Investing Curiouscatblog

Category: Investing

  • Not Every Day is Profitable

    Some days turn out to be quite unprofitable. One of my larger holdings is Depomed – it was down 58% today (a phase 3 drug trial failed to significantly reduce pain when compared with placebo with Depomed’s formulation, not the kind of news you want for your company). Oh well, you have to take the bad days as an investor (at least I do) if you expect to see the good days (if you invest in individual stocks you have to accept that you will have some bad days). It was the largest holding in my Darvamore marketocracy fund. I imagine the fund, which beat the S&P 500 by 3.5 percentage points annually since it was started, is going to see that result take a huge hit. This day will be noticeable on the chart for a long time.

    At least I have the sense to know it was a risky stock – I didn’t have any in my sleepwell fund, for example (the sleepwell fund is beating the S&P 500 by 1.5 percentage points annually since inception – 17.4% to 15.9%, and remember marketocracy reduces returns to account for a 2% annual management fee and trading commissions). Of course that is a bit misleading as most any individual stock can have huge losses on a given day or week. Google is my biggest holding there and while I think a sharp decline is unlikely right now, I would not be amazed to see it drop 30% in some week during the next few years. Given that Google is up 149% even a 50% decline would still make it quite profitable for the the fund. Taken as a whole for a long period of time I think the sleepwell portfolio is pretty solid.

    Well, even though I am sure I will have more days like this I hope I can avoid them for awhile and build up some profits first.

  • Old and Wealthy

    I am not exactly sure why but for some reason people seem very ignorant of the wealth distribution by age. The richest group by far are those over 65. There are several reasons for this including self preservation. Once you stop working you better have a large pool of capital or you will most likely have little income (you could have a great pension and no other savings but…). Another is that the “miracle” of compound interest. Those that actually saved enough for retirement often find their investments out-earning their spending thus wealth increasing yearly. This effect over time results in wealth increasing dramatically. Many of those that failed to save enough will have their savings dissolve very quickly thus leaving the inverse of a bell curve (a high number of wealthy and of poor and a lessor number in the middle). Social Security helps those that failed to save enough for retirement to slow the decline (and those that saved enough to become even wealthier even faster). The presence of large numbers of poor elderly I think is one reason so many are surprised that they are the richest age group.

    I used to be surprised how few people know this – now I know, for those I talk to anyway, they are always surprised. This has several public policy impacts such as why do we have a huge “social security transfer system” (social security including medicare) to move money from the young to the old when the old are wealthier than the young? People see the 7.65% deducted from their check but the employer has to pay an equal amount to this transfer of wealth between the generations bringing the total to 15.3%.

    It doesn’t make much sense to me to have those working at Wal-mart and McDonalds transfer 15.3% of the income from their labor to much wealthier people. Yes, paying something in I think is fair. But the system should be adjusted. One method I would use is to reduce (or eliminate) payments to the wealthy elderly (continuing the existing payments to the poor elderly is affordable so I see continuing those payments as good public policy) and reduce taxes on the working poor. Obviously others disagree so we transfer a large amount of money from those working at Wal-mart to those with hundreds of thousands in investments. I think this is wrong. I wish at least the facts would be known so that the decision is made with awareness of the facts.

    The median net worth of people 55 to 64 has climbed to nearly $250,000, while it has dropped to about $50,000 for those in their late 30s
    …
    The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what’s received little attention is who these rich people are. Overwhelmingly, they’re older folks. Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.
    …
    The implications are far-reaching and can turn conventional wisdom on its head. Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.

    Wow, I don’t recall seeing publications actually point out this fact very often. Good for the USA Today.
    (more…)

  • Microfinancing Entrepreneurs

    Business Week has an article on Microfinance Draws Mega Players on how investment banks are getting into microfinance. I must admit that while I certainly am happy if the market can get involved in making microfinance aid development I think it might be better suited to non-profit, foundations and charities. I am happy to continue to fund organizations like Trickle Up to help people help themselves.

    Kiva is another interesting organization that lets you loan directly to an entrepreneur of your choice. If fact, I have just placed $350 in loans to 5 business entrepreneurs (in Kenya, Mexico, Cameroon and Azerbaijan) – and a $50 donation to Kiva. Kiva provides loans through partners (operating in the countries) to the entrepreneurs. Those partners do charge the entrepreneurs interest (to fund the operations of the lending partner). Kiva pays the principle back to you but does not pay interest. And if the entrepreneur defaults then you do not get your interest paid back (in other words you lose the money you loaned). I plan to just recycle repaid loans to other entrepreneurs.

    Add a comment with a link to your Kiva page and I will add a page to this site with links to all Curious Cat blog readers with a link to Kiva pages.

    Related: Microfinance article from the New Yorker – Kiva: Microfinance Loans (posted on Christmas day 2006) – helping people succeed economically
    (more…)

  • Who Will Benefit From Fixed Pricing Ruling?

    The USA supreme court has ruled, 5-4, that manufacturer price fixing is ok (technically setting a minimum price would be ok). An interesting question is who will benefit from this. The right answer might also provide valuable investment ideas. My first thought is this will help those that provide customers added value. Without price to be a factor in the decision that leaves convenience and service. I would think Amazon.com could benefit (though they would likely rather provide discount prices to gain more market share I think they will retain and even grow market share due to convenience). Also retailers like Crutchfield that provide excellent after market support should benefit. Places that people go to only due to cheap prices will probably suffer. And of course the consumer that have to pay the higher prices will suffer. Basically retailers will win due to higher prices then there is just the matter of whether they lose enough business to offset that gain (customers moving from poor service but cheap retailers to good service retailers since there is no price difference).

    I also think the idea of using fixed prices as a business strategy will not be as easy as it may seem. Competitors don’t have to institute such a policy and therefore discounters could offer lower prices on their products which might then mean they don’t sell many of yours (and the retailer may just choose not to carry yours). The biggest winners might even turn out to be manufacturers that take advantage of competitors that set minimum prices (by not setting minimum prices themselves) and gaining market share.

    Related: High court eases ban on minimum prices – Supreme Court OKs retail price fixing by manufacturers

  • 12 Stocks for 10 Years Update – Jun 2007

    I originally setup the 10 stocks for 10 years portfolio in April of 2005. In order to track performance I setup a marketocracy portfolio but had to make some adjustment to comply with the diversification rules. In December of 2006 I announced a new 11 stocks for the next 10 years (9 are the same, I dropped First Data Corporation, which had split into 2 companies and added Tesco and Yahoo). Now I will add Templeton Emerging Market Fund (EMF) making it 12 stocks for the next 10 years. I like the emerging market area and liked the concentration in China and southeast Asia the Dragon fund offered. I still do, but given the rapid rise in the Chinese market especially other markets look more attractive than previously. EMF will allow for a wider geographic representation.

    At this time the stocks in the marketocracy portfolio in order of returns –
    Google (134% return, 15% of the marketocracy portfolio, 12% of portfolio if I were buying today)
    PetroChina (127%, 7.5%, 8%)
    Amazon (92%, 6%, 6%)
    Templeton Dragon Fund (73%, 11.5%, 10%)
    Toyota (69%, 10%, 10%)
    Cisco (54%, 6%, 8%)
    Tesco (14% [22.55 purchase price on Dec 11th 2006]*, 0, 10%)
    Templeton Emerging Market Fund (EMF) (15%, 2%, 4%)
    Intel (6%, 4%, 8%)
    Pfizer (-6%, 4%, 8%)
    Yahoo (-12%, 4%, 6%)
    Dell (-23%, 6%, 10%)
    (more…)

  • Why Investing is Safer Overseas

    Jim Jubak makes a good case for why investing is safer overseas now.

    To which I say: Wake up and smell the new world order. The U.S. financial markets are relatively riskier now than they were five years ago, and (many) emerging country financial markets are relatively less risky. If you haven’t updated your view of what’s called country risk in the last five years, you’re costing yourself money.
    …
    And as I look ahead, I see few signs that the United States will put its financial ship into better trim and lower the country risk that comes with owning U.S. equities and bonds.
    …
    I think you need to compare markets one by one to look for those where investors, who tend to stick with the conventional wisdom until something whacks them over the head, have mispriced risk. The countries that I find particularly interesting as investment targets are those that have made the biggest strides in getting their houses in order.

    He makes a good point. I have long advocated the benefits of international investing. And looking forward the potential for economic development (and investment gains) outside the USA are strong. As he says this does not mean abandoning the USA stock market but does mean thinking about increasing ownership of foreign stocks (probably using mutual funds though in our 10 stocks for 10 year portfolio we have 3 individual stocks: Toyota, Tesco (added in the December 2006 update), PetroChina and Templeton Dragon Fund [closed end mutual fund]).

    Related: State of the nation? Broke – Our Only Hope: Retiring Later

  • Fourteen Fold Increase in 31 Years

    chart of house price increases by country

    From 1975 to 2006 house prices in the UK increased 14 times. At 14 times that works out to about a 9% annual rate of return which is doesn’t sound nearly as impressive as a 14 fold increase to most people (I believe). The article does not mention if the chart is adjusted for inflation (a 9% return after inflation is incredibly good, a 9% return before factoring in inflation – which would reduce the rate of return – is good but reasonable) – my guess is that the chart is adjusted for inflation (meaning Britain’s owning real estate have been fortunate). Online calculator for annual rates of return over time.

    Real estate rate of returns (when calculated on the total price) also underestimate the “real return” most investors experience because investors often only put down a portion of the investment. So the real rate of return is increased dramatically to the investor as a result of the the multiplier effect of buying on margin. Of course, real estate also has expense related to upkeep and the advantage of providing a place to live…

    The graph (from the economist – see: Through the roof) shows other countries, USA: about 6 times, France 9 times… Remember these rates are averages for entire countries some areas in each country will have far exceeded these rates.

    The graph could be a bit better if they didn’t make several of the colors almost the same.

    Related: More Non Bubble Bursting in Housing – Europe and USA Housing Price Boom – How Not to Convert Equity – 30 year fixed Mortgage Rates

  • Study on Real Estate Sales With and Without Realtors

    Realtors take a large percentage of a home’s sale price for their services. It has never made much sense to me. It does not seem like the services are proportional to the sales price. I don’t see how it costs 5 times more to sell a $1,000,000 house than a $200,000 house. The Freakonomics authors have commented on the problems caused by the way realtors charge for services.

    Study Offers Provocative Comparison of Selling a Home:

    The research suggests that some sellers seem to be better at getting a favorable price. They might be better at marketing and bargaining or are more patient; they also are more likely to choose to use FSBO. “Sellers in Madison appear to sort themselves as expected across platforms, the more patient and astute ones going to FSBO, and those who need more help or a quick transaction going to MLS,” said Ortalo-Magné.

    “Our results are good news for buyers,” he said. “The price buyers pay appears to be driven entirely by the characteristics of the property and of the seller. Whether the property is sold through FSBOMadison.com or a realtor appears to make little difference in terms of purchase price.” “Realtors undoubtedly can provide value to sellers,” Nevo concluded. “But our research shows that for-sale-by-owner Web sites increasingly are making selling your own home more appealing and offering a viable alternative to realtors.”

    Study: The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (pdf)

  • Frugality Versus Better Returns

    Very nice illustration in Personal Finance Success Comes More From Smart Budgeting Than Smart Investing:

    Let’s say Kevin and I both make $50,000 a year. Kevin spends his spare time chasing individual stocks; I spend my spare time looking for frugal living ideas. Kevin spends $45,000 in a year and is thus able to invest $5,000 a year, while I, through budgeting and frugal living, only spend $40,000 in a year and am thus able to invest $10,000 a year.

    Now, Kevin’s a smart investing cookie and is able to crank out a 16% return each year. I just take my money, dump it in a Vanguard 500, and move on with life, which means over the long haul I earn a 12% return. Who earns more in the long run?

    After five years of this same investing, Kevin has $34,385.68 in his investment account, while I have $63,528.47 in mine, a difference of $29,142.79 in the frugal guy’s favor. Even at the twenty five year mark, if the investments have continued for that long, Kevin has $1,246,070.12 in his account, while I have $1,333,338.70 in mine, a difference of $87,268.58.

    I would use lower returns (to better match what I think is reasonable to use in projections about the future) but by using higher returns it actually makes a stronger point (the compounding at 16% is extraordinary – I was actually surprised that at the 25 year mark that the results were the way they were). The lesson is powerful. Your personal finance situation is a factor of several things, but very close to the most important is just actually saving money, as the post illustrates.

    Related: Trying to Keep up with the Jones – Earn more, spend more, want more – Living on Less – Saving for Retirement – How much have people saved?

  • Greenspan Warns of China Stock Drop

    Greenspan Says China Stocks May Post `Dramatic’ Drop:

    Former Federal Reserve Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a “dramatic contraction” after its main stock index jumped more than 90 percent this year.
    …
    “It is clearly unsustainable,” Greenspan told a conference in Madrid today by satellite. “There is going to be a dramatic contraction at some point.”

    Sure seems like a fair point. Over the long term China has great potential but a dramatic decline in stock prices seems a reasonable thing to fear.