It’s reasonable to ask for this. After all, life happens. We need to be prepared for problems.

In over 50 years of commercial flight, there has never been a fatality linked to in-flight deaths. Such a safety record is achievable because of the airlines’ emphasis on redundancy. Applying this lesson to portfolio management means that investors can remain confident even when the markets get bumpy.
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 Redundancy [0:58m]: Play Now | Play in Popup | Download

Among the many insights of our Constitution is its commitment to Federalism. In general, people want to be close to the their government. So the Founders decided that most issues would be decided on the State level, rather than the National level.

But the authors of the new cap-and-trade energy bill didn’t apparently get that lesson in civics class. Because there are all kinds of mandates in the bill that most of us would consider local issues. For example, building codes must be amended to make new structures 30% more energy efficient by the year 2012. Hey, I’m all for saving on my heating bill. But why do the Feds have to get involved.

Presumably, if the states don’t play ball, the Federal Government will find new ways to motivate them. Like cutting off highway funds when some of the states objected to a nationwide 21 year-old drinking age.

Unlike state laws, the law of unintended consequences cannot be overruled. If the Feds try to control everything from Washington, they’ll find that there is less and less to control
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 Federalism, R.I.P. (Part 1) [1:00m]: Play Now | Play in Popup | Download

Lots of economists want to be psychologists.

“Neuroeconomics” is all the rage. Otherwise normal economists are breaking decisions down into their neural roots, ascribing all kinds of strange reasons as to why consumers prefer Pampers to Huggies.

Fancy names like recency bias (the most recent data are the most important), loss aversion (we’re more concerned about avoiding losses than scoring gains) and cognitive dissonance (holding self-contradicting views) all sound impressive. But what they’re arguing is that people are irrational in predictable ways.

Well, knock me over with a feather. The continual gyrations of the stock market are enough to prove that. While the stories these neuro-economists tell can be entertaining, they haven’t yet figured out how psychology plays out in the market in any consistent manner.

To paraphrase Han Solo: hokey economics and highfalutin language are no substitute for improving earnings and a growing dividend. And you can take that to the bank.
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 Psychologist Envy [1:00m]: Play Now | Play in Popup | Download