Investing Curiouscatblog

Category: Financial Literacy

  • Inflation Shows Up in Huge Commodity Price Increases

    Gold and Silver at up dramatically in the last year. Food prices are up dramatically.

    The World Bank Development Prospects Group shows food price changes Q1 2010 to Q1 2011

    Increase
    Maize (corn) 74%
    Wheat 69%
    Soybeans 36%
    Beef 36%
    Rice -2%

    If food is 10% of your expenses and food overall has inflation of 30% that only increases your expenses 3%. If food is 50% of your income and goes up 30% that increases your expenses 15%. In the USA people spend about 10% disposable income on food (much of that though is really processing the food not the raw material). Spending in Japan on food is 19%, France 16%, China 33% and India 46%. 50% if what most of the people in the world spend. Those people are poor and don’t have the resources to pay more. This is why food prices are so critical. Governments fall from such rises in basic food prices. Also remember even in a country like the USA, where the average is 10% nearly 30% of people spend over 20% of disposable income on food. There are large variances not only between countries but within countries.

    What matter most is local food prices, but global food prices impact the prices in countries. Though many governments subsidize food prices – when food costs more than 30% of people’s income I think not doing so (when prices rise dramatically) would be crazy. When food costs 5% the government really doesn’t need to be involved.

    Inflation is a serious threat to economies in the next few years. Food inflation for non-rich countries is a huge problem now.

    Related: Food and Energy Costs July 2008 – Food Price Inflation is Quite High – You Can Help Reduce Extreme Poverty – Creating a World Without Poverty – Ethanol: Science Based Solution or Special Interest Welfare

    Food Price Watch by the World Bank
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  • Banks Hoping they Paid Politicians Enough to Protect Billions in Excessive Fees

    USA consumers pay huge fees on debit cards not found in most other rich countries. Other countries provide debit cards with much cheaper fees than USA banks mandate now given their anti-competitive oligopolistic pricing power. I haven’t seen anyone (that isn’t in the pay of banks) arguing for keeping excessive fees in place. But there are lots of people being paid by the banks (including most likely, “your” representative).

    Banks want a favor — at your expense

    The big banks are pressing Congress for a favor that will cost the average American household $230 a year. The bankers argue that the favor is needed to support small community banks. But since the lion’s share of the favor will be collected by just four banks, it might be cheaper to subsidize community banks with a check direct from the Treasury.

    David Frum, special assistant to President George Bush, is exactly right.

    Banks charge an average of about 1% on debit card transactions. In Australia, where swipe fees are regulated, banks charge half as much — and still earn a profit.
    …
    [banks] are lobbying hard to repeal the cap on debit card fees in advance of the July date when Dodd-Frank goes into effect… Congress is not swayed by arguments. It is swayed by clout — and on this issue, it is the banks who have the clout.
    …
    Based on that experiment, economist Robert Shapiro of Sonecon estimates that about 56% of the value of reduced swipe fees will reach the final consumer. That’s the basis for his calculation of savings of $230 per household. That’s also the basis for his further calculation that reduced swipe fees will translate into a one-time gain of 250,000 new jobs.
    The new Republican House majority appropriately mistrusts government regulation. But if the financial crisis taught us anything, it should have taught that financial regulation is different from other forms of regulation. Invisible charges imposed by a financial cartel is not my idea of a free market.

    The caps were part of the huge bailout taxpayers gave banks and were meant to be a partial watering down of a few of the smaller favors their bought and paid for politicians had given them over the years (as “punishment” for their misdeeds).
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  • Buffett Cautions Against Buying Long Term USD Bonds

    This is another article supporting my belief that long term bonds are not investments I want to take on now. The risks of inflation and low yields seem like a very bad combination.

    Buffett Says Avoid Long-Term Bonds Tied to Eroding Dollar, quoting Warren Buffett:

    “I would recommend against buying long-term fixed-dollar investments”
    …
    “I would much rather own businesses,” he said. “It’s very easy to take away the value of fixed-dollar investments.”

    By “take away” he mean the government can undertake policies to “inflate” their way out of a budget mess. By undertaking policies that create inflation (drastically increasing the money supply, borrowing huge amounts of money, running huge trade deficits…) the country can devalue the currency, the US dollar in this case, and thus reduce the effective cost of the payments they have to make on long term bonds (because they pay back the loans with devalued, inflated, dollars). I believe he is right and long term USD bonds are a very risky (inflation risk) investing option today. Of course I have felt the same way for the last 5 years. I own very little in the way of bonds – I do own a bit of TIPS (Treasury Inflation-Protected Securities), in my 401(k) – but stopped allocating money to that class in the last year.

    Related: Bill Gross Warns Bond Investors (March 2010) – Bond Yields Stay Very Low, Treasury Yields Drop Even More – Who Will Buy All the USA’s Debt?

  • Dishonest and Dangerous State Budgets

    Bill Gates is really doing some great stuff the last few years. He takes a look at the enormous problem with state government’s failure do deal with the very long term health care failure in the USA (this has been going on for the last few decades) and the financial games them play. His Twitter quote is: Enron would blush at the financial untruth State governments engage in.

    I have written about these problems before, including in: USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations. One small (compared to the problem for the whole country) He notes is that California has a $62.5 billion health care liability and $3 billion set aside for it.

    We have been doing a very bad job of electing people to honest manage budgets. We, or our children and grandchildren are going to pay for those failures. The longer we fail to elect people that will deal with the real decisions that need to be made for government spending and taxing the greater those bills for our mistakes will be.

    Related: Are Municipal Bonds Safe? – USA Heath Care System Needs Reform – USA Spends Record $2.5 Trillion, $8,086 per person 17.6% of GDP on Health Care in 2009 – The USA Pays Double for Worse Health Results – The Long-Term USA Federal Budget Outlook

  • Warren Buffett’s 2010 Letter to Shareholders

    Warren Buffett has published his always excellent annual shareholder letter. It is a pleasure to read them every year, when they are published, and re-read them at other times of the year.

    Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
    …
    At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.
    …
    From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire.
    …
    At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.
    …
    a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.
    …
    It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

    Warren Buffett packs in great lessons all throughout the letter. Read it and take them to heart.

    Related: Buffett Calls on Bank CEOs and Boards to be Held Responsible – Warren Buffett’s Q&A With Shareholders 2009 – The Greatest Wall Street Danger of All: You – Warren Buffet Webcast to MBAs – Warren Buffett’s 2007 Letter to Shareholders – Warren Buffett’s Annual Report
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  • Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation

    The biggest investing failing is not saving any money – so failing to invest. But once people actually save the next biggest issue I see is people confusing the investment risk of one investment in isolation from the investment risk of that investment within their portfolio.

    It is not less risky to have your entire retirement in treasury bills than to have a portfolio of stocks, bonds, international stocks, treasury bills, REITs… This is because their are not just risk of an investment declining in value. There are inflation risks, taxation risks… In addition, right now markets are extremely distorted due to the years of bailouts to large banks by the central banks (where they are artificially keeping short term rates extremely low passing benefits to investment bankers and penalizing individual investors in treasury bills and other short term debt instruments). There is also safety (for long term investments – 10, 20, 30… years) in achieving higher returns to gain additional assets – increased savings provide additional safety.

    Yes, developing markets are volatile and will go up and down a lot. No, it is not risky to put 5% of your retirement account in such investments if you have 0% now. I think it is much riskier to not have any real developing market exposure (granted even just having an S&P 500 index fund you have some – because lots of those companies are going to make a great deal in developing markets over the next 20 years).

    I believe treating very long term investments (20, 30, 40… years) as though the month to month or even year to year volatility were of much interest leads people to invest far too conservatively and exacerbates the problem of not saving enough.

    Now as the investment horizon shrinks it is increasing import to look at moving some of the portfolio into assets that are very stable (treasury bills, bank savings account…). Having 5 years of spending in such assets makes great sense to me. And the whole portfolio should be shifted to have a higher emphasis on preservation of capital and income (I like dividends stocks that have historically increased dividends yearly and are likely to continue). And the same time, even when you are retired, if you saved properly, a big part of your portfolio should still include assets that will be volatile and have good prospects for long term appreciation.

    Related: books on investing – Where to Invest for Yield Today – Lazy Portfolios Seven-year Winning Streak (2009) – Fed Continues Wall Street Welfare (2008), now bankers pay themselves huge bonuses because the Fed transferred investment returns to too-big-to-fail-banks from retirees, and others, investing in t-bills.

  • Failing to Save for Retirement Has Consequences

    I have posted about the need to save money while you are working numerous times. Here is a good article looking at the large number of people that have failed to do so and are now retiring.

    Retiring Boomers Find 401(k) Plans Fall Short

    The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal.
    …
    Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.

    Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.
    …
    Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.

    The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity. That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.

    Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year.

    Knowing exactly what is needed for retirement is difficult. But knowing what is a responsible amount is not. It is certainly no less than 8%, and is likely the 12-15% figure Vanguard recommends. If you start at 10% from the time you join the full time workforce (in your 20’s) then you have some flexibility you can see how thing look when you are 30, maybe 12% is sensible, maybe 15%, maybe 10%. If you fail to save for a decade however, you are likely to need to be at 15%, or higher.
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  • Picking the Right Bank Can Eliminate ATM Fees

    Unfortunately large banks have a very strong tendency to try to take as much of your money as they can get away with. Rather than having to stay ultra-vigilante (as though I am in business with a thief that I have to watch ever minute or expect my money to be stolen) I would rather pick those I going into business with to avoid those seeking to rip me off. Credit unions are usually the best bet. Some credit unions join nationwide ATM networks, so if ATMs are important to you check this out before selecting a credit union.

    Hate ATM fees? Try these fee-friendly banks

    In fact, if you frequent an out-of-network ATM once a week, you could end up paying more than $200 in ATM fees a year.

    If you’re looking to avoid those fees, Ally, Charles Schwab (SCHW, Fortune 500) and USAA not only let all of their customers use out of network ATMs free of charge, but they also refund the fees that their customers are charged by other banks. State Farm Bank doesn’t charge you for going out of network and reimburses fees of up to $10 charged by other banks.

    In general, the best advice is to avoid large banks like you would someone with a dangerous communicable disease.

    BankSimple is a very promising new offering from Alex Payne, one of Twitter’s first employees and CTO of BankSimple, that promises “to simply put people first. Real customer service, no surprise fees, and a deep desire to help people is what makes BankSimple different.” Now the large banks are perfectly comfortable saying they try to help while trying to find any way possible to trick customers out of money. So Banksimple’s words don’t mean much. but I think there is a real chance they will be different. It is a great market to be in, huge amounts of money to be made and your competitors all treat customers egregiously poorly. That should give you a great opportunity to gain a huge market share.

    They are not yet open for business but it might open in early 2011. They are not actually going to be a bank, but instead provide the customer value and partner with existing banks (so we can deal with someone that isn’t trying to rip us off and they can let some bank deal with the administration of managing the money.

    Related: Worst Business Practices: Fees to Pay Your Bills – Credit Card Regulation Has Reduced Abuse By Banks – FDIC Study of Bank Overdraft Fees – Sneaky Fees

  • Avoiding Withdrawing Retirement Savings Starts Early

    In the USA we fail to save nearly enough for retirement by and large. And fail to save emergency funds or prepare for economically difficult times. We by and large chose to spend today and hope tomorrow will be good rather than first establishing a good financial safety net before expanding spending.

    When people are debating withdrawing from their retirement account it is actually not the important decision it seems to be (normally). Normally the important decision was years before when they chose to take on consumer debt and not to build up an emergency fund. And when they failed to just build up saving beyond that which could be used for nice vacations, a new car, or to live on in economically challenging times.

    If someone had been saving 15% of their salary in retirement since they started working if they took an amount that left them at 10% that is hardly a horrible result. While someone that was already behind by say adding just 3% to retirement savings and they took out all of it that would be much worse.

    And we should remember even having a retirement account to withdraw from might put you ahead of nearly 50% of the population (and our state and federal governments, by the way). If you have to resort to withdrawing from your retirement account don’t think of that as the failure. The failure was most likely the lack of savings for years prior to that. And as soon as possible, re-fund your retirement account and build up a strong emergency fund, even if that means passing spending on things you want.

    Related: Retirement Savings Allocation for 2010 – 401(k)s are a Great Way to Save for Retirement – Save Some of Each Raise

  • Selling Covered Call Options

    Options strike most as exotic investment transactions. And some option strategies can be risky. But stock options can also be used in ways that are not risky. Call options give you the right to buy a stock at a certain price (the strike price) on, or before, a certain date (the expiration date). So if you want to speculate that a stock will go up in a short period of time you can buy call options. This is a risky investment strategy – though it can pay off well if you speculate correctly.

    Someone has to sell the call option. The seller gives the buyer the right to buy a stock at a certain price by a certain date. A speculator can do this and take the risk that the price will not rise to the level where a person chooses to exerciser their option. The also carries a significant risk, as if the stock price rises the speculator that sold the option has to either buy the option back (at a significant cost) or provide the stock (which they would have to purchase on the market). In order to trade in options you must be approved by the broker (at least in the USA) as an investor with the knowledge, finances and goals for which options trading is appropriate.

    An investor can also sell an option to buy a stock they own – this is called selling a covered call option. This means you get the price the speculator is willing to pay to buy the option and may have to sell the stock you own if the person holding the option chooses to exercise it.

    Lets look at an example. Lets say you own some Amazon stock. (more…)