Investing Curiouscatblog

Category: quote

  • Your Home as an Investment

    A house is where you live–not an investment

    If you’re living in the house you plan to live in for the rest of your life, you shouldn’t view it as an investment.

    Very good point – as long as you fall into that category of living there until you die. True for some people but far from all. Also, even for those people, it is not a complete view of the financial situation.

    A reverse mortgage will allow you to sell the house and get paid for the rest of the time you live there. So you can build up equity over 20,30,40 years and then take a reverse mortgage and get payments every month (based on your investing in your house). Reverse mortgages, like many financial tools, can be applied poorly and is I would guess unethical behavior related to them is fairly high (so be very careful!). If you think of such an option you need to do your research and actually understand what you are doing – you can’t afford to be like the many ignorant mortgagors. The AARP offers information on Reverse Mortgages.

    Additionally, you lock in a large part of your housing cost (you still have maintenance and taxes but you do not have every increasing rent. Now ever increasing rent is not a certainty but for many it is very likely rent will go up on average over the long term. Ownership of your home removes the risk of being priced out of the area you want to live by increasing rental prices over time. You also lose the potential of benefiting if rent prices fall over time, but I would say the more valuable of those options is avoiding the risk of rising rental prices.

    Related: How Not to Convert Equity – Housing Inventory Glut – articles on home ownership and real estate

  • The Ever Expanding House

    Behind the Ever-Expanding American Dream House

    The average American house size has more than doubled since the 1950s; it now stands at 2,349 square feet. Whether it’s a McMansion in a wealthy neighborhood, or a bigger, cheaper house in the exurbs, the move toward ever large homes has been accelerating for years.

    Consider: Back in the 1950s and ’60s, people thought it was normal for a family to have one bathroom, or for two or three growing boys to share a bedroom. Well-off people summered in tiny beach cottages on Cape Cod or off the coast of California. Now, many of those cottages have been replaced with bigger houses. Six-room apartments in cities like New York or Chicago have been combined, because upper-middle-class people now think a six-room apartment is too small. Is it wealth? Is it greed? Or are there more subtle things going on?

    This is extreme wealth. It is also part of the reason housing prices take an ever increasing multiple of median income. Basically people are buying two houses (not just one). Average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.

    Related: mortgage terms defined – Trying to Keep up with the Jones – Too Much Stuff – Investing Search Engine

  • Raising Taxes on Future Generations

    A Washington official dares to tell the truth

    Washington is bankrupting future generations. The longer we wait to address the $9 trillion national debt and ongoing annual budget deficits, the more taxes our children and grandchildren will have to pay, says David M. Walker, comptroller general of the United States, head of the General Accountability Office and just about the only public official in Washington these days telling the truth about the country’s fiscal situation. We’re basically taxing future generations without representation (because they can’t vote or haven’t been born), which he says is immoral.
    …
    Walker: The present value of future unfunded liabilities for Medicare, Social Security and other plans is $53 trillion.
    Walker: “You’re supposed to leave the country not just the way you found it, but better prepared for the future. The baby boom generation is failing on that.”
    Walker: President Bush’s Medicare drug plan and the way it was sold to Congress and the public was “unconscionable.” The true, $8 trillion pricetag “was never calculated, disclosed or debated.”
    Walker: The $9 trillion national debt is much more important than the budget deficit. Through the miracle of compound interest on the debt, he says, it will eat up more and more of the country’s resources.

    Right. I keep posting on this because it is very important. To understand economics you need to understand the true shape of the economy. And to manage your investments you need to understand the great risk of a rising debt load (whether it is you personally or a country). Charge It to My Kids – USA Federal Debt Now $516,348 Per Household – Why Investing is Safer Overseas – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren – Broke Nation

  • 12 Stocks for 10 Years Update – Oct 2007

    I originally setup the 10 stocks for 10 years portfolio in April of 2005. At this time the stocks in the sleep well portfolio in order of returns –

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    PetroChina – PTR 298% 11% 7%
    Google – GOOG 210% 17% 13%
    Amazon – AMZN 173% 7.5% 7%
    Templeton Dragon Fund – TDF 116% 17% 13%
    Cisco – CSCO 67% 6.5% 8%
    Templeton Emerging Market Fund – EMF 67% 3.5% 5%
    Toyota – TM 48% 7% 10%
    Tesco – TSCDY 25% 0% 10%
    Intel – INTC 18% 4% 8%
    Yahoo – YHOO -2% 4% 5%
    Pfizer – PFE -9% 5% 8%
    Dell -16% 7% 10%

    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). Earlier this year I added Templeton Emerging Market Fund (EMF) and reduced the TDF portion. Tesco also pays a dividend which I am not including in the calculation – that is one reason marketocracy is so nice it keeps track of all those details for you.

    I have orders in to sell some of the PTR and TDF if the prices rises a bit more. In the marketocracy portfolio I have several smaller positions. I do this to comply with marketocracy’s diversity rules – I also have about 8% in cash (they still won’t let me buy Tesco). Google, PetroChina and Amazon have had an incredible few months. I am getting a little tired of Yahoo’s failure to deliver. I also think Amazon’s price has gotten a bit ahead of the performance but I think the performance is great and the long term looks strong.

    The current marketocracy calculated annualized rate or return (which excludes Tesco – reducing the return, and has a significant cash position reducing the return) is 20% (the S&P 500 annualized return for the period is 13.4% – in addition to the other reductions in the return, marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund). View the current marketocracy Sleep Well portfolio page.

    Related: 12 Stocks for 10 Years Update (Jun 2007) – 10 Stocks for 10 Years Update (Feb 2007) – 10 Stocks for 10 Years Update (Dec 2005)

  • Charge It to My Kids

    In Charge It to My Kids Thomas Friedman makes the correct point that I have made previously (Washington Paying Out Money it Doesn’t Have – Inheritance Tax Repeal). Politicians like to tax your grandchildren to pay for what they are spending today.

    Dana Perino, the White House press secretary, was asked about a proposal by some Congressional Democrats to levy a surtax to pay for the Iraq war, and she responded, “We’ve always known that Democrats seem to revert to type, and they are willing to raise taxes on just about anything.”
    …
    added Ms. Perino. “I just think it’s completely fiscally irresponsible.”

    Friends, we are through the looking glass. It is now “fiscally irresponsible” to want to pay for a war with a tax. These democrats just don’t understand: the tooth fairy pays for wars.

    Huge deficits created by spending tons of money that you don’t have, is just taxing your grandchildren. It is not a sign of being fiscally responsible. It is a spending today and charging it to your kids – which is a bad idea.

    If you want to cut (or not raise) taxes the honest way to do so is to cut spending. It is not honest to claim you are not raising taxes when you spend more than you have and pass on debts. Those debts are just future taxes. Those electing these politicians that just add more and more debt to the future are mortgaging the country. Those debts will come due. That is obvious.

    You can seem to have a free lunch (or free roads to nowhere or whatever other frivolous, or important, spending you want) for awhile (decades actually for a country with a very strong economy) but eventually people will have to pay for the debts the current credit card culture of those in Washington. Those decades of spending what they don’t have might well start causing real pain in the next 10 years, or perhaps such irresponsible behavior can go on several more decades (a strong economy can hide spendthrift habits). but eventually that spending will have to be paid for – either by your children or grandchildren.

    Related: Buffett on Taxes – Warren Buffett on the similar trade deficit (where those in the USA directly, instead of though their elected government) spend beyond their means:

    Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.

  • Mortgage Payments by Credit Score

    A few months ago we posted on the effect your FICO (“credit”) score would have on your mortgage payment. Given turmoil in the credit markets we though it would be interesting to revisit that post.

    Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):

    FICO score APR May APR Aug payment/mo May payment/mo Aug
    760-850 5.86% 6.27% $2,362 $2,467
    700-759 6.08% 6.49% $2,419 $2,525
    660-699 6.37% 6.77% $2,493 $2,600
    620-659 7.18% 7.58% $2,709 $2,819
    580-619 8.82% 9.32% $3,167 $3,311
    500-579 9.68% 10.31% $3,416 $3,603

    Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.

    Frankly I was expecting the rates to show the widely reported expanding of the risk premium (charging increasingly higher rates for riskier borrowers). For example, in May the difference was 382 basis points (9.68% for the lowest FICO range and 5.86% for the highest. However the current difference is just 404 basis points – hardly a big increase. The reason must be that the MyFICO page shows rates for homes with 20% down at the high end of scores and 20-40% down below there.

    Related: 30 Year Fixed Rate Mortgage Rates – Learning About Mortgages

  • Misuse of Statistics – Mania in Financial Markets

    The quantitative schools of investing rely on very high powered mathematics (often drawing on physics and engineering graduate students). They tread on very dangerous ground (often engaging in complex and highly leveraged speculation) and make errors in assumptions about the market conditions upon which the mathematical models they use to invest are based. Fat Tails and Limitations of Normal Distributions describes one common mistake:

    The central reasons why fat tails exist is a result of interdependence during market extremes. People’s decisions are not always fully independent or logical. At extreme market highs, investors become irrationally exuberant. At extreme lows, investors become fearfull and less risk tolerant.

    Stock market data clearly shows that a normal distribution does not provide a good model of the market. Not every system is defined by a normal distribution – it is common for distributions to be close to normal but there is no reason any system need be. Many statistical tools have as an underlying assumption that the system in question is a normal distribution (therefore to use the tools you need to determine if the system can be classified that way – if not some tools can’t be used).

    Crazy as it seems, very smart people continually forget that the markets often experience panics, euphoria, behave in ways that models do not predict, seize up and fail to function… Against the Gods by Peter Bernstein provides a good picture of the chaotic nature of financial market risks. A good book on an example of a mathematical model failure, Long Term Capital Management: When Genius Failed. Another excellent book on financial market chaos is: Manias, Panics, and Crashes: A History of Financial Crises.

    I keep thinking people will learn but so far the faith in numbers seems to outweigh the past examples of overconfident failures.

    Related: Data doesn’t lie but you can be fooled – investment risk – Statistics for Experimenters

  • Ignorance of Many Mortgage Holders

    Mortgage ignorance rampant

    In the survey of 1,004 adults conducted by Gfk Roper, homeowners with mortgages were asked what type of mortgage they had. A stunning 34 percent of the homeowners had no idea. “That’s a symptom of the complexity of the mortgage market today,” says Ken Wade, chief executive officer of NeighborWorks America, a nonprofit organization that provides financing and training to neighborhood-based housing organizations.

    Sorry but that is a symptom of massive ignorance. Not knowing an incredible important aspect of your largest financial decision is like not know what days you are suppose to show up for work. There is a minimum amount of knowledge people should have that sign a mortgage. I think at least 34% of mortgage holders need to read this blog. Ok, I probably alienated all of them, so if that is the case then they should read some of the blogs we list in our blogroll.

    Nationwide, 36 percent of homeowners who now have an ARM said they planned to refinance to a fixed-rate loan when their ARM changes. Only 2 percent planned to refinance into another ARM.

    There is a big problem in that logic – it could maybe make sense if you had good reason to believe rates will be lower in the future than when you took out the loan (but that is a very questionable). I don’t know why someone would think that in the last couple of years – the risks have been much better than rates would go up a few hundred basis points than down that much. Basically I can see someone that is very financially savvy using an adjustable mortgage to qualify and if they know they will move in a fairly short period…

    Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – How Not to Convert Equity – 30 year fixed Mortgage Rates

  • USA Federal Debt Now $516,348 Per Household

    The federal debt is not officially calculated the way that other accounting is done. Future obligations are not included, thus promising ever larger payments for health and retirement programs are not accurately reflected in government official debt totals. There are some legitimate arguments for why using exactly the same standards as others does not make sense for the federal government accounting. However the current methods make it too easy for politicians to claim they are not spending our grandchildren’s money for promises they make today. Rules ‘hiding’ trillions in debt:

    Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later. The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition.

    Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined.

    Foisting debts on our grandchildren because we elect politicians that refuse to either cut spending (and promised spending) or raise taxes is a sad legacy of the last 30 years for the USA.

    Related: Washington Paying Out Money it Doesn’t Have – Is the USA Broke – The Fallacy of Estate Tax Repeal – Social Security Trust Fund

  • Incredibly Bad Customer Service from Discover Card

    So I had a Discover Card. They charged me for charges I didn’t authorize. They then force me through their maze of policies telling me that it was not possible to be more customer friendly – their policies couldn’t be any different they were the policy (as if that made any sense). So Discover Card had to shut down my account. I told them if they couldn’t provide better service then I didn’t want a new account after they closed my account which was the only way they wouldn’t charge me for charges I didn’t authorize. They owed me $240 from their cashback bonus program. Now they refuse to pay me the money I earned because they say that it is their policy not to pay the cashback bonus if an account is closed.

    After going around on that for awhile and them assuring me it was their policy and it was not possible for it to be done any other way by them or anyone else I asked what happened if someone died. Oh then the account is closed and we pay the money we owe on the cashback bonus. So obviously it isn’t that the account being closed makes it impossible for Discover to pay what was owed. It seems pretty obvious it is just a good way to take money Discover owes and just count on people not wanting to waste their time fighting to get what Discover owed them. Maybe one of their marketing people told them doing this to people that just had a parent/spouse… die might be bad publicity so they decided to actual pay what was owed in those instances. Jeez why can’t credit card companies just provide good service and treat customers well instead of only doing the absolute least they can that won’t spark outrage from the public and legislative action to prohibit such practices (I image not paying what was owed to people that died would spark legislative action if it wasn’t already illegal).

    Is it really legal to charge someone for charges they didn’t authorize and when they tell you they didn’t authorize them refuse to do anything about it if they don’t close their account and then say we are not going to pay your cashback bonus because your account is closed? it seems to be yet another instance of credit card companies doing everything they can to take money from customers. Of course they claimed it was impossible to do anything else it was their policy to do it this way and no other credit card company is any different.
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