Every finance student has to memorize the goal of a corporation: maximizing shareholder value. The shareholders elect a board of directors to represent them and oversee management. The board members are all shareholders. Now, board candidates are often proposed by senior management, run out and buy 50 shares so they can stand for election, then rubber stamp the CEO’s ideas. We know that. We also know that conscientious board members may disagree about how best to maximize shareholder value (short term or long term? Dividends or capital gains? And how – new products? Acquisition? International expansion?) Nevertheless, there are laws, norms, and fiduciary responsibilities in place.

A not-for-profit corporation is still a corporation, and many of the norms of corporate governance apply. Instead of maximizing shareholder value, though, non-profits are in the business of maximizing donor value. The donors put up the money for a cause, and the employees are to work to maximize the value of their donation. A board of directors is selected from the donors, not elected in most cases; many organizations have minimum financial contributions for board members that can be quite high (you don’t get on an arts museum board without writing a big check), although some only expect that board members give something.

Hence, Susan G. Komen doesn’t distribute free money. It distributes donor funds, and the donors have the right to a say in that. Now, a large donor has more clout than a small donor, which is fair, and most Komen donors are people who have given relatively small amounts. Nevertheless, they felt a stake in the organization.

From a governance perspective, the issue of supporting Planned Parenthood is neutral. Instead, the issue is providing donors with transparency on the use of their funds. The IRS sets minimum standards for that, but many non-profits go beyond the minimum.

No matter what the Komen board decided to do about funds for Planned Parenthood, some donors would be upset. That’s a given. It would have been better to be upfront about what the decision was and why it was made; acknowledge that some donors would be unhappy; and suggest other organizations that the unhappy folks could support toward the goal of better treatment and prevention for breast cancer. They would have lost money but kept credibility. Think of all the money spent on crisis public relations that could have been spent on research! How responsible was starting a scandal?

Large-scale philanthropy is very American. In other countries, the government pays for health care, higher education, museum operations, and the like. Here, it’s a private-sector function, and that means good old-fashioned private sector fiduciary responsibility.

Essentially, we can think of social investing two ways. One is finding investments for people who want to invest socially, and the other is improving the environment, social conditions, and corporate governance. All of this is against a backdrop of struggling financial markets and tremendous upheaval in the United States and Europe.

Starting with the environment, I think the opportunities are becoming more limited. The Kyoto Treaty has fallen apart, and the European Union, which has tougher environmental regulations than the US, has bigger issues to deal with now (including whether or not there will still be a European Union.) The situation with Solyndra means that the US government will be less supportive of research in alternative energy. Investors can buy stock in Chinese solar companies, but the number of stock frauds aimed at US investors has grown and made a lot of people nervous. Unfortunately, I think this limits the number of opportunities to make money investing in environmental change.

On the social side, we’ve seen some really interesting trends, led in part by the Occupy movement. No matter how people feel about the protesters themselves, there is a lot of frustration with how American banks have conducted themselves in the light of the federal bailout. The big beneficiaries have been credit unions, which picked up an estimated $4.5 billion in deposits on Bank Transfer Day, November 4, 2011. This may make the credit unions stronger and more attractive for depositors; they may also become a bigger source of community lending.

Finally, on the governance side, the combination of Occupy and general frustration with the economy is causing more people to ask questions about executive pay and corporate taxation. When Mitt Romney released his tax returns, he made a lot of people aware of just how many legal opportunities there are for wealthy individuals and businesses to shelter income. That will end up being addressed at some point by different changes in disclosure regulations and tax law, which is good for overall transparency. On top of that, the Securities and Exchange Commission has been aggressive about pursuing insider trading violations, which improves the overall market climate.

Stronger credit unions and better transparency are good for the entire financial system. However, I don’t see a lot of great opportunities that would make social investing do better than any other investors. Social investing doesn’t have to underperform, but it’s not likely to outperform this year.

Here’s what I wrote on that site in 2007:

Keith Gilabert, who operated the Capital Management Group Holding Company that managed a hedge fund, the GLT Venture Fund, raised $14.1 million from 38 investors beginning in September of 2001. The fund posted losses almost from the beginning, but it reported gains to investors. Gilabert charged his management fees based on the phony profits, and he also received commission kickbacks from one of the brokers with whom he did business. When investors made withdrawals, they received funds from new people coming in, not from the fund’s assets. There is also evidence that he mass-marketed the fund, in violation of the rules requiring unregistered funds to deal only with accredited investors. He is alleged to have been assisted by someone at a large brokerage firm. Gilabert pleaded guilty in April of 2006.

There were two warning signs that might have been uncovered in due diligence. The first is that the fund was not formed until 2000, but it claimed performance dating back to 1997. The second is that in 2003, the California Department of Corporations revoked Gilabert’s investment adviser registration.


Last week, Gilabert sent a letter to Aaron Krowne, who operates the Hedge Fund Implode-o-Meter, claiming that this post was defamatory. Krowne took the post down and replaced it with more information, including the letter from Gilabert. I agreed to move the original post here, because I stand behind what I wrote. It is all backed by primary sources, specifically a complaint by the US Securities and Exchange Commission, the cease and desist order from the California Department of Corporations, and Gilabert’s own guilty plea as reported by the US Department of Justice. In fact, one of the issues that Gilabert says is defamatory is my reference to his press release in 2004, but it is still available online.

I’m not the only person who has reported this. The Los Angeles Times reported a similar story in 2006.

I’m not interested in picking a fight with Keith Gilabert, but I did not post anything false and malicious. Aaron Krowne gave me a platform to promote my book, and I appreciate it. It was all in the interest of making readers aware of the importance of doing good due diligence before investing in a hedge funds.

To reiterate: Keith Gilabert pled guilty to operating a fraudulent hedge fund and lying to investors in an effort to convince them to invest with his fund. He admitted that from September 2000 through January 2005, his firm purported to offer investments in GLT and collected more than $7 million from more than 40 investor-clients. Even though he claimed average annual returns of 27 percent, since at least 2002, Gilabert concealed the fact that he had lost most of the investors’ funds and that he had misappropriated investors’ funds throughout most of GLT’s operation.

Like the song says, don’t do the crime if you cannot do the time.

Also: Annie Logue knows how to do research using such primary sources as government documents. That, too, is a fact.

Finally, another fact: the statute of limitations for libel claims in California is one year. It’s now 2011, four years after I wrote the post for the HF Implode-o-Meter.

I had to tell my friend that I could not, because it does not. To the disappointment of social investing advocates, social investing does not outperform traditional investing. But, despite what many in the traditional investing business like to say, it does not have to underperform traditional investing. Pension funds have a legal obligation to place investment performance ahead of all other considerations, and that goes for Catholic hospital and labor union pensions with social investment restrictions. Many social funds outperformed in the financial crisis, but that was skewed by Islamic finance funds that would not invest in banks or other financial institutions.

I should add that most traditional investing underperforms the market to begin with, so these critics shouldn’t be so smug. If you can’t beat a cheap index mutual fund, with all of its tobacco companies and defense contractors, you should not be casting aspersions. I don’t say that lightly, either.

Social investment can match traditional investment performance and market performance if it is done correctly. Not everyone who invests socially does it well. The starting issue is that the definition of social or sustainable investing is not simple. Some organizations define it very clearly because they have an organizational mission to refer to. A lot of Catholic colleges and pension funds for religious orders will not invest in companies that market tobacco, make weapons, or provide anything that could be used for birth control or abortion. They have clear lines. It is hard to set those; gray areas emerge quickly. WalMart is one of the most environmentally responsible companies in the United States, but they are hardly a model employer. BP was an example of how an oil company could be environmentally responsible until the Deepwater Horizon spill showed that it was all a sham. At a big state-supported university, it would be especially difficult to build a consensus on what should and should not be in the endowment.

Here’s the other thing: an endowment has to invest its money somewhere. The trustees have a fiduciary responsibility to run the endowment in order to support the academic mission of the university, and everything else comes behind that. Is anyone prepared to give up a student scholarship or two for the sake of social goals? The two are not mutually exclusive, but it takes work to reconcile them.

The key to identify what your true hot issues are and then finding acceptable investments that have the same risk and return characteristics as the investments you want to replace. One firm that has done great work on this is a company that used to be known as KLD that has since sold out to an index firm called MSCI (which used to be Morgan Stanley Capital International.) Finding other investments creates more work and possibly raises costs to the investment staff, so that adds to the challenge. In general, funds that naively exclude alcohol, tobacco, pornography, and gambling stocks underperform unless the fund manager takes the time to find good substitutes.

I gave my friend several resources to help his research. The first is the National Jesuit Committee on Investment Responsibility. The Jesuits have been leaders in investing among the Catholic orders, and they are known for their intellectual approach to worldly issues. I sent him to two bibliographies of some of the academic research on performance.

I also suggested that my friend channel his energies into a proxy voting program. It’s a popular form of campus shareholder activism because it does not interfere with the investment process, and I wrote an article about it and other investment activism issues a few years back for University Business. One of the organizations I talked to is the Responsible Endowments Coalition, which gives students resources for addressing social investment issues.

All of this is a long way of saying, there isn’t an easy answer, because you have to balance a lot of issues to make social investing work in a large portfolio. It can work, though, if the parties involved work at it. I hope my friend can be the catalyst at his college.

Covered Calls: Earn 1.5% Per Month And Have Downside Protection

by Mike Scanlin

Website: http://www.borntosell.com

Covered calls are a popular and well-practiced investment strategy used by income investors. In-the-money buy-writes can be used to generate 1.5% per month or more. Although fairly consistent in their ability to generate income, some covered call investors suffer losses during bear markets. Often missing from their portfolios are discipline, diversification, and patience. Let’s examine those and then consider a portfolio for the November option cycle.

1. Discipline

Covered calls are not a get-rich-quick strategy. It’s more like collecting interest than anything else. But the compounding effect of regular monthly gains is powerful over long periods of time. Once an investor decides to implement a covered call strategy it is best to give the strategy a couple of years before rendering judgment on its effectiveness.

In fact, last month Nikunj Kapadia, an Associate Professor of Finance at the University of Massachusetts, published a paper called “15 Years of the Russell 2000 Buy‐Write“. It examined the robotic application of the covered call strategy to the Russell 2000 index, RUT. Professor Kapadia’s results:

“Over the 182 month period of analysis, the RUT buy‐write strategy using 2% out‐of‐the‐money, one‐month calls generated higher returns than the underlying index (8.87% versus 8.11%) at about three‐quarters of the standard deviation (16.57% versus 21.06%).”

2. Diversification

Investors tend to fall in love with a handful of stocks. That’s fine as long as the handful includes companies are not all correlated. Spreading investments across industry sectors, geographic regions, growth rates, commodities, etc, is critical because uncorrelated investments offer some diversification protection in the event that one of them declines during the covered call portfolio’s life.

3. Patience

Collecting time premium is a game of patience. Due to option spreads and transaction costs you should not be making daily adjustments to your covered call positions. In fact, if you are selling in-the-money options you will rarely adjust them at all. Most likely just wait until expiration day and then let them get called away.

So how do we earn 1.5% per month?

Let’s look at the characteristics of the holdings in a portfolio of 5 uncorrelated companies or ETFs. Then we can find examples in each category that generate an annualized return of 18% or more per year (including dividends).

The sectors could be:

1. Industrial Goods or Conglomerate

2. Technology or Services

3. Healthcare or Financial

4. Materials or Consumer Goods

5. International focused

Within each sector the ideal, but not always required, characteristics include:

– dividend yield

– no earnings release before option expiration

– large market cap

For each call option we’ll be writing:

– downside protection of 5% or more

– reasonable open interest

An Example Portfolio For November 19 Expiration

Start with the list of Dividend Champions, which are those companies that have increased dividends for 25 or more years in a row. From that list we find the AFL 35 strike (stock 41.30) and TGT 50 strike (stock 52.95) offer annualized-returns-if-called of 17% and 18%, with a downside protection of around 17% for AFL and 7% for TGT. Both have earnings coming up, so you’d have to be comfortable with that before investing (although these in-the-money options mitigate some of the earnings risk).

To that mix, let’s add some uncorrelated stocks in the technology and financial sectors.

On the technology side, these covered calls all yield over 18% annualized return for the November cycle: SINA 80s (stock 93.40), SWKS 20s (stock 22.46), NVDA 14s (stock 15.70), AKAM 22s (stock 24.50). They also offer downside protection of 11% or more and none of them have earnings before the November expiration. Or, if you just wanted to buy AAPL you could do the Nov 390s (stock 422) for 19% annualized return (but AAPL has an earnings release Oct 18).

Probably want to use an ETF for the financial sector to avoid single company risk. One of the most-popular financial ETFs is XLF (stock 12.60). The Nov 12 buy-write offers a 31% annualized return.

Lastly, let’s add a commodity stock. We’ll use GLD (stock 163.40) but there are many other choices in the materials space. The GLD Nov 159s yield 19%.

Adding it all up, here is a diversified covered call portfolio for the November expiration:

If you wanted additional diversification (probably a good idea if your portfolio allows it) you could add consumer goods, industrial goods, healthcare, or an international focused company or ETF.

I had forgotten how to use a microfilm reader and had to have a librarian show me.

One of the articles I wanted was an April, 1966 interview with Alfred Winslow Jones, considered to be the inventor of the hedge fund. It was the first article that really explained the concept to the wide world.

Here’s what struck me, though. Poor Warren Buffett’s name was misspelled even back then: “Stayman, whose wealth comes primarily from a woolen business, also has money in the two other big hedge funds, City Associates and Fairfield Partners, and in Buffet (sic) Partnership, Ltd., a $45 million Omaha operation that uses hedge principles to some extent but that has mainly, and very successfully, concentrated on long-term investment.”

Buffett did have a private fund that eventually was liquidated and converted into the shares of a publicly traded textile manufacturer that he controlled, Berkshire Hathaway. Then, as now, everyone wanted to spell his last name with just one T.

Romance author Danielle Steel has a similar spelling problem. Everyone wants to add an extra e to Steel. Why, I don’t know.

Logue is misspelled all the time. I get Louge, Loque, Loge, Luge, and Logan. (For what it’s worth, it’s an Irish name that rhymes with “vogue”.) When I was younger, it bothered me, but now I’m resigned to the fact that last names are hard and most people don’t misspell names to be jerks. It probably helps my acceptance that I’ve misspelled names more than I’d like to admit. However, I think that if you reach the household-name status of a Warren Buffett or a Danielle Steel, proper spelling should go with the territory. Right?

Magazine fact-checkers should pick up on that, and they should have back in 1966. Of course, maybe Mr. Buffett didn’t take the fact-checker’s call.

It means a lot more uncertainty. One of the issues affecting Egypt is tension between conservative Muslims who would like the country to be more religious and secular Egyptians, many of whom are also Muslim, who would like the country to focus on being a modern economic power. Neither group seemed happy with the government, the result being riots in the spring of 2011 and the overthrow of Hosni Mubarak, who was the fourth president of Egypt. Elections have been scheduled for November 28, and much hinges on them. Will the people of Egypt be able to come together? What will the new nation look like? And, will the new government support economic growth, or will it have other priorities?

This is a high-risk situation. It’s too soon to know if the new government will be friendly to commercial interests, or even able to hold the country together until the next election.

Type of government: Republic

Major industries: Cement, chemicals, construction, energy, food processing, hydrocarbons, light manufacturing, metals, pharmaceuticals, telecommunications, textiles, transportation

Median age of population: 24.3

GDP per capita: $6,200

MSCI 2010 equity market return: In local currency 15.45%; In US dollars 9.55%

Currency: Egyptian pound (also known as gineih)

English-language newspaper: Daily News Egypt

There are a few options out there. Most brokerage firms that deal with traders offer simulation trading for their customers, but you usually have to open an account to access those features.

More than one trader has gotten started by watching the market fro buy and sell points, entering phantom trades in a spreadsheet, and then calculating performance. It’s not glamourous, but it works.

The Chicago Board Options Exchange offers an online trading game called OptionQuest, if you want to try out options trading. If stocks are more your thing, MarketWatch offers a stock market game and Investopedia has its stock simulator (with a Canadian version, if that suits your needs best).

If you want to compete for real money, you can try the CNBC Million Dollar Challenge. This year’s contest is billed as the fourth annual, but it hasn’t run in consecutive years. There as a nifty scandal a few years back in which some contestants found a bug that let them enter trades after the market closed. That is a little reminder that trading games are not the same as real trading; the rules and the regulators may be a little different, and the stakes change when the bucks are real. Still, it makes a lot of sense to practice before jumping in to real markets.

In Emerging Markets For Dummies, I have a summary of each of the markets in the MSCI Emerging Markets and Frontier indexes. Since publication in January, no markets have changes as much as those of the Middle East and North Africa, so I’m writing updates. The first installment: Bahrain.

Type of government: Constitutional monarchy

Major industries: Aluminum smelting, fertilizers, insurance, iron pelletization, Islamic and offshore banking, petroleum processing and refining, ship repair, tourism

Median age of population: 30.9 years

GDP per capita: $40,300

MSCI 2010 equity market return: in local currency, -21.43% ; in US dollars, -21.42%

Currency: Bahraini dinar

English-language newspaper: Gulf Daily News

Bahrain is in the MSCI Frontier Markets index. It’s a tiny country, with about 1.2 million residents, both citizens and expatriates. It was long considered to be one of the most stable and open countries in the Middle East, which makes it a popular site for the regional offices of different multi-national corporations. The opposition, mostly Shia Muslims who opposed the Sunni ruling family, was mostly small and quiet. Until this spring. The Shia opposition was inspired by uprisings elsewhere in the Middle East and launched full-scale protests, with lots of violence and mayhem following. The government is still in place. There’s a lot of uncertainty in the country now, which makes it a high-risk situation for investors. You need to watch the news carefully to see how it plays out.

Africa, of course, is a continent. The Republic of South Africa has as much in common with Sudan as Point Barrow, Alaska has with Cancun: on the same continent, yes, but very different in terms of economy, climate, and interests of the people. Many African countries are poor and have irresponsible governments. And many African countries are prosperous and democratic. (None is rich – yet.)

One of the features of Emerging Markets for Dummies is a guide to each of the world’s emerging and frontier markets. It has information on the economy, the challenges, English-language business publications, and other items to help people research the markets. Most of Africa’s emerging markets are in the north, along the Mediterranean. That’s not surprising; the proximity to Europe has allowed these nations to establish strong traditions of trade and commerce.

However, it seems like every nation in North Africa has changed since the book came out! The Arab Spring has been amazing to watch. And, to the point here, it shows just how much fluidity is in emerging markets. The reason that they have great opportunities is that they also have great risk.

In coming weeks, I’m going to update the information on North Africa’s emerging markets here. Something to watch for, eh?