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Are Entrepreneurs Born?
Steve Forbes: Ken, very nice to have you with us. To begin with, first describe Mercadien Asset Management and then we’ll get into what investors should do.
Ken Kamen: Sure. Mercadien Asset Management is a firm that caters to families and high-net worth individuals, helping them think through the big financial decisions of their lives. I like to say that we watch their financial back by helping them decide what to do as far as the big things – buying a house, how to asset allocate, where their investments should be. And we’re there to help think about generational things as it relates to their money, also. So we’re a full-service, asset allocating, financial planning firm.
Forbes: You started your own firm years ago, sold out and then, after a couple of years of a no compete, started Mercadien. Are entrepreneurs born or do you learn to be an entrepreneur?
Kamen: Well, I think it’s a little bit of both. I think you have to have the ability to take risks in you. The talent that it gives you to take a chance, and if you fall you know you’re going to get up, I think is the key ingredient for an entrepreneur. So many people that are afraid of falling never actually leave the house. So I think that’s the key thing. But then you have to have a pretty wide ear and try to listen to what’s going on in the marketplace and respond to the needs of the people.
Forbes: Some entrepreneurs say that you’d better be prepared for real sacrifices. You’re not going to be able to do everything. Your family may not get as much of your attention. What kind of sacrifices should entrepreneurs be ready for?
Kamen: Well I’ll tell you, if you’re going to stake the family fortune on building a business, you have to be willing to take the time out of all the other things to make that work. When I started my first firm, when I was 27, I didn’t realize how much time it was going to take in the evening.
And my young kids paid a price for that at the time. So when I sold my firm 13 years later, I decided that when I do it again, maybe I’ll do it a little bit slower so I can get that balance right. But it’s absolutely important for an entrepreneur to recognize that if you want to grab the holy grail of capital, you do give up some other things potentially.
Reclaim Your Nest Egg
Forbes: You have a book, Reclaim Your Nest Egg. I’ll hold it up for viewers. You, in effect, say investing should be similar to driving an automobile. Certain things you have to know, but you don’t have to be a mechanical engineer to be able to drive a car. How do you apply that to an investor? What should they know? What questions should they ask? What should they just say, “I don’t need to this to make a good decision.”
Kamen: The point is when you’re driving a car, your family counts on you to know what the red light means. But they don’t need you to know what a combustion engine does and how it works. The same in the financial world. You need to know enough about your own situation so that if someone recommends something to you that doesn’t fit, you go, “Huh? Roll that by me again.”
So many people outsource all these decisions. The concept of Reclaim Your Nest Egg came from the fact that there are so many unknown things about growing older and funding your retirement years. You don’t know how long you’re going to live, what your health is going to be, what the economy’s going to be, what the market’s going to be, how much money you’re going to have.
So when there are all these unknown factors, we have ways of – just human nature –disengaging. If it can’t be known, I’m not going to waste time with it. And the point of the book is saying there are a lot of things you can know. I mean, you might not know how long you’re going to live, but there’s a whole bunch of planning tools out there that if people just start looking at it and engaging, they’re going to start being able to answer their own questions. And that’s the whole point of the book.
Forbes: Can you give a couple of hypothetical examples?
Kamen: Sure. I try to provoke questions in people’s minds. One of the things I talk about there is maybe the concept of wealth insurance – the long-term care insurance. I’m not saying it’s right for everyone. But you could have the best planning in the world, but if some catastrophe happens that blows a hole in the side of your ship and you have to fund catastrophic illness or something, that could really crush you.
So taking the time to learn whether that’s something that makes sense for you is important. People hear things all the time about asset allocation. Should they just buy ETFs or a particular style of management? And what are the benefits of diversifying? And do I have enough capital to diversify into certain types of things? Getting to know the basic questions that are important to you is really the key to getting your own financial house in order.
Risk vs. Volatility
Forbes: You make the point there’s a difference between risk and volatility. Explain.
Kamen: Yeah, I often say that risk and volatility are cousins – they’re not twins. Risk is the idea of, “What’s the likelihood of hitting an end point?” When you go to the amusement park you stand in front of the rollercoaster and you see five groups of people get on and get off and you say, “There’s probably not much risk in getting on it.” But if you get on, then you’re signing up for three minutes of extreme volatility.
That’s the idea. If you put together a well-diversified portfolio and do your homework on it, the risk of you not hitting an end point at a certain five or ten or 20 years out might be pretty low. That you won’t hit it. But that doesn’t mean that you won’t get volatility along the way. Many people get off of long-term game plans because they don’t accept the short-term volatility. They think that every time they bump in the road, the world’s coming to an end. So you have to accept that risk and how bumpy the road’s going to be are two separate things.
Forbes: 2008 was something no one had seen in most people’s lifetimes.
Kamen: Yeah, that’s true.
Forbes: You didn’t think the world was coming to an end?
Kamen: No, I think I’m too much of an optimist to think the world’s coming to an end. Although when everything correlated to one and kind of pancaked down together it was a little bit frightening at the time. But pendulums have a way of over swinging. And history has always shown that when pendulums get either too bad or too good, it’s time to do some thinking. One of the best pieces of advice I ever got was: You’ve got to buy them when they’re crying and sell them when they’re yelling. And it’s so hard to do that emotionally, but it really works.
Market Timing
Forbes: Emotions are your enemy. That relates to market timing. You see that as a fool’s errand.
Kamen: Yeah. Look, I know a lot of people spend a lot of time trying to figure out whether the market’s up, down, hot, cold. But if you look at all the empirical data, it is so hard to pick when the right time to get in and out of the market is. There are all sorts of statistics that if you just bought the S&P over the last 15 years and didn’t trade, it you would have made probably 7%. But if you missed the best 40 days you probably would have lost 6% or 7%.
And one of the stats over the last 15 years is that the best days in the market, 63% of the time, came within two weeks of the worst days in the market. So if you’re going to try to time the market, you have to be smart enough to get out when it’s ready to go down and then get back in when all the media’s telling you you’ve got to be out of your mind. It’s rough to do. And you shouldn’t have to wait to every night to hear how the market’s going to close to decide if you’re going to be able to sleep that night.
Avoid The Noise
Forbes: This relates to, you say, ignoring the noise in the media. You think we in the media provide too much noise?
Kamen: Well, what I mean by that, with all due respect, is that there’s a tremendous amount of information out there that people don’t know what to respond to. And there’s this big element of what’s new now. This idea that the long-term, in some cases, is a week – two or three weeks.
And when people are hearing about what’s going on with the economy now, or what Chairman Bernanke said yesterday, they have to put that in the lens of: do they need this money in five years, ten years, 20 years? And that’s where the media is sometimes screwing people into the ground. It’s okay if you’re using it as the beginning of your information to go out and look for an answer. But you’ve got to be careful that you’re not just doing things on the temperature of the day.
Forbes: You’ve also made the point of – what advice do you give when a CEO goes on TV
Kamen: I did say in the book that when the CEO goes on TV, that’s when you want to take the bathroom break. Because that’s a commercial also. If a CEO is out there on television, he’s doing one of two things: either telling you about a great new product that is coming or apologizing and making excuses why something that he thought was going to happen didn’t happen. So you know you’re getting some form of corporate propaganda. That’s not a personal dig on them as individuals. But let’s be honest, that’s their role in the world, to be the lead cheerleader for their companies.
Forbes: So these in terms of information that the investor should take to heart. You’re really saying if you have the right time horizon, the rest falls into place?
Kamen: Well, I think it’s important that people have different buckets, I call it. There has to be that short-term money for things you’re going to need next month or next year – if you know you’re going to need a car. But when you come to that retirement, the nest egg funds, you have to really put things into context.
And I do believe that it’s not a set it and forget it. I’m not making the claim that you could just buy things, close your eyes, and wake up one day like Rip Van Winkle and it’ll be there. But on the other side of the coin, sometimes too much tinkering isn’t a very good thing. But it is important to understand what you own. That is important.
Investing As You Age
Forbes: There’s a rule of thumb, as you get older, that you should have more money in bonds. Does that hold true today when the bond market’s been twisted like a pretzel with what the Fed is doing?
Kamen: Well, I think it’s a good rule of thumb that your investments should get more conservative. In today’s market environment maybe that means more higher quality dividend paying stocks. Because at least if we get inflation – when/if – companies can increase pricing. And maybe their stock prices could keep up. Where if you buy a bond, you made your deal. You’re going to get your $1,000 back in ten or 15 years from now. So I think that’s something.
But I think also that people have to look at, again going back to their own time horizon, that there’s room for conservative investments. And you have to know the role they play. And if you need cash flow there are certain bonds, or even CDs in the short run, that make sense for people.
Forbes: Does it make sense to buy annuities with all the expenses in them?
Kamen: You know, I’m not a huge fan at the moment. I know that products are evolving and they’re having more bells and whistles in them. The problem is, the more bells and whistles – they charge you for all those nice sounds that they make.
The problem with the annuity world is that the pitch, basically, is that it’s going to help you protect lifestyle, because you know the money’s going to be there. If someone has enough assets, they can put together a well-diversified portfolio on their own. They can do that with the same dynamic and diversification that the annuity company’s doing. And they just don’t have that guarantee that comes with it.
But many annuities, just like social security, aren’t going to protect your lifestyle. They might protect some base things for you. But I don’t know too many people that are taking their entire nest egg and putting it into annuities. So it does have a place for some people. And to some people it helps them sleep at night, that they know that there’s a guarantee.
But I always caution people the guarantee’s only as good as the company on the other side of the contract. And we saw in the market meltdown in 2008 that we’re all holding our breath that a whole bunch of companies that we thought were rock solid remain that way. And I’ll leave the listener to decide which of those companies were.
Forbes: Turnover. How much turnover do you have in the money you manage?
Kamen: Well, we asset allocate. What we do for our clients is we look to find managers and place the money around. We don’t look to allocate to high turnover managers. The average turnover in my overall portfolio is probably 30% a year. You want to be somewhat tax efficient, especially if we see capital gains going up over the next couple years. But we look more at asset allocation. It’s more important to be in the different style boxes than it is to being in the individual stocks.
Forbes: So while timing is a fool’s errand, a lot of trading is a fool’s errand as well?
Kamen: Well, I won’t say it’s a fool’s errand because you have to – if you’re not going to take the time to keep your ear to the ground somewhat, you should hire someone that will. I always say to people that, “What I do for you is probably no more difficult than changing oil. If you’re going to, you could do it. But if you’re not going to do it there are a lot of consequences to your car.”
You could stay on top of all the things guys like me stay on top of. But if you’re not going to do it, you have to pay someone to do it. Because you don’t want to be in a company that’s falling behind and you could have known it if you just looked.
Market For Small-Caps?
Forbes: You’ve been an advocate of small-caps. One, is this the right market for them? And two, you’ve made the point it’s like life insurance – they are sold.
Kamen: Yeah, the small-cap. When I started my career, my private firm was more about raising capitals for smaller companies. And I always said that in the small-cap world, no one wakes up in the morning and says, “Buy me Glass Inc.” – some company they’ve never heard of – unless someone gets on the phone and tells them about it. And that’s my point; that they’re sold to them. Someone has to champion their cause.
I think small-caps do, certainly, very well. As we’ve seen when economies come out of recession, when the small businesses get that $10 million order, it’s a big deal. And many times, it’s from the big companies starting to ramp up. So I think they have a very good place in a portfolio. But I caution people to not swing for the fences with them. It shouldn’t be 100% of someone’s portfolio allocations, because they tend to be a lot more volatile and their balance sheets tend to be a lot shakier than the most substantial companies. Or at least you would have thought so. Maybe not after 2008.
Forbes: In terms of allocation though, is this the time to go into big-cap stocks?
Kamen: I look at it as – big-caps for me are my tent pole. I think that, whether it’s big-cap domestic – and I believe in kind of a global allocation. A lot of people are not as robustly allocated into the global footprint as maybe I would like them to be. So I think that big-cap stocks in general should probably always be the tent pole of someone’s portfolio. So I guess the answer is yeah.
D.C. Is Run By 25-Year-Olds
Forbes: You’ve spent a period of your time in Washington. And it wasn’t a very edifying experience talking with the members of Congress and doing what we call lobbying. Why don’t you think the system is working, if you don’t think it is? And I would love to get your comments on what should we do about things like Sarbanes Oxley and this new monstrosity, I think, Dodd-Frank.
Kamen: I agree. Well, a couple of things. Back when WorldCom and Enron were blowing up, I had shared a business advisory group to the Commerce and Energy committee. And during that time, my role was to try to bring the interests of small businesses to the discussion. That they wouldn’t take actions to, what I called, paint the problem of the corporate malfeasance with a big roller when maybe a small paintbrush would work better for smaller companies.
So I spent a lot of time looking at those issues for members of Congress. And one of the things that really struck me was how little our elected officials really know about the issues that affect our economy. They’re all well-intended people. They all are very knowledgeable in certain things.
But so many of our elected officials, especially in on the House side, get elected because of local issues. Don’t let put garbage in our backyard might be one of them. Don’t let them cut down our forests are another. I mean, they get elected on all these things. And then, due to seniority, they find themselves on these committees, opining on these very weighty issues that they have very little experience with.
So one of the things that I was shocked to find is that one of the little dirty little secrets of Washington is it’s run by 20-year-old kids – well, young, mature people. Because so many staffers take all the meetings from all the people that want to come in and talk to our elected officials. And it’s what that staffer writes down in what I’ll call a little book report that our elected officials read.
That’s why lobbying is so effective. Because the big lobbying firms spend a lot of time putting together a one and two page glossy sheet, well-written, that gets the point across very well. Smaller organizations or grassroots efforts don’t have that. They have nice, well-intended people trying to get face time with their senator.
But they meet with a 25-year-old who writes a book report. And maybe, if you were wearing the right tie, they give you a good light to the senator. So I think that those are the types of things that we need to get serious about. The big problems we have in our country right now. And I think our elected officials have to take it upon themselves that if they’re going to be part of this debate they have to get themselves educated about it. They really do.
Forbes: And do you think the system is geared to a complex economy? Is there somehow – at the end of the day, as we did in the early ‘80s – somehow things get back on track again?
Kamen: Well, I try to be an optimist all the time. The problem is our system is geared towards the sound bite, to go back to the media. And so many of our elected officials will poll before they decide what they want to do. Making good, long-term financial decisions isn’t necessarily sticking your finger out in the wind and going, “Oh, it’s cold today.”
I think there’s part of the system that is broken because we’re focused too much on short-term results and two-year election and four-year election cycles. And the problems that we have, our kids and grandkids are really depending on us to get that right. And history’s not going to care whether we had a good two- or four-year cycle for one party or the other.
Forbes: You compared legislative decision making not to a sausage factory, but to somebody going on vacation. Explain.
Kamen: Well, what winds up happening is that our elected officials go out and they decide what issue they might want to look at. They go out, they get a great weekend or two getting wined and dined by various industries to learn something from a particular point of view.
And if you spend enough time presenting a point of view anyone could be persuaded. If you spend three days listening to one point of view and you come back and you’re already making a decisions. But that might not be all points of view. And I recognize that it’s so hard to become as well-informed about the issues as we need them to be. But I think the best things that happened for our kids and grandkids over the last month is that our elected officials are starting to use the world trillions instead of billions.
Because as long as they were talking about cutting billions from our spending, that was like deck chairs on the titanic. I almost don’t care what solution they come up with to save us trillions – whether it’s this plan or that plan – but the fact that they’re talking about saving that kind of dollars is going to mean they can’t just take the easy way out anymore. So I hope they don’t back off from that. And I hope they stick with that.
IPOs & Dodd-Frank
Forbes: Get to one of your favorite topics – IPOs. Why is it that we don’t have IPOs anymore, especially for smaller companies at a time when you would think, with high-tech, it would be pretty easy to do an IPO?
Kamen: Well I think the root of that is back in the – there was a study done in the late ‘90s called Market 2000. The SEC did this study. And at the time it said that the stocks trading on the New York Stock Exchange, when it was eighths and quarters, fractions, traded on a 1/8 spread where companies on NASDAQ traded on a 1/4 spread.
So decimalization came in to basically narrow that spread, theoretically. And it’s one of the things I testified in Congress on at another point time. My fear at the time, and it was born out, is that if you take away all the incentive for the financial institutions to champion the companies that take two, three and ten years to work out, because you wring all ability to make profit out of that. And they painted spreads. And there’s no doubt there were a lot of abuses. A lot of penny stock firms found loopholes to mark up spreads, so that’s a different issue.
But they took any financial incentive for a firm to want to commit capital to make an orderly market in these small companies. So now, as I said earlier, if no one’s going to be willing to make an orderly market – stand under that buttonwood tree if you will, for that company – why would anyone bring the company public?
And then you have Sarbanes Oxley which just made it a tax on going public. And many small public companies said, “No más. I’m done.” And went the other way. And Sarbanes Oxley had the unintended consequence of putting a lot of companies under pink sheets so they became non-reporting. So it’s kind of unintended consequences, which I talk about all the time when I talk to our elected officials. It’s hard to know what they’re going to be, but you have to always be on the lookout for unintended consequences.
Forbes: And Dodd-Frank?
Kamen: Well, Dodd-Frank is just starting to work its way into the system. And there are pieces of it that – there are a lot of people with some scalpels now trying to deal with it. I think there are a lot of things in there that are going to be wrestled with, because people have no idea.
It was let’s just, “Get a bill out, because the world is calling for it and we got an election to get home and start running for over the summer.” I mean, just look at the fiduciary suitable standard thing. The whole Wall Street is kind of set up on this fiduciary suitability standard that I just have to recommend something that’s right for someone in your situation, but not necessarily exactly right for you.
Well, if they say that everything has to be absolutely suitable, no matter what I recommended to you today better still be the right thing a year and two and five from now. And I have to keep on top of that. That changes Wall Street’s model. I’m not saying it’s good or bad. But there are so many things that they didn’t pull the thread all the way to see what was on the other end. And the Dodd-Frank bill was full of that kind of thing. And so we’ll all wait and see.
Forbes: Ken, thank you very much. The book is Reclaim Your Nest Egg.
Kamen: Thank you.
source: forbes.com
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