One very overlooked aspect of retirement planning is the things that cannot be planned for--one offs. I've written about the concept quite a few times because depending on events and luck, one offs could be ruinous...unless a generous cushion is built in to the plan.
Things in the one off category that I've brought up before have included veterinary bills, new tires, replacing the roof, an unexpected dental event and there are of course others. Add to the list refrigerators as our appears to be crapping out on us. Fortunately we don't need a big fridge--actually a big one won't fit through our front door--but this will be somewhere between $1000 and $1200 depending on the various sales prices that all seem to end the day we are looking.
There are also various forms maintenance that need to be done and costs money. This year we have had to re-stain our house and deck. Earlier in the year I got an eye exam and new glasses. These can be nuisance expenses but if you don't maintain your house properly then the expense later will be much more than a nuisance.
A modest but comfortable lifestyle in today's dollars might require $50,000 for regular expenses and maybe another $5000 for some sort of annual trip. If $30,000 might come from social security (combined his and hers) then these folks might need a portfolio of $625,000 to make up the difference assuming the 4% rule and that neither spouse has a job.
If these folks take their annual trip in June and then later that summer the transmission goes out on the car, their dog needs hip surgery, there is a failure with the heating/cooling system in their house and their portfolio goes down 20% in a 30% stock market decline and these folks have a real problem. And I would guess that going into this little scenario these people were in much better financial shape than the vast majority of people, one very unlucky summer and something will have to give immediately.
A few months ago a reader on Seeking Alpha tried to argue that the notion of one offs was not really a problem and rationalized away whatever examples I used. I imagine that if you live in a rent controlled apartment in NYC with no pets, with a grocery store and subway stop within a block then you will have no one offs with where you live, and no one offs with your car (this assumes you wouldn't own one) and if you have the best possible insurance you will have no out of pocket medical expenses.
I know someone who lives in a rent controlled apartment in NYC, with no car, a subway stop one block away with a supermarket and more than one drugstore close by as well. He does not have a pet and I don't know the particulars of his health insurance. So it is possible to mitigate many of these issues.
Part of the planning process then perhaps needs to include looking at where you are likely to be with one offs (if you own a house, pets and cars then you'll probably have more one offs than the person I mentioned above) and then pad your estimates accordingly. I would not simply take your salary and multiply by 0.7, this is too simplistic. Some expenses will go away and some new ones will pop up. If you live below your means then figuring expense become far more important than relating to your salary. Likewise if you live beyond your means.
Not everything will go as planned for everybody. If you're numbers juuuuuuust squeeze by you might want to change something in your plan.
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Wikinvest Wire
Tuesday, May 31, 2011
Monday, May 30, 2011
We're Back!
...after a two day hiatus.
Dennis Stattman who runs the BlackRock Global Allocation Fund (MDLOX) was interviewed in Barron's over the weekend and had a couple very interesting things to say. You may have seen Stattman on Consuelo Mack before and we was on CNBC recently.
On why asset allocation funds like his have risen in popularity he said;
He accomplishes several things in that quote aside from a not so subtle plug and overt shot at narrower or regular equity mutual funds.
To the extent mutual fund results have been dismal it is because the typical equity fund needs to be invested in equities. More funds now have broader mandates but if a fund you own needs to be invested then it will go down a lot when the market goes down a lot. It might go down less but it will participate in a large decline, or at least that needs to be the expectation. This is not a defense of product, it is a reminder to know what you own or more correctly understand how what you own actually works. If the market cuts in half and a fund that has to be invested drops 40% then realistically you can't be upset at the fund. If that sort of scenario would be upsetting then it is more likely you had too much in fund.
The idea of being diversified with six different US stock funds was "true" back in the 1990s. I put true in quotations because in the 1990s the various dips and corrections were mild as compared to the last eleven years and we don't need diversification during a ten year rally.
I obviously agree with Stattman that managers should be able to go anywhere but going anywhere has disadvantages too. A portfolio constructed in 2007 to own a broadly based actively managed fund, a broadly based actively managed international fund, a bond fund focused on high quality debt and a bond fund focused on low quality debt could have fared just as badly as the S&P 500 in 2008 (the idea being a mix of stocks and bonds should not go down as much as 100% equities) for getting caught in the wrong sectors (financials), wrong countries (Big Western Europe) and the wrong asset class (high yield debt).
With narrow funds you know with more precision what you own. An actively managed tech fund will always be a proxy for tech. It may or may not own Apple but it will own tech, you will always know that and so then the decision falls on you to figure out how much tech to own. The same applies to a tech ETF other than you will always know in real time what the fund owns.
Candidly I'm not sure what to do with Stattman's assertion that most people aren't equipped to manage an all asset, go anywhere portfolio. He is talking about both individuals and professionals. I certainly would agree that many do not but I don't know about can not. For individuals managing their own the only realistic constraints are access and time available. A moderately intelligent individual can sift through at the country level and make decisions that are not ruinous. Additionally it does not take too long to realize that you should hire out these decisions one way or another, not everyone is an asset manager.
If you are inclined to spend the time then don't load up on any one region, type of economy or currency--if you care enough about investing to read a blog like this one then not loading up can be obvious. I promise you there was not black box that lead me to the countries I've been writing about as liking all these years or that lead me to avoid or grossly underweight the ones I've been saying stink all these years.
The reason I say at the country level above is because obviously there are countless country ETFs that investors can buy. It is not rocket science that a surplus country with favorable demographics (or at least demographics that don't stink) and something the world needs might have a stock market that would not look like the US very often.
It is not clear why professionals couldn't do this with some proficiency. As an individual if you are so inclined to at least make country and sector decisions but not single stock decisions then obviously you can make very specific decisions, avoid some very obvious sinkholes and go anywhere with ETFs. If you are not inclined to do this sort of work then a well chosen go anywhere fund would be a better.
In past posts I've talked about ETFs being a democratizing product. They can be democratizing in both directions; very sophisticated or very simple ranging from a combo including Small Cap Taiwan (TWON), Fisheries (FISN) and the Swedish Krona (FXS) to some version of the permanent portfolio.
Read more!
Dennis Stattman who runs the BlackRock Global Allocation Fund (MDLOX) was interviewed in Barron's over the weekend and had a couple very interesting things to say. You may have seen Stattman on Consuelo Mack before and we was on CNBC recently.
On why asset allocation funds like his have risen in popularity he said;
It reflects the frankly dismal job that the most popular category, equity-only mutual funds, have done, as shown by the dismal results they have delivered to investors over long periods of time. They just haven't provided a good risk-return trade-off. Furthermore, the idea that somebody can buy six different U.S. stock funds and somehow achieve useful diversification just isn't an effective idea. It never was a good idea, and now it has been proved wrong. So having the ability to go anywhere is what, ideally, a fund manager should have. But there are very, very few individuals or teams who have the experience and who are equipped to do this.
He accomplishes several things in that quote aside from a not so subtle plug and overt shot at narrower or regular equity mutual funds.
To the extent mutual fund results have been dismal it is because the typical equity fund needs to be invested in equities. More funds now have broader mandates but if a fund you own needs to be invested then it will go down a lot when the market goes down a lot. It might go down less but it will participate in a large decline, or at least that needs to be the expectation. This is not a defense of product, it is a reminder to know what you own or more correctly understand how what you own actually works. If the market cuts in half and a fund that has to be invested drops 40% then realistically you can't be upset at the fund. If that sort of scenario would be upsetting then it is more likely you had too much in fund.
The idea of being diversified with six different US stock funds was "true" back in the 1990s. I put true in quotations because in the 1990s the various dips and corrections were mild as compared to the last eleven years and we don't need diversification during a ten year rally.
I obviously agree with Stattman that managers should be able to go anywhere but going anywhere has disadvantages too. A portfolio constructed in 2007 to own a broadly based actively managed fund, a broadly based actively managed international fund, a bond fund focused on high quality debt and a bond fund focused on low quality debt could have fared just as badly as the S&P 500 in 2008 (the idea being a mix of stocks and bonds should not go down as much as 100% equities) for getting caught in the wrong sectors (financials), wrong countries (Big Western Europe) and the wrong asset class (high yield debt).
With narrow funds you know with more precision what you own. An actively managed tech fund will always be a proxy for tech. It may or may not own Apple but it will own tech, you will always know that and so then the decision falls on you to figure out how much tech to own. The same applies to a tech ETF other than you will always know in real time what the fund owns.
Candidly I'm not sure what to do with Stattman's assertion that most people aren't equipped to manage an all asset, go anywhere portfolio. He is talking about both individuals and professionals. I certainly would agree that many do not but I don't know about can not. For individuals managing their own the only realistic constraints are access and time available. A moderately intelligent individual can sift through at the country level and make decisions that are not ruinous. Additionally it does not take too long to realize that you should hire out these decisions one way or another, not everyone is an asset manager.
If you are inclined to spend the time then don't load up on any one region, type of economy or currency--if you care enough about investing to read a blog like this one then not loading up can be obvious. I promise you there was not black box that lead me to the countries I've been writing about as liking all these years or that lead me to avoid or grossly underweight the ones I've been saying stink all these years.
The reason I say at the country level above is because obviously there are countless country ETFs that investors can buy. It is not rocket science that a surplus country with favorable demographics (or at least demographics that don't stink) and something the world needs might have a stock market that would not look like the US very often.
It is not clear why professionals couldn't do this with some proficiency. As an individual if you are so inclined to at least make country and sector decisions but not single stock decisions then obviously you can make very specific decisions, avoid some very obvious sinkholes and go anywhere with ETFs. If you are not inclined to do this sort of work then a well chosen go anywhere fund would be a better.
In past posts I've talked about ETFs being a democratizing product. They can be democratizing in both directions; very sophisticated or very simple ranging from a combo including Small Cap Taiwan (TWON), Fisheries (FISN) and the Swedish Krona (FXS) to some version of the permanent portfolio.
Read more!
Friday, May 27, 2011
The Not Permanent Portfolio
A few days ago I disclosed buying the Global X Nordic 30 ETF as part of swapping out of Australia (for "small" accounts we sold Aussie ETFs and bought GXF and iShares Canada, for "large" accounts the Australian exposure has not yet been replaced). For these small accounts we used Australia as a proxy for foreign developed because aside from liking Australia we want no part of Japan or Big Western Europe and the broadest index funds are heavy in those countries.
As I mentioned Australia was a very long term hold (we'll be back in one way or another for large accounts soon) but I felt a change was needed (click through for the rationale) but still wanted to avoid Japan and Big Western Europe.
Depending on the client, they'd had EWA since 2004. That is a long time; seven years is almost permanent. Scandinavia has been a region that I have been favorably disposed to and heavy in the portfolio for quite a while and as I would prefer to keep turnover low and 30-40 positions in a small account remains prohibitive, I hope to be able to keep GXF for a very long time as well, maybe almost permanent. If something sours or more correctly if I believe that something has soured I won't hesitate to sell it but hopefully that does not happen.
This got me thinking about an alternative to the permanent portfolio as I am not a huge fan of holding on to something come hell or highwater. I could not feel good about putting 25% of anyone's money into long term treasuries here (my thoughts are more about not wanting to buy high as opposed to calling a bond bubble because while I realize prices can stay high for a long time, buying high is buying high) and gold is too volatile in my opinion to get 25%.
I think there might be some middle ground here as not permanent for the rest of your life but permanent in the sense of the foreseeable future with a small number of funds--so inspired by the original, with a willingness to be more tactical as fundamentals occasionally call for it.
With that in mind I came up with a simple grouping of funds that offer exposures that I think are important with the understanding that while the fundamentals are good now (even you even agree, and you may not) that may change and if it does change then the grouping would need to change.
The following quote from Felix Salmon is also relevant;
Global X Nordic 30 (GXF)
iShares Emerging Market Infrastructure ETF (EMIF)
WisdomTree Australia New Zealand Debt Fund (BNZ)
SPDR Gold Trust (GLD)
WisdomTree Managed Futures Fund (WDTI)
GXF, GLD and EMIF are client holdings and BNZ will be switching to the above from the New Zealand dollar fund in June.
No US exposure is different but the fundamentals at the broad index level stack up poorly against other parts of the world. The combo of GXF and EMIF leans quite a bit smaller than most large cap benchmarks and while I could not find beta info for GXF the iShares website has EMIF's beta at 0.69. As for bond exposure, I still very much like Aussie sovereign debt, we own individual issues for clients. I've written about why we own GLD many times so without repeating that I will say that while I need to avoid mentioning percentage weightings of that grouping I would never have 20% in gold. WDTI uses the strategy used by the Rydex Managed Futures Fund (RYMFX) which we own for clients and which we have had good luck with.
While talking about percentages is off limits the idea would be a "normal" allocation to equities, a "normal" allocation to fixed income and then small allocations to gold and absolute return. We don't do the above for anyone, it is just a talking point. Also there is plenty that is given up with such a mix including dividends (BNZ should have a good yield) and volatility (at times you want volatility) but I do think it is a good grouping for people to look at their own portfolios, get them to look under the hood and get in better touch with their portfolio shortcomings.
I would also add that there is some unique thought here that makes use of some innovative funds. Speaking of innovation, yesterday I spoke to execs from two different ETF providers and while the content of the conversations need to remain confidential the commitment to innovation and utility is alive and well. There is a willingness to explore more concepts than five years ago. I made a joke the other day about the China Carpet ETF and will say that while research is not that granular the recently announced filing for the Market Vectors Mongolia ETF (I think the ticker should be KHAN but they haven't asked me) does show the willingness to innovate.
An update on the Pink Car; it was found at the Prescott High School covered with blue and gold graffiti (the colors of the school). We will be getting back. I've heard there is profanity on the car which would mean repainting it with many up here wanting to take it back to the original pink. If the graffiti turns out not to be profane I would be in favor of not painting it. It was pink for over 40 years now it is not but I don't think too many agree with me--again only if there is no profanity on it.
As for the picture, I just think it says a lot about many topics.
Read more!
As I mentioned Australia was a very long term hold (we'll be back in one way or another for large accounts soon) but I felt a change was needed (click through for the rationale) but still wanted to avoid Japan and Big Western Europe.
Depending on the client, they'd had EWA since 2004. That is a long time; seven years is almost permanent. Scandinavia has been a region that I have been favorably disposed to and heavy in the portfolio for quite a while and as I would prefer to keep turnover low and 30-40 positions in a small account remains prohibitive, I hope to be able to keep GXF for a very long time as well, maybe almost permanent. If something sours or more correctly if I believe that something has soured I won't hesitate to sell it but hopefully that does not happen.
This got me thinking about an alternative to the permanent portfolio as I am not a huge fan of holding on to something come hell or highwater. I could not feel good about putting 25% of anyone's money into long term treasuries here (my thoughts are more about not wanting to buy high as opposed to calling a bond bubble because while I realize prices can stay high for a long time, buying high is buying high) and gold is too volatile in my opinion to get 25%.I think there might be some middle ground here as not permanent for the rest of your life but permanent in the sense of the foreseeable future with a small number of funds--so inspired by the original, with a willingness to be more tactical as fundamentals occasionally call for it.
With that in mind I came up with a simple grouping of funds that offer exposures that I think are important with the understanding that while the fundamentals are good now (even you even agree, and you may not) that may change and if it does change then the grouping would need to change.
The following quote from Felix Salmon is also relevant;
Realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook.
Global X Nordic 30 (GXF)
iShares Emerging Market Infrastructure ETF (EMIF)
WisdomTree Australia New Zealand Debt Fund (BNZ)
SPDR Gold Trust (GLD)
WisdomTree Managed Futures Fund (WDTI)
GXF, GLD and EMIF are client holdings and BNZ will be switching to the above from the New Zealand dollar fund in June.
No US exposure is different but the fundamentals at the broad index level stack up poorly against other parts of the world. The combo of GXF and EMIF leans quite a bit smaller than most large cap benchmarks and while I could not find beta info for GXF the iShares website has EMIF's beta at 0.69. As for bond exposure, I still very much like Aussie sovereign debt, we own individual issues for clients. I've written about why we own GLD many times so without repeating that I will say that while I need to avoid mentioning percentage weightings of that grouping I would never have 20% in gold. WDTI uses the strategy used by the Rydex Managed Futures Fund (RYMFX) which we own for clients and which we have had good luck with.
While talking about percentages is off limits the idea would be a "normal" allocation to equities, a "normal" allocation to fixed income and then small allocations to gold and absolute return. We don't do the above for anyone, it is just a talking point. Also there is plenty that is given up with such a mix including dividends (BNZ should have a good yield) and volatility (at times you want volatility) but I do think it is a good grouping for people to look at their own portfolios, get them to look under the hood and get in better touch with their portfolio shortcomings.
I would also add that there is some unique thought here that makes use of some innovative funds. Speaking of innovation, yesterday I spoke to execs from two different ETF providers and while the content of the conversations need to remain confidential the commitment to innovation and utility is alive and well. There is a willingness to explore more concepts than five years ago. I made a joke the other day about the China Carpet ETF and will say that while research is not that granular the recently announced filing for the Market Vectors Mongolia ETF (I think the ticker should be KHAN but they haven't asked me) does show the willingness to innovate.
An update on the Pink Car; it was found at the Prescott High School covered with blue and gold graffiti (the colors of the school). We will be getting back. I've heard there is profanity on the car which would mean repainting it with many up here wanting to take it back to the original pink. If the graffiti turns out not to be profane I would be in favor of not painting it. It was pink for over 40 years now it is not but I don't think too many agree with me--again only if there is no profanity on it.
As for the picture, I just think it says a lot about many topics.
Read more!
Thursday, May 26, 2011
Rough Week
This has been a rough week for all sorts of reasons for all sorts of people. This tornado business happening in the midwest seems particularly vengeful. A little closer to (the market) home was the passing of Mark Haines Tuesday night.
September 11, 2001 was obviously a remember where you were moment and Mark was a big part of my September 11 as he was for many people working in the business or following the markets. I've told this story before but on that morning I was on the phone with a client (I was a trader back then) selling some stock into the premarket (this stock had been halted for a while and this was the first morning it was going to trade). Mark reported the first plane hitting, I interrupted the client to hear what had happened. No one knew yet what was actually going on but for some reason (I don't know the reason) I said to the client we need to get more aggressive. We sold as much as we could and then got off the phone before what should have been the open. For the rest of the morning we sat around watching CNBC trying to understand the moment.
At one point yesterday Simon let out that he'd been "quite ill." I was never a huge fan of his and I wrote many times that he acted like he did not understand the ETF market but like many people he has been a fixture in my career just about every morning for a long time. He certainly could be entertaining and no doubt he will be missed.
A little more local to Walker (the town where I live) is the story of the Pink Car. Legend has it that the mayor of Prescott crashed the car here in the 1940s (he supposedly was drunk at the time). It was moved across the street after the accident and then painted pink in the 1960s. About 20 years ago they started naming all of the streets up here and so the street where they left the car after moving it was named Pink Car Hill.
The Pink Car has long been a local landmark. We took a picture in front of it for our 2010 holiday card. Yesterday the pink car was stolen presumably for the scrap value but for now we obviously can't know. I'm glad we have some pictures of it.
For the people who live here in Walker the stealing of the Pink Car is truly a Black Swan event. It has been here for almost 70 years and then one day it gets stolen? Unforeseeable in my opinion. Taleb might say it was not a Black Swan for the dirtbags that stole it.
On a more personal level my college fraternity (our chapter at San Diego State) was sanctioned such that it was not quite the death penalty although it could be the death of the chapter. Fraternities are clearly not for everyone but it was for me, I learned a lot of different things, did a lot of different things and had a lot of fun. I attribute my very active involvement with the fire department to my having been very active in the fraternity. I feel bad for anyone who is in the chapter now but who will not get the full experience that they apparently wanted. Obviously these same people one way or another contributed to the problem.
I have no idea how I come across in these posts but I have a very positive outlook on things. Bad things happen in the world and to people and I am no exception but it is what we do with bad things that matters. The events described above are great reminders to not just live in the moment but also to understand the moment and then enjoy it. We all have our own ideas about how to be happy and how to enjoy life and occasionally events occur that serve as a good reminder to not let happiness and fulfillment get too far down on the priority list.
Read more!
September 11, 2001 was obviously a remember where you were moment and Mark was a big part of my September 11 as he was for many people working in the business or following the markets. I've told this story before but on that morning I was on the phone with a client (I was a trader back then) selling some stock into the premarket (this stock had been halted for a while and this was the first morning it was going to trade). Mark reported the first plane hitting, I interrupted the client to hear what had happened. No one knew yet what was actually going on but for some reason (I don't know the reason) I said to the client we need to get more aggressive. We sold as much as we could and then got off the phone before what should have been the open. For the rest of the morning we sat around watching CNBC trying to understand the moment.
At one point yesterday Simon let out that he'd been "quite ill." I was never a huge fan of his and I wrote many times that he acted like he did not understand the ETF market but like many people he has been a fixture in my career just about every morning for a long time. He certainly could be entertaining and no doubt he will be missed.
A little more local to Walker (the town where I live) is the story of the Pink Car. Legend has it that the mayor of Prescott crashed the car here in the 1940s (he supposedly was drunk at the time). It was moved across the street after the accident and then painted pink in the 1960s. About 20 years ago they started naming all of the streets up here and so the street where they left the car after moving it was named Pink Car Hill.The Pink Car has long been a local landmark. We took a picture in front of it for our 2010 holiday card. Yesterday the pink car was stolen presumably for the scrap value but for now we obviously can't know. I'm glad we have some pictures of it.
For the people who live here in Walker the stealing of the Pink Car is truly a Black Swan event. It has been here for almost 70 years and then one day it gets stolen? Unforeseeable in my opinion. Taleb might say it was not a Black Swan for the dirtbags that stole it.
On a more personal level my college fraternity (our chapter at San Diego State) was sanctioned such that it was not quite the death penalty although it could be the death of the chapter. Fraternities are clearly not for everyone but it was for me, I learned a lot of different things, did a lot of different things and had a lot of fun. I attribute my very active involvement with the fire department to my having been very active in the fraternity. I feel bad for anyone who is in the chapter now but who will not get the full experience that they apparently wanted. Obviously these same people one way or another contributed to the problem.
I have no idea how I come across in these posts but I have a very positive outlook on things. Bad things happen in the world and to people and I am no exception but it is what we do with bad things that matters. The events described above are great reminders to not just live in the moment but also to understand the moment and then enjoy it. We all have our own ideas about how to be happy and how to enjoy life and occasionally events occur that serve as a good reminder to not let happiness and fulfillment get too far down on the priority list.
Read more!
Wednesday, May 25, 2011
Chanos Is Not Bearish Enough?
Barry Ritholtz posted the video from Jim Chanos' appearance on Bloomberg TV. The big deal might be that after sending his research team to China he said he may not be bearish enough on China. Ruling out that the comment was not more about seeing only what they wanted to see it should be obvious that China is, at the very least, a complicated investment destination.
In the interview he only talked about two segments of China; real estate and reverse mergers (this Longtop is the latest one of these to blow up I guess). We know there are a lot of questions about how many apartments have been built, how many are empty and how many will remain empty.
I don't know if bubble is the right word and frankly I don't care. It is easy to envision that the apartment capacity is far ahead of the rural to urban migration, exceeds the need of the people who own two or three of them, that there could be a problem at some point with over leverage (not on the properties as the down payments are huge, but in terms of carrying two or three mortgages), that the banks will mismanage their loan portfolios or that the developers will over leverage themselves. This case is simply too easy to make. That does not mean the market must collapse just that it doesn't take too much heavy lifting for an adverse scenario to develop.
As for the reverse mergers, in a way these aren't even investing in China. It is China of course but these companies find shell companies here (where did all these shell companies even come from?), merge into them, take a Chinese name and list on a US market. I've heard that one dynamic with these is that the penalty for this sort of scam in China (when it is a scam) is death but not so in the US so they are willing to try it in the US but not at home.
The best course of action with the reverse mergers is simply to avoid them. Chanos said this in the video and I have been saying this for ages.
I've not heard Chanos ever talk about energy, materials or industrial companies that are real companies in China that have been around for a while that play into the improving quality of life, the ascendancy of a middle class and the real volume of rural to urban migration. I think these are the best places to look.
China is a major driver of the global economy. The population is massive and the country is going through what appears to be a major transformation which I believe is a net positive as a long term investment destination. On the flip side if the transformation is major then it is only logical that some aspects will be badly mishandled and it is these segments that should be avoided. The country also has a bit of a demographic problem such that the one child rule may be changed. If that happens it would cause another distortion which at this point I am not sure if it would be a positive or negative factor.
Our exposure is quite modest by virtue of China's weight in the Market Vectors Coal ETF (KOL) and the iShares Emerging Market Infrastructure Fund (EMIF). If the toll roads were more easily (read cheaply) traded I would not hesitate on one in particular right now.
The picture was taken by my buddy BT and is of course in Hong Kong.
Read more!
In the interview he only talked about two segments of China; real estate and reverse mergers (this Longtop is the latest one of these to blow up I guess). We know there are a lot of questions about how many apartments have been built, how many are empty and how many will remain empty.
I don't know if bubble is the right word and frankly I don't care. It is easy to envision that the apartment capacity is far ahead of the rural to urban migration, exceeds the need of the people who own two or three of them, that there could be a problem at some point with over leverage (not on the properties as the down payments are huge, but in terms of carrying two or three mortgages), that the banks will mismanage their loan portfolios or that the developers will over leverage themselves. This case is simply too easy to make. That does not mean the market must collapse just that it doesn't take too much heavy lifting for an adverse scenario to develop.
As for the reverse mergers, in a way these aren't even investing in China. It is China of course but these companies find shell companies here (where did all these shell companies even come from?), merge into them, take a Chinese name and list on a US market. I've heard that one dynamic with these is that the penalty for this sort of scam in China (when it is a scam) is death but not so in the US so they are willing to try it in the US but not at home.The best course of action with the reverse mergers is simply to avoid them. Chanos said this in the video and I have been saying this for ages.
I've not heard Chanos ever talk about energy, materials or industrial companies that are real companies in China that have been around for a while that play into the improving quality of life, the ascendancy of a middle class and the real volume of rural to urban migration. I think these are the best places to look.
China is a major driver of the global economy. The population is massive and the country is going through what appears to be a major transformation which I believe is a net positive as a long term investment destination. On the flip side if the transformation is major then it is only logical that some aspects will be badly mishandled and it is these segments that should be avoided. The country also has a bit of a demographic problem such that the one child rule may be changed. If that happens it would cause another distortion which at this point I am not sure if it would be a positive or negative factor.
Our exposure is quite modest by virtue of China's weight in the Market Vectors Coal ETF (KOL) and the iShares Emerging Market Infrastructure Fund (EMIF). If the toll roads were more easily (read cheaply) traded I would not hesitate on one in particular right now.
The picture was taken by my buddy BT and is of course in Hong Kong.
Read more!
Tuesday, May 24, 2011
Ideology Versus Reality
Yesterday I stumbled across a bit of a dilemma that I cannot offer a real solution to. Jonathan Hoenig had a post called Why Bill to Limit 401K Loans is Dangerous. If you are familiar with Jonathan then you probably know that he said the government should not meddle in these sort of personal finance matters, we should be free to govern our own affairs without big brother looming over us.
Other than his failure to mention the tax writeoff for making 401k contributions I can't argue against the ideology he expressed, actually I agree with it. I think people should be free to make all their good and bad decisions about finance matters and then own the consequences good and bad.
The reality of this is far more complicated. It is complicated by the fact that collectively we have no understanding of the decisions we make, we don't understand the consequences, we make poor decisions in terms of not saving enough, raiding our savings for things that are not necessarily emergencies, we buy high, we sell low, we spend wildly beyond our means, we have credit card debt out the wazoo, we take way too much risk, we don't take any risk--this list could be endless.
If the reality is that we collectively hang ourselves with most of our financial decisions then to paraphrase Jim Rogers the solution would not be to give us more rope.
I was exposed to a mentality along these lines yesterday that I simply don't know how to understand. I posted this article from the WSJ and pointed out the "debt is slavery reference." A Facebook friend with very specific ideas on all of this said that everyone in the US is a slave except the "super rich." I countered with not needing to be super rich to buy less house than you can afford, to brown bag your lunch and drive cars longer than five years; I even pointed him to my interview with my 80 year old backhoe driving neighbor (side note, the idea for the interview came from Seeking Alpha and then they chose not to run it, very funny). He shared a couple of opinions about the Fed and IRS and related some of his personal hard luck story.
As I read his comments it seemed to me that he was saying that he is not accountable for any of his circumstance, that people have been taken advantage and that it is not their fault, it is someone else's like the bank or the Fed. I can't relate to this in the least and so I cannot rule out that he is correct but whether he is correct or not there are some truths that still exist. No one will care more about your finances (savings, debt, housing) than you do.
Nassim Taleb was right in saying that we learned everything we need to know about personal finance from our grandmothers; don't borrow too much, don't lend too much and save as much as you can. One some level, everyone knows these things but the reality is that not enough people live their lives this way.
If we assume that my friend is correct, he is still there left to endure his hardship just like everyone else facing similar hardships. The thing missing would appear to be proper education. Education is not supplied (a point we've gone over many times) nor is it sought and so the result is that collectively we are financially illiterate.
Ideally everyone would care enough to learn about what they are doing and understand there will be consequences for their actions but if a lot of people cannot understand accountability and really believe others are to blame then we would appear to be a long way from a solution.
While the education needs to include the nuts and bolts of how things work, I also think the expectation needs to be set that no one but you cares if you lose your house, don't have enough money saved or otherwise get done in financially. While that might read as being very harsh, I think more people would take more suitable risks in their financial lives. If you can't make your house payment you will lose your house. If you lose your job you will probably need to make your house payment out of your savings. Your savings will go much further if you have a $1200 house payment than if you have a $3000 payment.
Is it more complicated than that? It probably is but it doesn't have to be. On a related post a few weeks ago a reader said I was skewed on these matters. In some respects that is true but another nugget from the WSJ post was learn vicariously through the mistakes of others which I did from my parents. As opposed to getting good advice, I learned what not to do and proactively sought out an existence that mitigates my hot buttons; I have multiple streams of income (and could have another if I accepted pay from the fire department) and a low overhead. My friend might make some crack about super rich here but that is utter nonsense, there are no barriers to entry for being cheap and hard working.
These things I did probably don't seem like too big of a deal to you but someone who reads a financial blog is not financially illiterate. We all have things to learn but that is not the same as being illiterate and we know from the housing market mess and lousy 401k results that too many people are financially illiterate.
I really do not know what a realistic solution could be. The gap between what should be and reality is vast.
Read more!
Other than his failure to mention the tax writeoff for making 401k contributions I can't argue against the ideology he expressed, actually I agree with it. I think people should be free to make all their good and bad decisions about finance matters and then own the consequences good and bad.
The reality of this is far more complicated. It is complicated by the fact that collectively we have no understanding of the decisions we make, we don't understand the consequences, we make poor decisions in terms of not saving enough, raiding our savings for things that are not necessarily emergencies, we buy high, we sell low, we spend wildly beyond our means, we have credit card debt out the wazoo, we take way too much risk, we don't take any risk--this list could be endless.
If the reality is that we collectively hang ourselves with most of our financial decisions then to paraphrase Jim Rogers the solution would not be to give us more rope.
I was exposed to a mentality along these lines yesterday that I simply don't know how to understand. I posted this article from the WSJ and pointed out the "debt is slavery reference." A Facebook friend with very specific ideas on all of this said that everyone in the US is a slave except the "super rich." I countered with not needing to be super rich to buy less house than you can afford, to brown bag your lunch and drive cars longer than five years; I even pointed him to my interview with my 80 year old backhoe driving neighbor (side note, the idea for the interview came from Seeking Alpha and then they chose not to run it, very funny). He shared a couple of opinions about the Fed and IRS and related some of his personal hard luck story.
As I read his comments it seemed to me that he was saying that he is not accountable for any of his circumstance, that people have been taken advantage and that it is not their fault, it is someone else's like the bank or the Fed. I can't relate to this in the least and so I cannot rule out that he is correct but whether he is correct or not there are some truths that still exist. No one will care more about your finances (savings, debt, housing) than you do.
Nassim Taleb was right in saying that we learned everything we need to know about personal finance from our grandmothers; don't borrow too much, don't lend too much and save as much as you can. One some level, everyone knows these things but the reality is that not enough people live their lives this way.
If we assume that my friend is correct, he is still there left to endure his hardship just like everyone else facing similar hardships. The thing missing would appear to be proper education. Education is not supplied (a point we've gone over many times) nor is it sought and so the result is that collectively we are financially illiterate.
Ideally everyone would care enough to learn about what they are doing and understand there will be consequences for their actions but if a lot of people cannot understand accountability and really believe others are to blame then we would appear to be a long way from a solution.
While the education needs to include the nuts and bolts of how things work, I also think the expectation needs to be set that no one but you cares if you lose your house, don't have enough money saved or otherwise get done in financially. While that might read as being very harsh, I think more people would take more suitable risks in their financial lives. If you can't make your house payment you will lose your house. If you lose your job you will probably need to make your house payment out of your savings. Your savings will go much further if you have a $1200 house payment than if you have a $3000 payment.
Is it more complicated than that? It probably is but it doesn't have to be. On a related post a few weeks ago a reader said I was skewed on these matters. In some respects that is true but another nugget from the WSJ post was learn vicariously through the mistakes of others which I did from my parents. As opposed to getting good advice, I learned what not to do and proactively sought out an existence that mitigates my hot buttons; I have multiple streams of income (and could have another if I accepted pay from the fire department) and a low overhead. My friend might make some crack about super rich here but that is utter nonsense, there are no barriers to entry for being cheap and hard working.
These things I did probably don't seem like too big of a deal to you but someone who reads a financial blog is not financially illiterate. We all have things to learn but that is not the same as being illiterate and we know from the housing market mess and lousy 401k results that too many people are financially illiterate.I really do not know what a realistic solution could be. The gap between what should be and reality is vast.
Read more!
Monday, May 23, 2011
Thoughts On "Investment Hats"
Barry Ritholtz' latest column for the Washington Post is titled The Many Hats of Great Investors and is a must read. Barry outlines the need to be a historian, a psychiatrist, a trial lawyer, a mathematician/statistician and an accountant.
In terms of being a historian, this is something I write about often. I talk about trying to take what I know about history and combine that with what I think is going on to make a forward looking analysis. The counter-argument to this is probably the criticism that looking at history is like driving in the rear view mirror. Obviously I disagree with that as I believe there are certain behaviors and patterns that do repeat. I guess I would add to Barry's comments that using market history is really about filtering what is historically significant versus what is historically insignificant.
Being a psychiatrist means two things; understanding the crowd but also self diagnosing our own fears, biases and hangups is important. Understanding the crowd can tie into history in terms of understand group-panic and group-euphoria. Properly diagnosing your own fears, biases and hangups can prevent you from getting caught up in the widespread panics and euphoria.
The part about being a trial lawyer seemed to be mostly about being skeptical. In being a top down believer I tend to focus my skepticism on bigger picture things like the economy, politics, the broad market and what people saying about these things. At the company level I tend not to assume fraud but I do assume that we are hearing things with the best light shone on them. Using CEO comments to support a thesis is one thing but using CEO comments as the foundation of a thesis is something else (the guy from Infospace who said it would be the first $1 trillion company as a good historical example).
Math and accountancy would seem to overlap a lot and while Barry says the math does not have to be complicated accounting most certainly can be. He does note that you don't need to be a forensic accountant to succeed but I would say a passing grade in a college accounting class probably would help but if you agree with that then I'm not sure how you get to simple math but I may not have understood this point entirely.
There are a couple of "hats" that I would add to Barry's list. The first one ties in with being a self-diagnosing psychiatrist and that is to understand what you really are trying to get out of investing. This will lead you to a more suitable asset allocation and more suitable investment choices. People often take on the wrong amount of exposure to risky assets. This can either too much or too little and include too much in lottery ticket companies. People often change their risk exposures at the wrong time (fear and greed).
As a matter of philosophy I think zooming out to target a result over an entire stock market cycle with the goal being to simply have enough money when you need can go a long way to reducing your portfolio's volatility and being less susceptible to fear and greed.
The other thing I would add to Barry's list is being a global macro strategist. Barry's list leans toward stock selection. While I believe wholeheartedly in using individual stocks, I don't believe in using only stocks and many investors use no individual stocks. Anyone making decisions that involve going narrower than SPY/EFA/IWM needs to make some effort to understand what they buy before they buy it and then follow it some to make sure they continue to understand it.
Yesterday I wrote about replacing Australian ETF exposure (for certain clients) with a combo of the Global X Nordic 30 ETF (GXF) and iShares Canada (EWC). While looking under the hood of the funds is crucial for what I hope are obvious reasons there also needs to be a macro assessment of the exposures involved. To the extent that a portfolio is a mix of individual stocks and funds investors need the traits Barry mentions and a few more.
Read more!
In terms of being a historian, this is something I write about often. I talk about trying to take what I know about history and combine that with what I think is going on to make a forward looking analysis. The counter-argument to this is probably the criticism that looking at history is like driving in the rear view mirror. Obviously I disagree with that as I believe there are certain behaviors and patterns that do repeat. I guess I would add to Barry's comments that using market history is really about filtering what is historically significant versus what is historically insignificant.
Being a psychiatrist means two things; understanding the crowd but also self diagnosing our own fears, biases and hangups is important. Understanding the crowd can tie into history in terms of understand group-panic and group-euphoria. Properly diagnosing your own fears, biases and hangups can prevent you from getting caught up in the widespread panics and euphoria.
The part about being a trial lawyer seemed to be mostly about being skeptical. In being a top down believer I tend to focus my skepticism on bigger picture things like the economy, politics, the broad market and what people saying about these things. At the company level I tend not to assume fraud but I do assume that we are hearing things with the best light shone on them. Using CEO comments to support a thesis is one thing but using CEO comments as the foundation of a thesis is something else (the guy from Infospace who said it would be the first $1 trillion company as a good historical example).
Math and accountancy would seem to overlap a lot and while Barry says the math does not have to be complicated accounting most certainly can be. He does note that you don't need to be a forensic accountant to succeed but I would say a passing grade in a college accounting class probably would help but if you agree with that then I'm not sure how you get to simple math but I may not have understood this point entirely.
There are a couple of "hats" that I would add to Barry's list. The first one ties in with being a self-diagnosing psychiatrist and that is to understand what you really are trying to get out of investing. This will lead you to a more suitable asset allocation and more suitable investment choices. People often take on the wrong amount of exposure to risky assets. This can either too much or too little and include too much in lottery ticket companies. People often change their risk exposures at the wrong time (fear and greed).
As a matter of philosophy I think zooming out to target a result over an entire stock market cycle with the goal being to simply have enough money when you need can go a long way to reducing your portfolio's volatility and being less susceptible to fear and greed.
The other thing I would add to Barry's list is being a global macro strategist. Barry's list leans toward stock selection. While I believe wholeheartedly in using individual stocks, I don't believe in using only stocks and many investors use no individual stocks. Anyone making decisions that involve going narrower than SPY/EFA/IWM needs to make some effort to understand what they buy before they buy it and then follow it some to make sure they continue to understand it.
Yesterday I wrote about replacing Australian ETF exposure (for certain clients) with a combo of the Global X Nordic 30 ETF (GXF) and iShares Canada (EWC). While looking under the hood of the funds is crucial for what I hope are obvious reasons there also needs to be a macro assessment of the exposures involved. To the extent that a portfolio is a mix of individual stocks and funds investors need the traits Barry mentions and a few more.
Read more!
Sunday, May 22, 2011
Sunday Morning Coffee
We said goodbye to a very old friend in the portfolio this week (going back to 2003-old in a couple of instances) as we existed Australia on the equity side of the portfolio. We sold Australia & New Zealand Bank (ANZBY) for large accounts and we sold ETFs for small accounts because they are very heavy in financials.
There have been signs of trouble in the Aussie housing market for a while in terms of various ratios of affordability and second home ownership being out of whack and while I doubt the fallout will be as bad as in the US I would rather not stick around to find out. As I said these have been issues for a while but have not really hurt the stocks and may not hurt them in the future but the situation has deteriorated a little (IMO) as time has gone on and the numbers seem to be a little worse perhaps as evidenced by the recent debt downgrades of the four big banks.
All four banks got hit hard in 2008 but less so than the US financial sector. Amusingly ANZ has been the best long term performer of the group and if that was not simply luck on my part then I would attribute this ANZ having more of a global footprint (really a regional footprint in Asia) which is why I chose it over the NAB and Westpac (I never considered Commonwealth). As I noted in a client email about this we are not rooting for bad things here but quite simply the risk characteristic appears to me to have changed enough to warrant taking this action. If I can buy it back in the low teens I'm sure that I would but we have to see where this goes, and again there may never be any consequence on the stock price for this perceived increase in risk.
For the small accounts (these are ones where 30-40 positions don't make sense for commission reasons) we split the exposure between the Global X Nordic 30 ETF (GXF) and iShares Canada (EWC). The bigger idea is foreign exposure that avoids Japan and Big Western Europe. I thought about the Norway ETF (NORW) but GXF has better sector diversification and holds several stocks from different sectors that we own in large accounts. Additionally a combo of NORW and EWC would have been too heavy in energy for my liking in this case. NORW as an energy proxy in a different type of account would be a different story.
For large accounts I need to figure the best way back into Australian equities and decide the best way in the financial sector to replace ANZBY. I have some ideas for both of course but for now ANZBY has not been replaced.
Read more!
There have been signs of trouble in the Aussie housing market for a while in terms of various ratios of affordability and second home ownership being out of whack and while I doubt the fallout will be as bad as in the US I would rather not stick around to find out. As I said these have been issues for a while but have not really hurt the stocks and may not hurt them in the future but the situation has deteriorated a little (IMO) as time has gone on and the numbers seem to be a little worse perhaps as evidenced by the recent debt downgrades of the four big banks.
All four banks got hit hard in 2008 but less so than the US financial sector. Amusingly ANZ has been the best long term performer of the group and if that was not simply luck on my part then I would attribute this ANZ having more of a global footprint (really a regional footprint in Asia) which is why I chose it over the NAB and Westpac (I never considered Commonwealth). As I noted in a client email about this we are not rooting for bad things here but quite simply the risk characteristic appears to me to have changed enough to warrant taking this action. If I can buy it back in the low teens I'm sure that I would but we have to see where this goes, and again there may never be any consequence on the stock price for this perceived increase in risk.For the small accounts (these are ones where 30-40 positions don't make sense for commission reasons) we split the exposure between the Global X Nordic 30 ETF (GXF) and iShares Canada (EWC). The bigger idea is foreign exposure that avoids Japan and Big Western Europe. I thought about the Norway ETF (NORW) but GXF has better sector diversification and holds several stocks from different sectors that we own in large accounts. Additionally a combo of NORW and EWC would have been too heavy in energy for my liking in this case. NORW as an energy proxy in a different type of account would be a different story.
For large accounts I need to figure the best way back into Australian equities and decide the best way in the financial sector to replace ANZBY. I have some ideas for both of course but for now ANZBY has not been replaced.
Read more!
Saturday, May 21, 2011
The Big Picture for the Week of May 22, 2011
A short story from my Western Civ 101 class that has stayed with me as the only thing I remember from the class. While I do not remember the particulars the mindset captured is both useful and topical.Apparently there was some sort of religious sect proclaiming that the world would end on October 15th of that year at 9:15 in the morning (as this was Western Civ I'm thinking this was hundreds of years ago). When 9:15 on October 15th came around and the world didn't end the religious sect proclaimed that the world had ended but that no one else but them knew.
Aside from being funny I think there is a lot there to take in. Short post, busy weekend.
Read more!
Friday, May 20, 2011
Friday Quicks
The funniest thing I saw yesterday about the LinkedIn (LNKD) hysteria was this one-liner from Amy Feldman, whom I follow on Twitter; Either I'm using my LinkedIn account wrong or the market is crazy.I thought that was hysterical. In all the excitement yesterday were countless references to the tech bubble and exploration of whether it is coming again this time with social media. I'm not concerned about trying to figure this out because as we have seen this movie before, I know that if there is a glut of these things, the more professional LinkedIn will not offer diversification for a position in Facebook, should it ever list, which is more social, which will not offer diversification for Twitter which is micro blogging, which will not offer diversification for Whereberry which is more aspirational (that one is real, I did not make it up).
There is nothing wrong with buying into the mania, the problems occur when people buy too much of the mania. A couple of percent into one of these things that then goes to zero becomes a lesson-learned. However 30% into a basket of them that blows up (don't snicker, this was very common 11 years ago) means going back to the drawing board with the financial plan. To be clear, I'm with Amy, I have an account that I must not be using correctly.
One item I forgot from yesterday's interview with my neighbor who drives the backhoe. I mentioned he gets a pension that they usually sock away. Part of their strategy is that they have built in the what-if of the pension fund going under. Their life is structured that it would be a nuisance not a game changer.
On a similar note I've previously disclosed being laid off from Schwab in September 2001 (that's right). I knew over a year ahead of time this was coming after they set up a call center in Austin that was immediately unnecessary and the voice mail from the then CEO gushing over the stock price hitting $100. We built up a war chest of sorts plus the severance that would have lasted a while but I got a job almost right away. While this turned out to be a very important milestone (in a good way), a lay off obviously can be very damaging. Living below your means is a way to mitigate the anguish it might cause.
The picture was taken this past Wednesday.
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Thursday, May 19, 2011
A Backhoe Operator Looks At 80
If you have been reading this blog for a while then you know about my retired neighbor who operates a backhoe to contribute to his and his wife's retirement income. He has been quite an inspiration and role model for many reasons. As you may know he was a firefighter with me for quite a few years, he recruited me onto the department back in 2002 (2003 was my first fire season).
Earlier this week he turned 80 and I've long thought his 80th birthday would be a great time to interview him for a blog post. Like just about everyone up here he did not know about the writing I do and he certainly did not know how famous he has become-- in an anonymous sort of way. I visited with them both yesterday (they will remain anonymous) for a couple of hours and for however well I knew them I learned a lot.
They have been married since 1954 which is something right there to be impressed with. They got married when he got out of the Air Force. In their early days he was a student at Michigan State and worked at Sears at night. They had son number 1 in 1956. When he graduated he wanted to be a law enforcement officer but there was no hiring in Detroit in 1958 so they moved to Phoenix where her sister lived and the police department was hiring.
When they were first married her father gave them $1200 in a mutual fund with the instruction to never sell it. By 1958 it was worth less than what it was in 1954 so they sold it for a down payment on their first house. Shortly thereafter they started to buy houses that needed work, they did the work themselves and rented them out such that the rent covered the mortgage. Very quickly they had five rental houses. While I am not certain of the exact timeline they were quite young at this point.
This was one of the things I learned about both of them. I knew he was very much a get it done type guy but really far more so than I ever knew. The entire time I have known him he is either out somewhere on the backhoe, doing something that is FD related and if he is home he is in his shop/garage working on something. Doing nothing really bothers him. This ran in his family as his grandmother successfully ran a farm with employees after her husband passed away and his parents were just as hard working. My neighbor seemingly knows at least a little about everything and learned much of this from time spent with his father when he was a boy and those lessons stuck. He tried to instill the same work ethic in both sons and while this was not easy when they were little guys both sons are as busy and successful as my neighbors.
To give an idea of the work ethic, my neighbor was a law enforcement officer for 27 years until age 54. About a year before he retired he went to school to learn refrigeration repair. After retirement his plan was to do refrigeration repair (roof top AC units mostly), have the rental income from the five houses and his police pension. They way things worked out, they lived off the rentals and the refrigeration work and the pension check went into savings.
This lasted for about five years until he made contact (friend of a friend) with someone we've all heard of (this person needs to remain anonymous as well) who needed a caretaker/manager of a mansion in Florida along with some other interests. They moved to Florida and did this for about five years (at one point in Florida they switched employers but the situation was very similar). The nature of this work was that all they had to pay for was food so essentially all of this income went into savings as well.
They first bought in Walker in 1972 as a weekend place. They moved here full time in 1992 when they got back from Florida. The bought a different place along the way and didn't do much with it until they moved back but it did need work that they did themselves both in terms of the actual house and the property (this is what lead to the first backhoe). As he was working on their own place he got a lot of side jobs with the backhoe but more on that later.
At some point they sold out of the houses in Phoenix and bought houses in the Prescott area with the same idea for the rental income and while I am not certain the status of those houses in terms of being occupied or positive cash flow, the police pension check still goes into savings.
Other than the mutual fund they got as a wedding gift they have no use for stocks but have owned bonds a couple of times but really have done very little there. There are two reasons for this; they don't know what stocks to buy and they believe there are too many dishonest people in the profession so they've always gone with houses and savings accounts. Although they never thought of it this way before I said that the self awareness to know they were not stock pickers is unusual and commendable. Too many people don't know what they don't know but my neighbors do which is impressive.
Both of them are incredibly fit. He is 80 and she is a couple of years younger. They apparently have good genes and they do have a good diet which you might expect to hear a very healthy 80 year old to say but he made a point to talk about never shying away from physical labor. It keeps you moving, keeps you fit and requires thinking and problem solving (same with firefighting). There was no mention of any exercising at this point. But as I was practically on my way out the door she said "oh yeah he does his exercises every morning." He is so fit that a normal 50 year old would need to exercise regularly to be as fit as he is. As recently as 2007 he dug a fire line up a very steep hill.
To the backhoe; as mentioned he bough the first backhoe in 1992 for $4000. He had so much work on their property that he felt it made financial sense to buy the backhoe instead of renting frequently. He did the work he needed, got some side jobs and was able to sell it for the $4000 he bought it for. He then bought the second and current backhoe (pictured above) in 1996. It was a 1992 model than he bought with 3000 hours on it for $23,000 which is much less than I would have guessed. It now has 6000 hours on it. The hours are relevant as there is relatively little maintenance before 5000 hours and more so after 5000 hours and he does the maintenance himself.
The income from the backhoe work would not be a lot by itself, it is simply a piece of the puzzle for their retirement solution--I think the funnest part as he loves doing it. Although he did say that it is fun for three-four hours but eight hours and it becomes a job.
As far as why they stay so active, simply, if you don't use it you're going to lose it. Another important point is that they have always lived below their means, with all the real estate transactions they've never owned a fancy house. They are happy with adequate in terms of quality and having room for when kids or grand kids visit (I am aware of one great grandchild). I asked about volunteerism as in they time I have known them they've been very involved with the fire department (less so in the last year because of how fouled up the politics have become) but for many years they were generally too busy but just as he recruited me in, someone else recruited him into the department and she got very involved on the fund raising side of things.
In many posts I have talked about all of these things in one way or another. When you don't have equity exposure that is adequate for growth you need to figure a way to make up for the growth you are not getting which is exactly what my neighbors have done in a way that is right for them. I do not know if they are wealthy in the way most people think of it but they have a modest lifestyle and the various sources of income are such that the pension check usually goes into savings (as mentioned above). This is a scenario where success does not hinge on having some huge balance in the bank. They cover their bills, do what they want to do and I imagine could address just about any sort of financial one off event that might come along.
My neighbors have had a profound influence on how we live our lives. We've not had a credit card balance since 1991, we've always been savers, quite content to live in a modest house and drive cars for a relatively long time but meeting these neighbors in 1998 was a chance to see some similar, as it turned out, ideas working out for people further down the road which was a validation of what we were doing. In 1998 I was 32 and while we were saving money the notion of retirement was not yet tangible to me (I was a trader at this point not an RIA). As I moved into this phase of my career I realized it was something I would not want to retire from and a contributing factor was the fun my neighbor has on his backhoe.
Read more!
Earlier this week he turned 80 and I've long thought his 80th birthday would be a great time to interview him for a blog post. Like just about everyone up here he did not know about the writing I do and he certainly did not know how famous he has become-- in an anonymous sort of way. I visited with them both yesterday (they will remain anonymous) for a couple of hours and for however well I knew them I learned a lot.
They have been married since 1954 which is something right there to be impressed with. They got married when he got out of the Air Force. In their early days he was a student at Michigan State and worked at Sears at night. They had son number 1 in 1956. When he graduated he wanted to be a law enforcement officer but there was no hiring in Detroit in 1958 so they moved to Phoenix where her sister lived and the police department was hiring.When they were first married her father gave them $1200 in a mutual fund with the instruction to never sell it. By 1958 it was worth less than what it was in 1954 so they sold it for a down payment on their first house. Shortly thereafter they started to buy houses that needed work, they did the work themselves and rented them out such that the rent covered the mortgage. Very quickly they had five rental houses. While I am not certain of the exact timeline they were quite young at this point.
This was one of the things I learned about both of them. I knew he was very much a get it done type guy but really far more so than I ever knew. The entire time I have known him he is either out somewhere on the backhoe, doing something that is FD related and if he is home he is in his shop/garage working on something. Doing nothing really bothers him. This ran in his family as his grandmother successfully ran a farm with employees after her husband passed away and his parents were just as hard working. My neighbor seemingly knows at least a little about everything and learned much of this from time spent with his father when he was a boy and those lessons stuck. He tried to instill the same work ethic in both sons and while this was not easy when they were little guys both sons are as busy and successful as my neighbors.
To give an idea of the work ethic, my neighbor was a law enforcement officer for 27 years until age 54. About a year before he retired he went to school to learn refrigeration repair. After retirement his plan was to do refrigeration repair (roof top AC units mostly), have the rental income from the five houses and his police pension. They way things worked out, they lived off the rentals and the refrigeration work and the pension check went into savings.
This lasted for about five years until he made contact (friend of a friend) with someone we've all heard of (this person needs to remain anonymous as well) who needed a caretaker/manager of a mansion in Florida along with some other interests. They moved to Florida and did this for about five years (at one point in Florida they switched employers but the situation was very similar). The nature of this work was that all they had to pay for was food so essentially all of this income went into savings as well.
They first bought in Walker in 1972 as a weekend place. They moved here full time in 1992 when they got back from Florida. The bought a different place along the way and didn't do much with it until they moved back but it did need work that they did themselves both in terms of the actual house and the property (this is what lead to the first backhoe). As he was working on their own place he got a lot of side jobs with the backhoe but more on that later.
At some point they sold out of the houses in Phoenix and bought houses in the Prescott area with the same idea for the rental income and while I am not certain the status of those houses in terms of being occupied or positive cash flow, the police pension check still goes into savings.
Other than the mutual fund they got as a wedding gift they have no use for stocks but have owned bonds a couple of times but really have done very little there. There are two reasons for this; they don't know what stocks to buy and they believe there are too many dishonest people in the profession so they've always gone with houses and savings accounts. Although they never thought of it this way before I said that the self awareness to know they were not stock pickers is unusual and commendable. Too many people don't know what they don't know but my neighbors do which is impressive.
Both of them are incredibly fit. He is 80 and she is a couple of years younger. They apparently have good genes and they do have a good diet which you might expect to hear a very healthy 80 year old to say but he made a point to talk about never shying away from physical labor. It keeps you moving, keeps you fit and requires thinking and problem solving (same with firefighting). There was no mention of any exercising at this point. But as I was practically on my way out the door she said "oh yeah he does his exercises every morning." He is so fit that a normal 50 year old would need to exercise regularly to be as fit as he is. As recently as 2007 he dug a fire line up a very steep hill.
To the backhoe; as mentioned he bough the first backhoe in 1992 for $4000. He had so much work on their property that he felt it made financial sense to buy the backhoe instead of renting frequently. He did the work he needed, got some side jobs and was able to sell it for the $4000 he bought it for. He then bought the second and current backhoe (pictured above) in 1996. It was a 1992 model than he bought with 3000 hours on it for $23,000 which is much less than I would have guessed. It now has 6000 hours on it. The hours are relevant as there is relatively little maintenance before 5000 hours and more so after 5000 hours and he does the maintenance himself.
The income from the backhoe work would not be a lot by itself, it is simply a piece of the puzzle for their retirement solution--I think the funnest part as he loves doing it. Although he did say that it is fun for three-four hours but eight hours and it becomes a job.
As far as why they stay so active, simply, if you don't use it you're going to lose it. Another important point is that they have always lived below their means, with all the real estate transactions they've never owned a fancy house. They are happy with adequate in terms of quality and having room for when kids or grand kids visit (I am aware of one great grandchild). I asked about volunteerism as in they time I have known them they've been very involved with the fire department (less so in the last year because of how fouled up the politics have become) but for many years they were generally too busy but just as he recruited me in, someone else recruited him into the department and she got very involved on the fund raising side of things.
In many posts I have talked about all of these things in one way or another. When you don't have equity exposure that is adequate for growth you need to figure a way to make up for the growth you are not getting which is exactly what my neighbors have done in a way that is right for them. I do not know if they are wealthy in the way most people think of it but they have a modest lifestyle and the various sources of income are such that the pension check usually goes into savings (as mentioned above). This is a scenario where success does not hinge on having some huge balance in the bank. They cover their bills, do what they want to do and I imagine could address just about any sort of financial one off event that might come along.
My neighbors have had a profound influence on how we live our lives. We've not had a credit card balance since 1991, we've always been savers, quite content to live in a modest house and drive cars for a relatively long time but meeting these neighbors in 1998 was a chance to see some similar, as it turned out, ideas working out for people further down the road which was a validation of what we were doing. In 1998 I was 32 and while we were saving money the notion of retirement was not yet tangible to me (I was a trader at this point not an RIA). As I moved into this phase of my career I realized it was something I would not want to retire from and a contributing factor was the fun my neighbor has on his backhoe.
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Wednesday, May 18, 2011
ETF Ideas Circa 2006
Yesterday I was looking for a document on my computer and saw a file in a folder called ETF Ideas that was dated from December 2006. It appears as though I solicited input from readers about "what you'd like to see" in advance of attending a conference. I'm not sure if the ideas listed were all reader ideas or whether I created the list, there is a grouping at the bottom of the list called miscellaneous so perhaps I had some ideas and readers contributed things I did not think of.
Either way here is the list as I had it in the file;
Commodities
Industrial Metals ETF
Energy ETF (access to brent)
Commodities ETF based on Dow Jones AIG Commodities
Global Timber
Uranium
Platinum
Fixed Income
Master Limited Partnerships
Preferred Securities
Floating Rate Notes
INTL bond
Muni bond ETF
ETFs of bond CEFs
High Yield Bonds
Emerging Market Bonds
Yield curve plays
Miscellaneous Ideas
Yen ETF
VIX
International REITs
U.S. Residential Housing (long and short)
A couple of intelligent groupings of the next BRICs IE N-11
Themes: Outsourcing ETF, Vice, Tortoise vs. Hare, Art and collectibles, weapon manufacturers
More equal weight
Narrow sector and sub sectors
More single country India 11 Russia Eastern Europe Mid East Africa Nordics Ireland
A broader global fund
Dividend ETFs with better sector diversification
Hedge Fund indices
Buy write ETFs
ETF of ETFs
International Small Cap Value ETF (truly small cap, truly value)
International MicroCap ETF
Almost all of these have come into existence and I would say in certain segments the number of funds now available exceeds the general expectations from 2006. There are maybe a dozen VIX related products and MLP products which may not be good things but they do exist.
It is also possible that the number of country funds and thematic funds also exceeds the general expectation from back then as well.
Narrow funds get picked on by many different people in all parts of the industry as being unnecessary, speculative or otherwise unsuitable for everyone. I've said countless times that the logic that narrow funds should not exist is simply idiotic. First of all some participants do speculate and plenty more use individual stocks to build a portfolio (a fact that often is forgotten). Would it be wildly reckless for anyone to own Alcoa (AA)? If not then it would not be wildly reckless for anyone to own the Global X Aluminum ETF (ALUM). I want no part of this niche which is why I chose the example. Someone could assess the fundamental story of the aluminum space decide they want to buy and then weigh the merits of various choices including one of the largest names in the space and a fund that focuses on the space.
Some funds of course end up being of little to no use to the market for whatever reason and those funds end up closing. I imagine that the China Carpet ETF might have a tough time catching on and the market will sort that out as new funds come. I found a company called Tai Ping Carpets which trades very thinly in Hong Kong but does have a five letter US designator; TACPF.
Clearly no investor will make use of too many funds; if there are 1000 funds it is not like someone can realistically make use of 100 of them or even 50. I'd be surprised if too many individuals or RIAs would have use for 20 ETFs. We use in the neighborhood of ten for the equity portion of client portfolios (including GLD) and two or three for fixed income. Those numbers for us mean very little as I would use more or fewer depending on where the portfolio goes.
If you go narrower than SPY/EFA/IWM then you should make informed decisions for each segment based on the available choices and consistent with your ability to analyze the choices, spend time monitoring the holding and your comfort level with things like trading volume.
That leaves us to ponder what else will come in the future now that we have a fishery ETF. No surprise, I would like to see a global cement ETF, some sort of toll road/air port/seaport fund (the yield could be very high), a Nordic bank ETF, a Chilean debt ETF and a few others. What ideas do you have?
Read more!
Either way here is the list as I had it in the file;
Commodities
Industrial Metals ETF
Energy ETF (access to brent)
Commodities ETF based on Dow Jones AIG Commodities
Global Timber
Uranium
Platinum
Fixed Income
Master Limited Partnerships
Preferred Securities
Floating Rate Notes
INTL bond
Muni bond ETF
ETFs of bond CEFs
High Yield Bonds
Emerging Market Bonds
Yield curve plays
Miscellaneous Ideas
Yen ETF
VIX
International REITs
U.S. Residential Housing (long and short)
A couple of intelligent groupings of the next BRICs IE N-11
Themes: Outsourcing ETF, Vice, Tortoise vs. Hare, Art and collectibles, weapon manufacturers
More equal weight
Narrow sector and sub sectors
More single country India 11 Russia Eastern Europe Mid East Africa Nordics Ireland
A broader global fund
Dividend ETFs with better sector diversification
Hedge Fund indices
Buy write ETFs
ETF of ETFs
International Small Cap Value ETF (truly small cap, truly value)
International MicroCap ETF
Almost all of these have come into existence and I would say in certain segments the number of funds now available exceeds the general expectations from 2006. There are maybe a dozen VIX related products and MLP products which may not be good things but they do exist.
It is also possible that the number of country funds and thematic funds also exceeds the general expectation from back then as well.
Narrow funds get picked on by many different people in all parts of the industry as being unnecessary, speculative or otherwise unsuitable for everyone. I've said countless times that the logic that narrow funds should not exist is simply idiotic. First of all some participants do speculate and plenty more use individual stocks to build a portfolio (a fact that often is forgotten). Would it be wildly reckless for anyone to own Alcoa (AA)? If not then it would not be wildly reckless for anyone to own the Global X Aluminum ETF (ALUM). I want no part of this niche which is why I chose the example. Someone could assess the fundamental story of the aluminum space decide they want to buy and then weigh the merits of various choices including one of the largest names in the space and a fund that focuses on the space.Some funds of course end up being of little to no use to the market for whatever reason and those funds end up closing. I imagine that the China Carpet ETF might have a tough time catching on and the market will sort that out as new funds come. I found a company called Tai Ping Carpets which trades very thinly in Hong Kong but does have a five letter US designator; TACPF.
Clearly no investor will make use of too many funds; if there are 1000 funds it is not like someone can realistically make use of 100 of them or even 50. I'd be surprised if too many individuals or RIAs would have use for 20 ETFs. We use in the neighborhood of ten for the equity portion of client portfolios (including GLD) and two or three for fixed income. Those numbers for us mean very little as I would use more or fewer depending on where the portfolio goes.
If you go narrower than SPY/EFA/IWM then you should make informed decisions for each segment based on the available choices and consistent with your ability to analyze the choices, spend time monitoring the holding and your comfort level with things like trading volume.
That leaves us to ponder what else will come in the future now that we have a fishery ETF. No surprise, I would like to see a global cement ETF, some sort of toll road/air port/seaport fund (the yield could be very high), a Nordic bank ETF, a Chilean debt ETF and a few others. What ideas do you have?
Read more!
Tuesday, May 17, 2011
By The Numbers
Valuation of individual stocks matters. Valuation is not at the top of my priority list but it does matter and for some investors valuation is at the top of the list and that is valid. There are different measures of valuation and people who consider themselves to be bottom up value investors have their own idea about the best measures of value and they can all be valid; obviously no one relies on a valuation metric they believe to be worthless, they only rely on what they believe to be useful and if they stick with it there must be some success thus any metric can be of value.
Consider the following group of related companies;
Company A:
PE ratio 13.74
Earnings estimated to grow 8%
Yield 5.18%
Payout ratio 72%
Company B:
PE ratio 11.72
Earnings estimated to grow 9%
Yield 6.08
Payout ratio 72%
Company C:
PE ratio 10.5
Earnings estimated to grow 19%
Yield 2.30%
Payout ratio 25%
Company D
PE ratio 12.2
Earnings estimated to grow 18%
Yield 3.81%
Payout ratio 48%
The group is a collection of utility stocks of varying attributes. For a bit of comparison, per the SPDR website the Sector SPDR Utility ETF (XLU) has a PE ratio of 13.61 which appears to be in line with the fund's history, a dividend yield of 3.85% and earnings expected grow at 4.18% for "3-5 years," the growth estimates above are just for one year.
Obviously a couple of the stocks have a better than average yield and the other two have better prospects for earnings growth. While there is clearly not enough information above to make a decision about buying any of the above names (pretend for a moment you knew the names and all you knew about them was those four data points) is the first impression absolutely not, no need to learn any more, those numbers stink the way you might with a company that will lose money for as far as estimates go out but still paying the dividend?
A couple of the yields are interesting but I'd say that the numbers are not particularly noteworthy as being cheap or expensive, actually the current PE ratios for all four appear to be a touch lower, but not meaningfully so, than where they were two years.
I'm sure some long time readers figured out a couple of paragraphs ago where this was headed. The four stocks are publicly traded Chinese toll road companies. They are four of the bigger stocks in the niche. I've said before that I think these are very much like utility stocks, I own one of them personally and for one or two clients but that they are too thin to buy across the board until Schwab offers direct access to Hong Kong.
For the last two years two them have performed in line with the Hang Seng Index, one has dramatically outperformed and one has lagged such that it is flat. From the 2007 peak to the March 2009 low the two with the higher yield fared better than the Hang Seng and the two growthier names did a little worse. For the last four years (so maybe an entire stock market cycle?) the Hang Seng is up 13%, two of them are down single digits, one is up 25% and the other is up more than 100%.
The reason for this post is that one reader jumped on me a little for yesterday's post about resource consumption in China and the various distortions in the country. The reader said "you recommend investing in toll roads etc. and you believe they can not get very, very overvalued in China or other countries?"
First, I never said they can't get overvalued. Anything can become overvalued but the potential to become overvalued in the future is not a reason to avoid a stock now. There are plenty of reasons to not buy Chinese toll roads but potential, not current mind you but potential, overvaluation is not one of them. The group is within its normal valuation range. If the prices went way up, throwing valuation metrics out of whack then selling would make sense.
One of the hang ups with foreign investing is incorrect perception of all sorts of things. All four stocks are profitable and have been trading for more than ten years. These are not insane holdings. They are stocks that may or may not work out as hoped for, similar to plenty of similarly valued US utility stocks.
Read more!
Consider the following group of related companies;
Company A:
PE ratio 13.74
Earnings estimated to grow 8%
Yield 5.18%
Payout ratio 72%
Company B:
PE ratio 11.72
Earnings estimated to grow 9%
Yield 6.08
Payout ratio 72%
Company C:
PE ratio 10.5
Earnings estimated to grow 19%
Yield 2.30%
Payout ratio 25%
Company D
PE ratio 12.2
Earnings estimated to grow 18%
Yield 3.81%
Payout ratio 48%
The group is a collection of utility stocks of varying attributes. For a bit of comparison, per the SPDR website the Sector SPDR Utility ETF (XLU) has a PE ratio of 13.61 which appears to be in line with the fund's history, a dividend yield of 3.85% and earnings expected grow at 4.18% for "3-5 years," the growth estimates above are just for one year.
Obviously a couple of the stocks have a better than average yield and the other two have better prospects for earnings growth. While there is clearly not enough information above to make a decision about buying any of the above names (pretend for a moment you knew the names and all you knew about them was those four data points) is the first impression absolutely not, no need to learn any more, those numbers stink the way you might with a company that will lose money for as far as estimates go out but still paying the dividend?
A couple of the yields are interesting but I'd say that the numbers are not particularly noteworthy as being cheap or expensive, actually the current PE ratios for all four appear to be a touch lower, but not meaningfully so, than where they were two years.
I'm sure some long time readers figured out a couple of paragraphs ago where this was headed. The four stocks are publicly traded Chinese toll road companies. They are four of the bigger stocks in the niche. I've said before that I think these are very much like utility stocks, I own one of them personally and for one or two clients but that they are too thin to buy across the board until Schwab offers direct access to Hong Kong.
For the last two years two them have performed in line with the Hang Seng Index, one has dramatically outperformed and one has lagged such that it is flat. From the 2007 peak to the March 2009 low the two with the higher yield fared better than the Hang Seng and the two growthier names did a little worse. For the last four years (so maybe an entire stock market cycle?) the Hang Seng is up 13%, two of them are down single digits, one is up 25% and the other is up more than 100%.
The reason for this post is that one reader jumped on me a little for yesterday's post about resource consumption in China and the various distortions in the country. The reader said "you recommend investing in toll roads etc. and you believe they can not get very, very overvalued in China or other countries?"
First, I never said they can't get overvalued. Anything can become overvalued but the potential to become overvalued in the future is not a reason to avoid a stock now. There are plenty of reasons to not buy Chinese toll roads but potential, not current mind you but potential, overvaluation is not one of them. The group is within its normal valuation range. If the prices went way up, throwing valuation metrics out of whack then selling would make sense.
One of the hang ups with foreign investing is incorrect perception of all sorts of things. All four stocks are profitable and have been trading for more than ten years. These are not insane holdings. They are stocks that may or may not work out as hoped for, similar to plenty of similarly valued US utility stocks.
Read more!
Monday, May 16, 2011
China's Consumption of Resources
The table comes from Jeremy Grantham via Barron's. Grantham expects an explosion upward in the commodity space for many of the reasons that many others do.The numbers on the table are new to me and quite eyeopening in terms of item after item with such high numbers. China has about 1/6 of the world's population. India has a similar portion of the world's population but is quite a ways behind China with many people expecting India make a lot of progress. There is something close to one billion people in Africa and again the a similar potential exists.
Part of this of course rests on the idea that quality of life continues to improve in these place (along with much of Latin American and other parts of Asia) in conjunction with the ongoing emergence of a middle class.
I've mentioned before my belief that the demand for food is a one way trade but the stocks involved will be subject to the regular ups and downs of the stock market cycle. One reader recently pointed out that I could be wrong which of course could be correct and why no matter how strongly you feel about something you should not be so exposed that being wrong does you in.
The list of commodities would seem to have very little reliance on real estate development--kind of. What I mean is that cement and some of the other things obviously do go into construction but they also go into the infrastructure build out as well. One criticism of China that pops up regularly is the excess in infrastructure projects which supposedly are being done to keep more people employed (so social reasons)--perhaps akin to bridges to nowhere. To the extent this is true I believe it is less destructive than real estate speculation in that misallocation of capital by the state, while continuing to generate cash will be less destructive than when people buy multiple apartments that go unrented. There is no greater fool aspect to building bridges or remodeling airports.
In looking at the food items on the list, it seems to me that long before someone would go much more expensive with a house or buy a car they would seek better nutrition. If this idea is wrong then it would probably be wrong for underestimating aspirational demand.
I think the idea of better diets has a lot of time to play out and that the demand is much stronger because of the fundamental need for food and water. Obviously this does not exist with a third apartment purchase.
Read more!
Sunday, May 15, 2011
Sunday Morning Coffee
The New York Times Magazine posted an update on Iceland that had some great quotes and thinking (as opposed to talking) points.
First up was this comment from an Icelander who did not get caught up in the excess;
When Joellyn and I went in 2006 I noted how many young people there were driving very expensive cars. As seen in real time this was either evidence of success or excess and given all the cranes we saw on the way in from the airport it certainly seemed like prosperity and one way to look at it was that this was somewhere on the spectrum of success building to excess.
The Icelander quoted above managed to not get caught up in what was going on, was content with what he had and so survived it better than most. People in the US with enough common sense to not buy a house by borrowing 120% of the price going in or take on four flips at once also fared better than most (one would hope anyway).
Introspection and self-awareness are important traits to have and while that seems like an obvious statement I do think it is collectively lacking. I don't know if collectively the US' roots can be one of living below our means, saving a lot of money relative to what we make and trying to make our lives simpler but this can occur on an individual level and while that may not solve what needs solving at the societal level this realization will help some people.
Maybe he was psychologically unable but part of the equation for success in financial matters is the introspection to understand your blindspots (we all have them) and if possible figure out how to mitigate some of them. There are countless books on these various biases, fallacies and other human defects that do in many people in terms of investing and spending.
I write about this stuff often for two reasons. One is that I find this sort of human condition stuff to be fascinating and the other is that when people make progress toward figuring this out for themselves they then can invest in a more suitable manner. When someone realizes that a $700,000 nest egg does not afford a $100,000 lifestyle they can then invest with a more suitable allocation, with a more suitable time horizon and probably reduce their financial stress.
Personally speaking I want no financial stress and the easiest way to avoid stress is to act on what you can control like savings rate and spending. Our income is not necessarily in our control in that if we work for a company we could get let go for some reason or if we are self-employed, business could dry up one way or another. The crisis in 2008 did not take down everyone in the country, and if there is somehow another leg to this that doesn't have to take down everyone either.
Read more!
First up was this comment from an Icelander who did not get caught up in the excess;
“I thought there was something wrong with me because I wasn’t taking millions in loans,” he admitted. “Everyone had brand-new cars and built big summer homes and boats. You felt like a loser or something if you didn’t have it. This is the feeling that many regular people felt if they weren’t making trillions, but maybe we weren’t so stupid.”
When Joellyn and I went in 2006 I noted how many young people there were driving very expensive cars. As seen in real time this was either evidence of success or excess and given all the cranes we saw on the way in from the airport it certainly seemed like prosperity and one way to look at it was that this was somewhere on the spectrum of success building to excess.
The Icelander quoted above managed to not get caught up in what was going on, was content with what he had and so survived it better than most. People in the US with enough common sense to not buy a house by borrowing 120% of the price going in or take on four flips at once also fared better than most (one would hope anyway).
A number of people suggested to me (the author of the article) that the nation, as a whole, was going through a period of intense introspection and that the consensus seemed to be that Icelanders needed to return to their roots.
Introspection and self-awareness are important traits to have and while that seems like an obvious statement I do think it is collectively lacking. I don't know if collectively the US' roots can be one of living below our means, saving a lot of money relative to what we make and trying to make our lives simpler but this can occur on an individual level and while that may not solve what needs solving at the societal level this realization will help some people.
“I analyzed the two other Icelandic banks, but I was unable to analyze my own bank,” he (former analyst at Kaupthing) confessed. “I was psychologically unable to admit that we were doomed.”
Maybe he was psychologically unable but part of the equation for success in financial matters is the introspection to understand your blindspots (we all have them) and if possible figure out how to mitigate some of them. There are countless books on these various biases, fallacies and other human defects that do in many people in terms of investing and spending.
I write about this stuff often for two reasons. One is that I find this sort of human condition stuff to be fascinating and the other is that when people make progress toward figuring this out for themselves they then can invest in a more suitable manner. When someone realizes that a $700,000 nest egg does not afford a $100,000 lifestyle they can then invest with a more suitable allocation, with a more suitable time horizon and probably reduce their financial stress.Personally speaking I want no financial stress and the easiest way to avoid stress is to act on what you can control like savings rate and spending. Our income is not necessarily in our control in that if we work for a company we could get let go for some reason or if we are self-employed, business could dry up one way or another. The crisis in 2008 did not take down everyone in the country, and if there is somehow another leg to this that doesn't have to take down everyone either.
Read more!
Saturday, May 14, 2011
The Big Picture for the Week of May 15, 2011
Following up on yesterday's mid-morning post, the ETF industry has kicked things up a notch in the last few days in a way that I believe is a net positive in terms of some new funds and filings.
As mentioned yesterday Van Eck came out with the Market Vectors LatAm Bond ETF (BONO) which offers a new narrow exposure in the ETP space. Next month the WisdomTree New Zealand Dollar ETF (BNZ) will become the WisdomTree Australian and New Zealand Debt ETF. I've been buying Aussie sovereign debt for clients for several years now. The conversion of BNZ democratizes this trade with a purer exposure than the Aberdeen Asia Pacific Fund (FAX) which owns mostly antipodean debt but the amount can vary. Some clients own FAX.
Next week's article for theStreet.com will be about BONO so without frontrunning it I will say that a combo of BONO and the new BNZ, properly sized, offers the chance for a very precise allocation that avoids a lot of shaky parts of the world. BONO is heavy in Brazil and Mexico. Each of those countries have their share of risks so anyone interested needs to do a little work there and come to their own conclusion but a foreign fixed income allocation that avoids Japan, the euro and the UK is worth exploring.
Also as mentioned yesterday Newton, MA (my hometown) based Direxion filed for a bunch of India ETFs including sector funds for financials, consumers, energy and utilities, industrials, infrastructure, materials and a tech and telecom fund. Also included in the filing is a fixed income fund. Of least interest to me would be the financial fund and there are several tech stocks that are have been easily accessible for a while. The materials fund might be 50% in Sterlite Industries (SLT) --slight hyperbole--and the rest in cement companies. Seriously there are a lot of cement companies in India. The energy and utility fund could be heavy in hydroelectric companies and the consumer fund would have a shot of capturing the ascending middle class--this is happening much slower than in China.
In general I think country-sector funds are preferable to broad country funds. If you have done some top down study on a country, it stands to reason that there could be some part of the country that you think is better to avoid. To bring up an example I've used before, Sweden is a country I want to own for clients, we've owned it for years with Volvo. The iShares Sweden ETF (EWD) has always had Ericsson as the largest holding. It is currently around 11% of the fund but it used to be more like 20%. There are several sectors in Sweden that I think could work out but I want no part of Ericsson so I've never seriously considered the fund. If there were a Sweden Financial Sector ETF I would be interested in that as I think the sector is healthy but the individual stocks are pretty thin.
If there is something to avoid in a country but has very little weighting then the broad country fund would be less of an obstacle; it is unlikely that the 3% allocated to utilities in SPY, if you hated that sector for some reason, could bring the whole thing toppling down.
Anyone that has been reading this site for a while knows I am a believer in building portfolios with narrower exposures, either individual issues or funds. Another aspect of portfolio construction is figuring out what to avoid. The new BNZ is a perfect example for someone who is favorably disposed to Aussie debt but who cannot access individual debt issues. Detractors will say that these funds are risky (although usually they mean volatile) but the riskiness of most products depends on how it is used. In thinking about permanent impairment of capital (a James Montier saying) a 3-4% allocation to something that is extremely volatile will not have a financial-plan-ruining outcome. The volatile thing may or may not work out as hoped for but proper sizing means it is not ruinous. However 50% in something that is extremely un-volatile can have a ruinous effect in some sort of worst case scenario for the product.
Anyone agreeing with this line of thinking will no doubt used narrow based products but anyone who cannot see this most certainly should avoid them.
Read more!
As mentioned yesterday Van Eck came out with the Market Vectors LatAm Bond ETF (BONO) which offers a new narrow exposure in the ETP space. Next month the WisdomTree New Zealand Dollar ETF (BNZ) will become the WisdomTree Australian and New Zealand Debt ETF. I've been buying Aussie sovereign debt for clients for several years now. The conversion of BNZ democratizes this trade with a purer exposure than the Aberdeen Asia Pacific Fund (FAX) which owns mostly antipodean debt but the amount can vary. Some clients own FAX.
Next week's article for theStreet.com will be about BONO so without frontrunning it I will say that a combo of BONO and the new BNZ, properly sized, offers the chance for a very precise allocation that avoids a lot of shaky parts of the world. BONO is heavy in Brazil and Mexico. Each of those countries have their share of risks so anyone interested needs to do a little work there and come to their own conclusion but a foreign fixed income allocation that avoids Japan, the euro and the UK is worth exploring.
Also as mentioned yesterday Newton, MA (my hometown) based Direxion filed for a bunch of India ETFs including sector funds for financials, consumers, energy and utilities, industrials, infrastructure, materials and a tech and telecom fund. Also included in the filing is a fixed income fund. Of least interest to me would be the financial fund and there are several tech stocks that are have been easily accessible for a while. The materials fund might be 50% in Sterlite Industries (SLT) --slight hyperbole--and the rest in cement companies. Seriously there are a lot of cement companies in India. The energy and utility fund could be heavy in hydroelectric companies and the consumer fund would have a shot of capturing the ascending middle class--this is happening much slower than in China.
In general I think country-sector funds are preferable to broad country funds. If you have done some top down study on a country, it stands to reason that there could be some part of the country that you think is better to avoid. To bring up an example I've used before, Sweden is a country I want to own for clients, we've owned it for years with Volvo. The iShares Sweden ETF (EWD) has always had Ericsson as the largest holding. It is currently around 11% of the fund but it used to be more like 20%. There are several sectors in Sweden that I think could work out but I want no part of Ericsson so I've never seriously considered the fund. If there were a Sweden Financial Sector ETF I would be interested in that as I think the sector is healthy but the individual stocks are pretty thin.
If there is something to avoid in a country but has very little weighting then the broad country fund would be less of an obstacle; it is unlikely that the 3% allocated to utilities in SPY, if you hated that sector for some reason, could bring the whole thing toppling down.
Anyone that has been reading this site for a while knows I am a believer in building portfolios with narrower exposures, either individual issues or funds. Another aspect of portfolio construction is figuring out what to avoid. The new BNZ is a perfect example for someone who is favorably disposed to Aussie debt but who cannot access individual debt issues. Detractors will say that these funds are risky (although usually they mean volatile) but the riskiness of most products depends on how it is used. In thinking about permanent impairment of capital (a James Montier saying) a 3-4% allocation to something that is extremely volatile will not have a financial-plan-ruining outcome. The volatile thing may or may not work out as hoped for but proper sizing means it is not ruinous. However 50% in something that is extremely un-volatile can have a ruinous effect in some sort of worst case scenario for the product.
Anyone agreeing with this line of thinking will no doubt used narrow based products but anyone who cannot see this most certainly should avoid them.
Read more!
Friday, May 13, 2011
Sociology Of Retirement
Ezra Klein had a post titled Eight Facts and Three Thoughts About Social Security. One of the thoughts was particularly interesting for several reasons;
The notion of so called "opinion elites" preferring to work longer while most Americans want to retire as early as they can rings true intuitively even if not easily quantified. But it is in this part of Klein's comment where a lot of progress can be made, maybe the most progress. Blending a couple of his facts together social security replaces 40% of pre-retirement income (read the post for more detail), without Social Security 45% of seniors would be below the poverty line and with it there are still 10% of seniors below the poverty line.
Klein makes mention of something we all know, that 401k balances and the like are disastrously low versus where they should be to give most people a shot at supplementing retirement income. A $60,000 balance upon retiring either becomes an emergency fund or a year or two of expenses not a 30 year source of income.
Klein thinks raising the retirement age is the worst thing that can be done as noted above and maybe he is correct but the totality of social security/medicare situation does, IMO, mean that something somewhere will have to give. Maybe more than one something will have to give. He seems to favor means testing and paying more than on the first $106,000 of income. My idea, that I have mentioned before, is no cap on qualified contributions with the tradeoffs being a phase out of the benefit and continuing to pay the current $17,000 in.
The social solution requires that more of the population making the effort to create their own solution for post retirement income. This line of discussion has the potential to be insensitive so apologies for that. I realize not everyone has the self-awareness, inclination or opportunity to ponder and then implement their own solution. You, reading a stock market blog, are more likely to have the self-awareness, inclination and opportunity to ponder and implement a solution than most of the population. Another related point is that you are also more likely to be a person of influence in your various social dynamics on financials matters and thus in a position to create more awareness of these points than would otherwise exist--sort of helping to promote financial literacy.
For as much as I write about this I obviously find this to be both intellectually interesting and also very important for many people. In the context of talking about working after "retirement" the objections usually focus on not wanting to stand all day in some sort of retail store which is understandable. We all have things that we would never want to do. But if that is true then it makes the argument for figuring out what you want to do then figuring out how to make that happen and do so with enough time so that if your first attempt does not work out you can recalibrate and try again or move onto something else.
The existence of the internet removes one barrier that has come up before, that being health. Clearly not all of us will be fit enough to fight a wildfire at age 76 like my neighbor with the backhoe (he worked on the fireline for the last big fire we had in 2007) and even if someone does not get around at 65 like they did when they were 35 they can harness their brain and the unlimited possibilities of the internet to figure something out.
This line of thinking is something that I think is very positive which contrasts with what appears to be going on with savings rates, entitlement programs, pension underfunding and whatever else you want to include in the conversation. Savings rates are in our control (or they should be) but the other two are not. One of my hot buttons is having my financial fate dictated by other people, this is unacceptable to me so I am motivated to do all I can to avoid that which includes more than one source of income and doing work that I hope I can do until I'm 100 (I guess Klein would call me an opinion elite?).
A reorientation to people creating their own solution is not new on this site and while not everyone can do this, there folks who can and hopefully will.
Read more!
Most opinion elites — Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better.
The notion of so called "opinion elites" preferring to work longer while most Americans want to retire as early as they can rings true intuitively even if not easily quantified. But it is in this part of Klein's comment where a lot of progress can be made, maybe the most progress. Blending a couple of his facts together social security replaces 40% of pre-retirement income (read the post for more detail), without Social Security 45% of seniors would be below the poverty line and with it there are still 10% of seniors below the poverty line.
Klein makes mention of something we all know, that 401k balances and the like are disastrously low versus where they should be to give most people a shot at supplementing retirement income. A $60,000 balance upon retiring either becomes an emergency fund or a year or two of expenses not a 30 year source of income.
Klein thinks raising the retirement age is the worst thing that can be done as noted above and maybe he is correct but the totality of social security/medicare situation does, IMO, mean that something somewhere will have to give. Maybe more than one something will have to give. He seems to favor means testing and paying more than on the first $106,000 of income. My idea, that I have mentioned before, is no cap on qualified contributions with the tradeoffs being a phase out of the benefit and continuing to pay the current $17,000 in.
The social solution requires that more of the population making the effort to create their own solution for post retirement income. This line of discussion has the potential to be insensitive so apologies for that. I realize not everyone has the self-awareness, inclination or opportunity to ponder and then implement their own solution. You, reading a stock market blog, are more likely to have the self-awareness, inclination and opportunity to ponder and implement a solution than most of the population. Another related point is that you are also more likely to be a person of influence in your various social dynamics on financials matters and thus in a position to create more awareness of these points than would otherwise exist--sort of helping to promote financial literacy.
For as much as I write about this I obviously find this to be both intellectually interesting and also very important for many people. In the context of talking about working after "retirement" the objections usually focus on not wanting to stand all day in some sort of retail store which is understandable. We all have things that we would never want to do. But if that is true then it makes the argument for figuring out what you want to do then figuring out how to make that happen and do so with enough time so that if your first attempt does not work out you can recalibrate and try again or move onto something else.
The existence of the internet removes one barrier that has come up before, that being health. Clearly not all of us will be fit enough to fight a wildfire at age 76 like my neighbor with the backhoe (he worked on the fireline for the last big fire we had in 2007) and even if someone does not get around at 65 like they did when they were 35 they can harness their brain and the unlimited possibilities of the internet to figure something out.
This line of thinking is something that I think is very positive which contrasts with what appears to be going on with savings rates, entitlement programs, pension underfunding and whatever else you want to include in the conversation. Savings rates are in our control (or they should be) but the other two are not. One of my hot buttons is having my financial fate dictated by other people, this is unacceptable to me so I am motivated to do all I can to avoid that which includes more than one source of income and doing work that I hope I can do until I'm 100 (I guess Klein would call me an opinion elite?).
A reorientation to people creating their own solution is not new on this site and while not everyone can do this, there folks who can and hopefully will.
Read more!
Blogger Has Been Down and Morning Notes
I have a normal post ready to publish from early today, we'll have to wait to see if it ever does publish.
Some quick notes;
Direxion has filed for India sector ETFs, these would be plain vanilla equity funds.
Market Vectors came out with a Latin American bond ETF with ticker BONO that looks very interesting.
There have been countless segments on stock market television guessing on the fair value of crude oil and many times there is mention that right now crude has a $20-$30 speculation premium in it. Oil always has the speculative premium in it. Always.
Read more!
Some quick notes;
Direxion has filed for India sector ETFs, these would be plain vanilla equity funds.
Market Vectors came out with a Latin American bond ETF with ticker BONO that looks very interesting.
There have been countless segments on stock market television guessing on the fair value of crude oil and many times there is mention that right now crude has a $20-$30 speculation premium in it. Oil always has the speculative premium in it. Always.
Read more!
Thursday, May 12, 2011
The Susie
Longtime acquaintance Mick Weinstein has an interesting post up at Covestor about what appears to be a new venture for Suze Orman. Per the article her investment advice has focused on dollar cost averaging into diversified mutual funds without market timing or stock picking. But that has changed as apparently she is now in the newsletter business partnering up with someone named Mark Grimaldi who manages the Sector Rotation mutual fund (NAVFX).This post will be about NAVFX, not so much about Orman. The fund looks like it started December 30, 2009, it currently has $25 million AUM, has a lot of turnover and has an expense ratio of 1.99%.
The newsletter that Orman and Grimaldi have a model portfolio as follows;
Dreyfus Small Cap (DISSX)
Janus High Income (JAHYX)
Sector Rotation Fund (NAVFX)--this is Grimaldi's fund
American Century Heritage (TWHIX)
American Century Value (TWVLX)
You can click through for percentages as we think putting them here is a potential compliance issue.
The make up of NAVFX is interesting, or at least it was on March 31 which is the last time holdings were reported and given that the turnover is 457% per Morningstar it would not be surprising if the fund looked completely different now.
Despite the name the fund only owned one sector ETF comprising 2.05% back on March 31 in the top 25 and the top 25 accounts for about 95% of the fund (eyeballing the percentages). I forgot to mention the fund uses ETFs almost exclusively. There were commodity ETFs, broad based equity and fixed income ETFs, several country funds and most interesting was the 22% in ProShares Ultra S&P 500 (SSO) and 15% in SPY. Despite all the warnings about levered ETFs SSO has been "working," YTD it is up 14% while the S&P 500 is up 7%. The broader levered funds might not be so crazy to hold when the market is functioning normally but I don't have a firm conclusion on that.
The Sector Rotation Fund which obviously owns more than sector funds was trailing the SPX by a couple of basis points YTD through Monday. Morningstar has the since-inception return at 11.95% which is slightly better than the categories Morningstar assigned to the fund but that trails the S&P 500 which was up 19.5% in the same period. I wondered whether comparing to the S&P 500 might was the proper comparison but based on the March 31 snapshot it effectively had 59% in that index, the description says the fund seeks capital appreciation and the prospectus says "in seeking to build a portfolio designed to outperform the S&P 500 Index..."
The 11.95% would be easier to defend if there was something in there about absolute return or hedging along the lines of Hussman although the fund can use inverse funds so maybe that is hedging and while there was a TIPS ETF in top 25 there were no inverse equity funds. There was an inverse bond ETF but that strikes me as strategy not counter-strategy. The fund is too new to have a bear market track record and maybe it would target something that would seek to avoid the full brunt of down a lot but I don't get that indication from the prospectus.
Much like Mick's post I don't really understand why Orman has aligned herself with such an expensive fund given what she apparently preaches for investment advice (I've never seen her show, just commercials for it which shows snippets) and for some reason I found this interesting in a what not to do sort of way.
There is nothing wrong with mutual funds using ETFs, what matters is how they are used. You might be able to see the strategy in the fund but I don't.
Read more!
Wednesday, May 11, 2011
Emerging Markets
The CFA Institute had a shindig with one of the sessions being about how much emerging market exposure to have and Seeking Alpha posted a recap of the session. The basic take was that most investors are not only under-invested but also under-benchmarked--meaning that investors who actually benchmark are looking at the wrong target.
Reading this was a great reminder of why the term emerging market has lost most of its meaning and the utility of the term continues to erode. It would seem unlikely that anyone who is willing to go to at least the country level (so narrower than EFA and VWO) is going to buy only the most volatile of countries. It is unlikely that someone would buy only debt-laden, low-growth stinkers. It is (hopefully) unlikely that someone would only buy commodity based countries. It is (hopefully) unlikely that someone would only buy countries from one region of the world.
In terms of the country by country aspect of constructing a portfolio it would be logical to take in countries with varying attributes such that certain expectations are expressed in the choices but without being so lopsided that some un-analyzable event doesn't destroy the portfolio; otherwise I might have 25% each in Chile and Norway.
The process for selecting countries should probably include understanding what the country has to offer (stuff, cheap labor or something else), its growth prospects, the demographic situation, the economic underpinnings (growth, inflation, debt, unemployment), trends in prosperity along with whether the country is becoming more important in the world economic order.
The next step after figuring what countries to own is the best way to own each country. Some holdings might be a very good proxy for the country and some not. Sorting this out comes from studying potential holdings. There is nothing wrong with buying something that may not be a proxy for the country unless you don't realize this.
As an example on Friday afternoon we bought ABB (ABB) for most clients. We got a lucky entry point as the job-print-lift had retraced to just about flat late in the trading day. ABB is headquartered in Switzerland but has a global footprint. This is our second Swiss company as we have owned Novartis (NVS) for many years. NVS has been a pretty good proxy for the Swiss market except for the financial crisis when iShares Switzerland (EWL) went down a lot more due to its heavy weight (currently 22%) in financials. ABB's chart looks very little like EWL's chart and I don't expect it to look too much like EWL in the future.
Obviously EWL would be a proxy for the country but in terms of figuring the best way in I knew seven or eight years ago when I first bought NVS that my preference was to avoid Swiss financials. I knew there was a good chance it would never matter and most of the time it has not mattered but this was one less trade I had to make during the meltdown.
A related quote from Jim Rogers: Buy where the people are going be rich.
He was talking about farmland in Iowa but I think it pertains to country selection too although I might tweak it to read buy where the people are going have an improved quality of life. People in China are never going to have the GDP per capita that Luxembourg (or do I mean Lichtenstein?) has but the China number is going to work higher despite the 60 million empty apartments (I read an article yesterday that cited that number, sorry for not having the link as I did not know I would use it). Like many countries buying into China requires being very selective, I've said many times I want nothing to do with the banks, real estate companies or parts of China that rely on US consumption.
Finally a little Twitter humor. I've been trying to be a little more active with Twitter lately. Yesterday I saw two different Twitter names that included fee-only in the name and when it ran together as feeonly it looked like it said felony. Oops.
Read more!
Reading this was a great reminder of why the term emerging market has lost most of its meaning and the utility of the term continues to erode. It would seem unlikely that anyone who is willing to go to at least the country level (so narrower than EFA and VWO) is going to buy only the most volatile of countries. It is unlikely that someone would buy only debt-laden, low-growth stinkers. It is (hopefully) unlikely that someone would only buy commodity based countries. It is (hopefully) unlikely that someone would only buy countries from one region of the world.
In terms of the country by country aspect of constructing a portfolio it would be logical to take in countries with varying attributes such that certain expectations are expressed in the choices but without being so lopsided that some un-analyzable event doesn't destroy the portfolio; otherwise I might have 25% each in Chile and Norway.
The process for selecting countries should probably include understanding what the country has to offer (stuff, cheap labor or something else), its growth prospects, the demographic situation, the economic underpinnings (growth, inflation, debt, unemployment), trends in prosperity along with whether the country is becoming more important in the world economic order.
The next step after figuring what countries to own is the best way to own each country. Some holdings might be a very good proxy for the country and some not. Sorting this out comes from studying potential holdings. There is nothing wrong with buying something that may not be a proxy for the country unless you don't realize this.
As an example on Friday afternoon we bought ABB (ABB) for most clients. We got a lucky entry point as the job-print-lift had retraced to just about flat late in the trading day. ABB is headquartered in Switzerland but has a global footprint. This is our second Swiss company as we have owned Novartis (NVS) for many years. NVS has been a pretty good proxy for the Swiss market except for the financial crisis when iShares Switzerland (EWL) went down a lot more due to its heavy weight (currently 22%) in financials. ABB's chart looks very little like EWL's chart and I don't expect it to look too much like EWL in the future.
Obviously EWL would be a proxy for the country but in terms of figuring the best way in I knew seven or eight years ago when I first bought NVS that my preference was to avoid Swiss financials. I knew there was a good chance it would never matter and most of the time it has not mattered but this was one less trade I had to make during the meltdown.
A related quote from Jim Rogers: Buy where the people are going be rich.
He was talking about farmland in Iowa but I think it pertains to country selection too although I might tweak it to read buy where the people are going have an improved quality of life. People in China are never going to have the GDP per capita that Luxembourg (or do I mean Lichtenstein?) has but the China number is going to work higher despite the 60 million empty apartments (I read an article yesterday that cited that number, sorry for not having the link as I did not know I would use it). Like many countries buying into China requires being very selective, I've said many times I want nothing to do with the banks, real estate companies or parts of China that rely on US consumption.
Finally a little Twitter humor. I've been trying to be a little more active with Twitter lately. Yesterday I saw two different Twitter names that included fee-only in the name and when it ran together as feeonly it looked like it said felony. Oops.
Read more!
Tuesday, May 10, 2011
Investing Process
John Hussman had a couple of interesting tidbits in this week's commentary that are worth exploring.
Hussman focuses a lot on valuations as determining likely returns over the next ten years. If valuations are high then expected returns are likely to be low calling for a more defensive posture and if valuations are low then then expected returns would be higher calling for a more invested posture. This approach has generally resulted in the fund not looking very much like the S&P 500. At times this result is good and at times not.
First up;
This ties in with what I believe in although I have to say I came to this before I started reading Hussman. I've attributed my belief in using the 200 DMA to reduce exposure to an article by James Stack in Smart Money Magazine in 1993--back then Hussman was more known for options commentary in the back of Barron's.
Throughout the industry there are various biases and other obstacles that prevents more attention being given to this but if the stock market is at greater relative risk of going down a lot we are far more likely to have success simply getting out of the way than trying to pick stocks that can somehow go up as the market falls 30%.
One observation on Hussman to this point is that his process seems to place more emphasis, in terms of implementation, on valuation such that stocks can go up a lot even when valuations are high, causing him to be underinvested, which is what has happened lately which is something Hussman has lamented a couple of times in past commentaries. My own take is that this is a forest for the trees sort of thing and I think there is more utility in acting on what the market is doing (SPX above its 200 DMA as a measure of healthy demand for equities) not what it should be doing.
The other quote;
As indicated above I think more success can be had with a more direct cause and effect type of indicator. There have been periods where the market stayed cheap for years and other periods where it stayed expensive for years. This is why I have focused on "less exposure to market risk" based on more technical indicators. If the S&P 500 is going to drop 50% then long before that low it will breach its 200 DMA. And yes some 200 DMA breaches will turn out to be insignificant but this is much easier to be disciplined about and in my opinion far less fuzzy than fundamental valuations.
Hussman's fund has done a great job of avoiding the full brunt of down a lot but unfortunately it misses too much up a lot. From the March 2003 low to the October 2007 high the SPX was up 80% and HSGFX was up 32% (taken from Google Finance so does not include dividends). From the March 2009 low the SPX is up over 100% and HSGFX is down 2% (taken from Google Finance so does not include dividends).
To paraphrase from past posts; Hussman offers very important bits of process to take in to contribute to building your own process but ultimately we all need to create our own process or hire the job out.
Read more!
Hussman focuses a lot on valuations as determining likely returns over the next ten years. If valuations are high then expected returns are likely to be low calling for a more defensive posture and if valuations are low then then expected returns would be higher calling for a more invested posture. This approach has generally resulted in the fund not looking very much like the S&P 500. At times this result is good and at times not.
First up;
I do expect that greater prospective returns are possible from investment strategies with the flexibility to vary their market exposure and asset allocations over time.
This ties in with what I believe in although I have to say I came to this before I started reading Hussman. I've attributed my belief in using the 200 DMA to reduce exposure to an article by James Stack in Smart Money Magazine in 1993--back then Hussman was more known for options commentary in the back of Barron's.
Throughout the industry there are various biases and other obstacles that prevents more attention being given to this but if the stock market is at greater relative risk of going down a lot we are far more likely to have success simply getting out of the way than trying to pick stocks that can somehow go up as the market falls 30%.
One observation on Hussman to this point is that his process seems to place more emphasis, in terms of implementation, on valuation such that stocks can go up a lot even when valuations are high, causing him to be underinvested, which is what has happened lately which is something Hussman has lamented a couple of times in past commentaries. My own take is that this is a forest for the trees sort of thing and I think there is more utility in acting on what the market is doing (SPX above its 200 DMA as a measure of healthy demand for equities) not what it should be doing.
The other quote;
So the challenge - and success strategy - for investors will be to accept much less exposure to market risk when it is priced to achieve poor long-term returns, and to expand their exposure to market risk when it is priced to achieve strong long-term returns.
As indicated above I think more success can be had with a more direct cause and effect type of indicator. There have been periods where the market stayed cheap for years and other periods where it stayed expensive for years. This is why I have focused on "less exposure to market risk" based on more technical indicators. If the S&P 500 is going to drop 50% then long before that low it will breach its 200 DMA. And yes some 200 DMA breaches will turn out to be insignificant but this is much easier to be disciplined about and in my opinion far less fuzzy than fundamental valuations.
Hussman's fund has done a great job of avoiding the full brunt of down a lot but unfortunately it misses too much up a lot. From the March 2003 low to the October 2007 high the SPX was up 80% and HSGFX was up 32% (taken from Google Finance so does not include dividends). From the March 2009 low the SPX is up over 100% and HSGFX is down 2% (taken from Google Finance so does not include dividends).
To paraphrase from past posts; Hussman offers very important bits of process to take in to contribute to building your own process but ultimately we all need to create our own process or hire the job out.
Read more!
Monday, May 09, 2011
Withdrawal Rates
A reader passed along a very dense paper that attempted to transform the conversation about safe withdrawal rates into a conversation about "safe savings rates." The paper was very wordy (kettle calling the pot?) and frankly I found the term safe savings rate to be misleading--not in a deceitful way but in a poorly communicated way. I think the point was to sort of work backwards to calculate how much you need to save to have enough money such that your portfolio replaces half of your final salary without depleting.
Some of the assumptions included 30 years of accumulation followed by 30 years of "decumulation" and maintaining a 60/40 equities/fixed income target throughout. The article focused a lot on when you retire, in relation to the stock market being low or high, as going a long way toward determining safe withdrawal rates and "safe savings rates."
Of interest to me was the data show the variability in what constituted a safe withdrawal rate. About the lowest safe withdrawal rate was the familiar 4% with the higher safe withdrawal rates being between 8-10%. Again this depends when you retire which is largely a function of luck in relation to the stock market cycle. It is very likely, based on the data on this paper, that someone who retired December 31, 2008 will be able to safely withdraw a higher percentage than the person who retired one year later after the market had gone up 25%. The chart of safe withdrawal rates was very volatile.
It is important to understand what the 4% rule really is. The idea is that by sticking to 4% a retiree gives themselves the best chance of not outliving their money, it is sort of a worst case scenario strategy which I think is prudent. There is nothing that says a 10% withdrawal rate can't work, it could. It would depend on variables that are beyond ones control making 10% imprudent but it could work. The lower the withdrawal rate the better the chance for success but there are no guarantees with any withdrawal rate--realistically it would be difficult to fail with a 1.5% rate unless there was some sort of medical catastrophe that had to be paid for out of pocket.
The concept of safe saving seemed to be about figuring how much to save but if I read it correctly (and I may not have, it really was wordy) it relies on a lot of assumptions about future unknowable events but at least it called for very high savings rates (most of the time). While plenty of people will disagree with me on this I think articles showing the need for very high savings rates have a better chance for metaphorically hitting people in the face with some reality and understanding of how far behind they might be. Collectively we are woefully behind where we need to be.
You might be able to get more out of the article than I did but I would circle back to a few points I have made before that seem to often be overlooked in these types of articles. First is linear returns; the paper took actual data and derived averages based on a retirement starting every year going back to 1901 so these were real market experiences although really not real experiences of people. The assumption of linear returns can muddy the waters in terms of taking the same $40,000 out when the market is up 20% versus flat versus down 15% and of course the one off events that occur every month. Beware of assumptions of linear returns.
I would also focus on replacement of some portion of your expenses not your income. For people who live below their means (hopefully that is you) replacing expenses becomes much easier to do. If you make $10,000/month and live off of $4000 while you work, in retirement the savings rate would go down (probably to zero) and the tax bill would drop by at least $1400/month (the FICA) and maybe more depending on the circumstance. If the $4000 includes a mortgage that will be paid off then all the better. If the goal is replacing 50% of expenses then at this point the portfolio only needs to be $600,000 which is not inconsiderable but much easier than $1.25 million to replace half of a $100,000 income. Of course none of that offers a guarantee and it ignores the one-offs that come every month (examples include vet bills, car repairs, home repairs, dental incidents and so on).
For now my thoughts remain save as much as possible, live below your means, plan on working a few hours a week doing something you love after you've "retired," don't take more than 1% per quarter (or better yet take less) and because this has been a source of humor and teasing over the years; don't drink soda.
Also, don't plan on getting social security and medicare. It would be better to plan on not getting them and being wrong than to plan on getting them and be wrong about that. I'll mention my not too popular idea again of paying in the full $17,000, getting nothing out but letting me contribute to my SEP with no limits and writing off the entire contribution.
The events of the last four years hurt a lot more people than most of us have seen hurt in a single financial event. The financial crisis drew comparisons to the great depression but not everyone was seriously damaged 80 years ago and not everyone was seriously damaged over the last fours years either. While being prudent and conservative will not ensure anything I have to believe the more prudent and conservative a person was the less likely they were to be seriously damaged.
Read more!
Some of the assumptions included 30 years of accumulation followed by 30 years of "decumulation" and maintaining a 60/40 equities/fixed income target throughout. The article focused a lot on when you retire, in relation to the stock market being low or high, as going a long way toward determining safe withdrawal rates and "safe savings rates."
Of interest to me was the data show the variability in what constituted a safe withdrawal rate. About the lowest safe withdrawal rate was the familiar 4% with the higher safe withdrawal rates being between 8-10%. Again this depends when you retire which is largely a function of luck in relation to the stock market cycle. It is very likely, based on the data on this paper, that someone who retired December 31, 2008 will be able to safely withdraw a higher percentage than the person who retired one year later after the market had gone up 25%. The chart of safe withdrawal rates was very volatile.
It is important to understand what the 4% rule really is. The idea is that by sticking to 4% a retiree gives themselves the best chance of not outliving their money, it is sort of a worst case scenario strategy which I think is prudent. There is nothing that says a 10% withdrawal rate can't work, it could. It would depend on variables that are beyond ones control making 10% imprudent but it could work. The lower the withdrawal rate the better the chance for success but there are no guarantees with any withdrawal rate--realistically it would be difficult to fail with a 1.5% rate unless there was some sort of medical catastrophe that had to be paid for out of pocket.
The concept of safe saving seemed to be about figuring how much to save but if I read it correctly (and I may not have, it really was wordy) it relies on a lot of assumptions about future unknowable events but at least it called for very high savings rates (most of the time). While plenty of people will disagree with me on this I think articles showing the need for very high savings rates have a better chance for metaphorically hitting people in the face with some reality and understanding of how far behind they might be. Collectively we are woefully behind where we need to be.
You might be able to get more out of the article than I did but I would circle back to a few points I have made before that seem to often be overlooked in these types of articles. First is linear returns; the paper took actual data and derived averages based on a retirement starting every year going back to 1901 so these were real market experiences although really not real experiences of people. The assumption of linear returns can muddy the waters in terms of taking the same $40,000 out when the market is up 20% versus flat versus down 15% and of course the one off events that occur every month. Beware of assumptions of linear returns.
I would also focus on replacement of some portion of your expenses not your income. For people who live below their means (hopefully that is you) replacing expenses becomes much easier to do. If you make $10,000/month and live off of $4000 while you work, in retirement the savings rate would go down (probably to zero) and the tax bill would drop by at least $1400/month (the FICA) and maybe more depending on the circumstance. If the $4000 includes a mortgage that will be paid off then all the better. If the goal is replacing 50% of expenses then at this point the portfolio only needs to be $600,000 which is not inconsiderable but much easier than $1.25 million to replace half of a $100,000 income. Of course none of that offers a guarantee and it ignores the one-offs that come every month (examples include vet bills, car repairs, home repairs, dental incidents and so on).
For now my thoughts remain save as much as possible, live below your means, plan on working a few hours a week doing something you love after you've "retired," don't take more than 1% per quarter (or better yet take less) and because this has been a source of humor and teasing over the years; don't drink soda.
Also, don't plan on getting social security and medicare. It would be better to plan on not getting them and being wrong than to plan on getting them and be wrong about that. I'll mention my not too popular idea again of paying in the full $17,000, getting nothing out but letting me contribute to my SEP with no limits and writing off the entire contribution.
The events of the last four years hurt a lot more people than most of us have seen hurt in a single financial event. The financial crisis drew comparisons to the great depression but not everyone was seriously damaged 80 years ago and not everyone was seriously damaged over the last fours years either. While being prudent and conservative will not ensure anything I have to believe the more prudent and conservative a person was the less likely they were to be seriously damaged.
Read more!
Saturday, May 07, 2011
The Big Picture for the Week of May 8, 2011
David Merkel says Most People Are Better Off Not Buying Common Stocks On Their Own. This is a multi-dimensional conversation. If we are talking about all market participants which includes 401k participants who would otherwise have no interest in investing then of course David is correct. But this is less clear for an investor so interested in investing that he knows who David is and reads his posts (not a shot at all, I have very good friends with zero interest in markets who have no idea about the blogging part of my life). Someone with that level of interest is more likely able to select individual stocks.
I'll circle back to the Fishing Industry ETF (FISN), by the way I got a good teasing from Josh Brown about this fund. When I first mentioned fishery stocks there was a frequent commenter who knew these companies in tremendous detail, she seemed to have total recall on fluctuations on hatchery production levels. If you have that level of interest in some niche then chances are you can make an informed decision about what stocks to buy in that niche.
Depending on the time you spend there could be several niches that you can make informed decisions about individual stocks to buy. The number of individual stocks to own varies from person to person with zero being perfectly acceptable. Realistically for someone who is at least moderately interested, with average analytical skill or experience could handle three or four individual stocks mixed into a fund portfolio.
Part of this has to be some self awareness as to interest, time available, ability and tolerance for volatility. You probably don't need to visit seven or eight production facilities to decide to buy Proctor & Gamble (PG), to pick a name we do not own, and by the same token you probably should not buy a gold mining company with nothing proven because it has a neat name.
When you take the time to understand what you are capable of you can then build a more suitable portfolio. It doesn't take too much time to understand that fish demand is increasing and to see how well some of the stocks have done in the last couple of years and how hard they got hit during the meltdown to understand the behaviors. If the demand story really interests you and you can find enough information to make an informed decision it would then be very reasonable to pick the ETF over an individual stock in the space. This logic can apply to just about every niche ETF; interesting dynamic leads to valid theme leads to want to invest but preferring not to go in with an individual stock.
Read more!
I'll circle back to the Fishing Industry ETF (FISN), by the way I got a good teasing from Josh Brown about this fund. When I first mentioned fishery stocks there was a frequent commenter who knew these companies in tremendous detail, she seemed to have total recall on fluctuations on hatchery production levels. If you have that level of interest in some niche then chances are you can make an informed decision about what stocks to buy in that niche.
Depending on the time you spend there could be several niches that you can make informed decisions about individual stocks to buy. The number of individual stocks to own varies from person to person with zero being perfectly acceptable. Realistically for someone who is at least moderately interested, with average analytical skill or experience could handle three or four individual stocks mixed into a fund portfolio.
Part of this has to be some self awareness as to interest, time available, ability and tolerance for volatility. You probably don't need to visit seven or eight production facilities to decide to buy Proctor & Gamble (PG), to pick a name we do not own, and by the same token you probably should not buy a gold mining company with nothing proven because it has a neat name.
When you take the time to understand what you are capable of you can then build a more suitable portfolio. It doesn't take too much time to understand that fish demand is increasing and to see how well some of the stocks have done in the last couple of years and how hard they got hit during the meltdown to understand the behaviors. If the demand story really interests you and you can find enough information to make an informed decision it would then be very reasonable to pick the ETF over an individual stock in the space. This logic can apply to just about every niche ETF; interesting dynamic leads to valid theme leads to want to invest but preferring not to go in with an individual stock.
Read more!
Friday, May 06, 2011
Gold and Silver Manias Updated
A couple of weeks ago I had two posts (here and here) outlining the mania in precious metals. Then starting early Monday of this week silver started to blow up, see the chart below. As I mentioned in the second post, I got some push back from some commenters on Seeking Alpha who essentially were saying that the fundamental argument of debt and money printing meant that precious metals could not go down.
Even if I was incorrectly interpreting those comments we have all read commentaries that have said precious metals can't go down. My reply to this is and always has been that anything can go down in price at any time for no apparent reason. That silver started to drop so quickly after my comments is just a coincidence as I can assure you I had no idea when it would correct and now that it is correcting I have no idea how long this will last.
What I try to understand is when manias are occurring and how they might impact client portfolios. Those two posts, among other things, reminded any clients who read them that occasionally there are distortions in the market like the extreme lift up and now a decline that seems to be pretty big. We have increased volatility in our exposure to materials and energy so for example we were down a hair more than the SPX yesterday and I would expect that with our current exposure anytime energy, materials and related foreign markets fare worse than the SPX so too will our portfolio.
As I said yesterday in an interview about the decline in silver "a long term strategy that unravels based on one week's trading was never a long term strategy to begin with."
I would also repeat something else I always say during these sorts of things; these type of events have come along before and are guaranteed to come along again in the future. The key for most types of market participants is to not learn you had to much exposure to thing that is going down a lot after it has declined such that you panic out at a low.
Read more!
Even if I was incorrectly interpreting those comments we have all read commentaries that have said precious metals can't go down. My reply to this is and always has been that anything can go down in price at any time for no apparent reason. That silver started to drop so quickly after my comments is just a coincidence as I can assure you I had no idea when it would correct and now that it is correcting I have no idea how long this will last.What I try to understand is when manias are occurring and how they might impact client portfolios. Those two posts, among other things, reminded any clients who read them that occasionally there are distortions in the market like the extreme lift up and now a decline that seems to be pretty big. We have increased volatility in our exposure to materials and energy so for example we were down a hair more than the SPX yesterday and I would expect that with our current exposure anytime energy, materials and related foreign markets fare worse than the SPX so too will our portfolio.
As I said yesterday in an interview about the decline in silver "a long term strategy that unravels based on one week's trading was never a long term strategy to begin with."
I would also repeat something else I always say during these sorts of things; these type of events have come along before and are guaranteed to come along again in the future. The key for most types of market participants is to not learn you had to much exposure to thing that is going down a lot after it has declined such that you panic out at a low.
Read more!
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