Decades ago, I spoke with a Florida State University professor, the late Dr. Charles Billings, who hailed from my home town of Detroit, Michigan. Dr. Billings talked about his experiences pledging a predominantly black fraternity at the University of Michigan in the 1950’s. He spoke about how his pledge class had to carry bricks everywhere they went.  As he held a brick in his hand, a member of the fraternity pushed the brick towards his face with such force, that a tooth penetrated his lip and the brick. Though he had a physical scar, the scars from his experiences as a pledge were much deeper.

As a young man, I had the privilege of meeting Bishop Edgar A. Love, one of my grandfather’s best friends, and a founder of a predominately black fraternity. If I can be sure of one thing, it’s that no one ever hazed Bishop Love – for that matter, I’m sure no founder of any Greek letter organization was ever hazed. If peer pressure to endure hazing is applied for social acceptance, such peer pressure should be re-directed from hazing to the encouragement of academic achievement. Some traditions must come to an end.

Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve started paying interest on bank reserves and excess reserves on October 1, 2008, a measure that accelerated the effective date of the Financial Services Regulatory Relief act of 2006 by 3 years. Labor statistics show that approximately 50% of American workers are employed by small businesses, and according to the United States Small Business Administration, 77% of new jobs are created by small businesses. Therefore, a greater focus should be placed encouraging small business creation, as well as helping existing small businesses expand and survive. I believe funds flowing from excess reserves towards lending will help in this capacity.

What I hear from bankers is that uncertainty and an environment in which it is difficult to comply with an abundance of regulation, imperils banks ability to increase their lending. And what I hear from small business owners and those who want to start a small business, is the banks are not lending – an impediment to the ability of many small businesses to get off the ground, expand, or sustain their existence.  Though there is no guarantee that banks will increase lending to small businesses if not being paid interest on excess reserves, the probability that banks will put the capital they hold in excess reserves to use would theoretically help spark economic activity, and potentially benefit the U.S. economy.

In finance, U.S. government bonds of various maturities represent the “risk free” rate of interest. This is because it’s assumed U.S. government bonds are “risk free,” i.e. there is no chance of default.  With the massive level of U.S. debt, and attempts to slash governments budgets falling short of being able to substantially cut U.S. debt, are we now to assume there is no such thing as a “risk free” rate?

I’ll let the finance professors ponder this question, however, I won’t make any assumptions. When I was a student I learned that you don’t increase taxes or decrease government expenditures during a recession, or times of slow economic growth. However, the U.S. must plan to do so after our economy is back on track, as our current path is not sustainable. Since U.S. government debt remains rated AAA (only the outlook has turned negative), now represents the opportunity for elected officials to move forward by slashing future government expenditures, increasing taxes, and saving America from itself.

A long-term one directional strategy can be a gamble. Hedging is supposed to reduce risks, not increase them. Prices can go up, down, or sideways, this is a matter of fact. Ideally, the possibility of price movement in all directions should be considered if implementing a hedging strategy. With futures, this is more easily achieved by using short-term futures contracts to help protect against short-term price swings. What’s ironic is the city pays a risk management consulting firm to provide advice on hedging risks. Just because one can lock in a future price, does not mean one will save money. The savings gained by a decrease in a commodity’s price, can be more than offset by the loss of premium paid for futures contracts.

I hate to dwell on Florida, but since I relocated to Florida from New York City, I’ll continue to do so.  In 2009, Florida’s State Board of Administration booked a 250 million dollar loss on a questionable investment in New York City real estate.  The board, which manages over $100 billion in state employee retirement assets, was apparently warned during audits about their risky 2007 investment in Manhattan’s largest rental apartment complex.  The risky investment, made at the peak of the real estate market, imploded to create a 100% loss.  Had Florida paid me $5 million for my opinion, I would have produced at least $245 million in savings by advising against losing $250 million, in one of the worst real estate transactions of all time. Note: the total cost of this blunder was closer to $266 million when you account for the fees involved – great revenue for the broker of this deal.

These are just some of the financial blunders government entities have made across the U.S.  The strategic direction set by elected officials, along with the various policies they administer, requires a greater level of financial literacy and prudence. A lack of financial literacy by individuals contributes to reckless behavior. A lack of financial literacy among elected officials is conducive to creating another global financial crisis.

Pensions are busting budgets

Investors must consider the fact that the long-term capital gains tax rate for collectibles, exceeds the maximum long-term capital gains tax rate for non-collectibles by 13%, i.e. stocks and bonds have a maximum long-term capital gains tax rate of 15%. The additional 13% in taxation might make an investment in gold a poor choice versus other investments, particularly at current price levels. Perhaps investing in precious metal mining companies can help one capture returns linked to precious metals as a hedge versus inflation, but without the high taxation. The point is moot if investing in a non-taxable account, but for taxable accounts, the high capital gains tax rate must be considered.

My high school guidance counselor was a graduate of Eastern Michigan University. During a school event, the counselor advised that any senior interested in attending his alma mater should visit him. He claimed he would write a letter of recommendation for any interested student. Therefore, I added EMU to my list of potential colleges. When I went to the counselor to discuss, he told me I shouldn’t go to college. He said I was good with my hands, and a vocational school would be the right choice for me.

Needless to say, Eric graduated from the University of Michigan, earned a master’s degree at Cambridge University, and a J.D. from Columbia University. Now a practicing attorney, I’m confident Eric made a wise decision to attend college. I earned a B.S. from Florida State University and an M.B.A. from Manhattan College. I also made a wise decision, as my education is the foundation of my success. But in one respect my high school guidance counselor was correct, I am good with my hands. Every time I use the manual shifting mode in my hundred thousand dollar car, I think about how great it is to be good with my hands.

I wonder how many middle-class suburban white kids my counselor tried to discourage?  Similar dissuasion often takes place during college, and in the workplace. However, by staying focused on goals, and having access to mentors and positive role models, black youth can realize that there is no limit to their potential. Fortunately for Eric and I, we had such mentors and role models. All black children are college material.

“You were born into a society which spelled out with brutal clarity, and in as many ways as possible, that you were a worthless human being. You were not expected to aspire to excellence: you were expected to make peace with mediocrity.”

James Baldwin – The Fire Next Time

Two African American males who graduated from college: Greg Collier and President Barack Obama

Greg Collier pictured in his office in West Palm Beach, Florida

I then said to him, “There are just six degrees of separation,” as in the title of the award winning play.

The gentleman replied, “With black people, there are just two degrees of separation.”

I stood silent for a moment to digest his statement. How prophetic  –  as a black man, there’s a minimal amount of separation between myself, a homeless person, or a senior corporate executive who is African American. In some respects, there is no separation at all. After all, even the most successful black men have difficulty catching a taxi in New York City.

So what separates us? Education, experience, access to opportunity, confidence, perseverance? There are many factors, but access to role models can help blacks understand our history, learn different points of view, see opportunities, avoid or overcome pitfalls, and thrive as individuals, families, and communities.

I’ve been fortunate to have many role models. I never had the opportunity to meet Dr. Martin Luther King Jr. or Malcolm X, but I had the fortune to meet author and civil rights activist James Baldwin, who knew Dr. King and Malcolm X. At the time I was 14 years old, too naïve to understand the magnitude of meeting James Baldwin, or the degree of separation between myself , Mr. Baldwin, and his elite circle of friends and acquaintances. Meeting Mr. Baldwin and his mother, Emma Berdis Jones, was an empowering moment in my life. The circumstances of our meeting is a thesis in and of itself, so I’ll digress – the confidence, eloquence and majesty of James Baldwin were apparent the moment I met him.

James Baldwin and a statue of William Shakespeare

Upon reflection, meeting James Baldwin reinforced the fact that if I work hard, I can achieve whatever I desire, and if someone impedes my ability to achieve, I must have the fire next time to overcome the obstacles in my path. As a tribute to Dr. King, Malcolm X., James Baldwin and the other African Americans who built a foundation that allows me to achieve, I must preserve their legacy by celebrating black history month, being a mentor, role model, and helping others achieve prosperity.

I was a young employee at Chemical Bank, recently out of college and learning quickly about the real world.  Should I work hard to make someone else rich? Possibly –  by helping make someone else rich, one can get rich in the process. Also, work experience is a priceless commodity. Don’t get me wrong, CEOs are entitled to whatever their companies are willing to pay them, and what the market will bear, as are senior executives and profitable traders.

An example of why it's great to be a CEO in corporate America

As an employee in the public or private sector, few achieve the rock star status or compensation of the late John McGillicuddy. Though the same can be said of entrepreneurs, in the context of the psycho dynamics of work and organizations, not only does entrepreneurial freedom yield happiness, but it’s more conducive to allowing one to be the master of their fate, rather than the victim of their circumstances.  I can honestly say that the most miserable people I know either work in corporate America or have been displaced by corporate America. Though entrepreneurialism in and of itself does not create a utopia, the happiest people I know are entrepreneurs, and I’m one of them.

What I’m going:

I’m going to continue following the market’s momentum to the upside, but I’m prepared for a big move to the downside. I’ll close any long call option positions when I either achieve my target profit, or as my gains erode due to time decay, a decreasing stock price, or other factors. For my long-term investments, I’m primarily invested in U.S. domestic equities, ETNs and ETFs. For most of my securities, I own put protection, which I usually finance by selling call options, i.e. I’ve created low cost to zero cost collars, having both covered calls and protective put positions.

To clarify, I’ve sold call options with strike prices above the current market prices of my securities to raise cash, and I’ve used the cash to purchase put options with strike prices below the current market prices of my securities. This allows me to protect profits because owning put options on a security gives me the right (but not the obligation) to sell the security at the strike price of the option  until the expiration date of the option (note: most index options are “European style” as opposed to “American style” and  can only be exercised on the expiration date).

If the market price surges above the strike price of a call option I’ve sold, I could miss out on the additional potential market gains as the  price keeps rising. This is because call options give the buyer of a call option the right (but not the obligation) to exercise the option against me, requiring me to sell them the underlying security at the strike price of the respective option.  I could avoid being exercised against by “buying to close” call option contracts, but will likely create a loss on the option transaction because an increase in price creates a more expensive call option, all other factors being equal.

Note: I like using stop orders, particularly stop-limit orders, but I’m anticipating the potential of a fast move to the downside. With a stop-limit order, if the stop price is hit, a limit order is triggered. However, if the market moves quickly below the limit price before my limit order can be executed, I’ll be stuck with the stock because I’ve specified my minimum sales price with the limit order.  And with a stop order, if an event like the “flash crash” occurs, even if less drastic, the stop price may be hit and a market order might not get filled at a price remotely close to the stop price that triggered the market order, leaving me with a large reduction in market value.

Be careful out there folks!

“If something cannot go on forever, it will stop.”

–Herbert Stein

1. Do your homework. The SEC has a website with tips on how to check out brokers and investment advisers:  http://www.sec.gov/investor/brokers.htm.
2. Never write a check or wire funds directly to an investment adviser to fund an account. Custodial accounts offer protection by safekeeping your cash and securities. With custodial accounts, funds are sent to a custodian for further credit to your account at the custodian. Firms offering such 3^rdparty accounts are highly regulated, and limit the risk of one being subjected to fraud. You should ask potential custodians questions regarding their ability to protect you from financial crimes, especially their ability to keep crooks from withdrawing cash from your account. Also, make sure the custodian is a member of SIPC (the Securities Investor Protection Corporation), and whether the firm has private insurance to protect you beyond SIPC limits in case the firm fails – the current SIPC limit is up to $500,000 including a $250,000 cash limit. If you’re not sure about the safekeeping of your cash and securities, consider consulting an estate planning attorney who should be able to explain this process in-depth. It’s better to pay for a legal opinion than to become the victim of fraud.
   

   Protect Yourself from Bad Guys!!!

3. Understand fiduciary responsibility, that is, an investment adviser’s duty to put your interests first. Brokers often use the title “financial adviser/advisor,” but don’t have fiduciary responsibility. Financial advisers who are registered investment advisers with the SEC or one or more of the 50 states, do have fiduciary responsibility.
4. If you require a financial adviser to trade for you, the adviser should only be empowered to trade in your custodial account, and not have the ability to transfer funds to other accounts, whether the other accounts are in your name or not. Suppose a corrupt adviser was able to use false identification to open an account elsewhere in your name, and then was able to transfer funds to that account for their personal use?  Restricting transfers can help prevent this scenario.  If you authorize your adviser to extract a “management fee” from your custodial account, according to the SEC’s definition of “custody,” your adviser has “custody” of your assets. If an adviser has custody of your assets, they could potentially divert your assets for their personal use. One can negotiate a fee arrangement whereby a financial adviser is paid via check, rather than direct debit. At minimum, you should be notified of any fund transfer requests immediately. For this scenario, you should consult your custodian regarding the specifics of receiving alerts, and ensuring your adviser can only extract the management fee to which you agreed upon, and at the specific interval agreed upon. Again, if you’re not sure, consider consulting an estate planning attorney.
5. Educate yourself on fraud. The Association of Certified Fraud Examiners provides anti-fraud training and education http://www.acfe.com/home.asp. Other resources include Fraud College, a non-profit organization devoted to helping protect people from fraud: http://www.fraudcollege.info.
6. Titles mean nothing. The fact that someone is a Senior Vice President, has a securities license, professional certification or advanced education, does not protect you from fraud. Titles also don’t ensure that a financial adviser is good or reputable. There are Certified Financial Planners (CFPs) and MBAs who cannot manage a portfolio, and people without a college degree who can. Your best defense is your financial knowledge. The greater your financial knowledge, the better your ability to judge the knowledge of others.
7. Understand risk and returns. “The greater the risk, the greater the return.” If an adviser promises a high return with little or no risk, there’s a strong possibility they are lying. Be careful if considering investing in a business start-up. People hopeful of high returns are often the target of entrepreneurs seeking start-up capital, and most start-ups fail.
8. Consider managing your own money, there are an abundance of free resources available to help self-directed investors. Most discount brokerage firms and broad-based financial websites offer an abundance of educational resources.