Saturday, October 24, 2009

Savings & Net Worth Update - Bull Market (?) Edition

It has been a long time since my last post. I've been pretty busy living life over the past few months and this blog took a back seat to some other projects I am working on.

However, as many of you might have noticed, the market has staged an impressive rally since hitting its lows in March of this year. The DJIA and the S&P are both up 50% from their lows.

So since the markets are up 50% from their lows, does this mean that I've gained back the 40% declines I saw in my 401(k) when I last reported my net worth? No. Let's illustrate with a simple example: you start with $100k in your portfolio. It falls 40%. You now have $60k in your portfolio. What percentage increase do you need to get the portfolio back up to $100k? You need $40k more and as a percentage of $60k that works out to ~66.7% (40/60*100). So while the markets have come close to returning to previous highs, they are not there yet.

Am I patting myself on the back for the 50% gains in about 6 months? No, I'm not. In fact, I'm not even that happy about it. As I've mentioned in prior posts, I'm currently a net saver, ie, I will be buying stocks for the next 15-20 years of my working life. When I buy things, I generally like to buy them at lower prices, not higher prices.

Additionally, I don't try to time the market and I won't try to predict where it will go from here. Is this a V-shaped recovery? Is it a W? Is it a Q? You're asking the wrong person. To elaborate a little more on my feelings about timing the market, I'll quote from a prior entry:

I have a set of rules that govern my stock market investments and getting in and
out of the market would break those rules. I refuse to play the market timing
game because I don't believe that I can win it. I have no advantage in that
game. The advantages I do have are that (1) I've learned a bit about the market
from studying Buffett, Graham etc... and they've given me a framework for
approaching investments (2) I have an extremely long time horizon (3) I only
invest money that I don't absolutely need and (4) I'm not tempermental about the
market. I look at it from a detached perspective.

I know quite a few people who "got out" when the market fell. They saw their portfolio fall 40% and they got scared into selling all of their equities. These people didn't listen when I recommended staying the course. For those who sold in 2008, missed out on the recent 50% rise in stock prices and are now looking to get back in because they think the market is "safe" again, all I can say is that they are not the kinds of people who can be successful investors. They need to take a step back and stop letting fear and greed dictate their invesment decisions.

To refresh your memory, my prior 401(k) update was as follows (11/28/08):

My 401(k) is down 40% year to date, with the biggest percentage losses
coming from the category of my international investments. My international fund
is down 50% and my emerging markets fund is down 58%. The S&P 500 index fund
which holds the bulk of my assets is down just about 40%. My best performer by
far is the fixed income fund That's up 4.8% year to date. My account value is
about $47,900, with a loss of approximately $10,000 year to date.

I'm going to add one other piece of data which is on my contributions. The $10,000 loss understates my actual losses because it does not tell you what I put in to the
account during the course of the year. My account value was about $58k at the
beginning of this year. I contributed about $17k during the year and my total
losses currently stand at $27.5k.


I'm going to use the same wording and just update the numbers for direct comparability here:

My 401(k) is now up 27.9% year to date, with the biggest percentage increases coming from the category of my international investments. My international fund is up 33% and my emerging markets fund is up 83%. (Side note: that is a huge number). The S&P 500 index fund which holds the bulk of my assets is upabout 26% year to date. My worst (formerly best) performer by far is the fixed income fund That's up 4.3% year to date. My total account value is about $81,500, with a gain of approximately $30,900 year to date.

I'm going to add one other piece of data which is on my contributions. The $30,900 gain overstates my actual gains because it does not tell you what I put in to the account during the course of the year. My account value was about $51k at the beginning of this year. I contributed about $15k during the year and my total gains currently stand at $16k.

If you recall, I have a considerable portion of my savings in cash that I intend to use as a down payment for a house. I'd hoped to be in a house by now, but for a number of reasons, this didn't work out and I continue to build my savings. In my previous update, I reported $197K in my down payment savings account. That amount is now approximately $260k, a gain of ~$60,000 over 11 months. I am earning very low interest rates on this cash and actually losing money in real terms (considering inflation) and paying taxes on the interest to boot, but I sleep well at night knowing no matter what the stock market does, I am still going to have my down payment.

In terms of total liquid savings right now, in addition to the $260k noted above, I have a few other accounts and assets totalling about $25K, giving me about $285k in liquid assets. Combining that with $125k in my and my wife's 401(k) accounts, that puts our total networth at about $410k.

I consider myself very fortunate to have come through the recent market and economic downturn with a job, and am slightly better off financially than before the downturn. A lot of people weren't as fortunate.

What are my thoughts on the market going forward? I am only sure about one thing: it will fluctuate.

I am an optimist and I believe that continuing to invest in stocks is a good way to invest for retirement. Though I acknowledge that we have some very serious current economic and political problems, I also believe in the long term success of capitalism and the USA. However, if you want to read an opposing view, check out "The Death of the Soul of Capitalism," written by short-sighted but long-toothed Paul B. Farrell of Marketwatch.com. I got a few good laughs out of it and hope you do too.

Wednesday, May 20, 2009

It's Expensive to be Poor

I read a pretty compelling story online today called "The High Cost of Poverty: Why the Poor Pay More", written by DeNeen Brown for the Washington Post. It raised some issues that you might never think of, sort of "hidden taxes" on being poor.

Having grown up in pretty modest means myself, I am pretty familiar with the amount of time you waste when you don't have much money or your own house. Poor people have to spend time at the laundromat waiting for clothes to wash and dry every week (I have done this) and time waiting for multiple public transportation connections to get to work every day (I have done this too). But the article points out that it is sometimes impossible for poor people to go to the big grocery stores where the middle class shop for discounted food. They have to buy their milk and butter from the local corner store, costing them significantly more.

The article also points to high rates charged by check cashing places as a cost of being poor, but I'm not as convinced that they are a necessity. For example, a man quoted in the story pays a fee to have the check cashing place pay a bill for him... it seems to me that fee (at least) is avoidable).

In any event, this article is an eye-opener (and includes a pretty memorable exchange between a man and the checkout person at a grocery store) that I think is worth a few minutes of your time. If you are in this situation- you're not alone. If you're not- be thankful for what you have.

Saturday, April 18, 2009

Richard Bernstein's Investment Guidelines

A blurb in the Wall Street Journal's "Heard on the Street" section caught my eye as I was on my way in to work last week:

"Overheard - Most people gush thanks (or occasionally spit bile) in their farewell address. Richard Bernstein, whose 20 years at Merrill Lynch drew to a close on Wednesday, went 10 steps further. In a final note, having thanked colleagues and clients, the bank's chief investment strategist signed off with 10 guidelines. All are worth remembering, but perhaps the last resonates strongest: 'Leverage gives the illusion of wealth. Saving is wealth.'"

This caught my eye and I made a mental note to see if I could find the complete list of 10. Lo and behold, through the magic of the Internet, I found the guidelines on seeking alpha.
They are the following: 
1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

I thought these were some pretty good observations. Number 1 definitely hit close to home for me. As I've grown my savings more over time and seen the impact a huge market downturn can have on the value of certain stocks, I've begun to pay a little more attention to income. Although I still believe capital gains are where the big payoff comes from in stocks, income is something tangible and shouldn't be overlooked. Number 5 is pretty important as well... over the past 2 years, people have seen every single asset class in their "diversified" portfolios sink almost in unison. Many were operating under an illusion of diversification and when the tide went out, we saw who wasn't wearing a bathing suit. 

I cocked my head sideways when I read number 4 because I think nothing fuels a bull market more than cheering and a rush to buy. I kind of see his point though. He is saying bull markets are more the result of assets being unfairly punished and undervalued prior to the bull market than the actual enthusiasm during the bull market. In my opinion, you can't have one without the other so this is kind of a circular argument.

This list reminded me of another post I made a while back on nine market lessons from John Dorfman, a Bloomberg columnist who retired a while back. For the sake of completeness and comparison, I list Dorfman's lessons here:

1) Out-of-favor stocks are the best road to capital gains.

2) Don't be swayed by what Wall Street analysts say.

3) High portfolio turnover is not necessary for good results.

4) The investment value of a stock is independent of whether it has been moving up or down.

5) Predicting the market with consistency is extremely difficult.

6) Predicting the economy is probably even harder.

7) High valuations alone aren't a good reason to sell a stock short.

8) High profits alone are no reason to invest in a stock.

9) Dialog with readers was one of the best parts of my experience as a columnist

Maybe one day I'll come up with my own list, but I have no plans to retire anytime soon :)

Wednesday, April 15, 2009

A Year off Work, With Pay

I came across an interesting article in the New York Times (which I rarely read, since I prefer the WSJ) about a lawyer who is getting paid $80,000 to take a year off from work. Apparently the big NYC lawfirm Skadden is offering some of its workers a year off at 1/3 of their salary as a way to reduce costs and retain employees during the current economic downturn. Since this particular woman made $240,000 a year, her drastic paycut still leaves her with a pretty hefty salary so she decided to take the year off and tour around the world.

I don't blame her. I would take this deal if I could (though I am sure I wouldn't be able to travel and would only just be able to scrape by on 1/3 of my salary). I've worked with people at big lawfirms like this in the past and I know the kind of grueling schedules they put in. I put in these kinds of hours myself for certains stretches throughout the year and over time it tends to get to you. A break like this would be a most welcome relief.

But of course I am not getting this deal. And neither are you. But we can dream.

What would you do if you got this offer?

Tuesday, April 14, 2009

Buffett Invests in Chinese Electric Car Company

Fortune published a recent article describing Berkshire Hathaway's purchase of a 10% stake in BYD, a Chinese electric car manufacturer last fall. I didn't really notice this announcement when it came out, but it was a decent-sized investment at $230 million for the 10% stake.

Looking at the net income graph in the article, it looks like BYD earned about $180 million in 2008. Dividing that by 10 gets about 18 million of earnings, or a P/E of about 12.7x. (This is just to give you a general sense of valuation, see this site for the current P/E of the S&P 500. Not sure if this site gets the calculation right or not, but I found it after a brief google search).

The reason this acquisition caught my attention is because (as others have noted), Buffett broke some of his own rules to make it. I don't see how an auto company could ever meet his criteria for an excellent business (for more on his criteria, see my review of Buffettology, particularly the 9 questions). I don't think he understands the industry either. It seems like this investment was more likely the brainchild of David Sokol, chariman of MidAmerican Energy and Charlie Munger than it was of Buffett.

I don't have much of an opinion either way but I do note that it continues the trend of Berkshire making acquisitions outside of the United States.

Thursday, April 9, 2009

How to Become As Rich As Bill Gates

I came across this pretty instructional post written by Philip Greenspun that offers some simple steps showing how you can become as rich as Bill Gates. It's funny I had this vision in my head that Gates was more of a self-made man but as it turns out, he came from pretty fortunate circumstances. Interesting stuff.

I haven't been posting all that much lately, but there has been much to absorb in the markets. There has been no shortage of negative headlines. We can't go a day without a new company being bailed out or a headline about a financial catastrophe of epic proportions.

I think people are starting to get numb to it all.

Wednesday, April 1, 2009

I hope Twitter is a Fad

I hope Twitter is the POG of this decade and that after a few years it sinks into oblivion, never to be heard from again. I really don't get it. You couldn't pay me to go on to Twitter and write that im tying my shoe or read about someone else tying theirs. But a lot of people are talking about it.

The reason I hope it fades away is that it would really ruin my faith in humanity to find out that we've stooped as low as making this kind of thing an integral part of our daily lives. Reading about some guy who is buying eggs, or some gal who is getting a new key made. Really?

I hope it's a fad.