I tell a story about a friend who has a $75,000 a year meal & entertainment budget, but the negative incentives put upon him by his accounting department have some unintended consequences.
In evaluating an investment, public or private, be sure you think about the managers, organizers, and CEOs to ensure their goals are aligned with yours and with the right supportive incentives.
Take 2.5 minutes to watch/listen to my video
TRANSCRIPT:
Hi Clients and Friends, Mike Brady here. I just got done with the detailed video of “Vix” (Volatility Indexes) from last week, and if you haven’t seen it, go ahead and click on my archives and watch last week’s video, kind of a more technical, showing more graphs on Vix, which is volatility indexes.
I just have a funny story that I wanted to share, I just wanted to share it with you because I think it is funny. It’s about incentives. I’ve got a buddy who is a salesman for a company and we go out for a beer. And he has two beers and I have two beers over a couple of hours and ready to pay the bill and he’s like “no Mike, let me take the bill.” And I’m like, “Oh, OK.” He’s like, “Mike order some food, take it home for your wife!” I’m like, “I’m not going to take any food home for…, you know, I don’t need to take advantage of you like that.”
He’s like “No, no, no Mike, you don’t understand. I have a $75,000.00, a year meal and entertainment budget. And if I submit this bill with our beers on there without food, I’m not going to get reimbursed.” I’m like, “OK.” He’s like, “…so order food for yourself, order food for your wife because if you don’t do it, I’m going to have to order, I’m going to have to pick a table here and buy the people food.” I’m like, “OK, wow, I can’t believe that.” I order some food.
And he’s like, “yeah.” He goes “Next they’re going to start looking at the ratio of food to alcohol to insure that it is the right ratio.” And I’m like, “wow, that seems extreme.” He’s like “and Mike, if I don’t spend the entire $75,000.00, a year, they’re going to take it off my, the difference between what I spend and what I have to spend, they’re going to take it out of my bonus.” He goes, “so here I am, all I want to do is spend $10 or $12 on a few beers with a buddy, and instead I’m forced to spend $30, $40, $50 just so I can get reimbursed!” He goes, “What kind of an incentive is that?”
And so, I think that is a really interesting, disturbing, but interesting story about making sure you have the right incentives. And from an investment point of view, of course, it is make sure that the people who are either proposing a project, or working in the project, or managing the project, whatever it might be, the investment, whether it is private investment or public investment, doesn’t matter, make sure that their incentives are aligned with the positive outcome that you want- both for the project and, of course, for your particular investment.
Anyway, I was just thinking about that and wanted to share it with you. And so that’s this week’s video. You have a wonderful week.
I’m a registered representative with Cambridge Investment Research. My company is Generosity, let’s see if I can get out here, Generosity Wealth Management in Boulder, CO. 303.747.6455. A little bit lighter video for this week but I’ll try to get something more technical next week. You have a wonderful, wonderful time, bye bye.
There are many indicators out there for helping to inform which way the markets are headed. None of them are perfect, or exact, or even able to be taken into account alone and without context.
This week I discuss the CBOE Volatility Index (VIX) and how it’s negatively correlated with the equity markets.
The fact that it’s at extremely low levels right now makes me concerned.
Take 2.5 minutes to watch/listen to my video
TRANSCRIPT:
This week I’m thinking about volatility index. I mentioned two or three weeks ago on my annual preview, that I was concerned that the, Vix, the “V,I,X,” which is the volatility index is very low. So I’m going to throw up a couple of charts up on the screen here. So that you can kind of see that when the market has a tendency to go down, volatility dramatically goes up. It doesn’t necessarily mean that one is a leading indicator versus a lagging indicator, but they are, they are correlated. And it’s something that I kind of watch for. If you look at April of last year, April of 2010, they really start, the volatility dramatically goes up right as the market through April, May, and into June, really, really wasn’t very good.
As I throw up a 5 year chart, you can see that at various times, the same thing happened. That the volatility goes up when the market goes down. And so the fact that it is down right now does not mean, it being down, the Vix is at a very low number, it’s between 16 and 17, right now, then it does not mean the market is going to go down. As a matter of fact, with quantitative easing, I would actually argue that the market is going up because of the quantitative easing. It may continue to go up. This is just one of the things to watch for.
A client asked me the other day, you know, what are some of the indicators that I use, and I look at, etc.? And I have to tell you, it is not just one. It is many many, many different technical indicators. It is many, value of the whole market, but you know, for me, if you’ve been watching my videos, diversification. Because even if you are wrong on the indicators you’ve got to be very very well diversified in many different asset classes, etc.
Anyway, I just wanted to talk a little about the Vix, how very low it is and how it correlates with the market many many times.
My name is Mike Brady. Cambridge Investment Research, is my, I’m a registered rep of. My company is Generosity Wealth Management in Boulder, CO. My phone number- 303.747.6455. And you have a wonderful week, bye bye.
Every wondered what the 2008 Financial Crisis was all about? The Big Short by Michael Lewis is a good, gripping book that explains much of it. I highly recommend it.
But what are some of the lessons we can take from this crisis as outlined in the book?
