Investing Curiouscatblog

Blog

  • Investing in the Poorest of the Poor

    I have donated more to Tricke Up than any other charity for about 20 years now. There is a great deal of hardship in the world. It can seem like what you do doesn’t make a big dent in the hardship. But effective help makes a huge difference to those involved.

    My personality is to think systemically. To help put a band aid on the current visible issue just doesn’t excite me. Lots of people are most excited to help whoever happens to be in their view right now. I care much more about creating systems that will produce benefits over and over into the future. This view is very helpful for an investor.

    Trickle Up invests in helping people create better lives for themselves. It provides some assistance and “teaches people to fish” rather than just giving them some fish to help them today.

    The stories in this video show examples of the largest potential for entrepreneurship. While creating a few huge visible successes (like Google, Apple…) is exciting the benefits of hundreds of millions of people having small financial success (compared to others) but hugely personally transforming success is more important. Capitalism is visible in these successes. What people often think of as capitalism (Wall Street) has much more resonance with royalty based economic systems than free market (free of market dominating anti-competitive and anti-market behavior) capitalism.

    Related: Kiva Loans Give Entrepreneurs a Chance to Succeed – Micro-credit Research – Using Capitalism in Mali to Create Better Lives

  • Don’t Expect to Spend Over 4% of Your Retirement Investment Assets Annually

    Pitfalls in Retirement (pdf) is quite a good white paper from Meril Lynch, I strongly recommend it.

    A survey asked investors at least 41 years of age how much of their retirement savings they can safely spend each year without running the risk of exhausting their assets. Forty percent had no idea; an additional 29% said they
    could safely spend 10% or more of their savings each year.

    But, as explained below, the respondents most on target were the one in 10 who estimated sustainable spending rates to be 5% or less. This is significantly impacted by life expectancy; if you have a much lower life expectancy due to retiring later or significant health issues perhaps you can spend more. But counting on this is very risky.

    This is likely one of the top 5 most important things to know about saving for retirement (and just 10% of the population got the answer right). You need to know that you can safely spend 5%, or likely less, of your investment assets safely in retirement (without dramatically eating into your principle.

    chart showing retirement assets over time based on various spending levels
    Chart showing retirement assets over time based on various spending levels, from the Merill Lynch paper.

    The chart is actually quite good, the paper also includes another good example (which is helpful in showing how much things can be affected by somewhat small changes*). One piece of good news is they assume much larger expense rates than you need to experience if you choose well. They assume 1.3% in fees. You can reduce that by 100 basis points using Vanguard. They also have the portfolio split 50% in stocks (S&P 500) and 50% in bonds.

    Several interesting points can be drawn from this data. One the real investment returns matter a great deal. A 4% withdrawal rate worked until the global credit crisis killed investment returns at which time the sustainability of that rate disappeared. A 5% withdrawal rate lasted nearly 30 years (but you can’t count on that at all, it depends on what happens with you investment returns).

    Related: What Investing Return Projections to Use In Planning for Retirement – How Much Will I Need to Save for Retirement? – Saving for Retirement

    (more…)

  • USA Adds Just 120,000 Job in March, Unemployment Rate Falls to 8.2%

    Nonfarm payroll employment rose by 120,000 in March, and the unemployment rate dropped to 8.2%, the United States Bureau of Labor Statistics reported today. Employment rose in manufacturing, food services, and health care, but was down in retail trade. The change in total nonfarm payroll employment for January was revised from +284,000 to +275,000, and the change for February was revised from +227,000 to +240,000 (together this adds just 4,000 more jobs brining the total added jobs with this report to 124,000.

    Adding 120,000 jobs in a month is mediocre in general for the USA economy. The biggest reason for disappointment is during recoveries jobs are normally added at a higher rate, and given how many jobs were lost in the during the credit crisis outsized job gains are needed. The other reason adding 120,000 jobs was disappointing is the consensus estimate was for over 200,000 jobs to be added.

    The number of long-term unemployed (those jobless for 27 weeks and over) was essentially unchanged at 5.3 million in March and remains one of the biggest employment problems for the economy. These individuals accounted for 42.5% of the unemployed. Since April 2010, the number of long-term unemployed has fallen by 1.4 million.

    In the prior 3 months, payroll employment had risen by an average of 246,000 per month. Private-sector employment grew by 121,000 in March, including gains in manufacturing, food services, and health care.

    Manufacturing employment rose by 37,000 in March, with gains in motor vehicles and parts (+12,000), machinery (+7,000), fabricated metals (+5,000), and paper manufacturing (+3,000). Factory employment has risen by 470,000 since a recent low point in January 2010. Manufacturing continues providing some of the best employment news.

    Related: Latest USA Jobs Report Adds 286,000 Jobs; Another Very Strong Month (Mar 2012) – USA Adds 216,00 Jobs in March 2011; the Unemployment Rate Stands at 8.8% – USA Added 162,000 Jobs in March 2010 – Another 663,000 Jobs Lost in March 2009 in the USA

    (more…)

  • Warren Buffett’s 2011 Letter to Shareholders

    Warren Buffett continues to write his excellent annual shareholder letter. It is a pleasure to read them every year. I have selected a few passages to include:

    The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

    Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.

    Investors face challenges within their own psychology. This is one, but not the only one.

    At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively evaluate the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.

    Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,” she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.”

    Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure.

    The insurance business is explained well in this, and his other shareholder letter.

    Related: Warren Buffett’s 2010 Letter to Shareholders – Warren Buffett’s Q&A With Shareholders 2009 – Warren Buffett’s 2007 Letter to Shareholders

    (more…)

  • Curious Cat Investing, Economics and Personal Finance Carnival #28

    Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival: find useful recent personal finance, investing and economics blog posts and articles. The carnival is published twice each month. This carnival is different than other carnival: I select posts from the blogs I read (instead of just posting those that submit to the carnival as many carnivals do). If you would like to host the carnival add a comment below.

    • Why the April Jobs Report Could Be a Disaster – “the one-two punch of a warmer winter and unusual seasonal adjustment factors stemming from the financial crisis could combine to create something of a disaster for those writing the labor market headlines in early-May when the April jobs data is reported.” [it also may not turn out to be an issue, but it is an interesting post and the type of thing you need to consider when looking at economic data – John]
    • Evaluating Your Auto Insurance Policy – “many companies offer defensive driver discounts if you take a course or install a device in your car to monitor your habits. You can also get good student discounts for students on your policy, low mileage discounts for cars you don’t drive much, accident-free discounts when you haven’t been in an accident lately, and loyalty discounts for sticking with the company.”
    • Buyting Foreclosed Homes as Rental Investments – “Since 2007, investors have been trolling the cratered suburbs stretching from California to Florida for cheap houses to flip. And firms such as PennyMac Mortgage Investment Trust have sought value in subprime-mortgage-backed securities. Waypoint, which owns 1,100 houses and is buying five more a day, is betting that converting foreclosures into rentals is a better way to make a profit.”
    • How Long Can We Finance the Debt? by James Kwak – “Since the Federal Reserve is expected to reduce its balance sheet as the economy recovers, if foreign holdings of U.S. government debt simply remain at current levels (as a share of GDP), they expect that 10-year yields would climb to 7.9 percent by 2020—rather than 5.4 percent as forecast in the CBO’s baseline.”
    • The Case for Raising Top Tax Rates – “In 1980, the top marginal rate was 70 percent for families making more than $215,400 — about $587,000 in current dollars. And these families pocketed a much smaller share of the nation’s income than they do now. Today, people earning over $200,000 a year capture more than a third of national income.”

  • Avoiding Hedge Fund Investments is One of the Benefits of Being in the 99%

    Hedge funds sell themselves as investments for elites and justify their extraordinary expenses mainly by appealing to elites egos. Well, hedge funds by and large do poorly. This is largely due to huge expenses. Add to that the incentives managers have to take huge risks: the managers often get 20% of extraordinary gains and if they lose, well you lose your money. These incentives to take huge risks do mean a few hedge funds do spectacularly well each year (of course more usually do spectacularly poorly over time).

    Warren Buffett knew this and wagered a long term investment in a low cost Vanguard S&P 500 Index fund would beat a hedge fund over the long term.

    Buffett Seizes Lead in Bet on Stocks Beating Hedge Funds

    The wager that began on Jan. 1, 2008, pits the Omaha, Nebraska, billionaire against Protégé Partners LLC, a New York fund of hedge funds co-founded by Ted Seides and Jeffrey Tarrant. Protégé built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor’s 500 Index. The winner’s charity of choice gets $1 million when the bet ends on Dec. 31, 2017.
    …
    Buffett’s argument, like the large pension funds, is that funds of hedge funds cost too much, according to a statement he posted on longbets.org, a website backed by the nonprofit Long Now Foundation that fosters “long-term thinking.” In addition to the 2 percent management fee and 20 percent performance fee that hedge funds typically charge, the funds of funds add another layer of fees, on average 1.25 percent of assets and 7.5 percent of any gains, according to data compiled by Bloomberg.

    There may be many nice things about being in the 1% of the USA (being in 1% of the World is something more people in the USA should realize they are – more than 50% of the USA is in the 1% of everyone) but investing in hedge funds is mainly fools helping make a few more of the 1% by paying huge fees for lousy investments. Yes a few hedge funds will manage to do well. As would a few monkey’s throwing darts at a page of investments each quarter. The odds of picking a hedge fund for a long period of time that does so well the huge fees are justified are not great. Missing out on this investment option is not one you should feel sad about.

    Related: Is the Stock Market Efficient? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation – 12 Stocks for 10 Years: January 2012 Update

  • Curious Cat Investing, Economics and Personal Finance Carnival #27

    Welcome to the Curious Cat Investing, Economics and Personal Finance Carnival. The carnival is published twice each month. This carnival is different than others in two significant ways. First, I select posts from the blogs I read (instead of just posting those that submit to the carnival). I think this provides readers a better selection of valuable material (many of the best blogs don’t take time to submit to carnivals). And second, I include articles when I think they are interesting. If you are interested in hosting the carnival, add a comment including a link to your blog.

    • Savers, who did nothing to create the financial crisis, are being punished – “Our policy makers do need to think about what we are transferring to the banks,” Mr. Todd said. “Why is the public obligated to provide them with all those subsidies? Nobody will ask these questions.” [I agree, the large financial institutions are most responsible for the credit crisis and what they get is welfare paid for by others and they don’t even admit to their welfare status, pretending that the large financial institutions are not getting billions of dollars in direct and indirect aid from the rest of us]
    • You’d Be A Fool To Hold Anything But Cash Now, interview with David Stockman – “Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.
      A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.”
    • The end of cheap China – “Labour costs have surged by 20% a year for the past four years… Labour costs are often 30% lower in countries other than China, says John Rice, GE’s vice chairman, but this is typically more than offset by other problems, especially the lack of a reliable supply chain.”
    • Killing the competition: How the new monopolies are destroying open markets by Barry Lynn – “the basic characteristics shared by all real markets. Most important is an equality between the seller and the buyer, achieved by ensuring that there are many buyers as well as many sellers.” [this is fundamental to how capitalism provides benefits to the society. As markets are made less free (think of any market with very few buyer or sellers – that is lots of them today) the risks increase that society will lose to those few players who can extract monopolistic rents from the broken markets. The concept that free markets result in benefit to society through competition require real markets and competition, just using the word capitalism doesn’t bring the benefits, the system must have capitalistic traits – John]
    • What Portion Of Your Portfolio Should You Invest In Bonds? – “The universal rule is quite simple. If you own 100% of your portfolio in stocks and bonds you would invest so that: Bond proportion = your age %; Stock proportion = 100% – bond proportion” [I have a long comment on the post, I disagree with this specific advice today, the concept is sound, but bonds are not the right investment to balance the portfolio – John]
    • Adam Smith versus Business by Sheldon Richman – “Smith knew the difference between being sympathetic to the competitive economy – which he called the ‘system of natural liberty’ — and being sympathetic to owners of capital (who might well have acquired it by less-than-kosher means, that is, through political privilege). He knew something about business lobbies.”
    • USA Consumer and Real Estate Loan Delinquency Rates from 2001 to 2011 by John Hunter – “Residential real estate delinquency rates fell just 25 basis points (to a still extremely large 9.86%). Commercial real estate delinquency rates fell an impressive 186 basis points (to a still high 6.12%). Credit card delinquency rates fell 86 basis points to a 17 year low, 3.27%.”

  • 60% of Workers in the USA Have Less Than $25,000 in Retirement Savings

    2012 Retirement Confidence Survey

    (60 percent) report they and/or their spouses have less than $25,000 in total savings and investments (excluding their home and defined benefit plans), including 30 percent who have less than $1,000

    The data would be better if some value were placed on defined benefit plans; currently it is a bit confusing how much they may help. But the $25,000 threshold is so low that no matter what being under that value is extremely bad news for anyone over 40. And failing to have saved over just $25,000 toward retirement is bad news for anyone over 30 without a defined benefit plan.

    The large majority of workers who have not saved for retirement have little in savings. Almost two-thirds (63 percent) report they have less than $1,000 in savings and investments, and another quarter (25 percent) have $1,000–$9,999.

    Thirty-four percent of workers report they had to dip into savings to pay for basic expenses in the past 12 months.
    …
    Thirty-five percent of all workers think they need to accumulate at least $500,000 by the time they retire to live comfortably in retirement. Eighteen percent feel they need between $250,000 and $499,999, while 34 percent think they need to save less than $250,000 for a comfortable retirement.

    Workers who have performed a retirement needs calculation are more than twice as likely as those who have not (23 percent vs. 10 percent) to expect they will need to accumulate at least $1 million before retiring.

    66% of workers say their family has retirement savings and 58% say they are currently saving for retirement. These results are fairly consistent over the last few decades (the current values are in the lower ranges of results).

    Nearly everyone wishes they had more money. One way to act as though you have more than you do is to borrow and spend (which is normally unwise – it can make sense for a house and in limited amounts when you are first going out on your own). Another is to ignore long term needs and just live it up today. That is a very bad personal finance strategy but one many people follow. Saving for retirement is a personal finance requirement. If you can’t save for retirement given your current income and lifestyle you need to reduce your current spending to save or increase your income and then save for retirement.

    A year or two of failing to do so is acceptable. Longer stretches add more and more risk to your personal financial situation. It may not be fun to accept the responsibilities of adulthood and plan for the long term. But failing to do so is a big mistake. Determining the perfect amount to save for retirement is complicated. A reasonable retirement saving plan is not.

    Saving 10% of your gross income from the time you are 25 until 65 gives you a decent ballpark estimate. Then you can adjust even 5 or 10 years as you can look at your situation. It will likely take over 10% to put you in a lifestyle similar to the one you enjoy while working. But many factors are at play. To be safer saving at 12% could be wise. If you know you want to work less than 40 years saving more could be wise. If you have a defined benefit plan (rare now, but, for example police or fire personnel often still do you can save less but you must work until you gain those benefits or you will be in extremely bad shape.

    IRAs, 401(k) and 403(b) plans are a great way to save for retirement (giving you tax deferral and Roth versions of those plans are even better – assuming tax rates rise).

    Related: In the USA 43% Have Less Than $10,000 in Retirement Savings – Saving for Retirement

  • Latest USA Jobs Report Adds 286,000 Jobs; Another Very Strong Month

    Nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3%, the U.S. Bureau of Labor Statistics reported today. The change in total nonfarm payroll employment for December was revised from +203,000 to +223,000, and the change for January was revised from +243,000 to +284,000. Which brings the total new jobs for this report to 286,000 (227+20+39). This is very good news. There are other serious economic concerns (failure, after years, to take any meaningful action to prevent systemic too big to fail risk, policies harming savers to benefit too big to fail institutions, extremely large and dangerous budget deficits…) and the employment situation still has a long way to go to recover from the credit crisis crash but the recent job news is strongly positive.

    The number of unemployed persons, at 12.8 million, was essentially unchanged in February. The unemployment rate held at 8.3%, 80 basis points below the August 2011 rate of 9.1%.

    The number of long-term unemployed (those jobless for 27 weeks and over) remains at very damaging levels; it was little changed at 5.4 million in February. These individuals accounted for 42.6% of the unemployed.

    Both the labor force and employment rose in February. The civilian labor force participation rate, at 63.9 percent, and the employment-population ratio, at 58.6 percent, edged up over the month.

    Private-sector employment grew by 233,000, with job gains in professional and business services, health care and
    social assistance, leisure and hospitality, manufacturing, and mining. Government jobs declined by 6,000. In 2011,
    government lost an average of 22,000 jobs per month.

    Professional and business services added 82,000 jobs in February. Just over half of the increase occurred in temporary help services (+45,000). Job gains also occurred in computer systems design (+10,000) and in management and technical consulting services (+7,000). Employment in professional and business services has grown by 1.4 million since a recent low point in September 2009.

    Health care and social assistance employment rose by 61,000 over the month. Within health care, ambulatory care services added 28,000 jobs, and hospital employment increased by 15,000. Over the past 12 months, health care employment has risen by 360,000.

    In February, employment in leisure and hospitality increased by 44,000, with nearly all of the increase in food services and drinking places (+41,000). Since a recent low in February 2010, food services has added 531,000 jobs.

    Manufacturing employment rose by 31,000 in February. All of the increase occurred in durable goods manufacturing, with job gains in fabricated metal products (+11,000), transportation equipment (+8,000), machinery (+5,000), and furniture and related products (+3,000). Durable goods manufacturing has added 444,000 jobs since a recent trough in January 2010. Of all the good news the continued manufacturing gains may well be the best news.

    Related: Nov 2010 USA Unemployment Rate Rises to 9.8% – USA Unemployment Rate Remains at 9.7% (Feb 2010) – Another 663,000 Jobs Lost in March 2009, in the USA

    (more…)

  • Consumer and Real Estate Loan Delinquency Rates from 2001 to 2011 in the USA

    chart showing loan delinquency rates from 2001 to 2011 in the USA
    Chart showing loan delinquency rates from 2001-2011. It shows seasonally adjusted data for all banks for consumer and real estate loans. The chart is available for use with attribution. Data from the Federal Reserve.

    2011 saw delinquency rates for loans fall across the board in the USA. Residential real estate delinquency rates fell just 25 basis points (to a still extremely large 9.86%). Commercial real estate delinquency rates fell an impressive 186 basis points (to a still high 6.12%). Credit card delinquency rates fell 86 basis points to a 17 year low, 3.27%.

    The job market continues to struggle, though it is doing fairly well the last few months. The serious long term problems created by governments spending beyond their means (for decades) and allowing too big to fail institutions to destroy economic wealth and create great risk to the economy are not easy to solve: and we made no progress in doing so in 2011. The reduction in delinquency rates is a good sign for the economy. The residential real estate delinquency rates are still far too high as is government debt. And the failure to address the too big to fail (big donors to the politicians) is continuing to cause great damage to the economy.

    We need to reduce consumer and government debt. Many corporations are actually flush with cash, so at least we don’t have a huge corporate debt problem. Reducing debt load will decrease risks to the economy and provide wealth for consumers to tap as they move into retirement. The too-big-to-fail big political donors like to keep policies in place that encourage too much debt and favor complex financial instruments that they take huge fees from and then let the government deal with the aftermath. The politicians continued favors to too-big-to-fail institutions is very damaging to out economic well being.

    Across the board, the wealthy economies are facing a rapidly aging population (the USA is actually acing this at a much slower rate than most other rich countries – which is helpful).

    Related: Consumer and Real Estate Loan Delinquency Rates 2000-2011 – Real Estate and Consumer Loan Delinquency Rates 1998-2009 – Government Debt as Percent of GDP 1998-2010 for OECD

    (more…)