Investing Curiouscatblog

Category: Investing

  • Curious Cat Investing, Economics and Personal Finance Carnival #18

    Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival: find useful recent personal finance, investing and economics blog posts and articles. If you want to have an post considered for the next carnival please submit it to quixperito: money.

    • How I live on $7,000 per year by Jacob Lund Fisker – “If I had to venture a guess, I’d say I’m more frugal (the way your grandparents were frugal—in fact what I do wouldn’t be considered very extreme by your grandparents or great grandparents—I’d probably be average from their perspective) and I adhere more to a do-it-your-self ethics.”
    • Invest in Communities to Advance Capitalism by Howard Schultz (CEO of Starbucks) – “It is no longer enough to serve customers, employees, and shareholders. As corporate citizens of the world, it is our responsibility — our duty — to serve the communities where we do business by helping to improve, for example, the quality of citizens’ education, employment, health care, safety, and overall daily life, plus future prospects.” [similar to Dr. Deming ideas from decades ago on the purpose of organizations, which I share – John].
    • My dad taught me cashflow with a soda machine by Rob Fitzpatrick – “The vending machine didn’t magically make me want to be an entrepreneur. I wanted to be a video game designer, then an engineer, then a video game designer again, and then an academic. I get the impression kids are a bit slippery in that regard.
      But when I stumbled into the startup world two decades later, the dots began to connect. Cashflow wasn’t a new concept.”
      • photo of path up through the Forest Glen Preserve
      Forest Glen Preserve, Illinois, Illinois by John Hunter
    • Disability Insurance is Very Important by John Hunter – “When I would have had gaps in coverage from work, I have purchased disability insurance myself. I am all in favor of saving money. About the only 2 things I don’t believe in saving money being very important are health and disability insurance.”
    • What Other Dividend Lists Exist Besides the Dividend Aristocrats? – “companies that have increased their annual regular dividends for at least the past 10 consecutive years and have met specific liquidity screening criteria… The members of the Dividend Champions List include, those stocks (not limited to the S&P 500) that have increased their dividend for the past 25 years.”
    • Buying a New Home and Converting Your Current Home Into a Rental Property by Philip Taylor – “By refinancing our mortgage, we reduced our mortgage payment by enough to allow us to rent out the property by at least a hundred more per month than all of our expenses: mortgage, property taxes, insurance, home owners association dues, repairs, and property management fees.”
    • The perils of near monopoly by Joshua Gans – “Had Qantas had market shares akin to airlines in more competitive markets, the shut down would not have had the external spillovers, publicity and also the ability to shield Qantas — both managers and workers — from personal long-term consequences of such brinkmanship.”

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  • Kiva Loans Give Entrepreneurs a Chance to Succeed

    photo of Manuel De Jesus in front of his milling equipment
    Manuel De Jesus, miller and farmer in El Salvador, will use his loan to buy parts for this milling euipment.

    There is a great deal focus recently on the “99%” (via occupy wall street and the like). The truth is these are mainly about the 5% or 10% (those rich, but not quite as rich as the richest 1% – and much further from the richest than they were a few decades ago). As I have written before, most of those in the USA (also Europe, Japan…) are rich (though this is changing, a greater percentage of the USA is not rich, looking globally, than maybe any point since the 1930s).

    We get confused because many near us are even richer and think that means the rest of us are very poor. But those in the USA are often in the 5% or 10% – not the 30% or 60% or 90% they seem to think they are. $50,000 in annual income puts you in the top 1% globally. $25,000 puts you in the top 10%.

    I agree with the desire to reduce the political and market corruption, as I have written for years.

    For the 99% (or the 90% anyway), I really think the best things are government policies that reduce corruption and increase market forces. Letting actually capitalism work instead of political and corporate cronyism failing to let markets work as they should. Also giving education and the chance to build a better life for yourself are important. Thankfully many countries have been doing very well on this front: Singapore, Korea, Brazil, Ghana, China… That doesn’t mean there are not huge issues to still address for most of the 90%, there are.

    Microfinance in general, and Kiva in particular, are one great way to help. Again it isn’t perfect. And those getting the loans are not given an easy life. They are given a chance to try and build there business to improve there economic condition. This isn’t a certain success. And I do worry that taking on too high an interest rate, or loan amount, can leave people worse off than before. But when looking at the system of microfinance I really like the opportunity it gives people, who haven’t been given many.

    Those getting loans have to make smart personal finance and business decisions. If they do well they can greatly improve their financial situation. I made several more loans today, using money repaid by previous borrowers. I try to find loans where I am able to help fund a investment that will improve capacity (but that isn’t always possible) – a new machine that makes them more efficient for example. I also try to avoid loans where the interest rate is over 30% (which might seem very high, but rates below 20% are very rare given the economics of these loans – they are very costly to service). What Kiva does is provide the funds people like me lend as interest free loans to the partner banks. The idea is that this allows partner banks to provide more capital for loans (obviously) and at a lower rate because the bank isn’t having to pay interest on the funds.

    My loans today went to: Mali, Honduras, Senegal, Ecuador, Togo, Philippines and in the photo above El Salvador. The Curious Cat Kivans group has now lent $12,925 in 320 loans. We now have 11 members, join up and help give people an opportunity to improve their economic condition.

    Related: More Kiva Entrepreneur Loans: Kenya, Honduras, Armenia… – Using Capitalism in Mali to Create Better Lives – Funding Entrepreneurs in Nicaragua, Ghana, Viet Nam, Togo and Tanzania

  • Political and Corporate Cronyism are not Capitalism

    Many talking heads and politicians try to sell their policies of allowing large market players to take profits by prevent markets from functioning properly as capitalist. They are not. Unless liaise-fare capitalism throws out the primacy of free markets being used to aid society by allocating economic resources efficiently it isn’t either. If it does, using the word capitalism is just obfuscation, because it isn’t capitalist.

    Crony capitalism is a better phrase for what we have been practicing. Though using the word capitalism is misleading. Even better would be politically supported corporate cronyism. We have elected those that pursue this anti-market approach. And we watch them in great numbers on TV based on what is supposedly popular. But I really hope we can turn away the claims of capitalism somehow being consistent with the crazy things people have done.

    Pushing a political desire that anti-government and calling it capitalism doesn’t make it so. Capitalism at the core is about a system that allows markets to efficiently allocate resources to provide the greatest societal good. It is based on markets working. Capitalists know market players will try to prevent markets from working to gain themselves. To support capitalism you need to design systems that deal with this weakness otherwise you are not talking about capitalism you are talking about something else. Something that where anti-market forces which undermine the basis for why capitalism is a useful method for societies to gain economically is subverted to a desire to support those that can buy political power.

    I have written about this some, as I care about it: Economic Consequences Flow from Failing to Follow Real Capitalist Model and Living Beyond Our Means – A Free Market is not One with Monopolies and Oligopolies – Mis-representing Capitalism

  • High Frequency Trading

    High frequency trading is rightly criticized. It isn’t bad because rich people are getting richer. It is bad because of the manipulation of markets. Those being

    • Front running – having orders executed milliseconds in advance to gain an edge (there is no market benefit to millisecond variation). In the grossest for it is clearly criminal: putting in orders prior to known orders from a customer to make money at the expense of your customer and others in the market. My understanding is the criminal type is not what they are normally accused of, of course, who knows but… Instead they front run largely by getting information very quickly and putting in orders to front run based on silly price difference (under 1/10 of a cent).
    • Putting in false orders to fake out the market – you are not allowed to put in false orders. It is clear from the amount of orders placed and immediately withdrawn they are constantly doing this. Very simply any firm doing this should be banned from trading. It wouldn’t take long to stop. Of course the SEC should prosecute people doing this, but don’t hold your breath.

    Several things should be done.

    • Institute a small new financial transaction tax – adding a bit of friction to the system will reduce the ludicrous stuff going on now. Use this tax to fund investigation and prosecution of bad behavior.
    • Redo the way matching of orders is done to promote real market activity not minute market arbitrage and manipulation – I don’t know exactly what to do but something like putting in a timing factor along with price. An order that is within 1/10 of cent for less than 1,000 shares are executed in order of length of time they have been active (or something like that).
    • Institute rules that if you cancel more than 20% of your order (over 10 in a day) in less than 15 minutes you can’t enter an order for 24 hours. Repeated failures to leave orders in place create longer bans.
    • Don’t let those using these strategies get their money back when they do idiotic things like sell bull chip companies down to 20% of their price at the beginning of the day. You don’t get to say, oh I didn’t really mean to buy this stock that lost me 50% the day I bought it, give me money back. There is no reason high frequency traders should be allowed to take their profits and then renege on trades they don’t like later.

    Speculation is fine, within set rules for a fair market. Traders making money by manipulating the system instead of through beneficial activities such as making a market shouldn’t be supported.

    To the extent high frequency trading creates fundamental buying opportunities take advantage of the market opportunity. Just realize the high frequency traders may be able to reverse you gains (and if you lose you are not going to be granted the same favors).

    Related: Naked Short Selling – Misuse of Statistics, Mania in Financial Markets – Failure to Regulate Financial Markets Leads to Predictable Consequences – Fed Continues Wall Street Welfare

    The truth is the billions of dollars high frequency traders steal from others market returns matters much less to true investors. For long terms holdings the less than a cent they steal from other market participants is small. It is still bad. Just people really get more excited about it than they need to. I would love to just get 1/1000 of cent on every trade made in the markets, I could retire. But they are mainly stealing very small amounts from tons of different people. Now the fake orders and trades that go against them that they then get reversed are a different story.

  • Curious Cat Investing, Economics and Personal Finance Carnival #17

    We collect useful recent personal finance, investing and economics blog posts to help you find useful information.

    • How to Create a Million-Dollar Business This Weekend (Examples: AppSumo, Mint, Chihuahuas) by Tim Ferriss – “Don’t get me wrong–I’m not opposed to you trying to build a world-changing product that requires months of fine-tuning. All I’m going to suggest is that you start with a much simpler essence of your product over the course of a weekend, rather than wasting time building something for weeks… only to discover no one wants it.”
      • photo of Penang, Malaysia
      Penang, Malyasia by John Hunter
    • The True Cost of Commuting – “In other words, a logical person should be willing to pay about $15,900 more for a house that is one mile closer to work, and $477,000 more for a house that is 30 miles closer to work. For a double-commuting couple, these numbers are $31,800 and $954,000.”
    • Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment by John Hunter – “A huge advantage of dividends stocks is they often increase the dividend over time. And this is one of the keys to evaluate when selected these stock investments. So you can buy a stock that pays a 4% yield today and 5 years down the road you might be getting 5.5% yield (based on increased dividend payouts and your original purchase price).”
    • I Stand With the Protesters by Lee Adler – “Stop the fraud, return to the rule of law, prosecute the bankers, punish the guilty, figure out what our assets are really worth and pay us a fair return, and most importantly, return basic standards of fairness and ethical behavior, something that many in society must relearn.”
    • The Depression: If Only Things Were That Good by David Leonhardt – “In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances.”
    • Banks Have a Right to Make a Profit; Customers Have the Right of Choice by Ryan Guina – “I encourage you to explore your options and find the bank which meets your needs, and won’t nickel or dime you with fees. I use USAA, which is an incredible bank. And there are a variety of fee free online savings accounts, free checking accounts, and hundreds of credit unions which don’t charge as many fees as some of the larger banks.”
    • Remember when rare earth stocks were hotter than magma? Well, they’re 50% cheaper now by Jim Jubak – “The growing demand for rare earths from new technologies plus China’s moves had two immediate effects. First, prices for rare earth minerals, especially the rarer heavy rare earth elements soared with prices for some rare earth elements climbing ten times from 2009 into 2011. Second, the scramble was on for alternative sources of supply. Suddenly there was plenty of capital available to restart mines that had closed because of low prices and stricter environmental regulation outside of China.”
    • Fighting Civil Forfeiture Abuse – “The net effect of these three factors [profit motive, standard of proof, innocent owner burden] is to increase the use of forfeiture by law enforcement agencies by incentivizing forfeiture through making it profitable for the agencies that engage in it, by making it easier to keep seized property (by lowering the standard of proof) and by making it more expensive and difficult for owners to challenge the action (by shifting the burden of proof to the innocent owner).”

  • Investing Return Guesses While Planning for Retirement

    In my opinion is has never been more difficult to plan for retirement. It is extremely difficult to guess what rates of return should be expected in the next 10-30 years. It might have actually been as difficult 10 years ago, but it seemed that it wasn’t. Estimating a 7-8% return for your portfolio seemed a pretty reasonable thing to do, and evening considering 10% wasn’t unthinkable, if you wanted to be optimistic and took more risk.

    Today it is very hard to guess, going forward, what is reasonable. It is also hard to find any very safe decent yields. Is 4% a good estimate for your portfolio? 6%? 8%? What about inflation? I know inflation isn’t a huge concern of people right now, but I still think it is a very real risk. I think trying to project is helpful (even with all the uncertainty). But it is more important than ever to look at various scenarios and consider the risks if things don’t go as well as you hope. The best way to deal with that is to save more.

    In the USA save at least 10% of your income for retirement in your own savings (in addition to social security) and it would be better to save 12% and you might even need to be saving 15%. And if you waited beyond 30 to start doing this you have to save substantially more, to have a comfortable retirement plan (obviously if you are willing to live at a much lower standard of living in retirement than before, you can save less).

    Other factors matter too. If you don’t own your house with no more mortgage payments you will need to save more. Ideally you will have not debts at retirement, if you do, again you need to save more.

    That Retirement Calculator May Be Lying to You

    According to Ibbotson data, the long-term annualized gain for the Standard & Poor’s 500-stock index dating back to 1926 is 9.9 percent. For bonds, it’s 5.4 percent. (From 1970 to 2010, the Barclays Capital Aggregate Bond index average was 8.3 percent.) Plug those numbers into a portfolio of 60 percent stocks and 40 percent bonds and the return is about 8 percent, which is precisely the number most financial planners — and retirement calculators — were using up until recently.
    …
    Vanguard founder Jack Bogle has a slightly more upbeat assessment. He expects stock returns of 7 percent to 7.5 percent over the next decade. He assumes no expansion in the market’s price-earnings ratio, dividend yields of 2.2 percent, and earnings growth of at least 5 percent. Bogle expects bond returns to be about 3 percent. For a balanced portfolio, that produces a net nominal return of slightly more than 6 percent. A higher forecast is T. Rowe Price’s estimate of 7 percent; until this year it had used 8 percent.

    I also suggest using high quality high yield dividend stocks for more of the bond portfolio. I wouldn’t hold bonds with maturities over 5 years at these yields (or if I did, they would be an extremely small portion of the portfolio). I would also have a fair amount of the bond portfolio in inflation protected bonds.

    I also invest in emerging economies like China, Brazil, India, Malaysia, Indonesia, Thailand, the continent of Africa… To some extent you get that with large companies like Google, Intel, Tesco, Toyota, Apple… that are making lots of money in emerging economies and continuing to invest more in emerging markets. VWO (.22% expense ratio) is a good exchange traded fund (ETF) for emerging markets. I also believe investing in real estate is wise as part of a retirement portfolio.

    Related: 401(k) Options, Select Low Expenses – How Much Will I Need to Save for Retirement? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation

  • Mortgage Rates Fall Under 4%

    For the first time ever average 30 year fixed mortgage rates have fallen under 4%. My guess about interests rates have not been very good the last decade or so. I can’t believe people actually want to lend at these rates but obviously I have been wrong. The risks of lending at these rates over the long term just seem way too high to take a paltry 4%. But obviously I have been wrong.

    So if you didn’t refinance when I suggested it (and refinance, myself), previously, you may want to look at doing so now. Or you may believe that listen to me about interest rates doesn’t seem very wise.

    I have even read that banks are reducing fees in order to encourage refinancing. Seems crazy to me, but what do I know.

    You do need to have a decent loan to value ratio (certainly no more than 90%, and probably 80% would be better). That can be difficult for those that have had large decreases in their homes value. Also you need a great credit rating and a stable job situation. But if you qualify refinancing at these rates should be a great financial move for many. I’m perfectly happen to have done so earlier, I didn’t quite pick the bottom but I still think over 30 years these rates (the current rates and earlier rates of 4 1/4% or 4 3/8%) will seem like a dream.

    Related: Fixed Mortgage Rates Reach New Low (August 2010) – Lowest 30 Year Fixed Mortgage Rates in 37 Years (Dec 2008) – The Impact of Credit Scores and Jumbo Size on Mortgage Rates (Jan 2009)

  • Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment

    My preference is for a lower use of bonds than the normal portfolio balancing strategies use. I just find the risks greater than the benefits. This preference increases as yields decline. Given the historically low interest rates we have been experiencing the last few years (and low yields even for close to a decade) I really believe bonds are not a good investment. Now for someone approaching or in retirement I do think some bonds are probably wise to balance the portfolio (or CDs). But I would limit maturities/duration to 2 or 3 years. And really I would pursue high yielding stocks much more than normal.

    In general I like high yielding stocks for retirement portfolios. Many are very good long term investments overall and I prefer to put a portion of the portfolio others would place in bonds in high yielding stocks. Unfortunately 401(k) [and 403(b)] retirement accounts often don’t offer an option to do this. Luckily IRAs give you the options to invest as you chose and by placing your IRA in a brokerage account you can use this strategy. In a limited investing option retirement account [such as a 401(k)] look for short term bond funds, inflation protected bonds and real estate funds – but you have to evaluate if those funds are good – high expenses will destroy the reasons to invest in bond funds.

    There are actually quite a few attractive high yield stocks now. I would strive for a very large amount of diversity in high yield stocks that are meant to take a portion of the bonds place in a balanced portfolio. In the portion of the portfolio aimed at capital appreciation I think too much emphasis is placed on “risk” (more concentration is fine in my opinion – if you believe you have a good risk reward potential). But truthfully most people are better off being more diversified but those that really spend the time (it takes a lot of time and experience to invest well) can take on more risk.

    A huge advantage of dividends stocks is they often increase the dividend over time. And this is one of the keys to evaluate when selected these stock investments. So you can buy a stock that pays a 4% yield today and 5 years down the road you might be getting 5.5% yield (based on increased dividend payouts and your original purchase price). Look for a track record of increasing dividends historically. And the likelihood of continuing to do so (this is obviously the tricky part). One good value to look at is the dividend payout rate (dividend/earnings). A relatively low payout (for the industry – using an industry benchmark is helpful given the different requirement for investing in the business by industry) gives you protection against downturns (as does the past history of increasing payouts). It also provides the potential for outsized increases in the future.

    There are a number of stocks that look good in this category to me now. ONEOK Partners LP pays a dividend of 5.5% an extremely high rate. They historically have increased the dividend. They are a limited partnership which are a strange beast not quite a corporation and you really need to read up and understand the risks with such investments. ONEOK is involved in the transportation and storage of natural gas. I would limit the exposure of the portfolio to limited partnerships (master limited partnerships). They announced today that the are forecasting a 20% increase in 2012 earnings so the stock will likely go up (and the yield go down – it is up 3.4% in after hours trading).

    Another stock I like in this are is Abbott, a very diversified company in the health care field. This stock yields 3.8% and has good potential to grow. That along with a 3.8% yield (much higher than bond yields, is very attractive).

    My 12 stocks for 10 year portfolio holds a couple investments in this category: Intel, Pfizer and PetroChina. Intel yields 3.9% and has good growth prospects though it also has the risk of deteriorating margins. There margins have remains extremely high for a long time. Maybe it can continue but maybe not. Pfizer yeilds 4.6% today which is a very nice yield. At this time, I think I prefer Abbott but given the desire for more diversification in this portion of the portfolio both would be good holdings. Petro China yields 4% today.

    When invested in a retirement portfolio prior to retirement I would probably just set up automatic reinvesting of the dividends. Once in retirement as income is needed then you can start talking the dividends as cash, to provide income to pay living expenses. I would certainly suggest more than 10 stocks for this portion of a portfolio and an investor needs to to educate themselves evaluate the risks and value of their investments or hire someone who they trust to do so.

    Related: Retirement Savings Allocation for 2010 – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – 10 Stocks for Income Investors

  • Chart of Largest Petroleum Consuming Countries from 1980 to 2010

    chart of petroleum consumption by country 1980-2010
    Chart of petroleum consumption by country 1980-2010 by the Curious Cat Investing and Economics Blog. The chart may be used with attribution.

    The USA remains, by a huge margin, the largest consumer of petroleum products (motor gasoline, jet fuel, liquefied petroleum gases, residential fuel oil…) using 22% of the total (with about 4.5% of the population). From 1980 to 2010 the global consumption increased 38% to 87 million barrels a day.

    From 1980 to 2010 USA consumption increased 12% (so less than global consumption). Meanwhile, Germany, Japan and France decreased petroleum use by 19%, 17% and 10% respectively. Many countries have very low use in 1980 and have grown their economies dramatically over this period and increased petroleum use dramatically also: India up 433%, China up 411%, South Korea up 360%.

    Africa, in total, used 3.3 million barrels a day in 2010, up 120% from 1980. Africa used 73% of what Japan used in 2010 and 17% of what the USA used and 50% more than Canada. The data shows no sign of declining petroleum consumption on a global basis. The USA uses as much as China, India, Brazil and Africa combined. I believe, in 2015 those countries (by which I mean all the countries in Africa too, not that Africa is a country, which of course it is not) will use more than the USA (and likely show significant growth from 2010 levels).

    Data is from the US Energy Information Agency.

    Related: Oil Production by Country 1999-2009 – Top Countries For Renewable Energy Capacity – Chart of Nuclear Power Production by Country from 1985-2009 – Increasing USA Foreign Oil Dependence In The Last 40 years

  • Curious Cat Investing and Economic Carnival #15

    The global economy continue to be fragile and chaotic. At the same time companies continue to make large, and often increasing, profit. Here are some good blog posts on investing, personal finance and the economy.

    • The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects by John Hunter – “the prospects in emerging markets look incredibly good to me. Yes they will slow their growth a bit if the large economies stall, but I think it is foolish to avoid investments in China, Singapore, Brazil, Korea, India, Ghana, Malaysia, Indonesia. In fact that is where companies like Google, Tesco, Apple, Toyota and Amazon are going to be making lots of money. Emerging markets are volatile and the companies in them are too. This will continue.”
    • Extreme Early Retirement in Practice: How Two People Did It by Robert Brokamp – “We recently spent three months in Guatemala nestled between three volcanoes, on the shores of beautiful Lake Atitlan, and our average spending was $40 per day for the two of us, which equates to $14,600 per year. Our hotel price included daily cleaning, wi-fi, room service, cable TV, and a view.”
    • Are stocks cheap yet? Not if the economy is slowing, these numbers say by James Jubak – “A 20% drop in forecast earnings—the rough equivalent of an economic slowdown instead of a recession—would put the price-to-earnings ratio of the S&P 500 at 13. That’s below the average of 15 but not really very cheap given the degree of economic risk that an investor is taking on right now.”
    • Private Pensions: Another Gradual Catastrophe by Evan Tarte – “Despite the arguably noble intent of defined benefit plans and the PBGC, these plans demand crippling contributions from employers and inevitably the taxpayer, and make little sense in today’s market environment. PBGC’s current deficit stands at $22 billion”
    • Emergency Savings: is 6 Months Still Enough? by GE Miller – “with the average unemployment duration at 40.4 weeks, 6 months (or 26 weeks) is no longer enough, particularly when you take into account the possibility of medical emergency, pet operations, or other unforeseen circumstances. What is a good length these days? 1 year, at a minimum.”

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