Investing Curiouscatblog

Category: Investing

  • Real Estate Tax Compared to Rental Income in Several Cities in the USA

    I was just taking a look at a couple of properties in Zillow and found it interesting how big the real estate tax bite can be. I have 2 rental properties and the real estate tax cost is 15% and 12% of the rental income. At least for my area Zillow underestimate rent rates (the vacancy rate is very low and properties in general rent within days or weeks – at rates 10%+ higher than Zillow estimates on average -based on my very limited sample of just what I happen to notice).

    I thought I would look at the real estate tax to property value estimate and rent estimate by Zillow in Various locations.

    Arlington, Virginia – real estate taxes were 1% of estimated property value and 17.5% of rental estimate.
    Chapel Hill, North Carolina – 1.5% of value and 41% of rental estimate.
    Madison, Wisconsin – 2.4% of value and 39% of rental estimate.
    Flagstaff, Arizona – .7% of value and 9.5% of rental estimate.
    Grand Junction, Colorado – .4% of value and 6% of rental estimate.

    This is just an anecdotal look, I didn’t try to get a basket of homes in each market I just looked at about 1-5 homes so there is plenty of room for misleading information. But this is just a quick look and was interesting to me so I thought I would share it. While the taxes are deductible (from the profit of the rental property) they are a fixed expense, whether the house is rented or not that expense must be paid.

    A high tax rate to rental rate is a cash flow risk – you have to make that payment no matter what.

    In my opinion one of the most important aspects of rental property is keeping the units rented. The vacancy rate for similar properties is an extremely important piece of data. Arlington, Virginia has an extremely low vacancy rate. I am not sure about the other locations.

    I wanted to use Park Slope, Brooklyn, NYC but the data was confusing/limited… so I skipped it; the taxes seemed super low.

    Related: USA Housing Rents Increased 5.4% in the Last Year (Sep 2012) – USA Apartment Market in 2011 – Top Markets in the USA for Buying Rental Property (2011) –
    Home Values and Rental Rates

  • Apple’s Outstanding Shares Increased a Great Deal the Last Few Years

    One of the frustrating things for shareholders is how readily companies give away stock. A huge company like Apple has been giving away huge amounts of stock (through stock options) even while adding tens of billions in cash to their stockpile.

    Outstanding stock for Apple

    Jan 2006 – 848 million shares
    Jan 2007 – 862 million shares
    Jan 2008 – 879 million shares
    Jan 2009 – 891 million shares
    Jan 2010 – 907 million shares
    Jan 2011 – 921 million shares
    Jan 2012 – 932 million shares
    Jan 2013 – 939 million shares

    So even in the last year, while promoting a $10 billion buyback – the net result was 7 million more shares (not fewer as a “buyback” suggests); it did reduce the amount of increase to less than it has been recently. 7 million more shares * $425 = $2.975 billion more stock in place. If Apple uses $50 billion more to buy back stock that would allow purchase of 100 million shares at $500 a share ($500 is less than I would guess the average price will be, but we will see what actually happens). That would get the share balance back to the Jan 2006 level, if there were not huge new additions during the buyback period (which there probably will be).

    Companies certainly like to heavily publicize share buyback programs. They don’t trumpet how much additional stock they issue each year with the same zeal (most of which, for successful companies not in desperate need for cash, is provided through extremely sweetheart stock options for executives and board members at the expense of diluting stockholder’s equity – the easiest form of excessive executive pay to give away as it doesn’t cost the company cash).

    It will be interesting to see to what extent share buybacks actually decrease the share balance and to what extent they just eliminate the exploding issuance of shares Apple has engaged in while piling up the largest cash reserves ever recorded.

    Given Apple’s financial position I do not believe diluting stockholders equity by issuing huge amounts of stock was a wise policy the last 7 years. I think reversing that policy is wise. Buying back the stock they gave away is sensible but it would have been wiser not to give so much away in the first place. I’ll be surprised, and happy, if the outstanding share balance drops below 890 million (the Jan 2009 figure).

    I do think Apple is a great buy at these levels (I bought some more last week). The earnings reported today are not as spectacular as those reported recently but they still made a profit of $9.5 billion in the quarter (and had positive cash flow of $12.5 billion bringing total cash on hand to $145 billion). It isn’t like this is a company that is failing. It is just a company that isn’t growing earnings as rapidly. They are still earning enormous amounts of cash.

    The decline in margins is disappointing (but not surprising) but the margins are still great (just not as amazingly great as recently). The worry over further declines in margins seems justified to me and is one of the big risks for the stock going forward. I think margins will remains at a level that justifies a much higher price than the stock has today, but only time will tell.

    I would have liked to see the dividend increase more, but a dividend increase was a good move.

    Related: Is it Time to Sell Apple? – Apple’s Impossibly Good Quarter (Jan 2012) – Google to Let Workers Sell Options Online

  • Top Nations for Retirement Security of Their Citizens

    Across the globe, saving for retirement is a challenge. Longer lives and expensive health care create challenge to our natures (saving for far away needs is not easy for most of us to do – we are like the grasshopper not the ants, we play in the summer instead of saving). This varies across the globe, in Japan and China they save far more than in the USA for example.

    The United States of America ranks 19th worldwide in the retirement security of its citizens, according to a new Natixis Global Retirement Index. The findings suggest that Americans will need to pick up a bigger share of their retirement costs – especially as the number of retirees grows and the government’s ability to
    support them fades. The gauges how well retired citizens live in 150 nations, based on measures of health, material well-being, finances and other factors.

    Top Countries for Retirees

    • 1 – Norway
    • 2 – Switzerland
    • 3 – Luxembourg
    • 6 – Finland
    • 9 – Germany
    • 10 – France
    • 11 – Australia
    • 13 – Canada
    • 15 – Japan
    • 19 – USA
    • 20 – United Kingdom

    Western European nations – backed by robust health care and retiree social programs – dominate the top of the rankings, taking the first 10 spots, including Sweden, Austria, Netherlands and Denmark. The USA finished ahead of the United Kingdom, but trailed the Czech Republic and Slovakia.

    Globally, the number of people aged 65 or older is on track to triple by 2050. By that time, the ratio of the working-age population to those over 65 in the USA is expected to drop from 5-to-1 to 2.8-to-1. The USA actually does much better demographically (not aging as quickly) as other rich countries mainly due to immigration. Slowing immigration going forward would make this problem worse (and does now for countries like Japan that have very restrictive immigration policies).

    The economic downturn has taken a major toll on retirement savings. According to a recent report by the U.S. Senate Committee on Health, Education, Labor and Pensions, the country is facing a retirement savings deficit of $6.6 trillion, or nearly $57,000 per household. As a result, 53% of American workers 30 and older are on a path that will leave them unprepared for retirement, up significantly from 38% in 2011.

    On another blog I recently wrote about another study looking at the Best Countries to Retirement Too: Ecuador, Panama, Malaysia. The study in the case was looking not at the overall state of retirees that worked in the country (as the study discussed in this post did) but instead where expat retirees find good options (which stretch limited retirement savings along with other benefits to retirees).

    See the full press release.

    Related: Top Stock Market Capitalization by Country from 1990 to 2010 – Easiest Countries in Which to Operate a Businesses: Singapore, Hong Kong, New Zealand, USA – Largest Nuclear Power Generation Countries from 1985-2010 – Leading countries for Economic Freedom: Hong Kong, Singapore, New Zealand, Switzerland – Countries with the Top Manufacturing Production

  • How Much of Current Income to Save for Retirement

    Determining exactly what needs to be saved for retirement is tricky. Basically it is something that needs to be adjusted based on how things go (savings accumulated, saving rate, planned retirement date, investing returns, predicted investing returns, government policy, tax rates, etc.). The simple idea is start by saving 15% of salary by the time you are 30. Then adjust over time. If you start earlier maybe you can get by with 12%…

    How Much to Save for Retirement is a very good report by the Boston College center for retirement research. They look at the percent of income replacement social security (for those in the USA) provides. This amount varies greatly depending on your income and retirement (date you start drawing social security payments).

    Low earners ($20,000) that retire at 65 have 49% of income replaced by social security. Waiting only 2 years, to 67, the replacement amount increases to 55%. For medium earners ($50,000) 36% and 41% of income is replaced. And for high earners ($90,000) 30% an 34%.

    Starting savings early make a huge difference. Starting retirement savings at age 25 requires about 1/3 the percentage of income be saved as starting at 45. So you can save for example 7% from age 25 to 70 or 18% from age 45 to 70. Retiring at 62 versus 70 also carries a cost of about 3 times as great savings required each year. So retiring at 62 would require an impossible 65% if you didn’t start saving until 45. But these numbers are affected by many things (the higher your income the less social security helps so the higher percentages you need to save and many other factors play a role).

    Starting to save early is a huge key. Delaying retirement makes a big difference but it is not nearly as much in your control. You can plan on doing that but need to understand that you cannot assume you will get to set the date (either because finding a job you can do and pays what you wish is not easy or you are not healthy enough to work full time).

    If you don’t have social security (those outside the USA – some countries have their versions but some don’t offer anything) you need to save more. A good strategy is to start saving for retirement in your twenties. As you get raises increase your percentage. So if you started at 6% (maybe 4% from you and a 2% match, but in any event 6% total) each time you get a raise increase your percentage 100 basis points (1 percentage point).

    If you started at 27 at 6% and got a raise each year for 9 years you would then be at 15% by age 36. Then you could start looking at how you were going and make some guesstimates about the future. Maybe you could stabilize at 15% or maybe you could keep increasing the amount. If you can save more early (start at 8% or increase by 150 or 200% basis points a year) that is even better. Building up savings early provides a cushion for coping with negative shocks (being unemployed for a year, losing your job and having to take a new job earning 25% less, very bad decade of investing returns, etc.).

    Investing wisely makes a big difference also. The key for retirement savings is safety first, especially as you move closer to retirement. But you need to think of investment safety as an overall portfolio. The safest portfolio is well balanced not a portfolio consisting of just an investment people think of as safe by itself.

    Related: Retirement Planning, Investing Asset Considerations – Saving for Retirement Must Be a Personal Finance Priority – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation

  • Is it Time to Sell Apple?

    No, it is not time to sell Apple, if your portfolio is not already too heavily overweighted in Apple it would make sense to buy. There is about as much wrong with Apple today as Toyota 3 years ago, which means essentially nothing is wrong. Yes, neither company is perfect. Maybe people were carried away with how awesome Apple was, but I don’t think the stock price every was.

    Apple was a great buy at $700. Of course in the same situation buying it at $500 would be even better. I think it is a great buy at $500 today. I think Apple is going to move ahead just as Toyota has the last few years. The people jumping around at every single rumor of a data point are going beyond reacting to each data point they are reacting to rumors of data points.

    I could be wrong. If Apple’s earnings cave over the next 5 years people can claim they say early signals. After a long time watching investors react to data and rumors and speculation I think they are just being foolish. Even if Apple is deteriorating, there needs to be a much better explanation for why investors should believe that than I have seen.

    The best reason to question Apple is how long of a run they are on. Figuring the “law” of convergence in mean should make investors wary. That isn’t really true but that idea – that you just don’t stay on such a run (especially when you are huge and the have the largest market capitalization in the world).

    But that is more just saying Toyota can’t keep being awesome. There is some sense that most likely they will stumble. But the problem is it is more likely about every other company will stumble first. The winners keep winning more than they start failing. But they also do often start failing. 100 years from now there is a decent chance Apple doesn’t exist. But there is a greater change most of the other companies you can invest in won’t. And there is a greater chance most other investments will do worse than Apple. That is my guess. Other investors get to place their money where there mouth is and we will see in 5 and 10 years how things stand.

    I’ll stick with Apple and Toyota and Google and Danaher and Intel and….

    Related: Apple’s Earning are Again Great, Significantly Exceeding High Expectations (April 2012) – Apple Tops Google (Aug 2008) – 12 Stocks for 10 Years: Oct 2010 Update

  • Curious Cat Investing, Economics and Personal Finance Carnival #40

    The Curious Cat Investing, Economics and Personal Finance carnival is published monthly with links to new, related, interesting content online.

    • Health-care bill in retirement: $240,000 by Elizabeth O’Brien – “Here’s a breakdown of where their $240,000 goes: 32% goes to premiums for Medicare Parts B & D, which cover doctor visits and drugs, respectively; 23% goes to prescription drugs expenses not covered by Medicare Part D; and 45% goes toward Medicare cost-sharing provisions, including copayments, deductibles, other services not covered by Medicare, and any optional Medigap policies purchased.

      For all their detail, Fidelity and EBRI’s retirement health-care estimates have a whopping exclusion: the cost of long-term care, which could be provided at home or in an assisted living or nursing facility.”

    • We’re Headed For A Disaster Of Biblical Proportions by Henry Blodget – “The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.”
      • photo of street art of spaceman in space
      Street art, Yogyakarta, Indonesia by John Hunter
    • Save What You Can, Increase Monthly Savings as You Can Do So by John Hunter – “My favorite tips along these lines are: spend less than you make, save some of every raise you get…”
    • A Better Way to Deliver Aid by Dr. William Brindley and Douglas Sabo – “To increase the speed of delivery and put decision-making power into the hands of beneficiaries, the international aid community has made a concerted effort over the last decade to transition away from the distribution of in-kind goods to the direct transfer of cash payments to assist those in need”

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  • Save What You Can, Increase Savings as You Can Do So

    Building your saving is largely about not very sexy actions. The point where most people fail is just not saving. It isn’t really about learning some tricky secret.

    You can find yourself with pile of money without saving; if you win the lottery or inherit a few million from your rich relative via some tax dodge scheme like generation skipping trusts or charitable remainder trusts.

    But the rest of us just have to do a pretty simple thing: save money. Then, keep saving money and invest that money sensibly. The key is saving money. The next key is not taking foolish risks. Getting fantastic returns is exciting but is not likely and the focus should be on lowering risk until you have enough savings to take risks with a portion of the portfolio.

    My favorite tips along these lines are:

    Spending less than you make and building up your long term savings puts you in the strongest personal finance position. These things matter much more than making a huge salary or getting fantastic investing returns some year. Avoiding risky investments is wise, and sure making great returns helps a great deal, but really just saving and investing in a boring manner puts you in great shape in the long run. Many of those making huge salaries are in atrocious personal financial shape.

    Another way you can boost savings is to do so when you pay off a monthly bill. So when I paid off my car loan I just kept saving the old payment. Then I was able to buy my new car with the cash I saved in advance when I was ready for a new car.

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  • Withdrawing Huge Amounts of Cash From Companies You Saddle with Debt is Despicable Behavior

    Bain Capital is a product of the Great Deformation by David Stockman

    Bain’s billions of profits were not rewards for capitalist creation; they were mainly windfalls collected from gambling in markets that were rigged to rise.
    …
    Except Mitt Romney was not a businessman; he was a master financial speculator who bought, sold, flipped, and stripped businesses. He did not build enterprises the old-fashioned way—out of inspiration, perspiration, and a long slog in the free market fostering a new product, service, or process of production. Instead, he spent his 15 years raising debt in prodigious amounts on Wall Street so that Bain could purchase the pots and pans and castoffs of corporate America, leverage them to the hilt, gussy them up as reborn “roll-ups,” and then deliver them back to Wall Street for resale—the faster the better.

    That is the modus operandi of the leveraged-buyout business, and in an honest free-market economy, there wouldn’t be much scope for it because it creates little of economic value. But we have a rigged system—a regime of crony capitalism—where the tax code heavily favors debt and capital gains, and the central bank purposefully enables rampant speculation by propping up the price of financial assets and battering down the cost of leveraged finance.

    So the vast outpouring of LBOs in recent decades has been the consequence of bad policy, not the product of capitalist enterprise.

    I abhor the subsidies provided to those that saddle corporations (that build up value through decades of hard work by employees) with huge debt. The actions of leveraged by out firms are atrocious. They seek to pretend that business is once again the land of the amoral behavior, as the robber barron’s sought to convince society of long ago. Those that saddle corporations (that have an obligation to those that built them up) with huge debt are despicable.

    Those same despicable people then take huge amounts of cash (for themselves) from the debt they saddled the corporation with.

    Quite a few smart people have figured out how to pay congress to allow those smart people to take huge profits out of businesses. By being smart enough to have congress create laws to allow their behavior they can say it was just doing what the law allowed. When you conspire with the authorities to create a system to drain cash from legitimate businesses into your pocket you can claim you are acting legally (if you do so by having them change the law, instead of having them just ignore the existing laws). But what is being done (for decades by both parties) by those we continue to elect to allow this behavior shows just how corrupt the system is.

    It is sad we allow those politicians who payoff those that give them large amount of cash, at the expense of our society, to remain in office. But we don’t even discuss the issues in any significant sense. Those using this cronyism and corruption know they are continuing to be given the open door to continue their very destructive ways. These are smart people. They know how to use public apathy and rhetoric to keep from discussing the important issues. It is going to take us to stop the corrupting cronyism that has taken over our political parties.

    Related: Too Much Leverage Killed Mervyns – Failed Executives Use Leverage to Increase Their Pay, Let Others Bailouts Later – Executives Treating Corporate Treasuries as Their Money, A Sad State of Affairs – CEOs Plundering Corporate Coffers – Leverage, Complex Deals and Mania – Looting: Bankruptcy for Profit

  • 12 Stocks for 10 Years – October 2012 Update

    The 12 stock for 10 years portfolio consists of stocks I would be comfortable putting into an IRA for 10 years. The main criteria is for companies with a history of large positive cash flow, that seemed likely to continue that trend.

    Since April of 2005 the portfolio Marketocracy* calculated annualized rate or return (which excludes Tesco) is 7.1% (the S&P 500 annualized return for the period is 5.4%).

    Marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that (it is not like this portfolio takes much management), the return beats the S&P 500 annual return by about 370 basis points annually (9.1% – 5.4%). And I think the 370 basis point “beat” of the S&P rate is really under-counting as the 200 basis point “deduction” removes what would be assets that would be increasing (so the gains that would have been made on the non-existing deductions in the real world – are missing). Tesco reduces the return, still I believe the rate would stay above a 300 basis point advantage.

    The current stocks, in order of return:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Amazon – AMZN 473% 11% 8%
    Google – GOOG 252% 18% 15%
    PetroChina – PTR 104% 6% 6%
    Apple – AAPL 94% 15% 13%
    Templeton Dragon Fund – TDF 84% 6% 4%
    Danaher – DHR 60% 10% 10%
    Templeton Emerging Market Fund – EMF 43% 5% 8%
    Pfizer – PFE 6% 6% 7%
    Toyota – TM 5% 7% 12%
    Intel – INTC 1% 5% 7%
    Cisco – CSCO -3% 3% 4%
    Cash – 8%* 4%
    Tesco – TSCDY -18%** 0%* 5%

    The current marketocracy results can be seen on the Sleep Well marketocracy portfolio (the site broke the link, so I removed the link).

    Related: 12 Stocks for 10 Years: Jan 2012 Update – 12 Stocks for 10 Years, July 2011 Update – 12 Stocks for 10 Years, July 2009 Update – hand picked articles on investing
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  • USA Housing Rents Increased 5.4% in the Last Year

    US Zillow Rent Index

    The USA economy is still in very fragile ground. The continued problems created by policies focused on aiding too big too fail institutions and continued huge federal budge deficits are dangerous. And the continued problems in Europe and mounting problems in China are not helping. Still, rental prices continue to rise across the USA.

    The graph above shows housing rents (as shown by the Zillow rent index) have increased 5.4% in the last year (through July) across the USA. In Boston the increase was 4.5%; Grand Junction, Colorado -4.9%; San Francisco up 8.8%; Washington DC up 7.3%; Raleigh, NC up 1.8% (though the last one couldn’t be added to the graph for some reason). I just picked some cities I found interesting – with some diversity.

    Housing prices are up 1.2% in the same period, according to the Zillow price index.

    When looking at data on rental prices and home prices you will notice different sources give different readings. Judging these changes across the nation is very difficult and requires making judgements. Even at the local level the measures are imprecise so the figures you see will vary. Taking a look at several different measures, from reputable sources, is often wise.

    Related: USA Apartment Market in 2011 – Top USA Markets for Buying Rental Property – Apartment Vacancies Fall to Lowest in 3 Years in the USA (April 2011) – Apartment Rents Rise, Slightly, for First Time in 5 Quarters (April 2010)