Sound Investing and Peaceful Sleep

ABOUT a week ago, I was swimming in my pool when I had serious difficulty breathing. “Uh-oh,” I said to myself, “now I am about to die.” My wife was upstairs reading, way out of earshot and, anyway, if I were about to have a lethal heart attack, I wouldn’t be able to scream.

It turned out to be a nasty but short-lived bronchitis, and as I was lying in bed recovering, I thought, “I will die someday, and before I do, I would like to share with you the best possible thoughts I can, in gratitude for the many insightful letters I have received over the years from my readers.”

DON’T SMOKE It is a filthy, disgusting, life-shortening, cancer-causing habit.

DON’T DRINK TO EXCESS It robs the mind of motivation, reason and health. Someday I will write about all of the bosses I’ve had who were heavy drinkers and whose lives were wrecked by it.

GET A BIG DOG And have that dog sleep in your bed with you. Dogs know nothing of mortality, and they share that peace with you.

INVEST FOR THE LONG HAUL If you are a smart long-term investor, do not pay any attention to short-term developments. They are often reported by people whose motivation may be to scare you (screaming about the subprime “crisis”) or to make you giddily greedy (screaming about that one certain stock you should buy to retire rich).

Some articles may scare you into selling, or not buying, at the wrong time, because the worse things are, and the worse the mood of speculators, the better the time to buy. Or some may motivate you to buy in excess — sort of like drinking in excess — at exactly the wrong, “irrationally exuberant” time. The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.

In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short-term trading. Such trading based on tips seen on television shows — even shows whose hosts are true comic geniuses with bald heads — or read in magazines can be potentially disastrous. The short term is no place for the ordinary investor to trade.

AVOID INDIVIDUAL STOCKS The data on this is as clear as a bell, and has been compiled by high-end thinkers ranging from Nobel laureates to the best friend the ordinary investor has ever had, John C. Bogle of Vanguard. Basically, you and I cannot pick stocks, except for Berkshire Hathaway. I was recently on a panel with the stock guru Ray Lucia, who offered overwhelming data about how impossible it was to pick stocks, trade in and out of them and fare as well as the market. His data was terrifying.

The people on Wall Street do many questionable things. They reward themselves extremely well. But they have, in the last couple of decades, made it possible for almost anyone to get good results in stocks: buying very broad-based mutual funds, index funds, exchange-traded funds and (with an eye on fees) variable annuities and holding them for a long time. The evidence that this form of investment does better over long periods than trying to pick stocks is simply staggering.

Yes, maybe some gurus at a hedge fund can do it for a while. Maybe your cousin claims that he has done it. Don’t try to do it yourself.

Wall Street, and especially Morgan Stanley, with its fine exchange-traded funds, and Fidelity and Vanguard, with their super-low-cost index funds, have made it possible to be a really good investor. So have many other companies with broad-based mutual funds. You can buy domestic funds, foreign funds, foreign developed markets funds, foreign developing market funds — all at amazingly low transaction costs.

Just for my own bad self, I suggest the Fidelity Spartan Total Market Index fund (FSTVX), a very broad index fund of domestic stocks; the iShares MSCI Emerging Markets Index fund (EEM), an exchange-traded fund that invests mostly in developing countries’ markets, and the iShares MSCI EAFE Index fund, for Europe, Australasia and the Far East (EFA),which invests mostly in highly developed in Europe, Japan and Australia. This has allowed the rank amateur to take advantage of the long fall of the dollar because the stocks are priced in foreign currencies that have appreciated against the dollar.

If you feel like throwing around money speculating on individual stocks, go for it — but only after you have several millions in index and other mutual funds and exchange-traded funds and variable annuities. Just as you might stop to gamble $300 as you pass by the craps table at the Mirage on your way back from the meeting to your room, feel free to take a flier on a few stocks just for laughs. But keep it limited.

KEEP A BUCKET OF CASH Have a good chunk of cash, or near-cash, in a place like an ultra-short bond fund. Markets do fluctuate. Sometimes they fluctuate horribly on the down side for a long while. This may coincide with the time you’re fired from a job or have a child starting college or are buying a second home. It is painful to have to sell stocks into one of these down slopes. It is much better to be able to live off your cash reserves. It is even better to be able to buy during those down periods. Ray Lucia calls this approach “bucketizing,” as in keeping a bucket of cash for emergencies and opportunities.

KEEP IT SIMPLE, STUPID There are supersharp traders using computers and leverage who claim to be able to make vast sums based on strategies that will work during up, down or flat markets. They use derivatives and complex arbitrage and exotic instruments like subprime mortgage pools. (Hey, did I just say that?) Don’t try this at home. Let the Mississippi riverboat gamblers gamble. You play it safe unless you are one of those gamblers. And if you are, don’t come crying to us ants when you start to freeze in the winter.

KNOW THY LIMITATIONS Be aware that there are almost no investment geniuses. The only ones I know of are Warren E. Buffett and John C. Bogle and Jim Rogers. If you want to buy Mr. Buffett’s individual stock, be my guest.

KEEP IT IN PERSPECTIVE Beyond an amount necessary to live in modest comfort, money is not that important, and often more of a burden than a pleasure.

GET SOME KITTIES And let them crawl all over you.

Now you have my best advice. And I can go back to swimming alone with a clear conscience.

Levi’s Turns to Suing Its Rivals

United States Patent and Trademark No. 1,139,254 is not much to look at: a pentagon surrounding a childlike drawing of a seagull in flight.

But the design for a Levi’s pocket, first used 133 years ago, has become the biggest legal battleground in American fashion.

Levi Strauss claims that legions of competitors have stolen its signature denim stitches — two intersecting arcs and a cloth label — for their own pockets, slapping them on the seats of high-priced, hip-hugging jeans that have soared in popularity.

So Levi’s is becoming a leader in a new arena: lawsuits. The company, once the undisputed king of denim and now a case study in missed opportunities, has emerged as the most litigious in the apparel industry when it comes to trademark infringement lawsuits, firing off nearly 100 against its competitors since 2001. That’s far more than General Motors, Walt Disney or Nike, according to an analysis by research firm Thomson West.

The legal scuffles offer a rare glimpse into the sharp-elbowed world of fashion, where the line between inspiration and imitation is razor thin. After all, clothing makers’ trade secrets are hung on store racks for all to see, and designs can be quickly copied with small changes to exploit a hot trend.

The lawsuits, which Levi’s says it is compelled to file to safeguard the defining features on its jeans, are not about the money — one settled for just $5,000 in damages. Instead, the company says, they are about removing copycats from stores. Nearly all the cases have settled out of court, with Levi’s smaller rivals agreeing to stop making the offending pants and to destroy unsold pairs.

But those competitors say the lawsuits are the last resort of a poor loser, a company that has lost billions in sales, laid off thousands of workers and flirted with bankruptcy as the denim industry exploded.

“They missed the boat,” said Tonny Sorensen, chief executive of Von Dutch Originals, a six-year-old denim and clothing manufacturer sued by Levi’s six months ago for allegedly borrowing the company’s double arcs for a back-pocket design. “Now they want to make a lot of noise and scare people away.”

Mr. Sorensen said his pocket design “did not look like Levi’s at all” because of subtle differences like placing the arcs “one inch to the left” and stitching a line to resemble “a pirate’s hook.”

Nevertheless, Von Dutch agreed to remove the jeans from dozens of boutiques and destroy hundreds of unsold pairs. “It was one style and it was not that successful anyway, so we made the decision not to fight it,” Mr. Sorensen said.

In the majority of cases, Levi’s accuses competitors of copying its design of two arcs that meet in the center of the pocket or its famous Levi’s tab, a folded piece of cloth sewn into the vertical seam of the garment.

Robert Hanson, Levi’s president for North America, said the company manufactured “a product that a lot of people are copying and copying with a lot of success.”

Instead of relying on Levi’s designs for what he called a “running start,” competitors should “look for other devices that don’t come remotely close to the Levi’s trademarks,” Mr. Hanson said. “Be more innovative.”

But the privately held Levi’s, whose founder sewed together the first pair of jeans in 1873, has been unable to exploit the latest $200-a-pair denim craze — and now claims scores of smaller competitors are riding high because of what it created. When consumers’ tastes shifted toward designer jeans that were bejeweled, torn and frayed, Levi’s was still selling basic $30 pairs at K-Mart.

In this dispute, back-pocket stitching has become the fashion equivalent of ink blots, with plaintiffs and defendants seeing in the new designs what they want, or need, to see. So far, Levi’s view is prevailing.

The company’s team of denim detectives — there are 40 across the world, scouring boutiques and department stores — has spotted what they considered offending stitches on jeans from the biggest names in the clothing business: Guess, Zegna, Esprit, Lucky Brand and Zumiez, to name a few.

Even companies that have painstakingly worked to avoid infringing on Levi’s trademarks have found themselves in the company’s crosshairs. At Rock & Republic, one of the country’s fastest-growing jeans makers, designers intentionally placed a cloth label on the right hand side of a back pocket, not the left, which would violate a Levi’s trademark.

Levi’s sued anyway, arguing its trademarks forbid placing such a label on a vertical seam of a back-pocket. During a tense, five-hour settlement discussion in San Francisco several weeks ago, the chief executive of Rock and Republic, Michael Ball, upbraided Levi’s lawyers for their aggressive tactics.

“I take it personally that you try to dictate how I design my jeans,” he recalled saying. Still, Mr. Ball said he agreed to stop placing the label on the vertical seam of a right-hand pocket for two years to avoid a drawn-out legal battle.

In an interview, Mr. Ball said his back-pocket stitching “was not remotely close to Levi’s” and that he agreed to a settlement, in part, because “I will get bored with that design soon anyway.”

Executives at Levi’s concede they missed important fashion trends as the denim industry ballooned over the last several years, but they deny the lawsuits are connected to any downturn in their business.

Instead, they say they are simply trying to preserve their intellectual property. Like pharmaceutical companies that sue generic drug makers over their patents or technology companies that duke it out over who owns the right to microchip designs, Levi’s says it is trying to protect its most valuable asset, its trademarks.

Clothing companies have battled counterfeiters and each other for decades over design trademarks. Lacoste has defended its alligator, Polo Ralph Lauren fights for its polo player and Nike fiercely protects its famous swoosh.

In that respect, Levi’s is no different. As far back as the 1970s, it sued the firm that made Wrangler jeans over the use of identifying tabs on clothing. “We protected our trademarks when business has been terrific and when it’s been difficult,” said Mr. Hanson.

Yet difficult only begins to describe Levi’s business today, after it failed to exploit the designer denim boom in what is widely regarded as one of the biggest debacles in the American clothing business. Levi’s sales have plummeted more than 40 percent since 1996 to $4.1 billion, forcing it to close dozens of factories and lay off nearly half of its workforce, or 7,600 employees, in the last five years.

The clothing company faced two major problems over the last decade. Its image and brand — button fly, rugged, and all-around bad-boy cool — was largely built for men, its jeans cut boxy and loose- fitting. At the same time, the company, which once distributed its jeans largely through department stores catering to the rich, had shifted into lower-priced retailers like J.C. Penney, Sears and Wal-Mart.

In the mid-1990s, though, the denim industry underwent a seismic shift as small upstarts began designing tight-fitting, feature-flattering women’s jeans and distributing them through luxury boutiques and department stores.

Women suddenly began snapping up jeans from manufacturers like 7 for All Mankind and True Religion that cost more than six times what Levi’s charged. Levi’s did not produce a premium denim line, Capital E, until just last year.

“The emergence of all this denim sold at astronomical prices simply passed them by,” said David Wolfe, creative director of the Doneger Group, a fashion consulting firm in Manhattan. “They should have jumped on the bandwagon but they did not even seem to see the bandwagon rolling, which amazed everyone in the fashion industry.”

The denim manufacturers who recognized the trend openly concede that Levi’s has served as an inspiration, if not template, for their products.

“Everyone is borrowing from them, it’s inevitable,” said Michael Silver, the founder of Silver Jeans, who has had several legal run-ins with Levi’s. “They should be happy that people are copying them,” he said.

But Levi’s is not flattered. “The value of the brand will become diluted if the marketplace becomes crowded with products with similar tabs or stitching to ours,” said Thomas M. Onda, a global intellectual property lawyer for Levi’s.

So employees at Levi’s keep walking into stores and scanning the racks for rivals who dare to stray to close its trademarks, as Steven Shaul, the founder and chief executive of Jelessy Jeans, learned when he slapped several intersecting arcs on a back pocket.

At the time, Mr. Shaul, who loves Levi’s and wears its jeans all the time, was confident his design bore no resemblance to the Levi’s trademark. “It was not even close,” said Mr. Shaul, whose jeans sell for between $200 and $400 a pair.

“It was an original design,” he said. “Why would I use Levi’s stitching? If my jeans sell for $200, I would not knock off $40 jeans from Levi’s.”

Nevertheless, Levi’s sued in 2005. “The first night after I was sued by them I couldn’t sleep,” he said. “The second night, no sleep again. Then I started talking to people in the industry and I realized, hey, everyone’s been sued by Levi.”

Relieved, he quickly settled the case, agreeing not to sell jeans with the offending stitches. “I did not even hire a lawyer,” he said.

From the Economist:

The world's first permanent war-crimes tribunal is proving more robust than expected; even sceptical America is softening its line

Get article background

WHEN the International Criminal Court (ICC) struggled into being, its well-wishers were unsure how long this fragile creature would survive, let alone if it would vindicate its creators' hopes of dishing out just deserts to tyrants.

Aged four-and-a-half, the tribunal is proving a lustier infant than many predicted. Its prosecutors have delved deeply into horrible wars in Congo, Sudan and Uganda. The court's first trial—of Thomas Lubanga, a Congolese warlord, accused of using children as soldiers—is due to start later this year. The first indictments for the mass killings in Sudan's Darfur region are expected next month. Five leaders of Uganda's rebel Lord's Resistance Army have already been indicted. One has since been killed, but the other four face trial when caught. An investigation into atrocities in a fourth, as yet unnamed, country is due to be announced soon.

As the court's reputation grows, so does the number of countries that have signed up—104 at the last count. They include all the main European states. Japan, which will become its biggest donor by far, is expected to join later this year. But the real change in the court's fortunes stems from a gradual shift in America's attitude: it has moved from outright hostility to some cautious signals that, in some parts of the world, it sees the ICC as useful.

In the court's early days, the administration devoted huge energy to limiting the risk of American citizens being hauled in. Using threats to hold back economic or military aid, it cajoled about 100 states into signing bilateral accords to keep Americans out of the court's grip. Under these deals, countries vowed that Americans would be immune from prosecution for atrocities committed on their soil—and would in no event be sent to the ICC.

John Bolton, America's erstwhile ambassador to the UN, hailed his country's decision in May 2002 to pull out of the ICC (not to be confused with the World Court, also in The Hague) as the “happiest moment” of his government career. Tom DeLay, the former Republican House majority leader, lambasted it as a “kangaroo court...a shady amalgam of every bad idea ever cooked up for world government”. President George Bush called it a “foreign court” where “unaccountable judges and prosecutors can pull our troops or diplomats up for trial”.

Despite the court's repeated assurances, American congressmen and officials feared that the world's sole superpower would become the target of politically-motivated prosecutions.

Although some fears remain, the tone has undoubtedly changed. Mr Bush recently waived restrictions on military aid to 21 countries, and curbs on economic aid to a further 14, despite their refusal to sign bilateral immunity deals. Senator John McCain, a Republican presidential hopeful, has said he wants to see the United States in the ICC. In an article in the Washington Post, he and a former senator, Bob Dole, urged America and its allies “to use their intelligence assets, including satellite technology” to help the ICC in Darfur.

John Bellinger, chief legal adviser to Condoleezza Rice in the State Department, has been the driving force behind the change of attitude. He thinks the campaign against the court undermines broader American aims, such as ending impunity for the worst crimes. “Divisiveness over the ICC distracts from our ability to pursue these common goals,” he has said. “We do acknowledge that it has a role to play.”

Ms Rice has herself urged a softer line, saying America was “shooting [itself] in the foot” by imposing sanctions on those unwilling to sign bilateral immunity deals. Many such states were old American allies who reacted by moving closer to China.

The first sign of a shift came with America's surprise decision not to veto the Security Council's referral of Darfur to the court in March 2005. When Serge Brammertz, the ICC's deputy chief prosecutor, was appointed to head the UN's inquiry into the murder of Rafik Hariri, Lebanon's former prime minister, nine months later, not a grumble was heard from America. Nor did it object when the Security Council voted last summer to transfer Charles Taylor, a former Liberian president, to the ICC's premises in The Hague for trial. And America's ambassador to Uganda has been urging support for the ICC's prosecution of the Lord's Resistance Army rebels, despite criticism from local community leaders who claim that the threat of arrest is impeding the peace process.

On their own, these signals may not amount to much. But together they suggest at least the beginnings of a change of heart. Mixed messages are still coming out of Washington; but the vitriol has gone.

As well as sensing that it may have something to gain from using the court, the Bush administration seems also to have been convinced that the risk of America or Americans being placed in the dock is less than originally feared. Administration officials were impressed by the court's carefully reasoned rejection of the hundreds of allegations it has received regarding America's role in Iraq—including suggestions that it was guilty of aggression or even genocide.

Luis Moreno-Ocampo, the court's chief prosecutor, argued as follows: first, the war involved states (Iraq and America) that are not members and therefore lie outside the court's jurisdiction, unless the UN Security Council (on which America has a veto) decides otherwise. Second, the court intervenes only when the home country fails to. America has already put some of its own soldiers on trial for crimes committed in Iraq.

Third, the crime of “aggression” is still undefined and thus cannot be applied. Fourth, Mr Moreno-Ocampo found no evidence to substantiate a charge of genocide, defined in the court's statutes as an “intent to destroy, in whole or in part, a national, ethical, racial or religious group”, or a crime against humanity, defined as “a widespread or systematic attack directed against any civilian population”. And though he did find evidence of isolated cases of rape, inhuman treatment and “wilful killing” of civilians, they were not sufficiently widespread to meet the threshold of gravity required.

Huge problems still lie ahead for the court, whose “leniency” towards America may disappoint some members. But it is off the danger list. “We have no more concerns about the court's vulnerability,” says Philippe Kirsch, its (Canadian) president.

Even though polls suggest that two out of three Americans favour joining the ICC, America is unlikely to sign up any time soon. The court has been so demonised by the Bush administration (and before that, so quibbled at by the Clinton White House) that it would take years to convince Congress to accept it. But court officials are privately making a bold prediction: one day, America will swallow all its doubts and join.

ONE morning last month in an airy hall at the Federal University of Viçosa, Brazil, the only sound to be heard was a chorus of zestfully inelegant slurping. Twenty-four black-aproned judges were wielding their distinctive tasting spoons at the Cup of Excellence competition, searching for the country's best coffee.

“My objective is to differentiate coffee,” says Susie Spindler, who started the competition in 1999 and now conducts it in seven Latin American countries. The competition is open to any grower in each country, tasting and scoring is systematic and blind, and the winning beans are sold worldwide in an online auction. By focusing on quality and transparency, Ms Spindler has not just ferreted out sublime coffees from some unexpected sources, but has connected the best growers to buyers who are prepared to pay for quality.

With global exports worth $9 billion in 2006 supporting some 25m coffee-growing families, coffee is an important source of income for many countries. But although the trade is profitable for importers and roasters, it has confounded governments and NGOs hoping to use the bean to stimulate developing economies. The collapse of trade barriers, a jump in production and a tendency by the largest roasters to treat coffee as a uniform commodity caused prices to fall to historic lows.

But a countervailing trend led by Starbucks and other “specialty” roasters has introduced drinkers to coffee differentiated by origin and type. Small roasters such as Stumptown, based in Portland, Oregon, are taking this approach further, borrowing concepts such as terroir, vintage and appellation from the wine world, taking the utmost care in roasting and preparation, and emphasising quality. “It's a different world,” says Joel Pollock, Stumptown's head roaster and one of the judges in Viçosa.

As a result, the coffee trade has bifurcated in the past decade into commodity coffee, sold in large quantities at a low price, and specialty coffee, where quality rules. There is little middle ground. Growers producing unexceptional coffee must either cut costs to compete with big, mechanised farms—impossible for most—or improve quality. The benchmark “C” price is set at the New York Board of Trade, and varies depending on the weather, the level of demand, and other factors. The aim of Cup of Excellence and other schemes is to enable high-quality coffees to differentiate themselves and command a premium over the C price. In Brazil, for example, investments in quality can increase a farmer's profits by 50%.

But Brazilian growers are relatively well off. For poorer farmers in less developed countries, even modest investments that would greatly improve their coffee can be out of reach. In such places, targeted assistance can help. “Quality coffee can be a significant driver in ending poverty,” says David Browning of TechnoServe, an NGO that promotes entrepreneurship among the rural poor. The tasting expertise and price-discovering transparency of Cup of Excellence can, he says, uncover “remarkable global competitive advantages” in some regions. Starbucks'CAFE practices, Fair Trade and other schemes can have a similar effect in some countries by providing technical and management assistance, improved facilities and access to credit.

With just under 800 bags of coffee (of 60kg, or 132lb, each) in its Brazil auction, Cup of Excellence is insignificant alongside worldwide production of around 100m bags a year. Yet it is influential. Trade in the best coffees is now distinct from the C market. But old habits die hard: “I don't take my eyes off the C price,” says Paulo Almeida, who won first prize in Brazil's Cup of Excellence competition in 2001 and went on to sell his coffee for $700 a bag, doubling his farm's income. The new diversity of buyers gives farmers a chance to maximise revenue by selling their coffee through many channels simultaneously: their best through internet auctions, a specialty grade through Fair Trade or other co-operatives, a commodity grade to big exporters and the rest to local markets. “It's a matter of finding the right market for each bean,” says Mr Pollock.

All of this, says Ms Spindler, “changes what is possible for coffee.” Certainly it has changed things for Fazenda Esperança, the top producer in this year's contest in Brazil. In the online auction on January 16th, 21 bags of its coffee fetched almost $40,000 from Japanese and Taiwanese bidders—more than ten times the C price.