The Investment Scientist

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Between 2000 and 2002, I worked as head weather derivative trader at PG&E National Energy Group. On the side, I also traded stocks for my personal account.

By the time the Enron Debacle happened, I had already become the third largest weather derivative trader in the country. Given another year, I am quite sure I would have become #1 in this field. Well, that’s a story for another time.

My stock trading, however, was a lot less successful. All the stocks I picked lost money, except for one. The one exception was PCG, the company I worked for. Granted, the time between 2000 and 2002 was a time of market collapse due to the burst of the dotcom bubble, but there is still an important lesson I learned and that I want to share with you.

The lesson was about  information advantage.

Though I was not in management and therefore was not privy to any material insider information, just from the ambiance noise of the trading floor I know so much more about my company than folks outside of the company.That’s why I was able to make money on PCG. That’s also why I didn’t make money in all those other stocks  – I didn’t  have any information advantage. Read the rest of this entry »

charity-1940x1259.jpgI visited a physician client in Wisconsin while on vacation in Chicago this week. He has been my client for several years now and his personal finance is in very good order. As I was driving the four hour stretch of highway, I thought: What idea I could bring to him that could make his situation tens or even hundreds of thousands of dollars better?

This physician client of mine is easily in the top income tax bracket, meaning marginal tax rate for him is nearly 50% combining federal and state. He also gives away about $10k to various charities a year. He plans to retire in about 10 years.

When he retires, he will continue to give away $10k a year. In fact, there is a good chance he will give away more since people become more charitable inclined when they get older and having a meaningful impact becomes much more important to them.

If he lives another 30 years after retirement, he will give away a minimum of $300k. Here is the problem, he will have little income to write off, thereby wasting up to $150k worth of tax savings.

Alas, but there is a way to recapture these tax savings, it’s called Donor Advised Fund or DAF.

Read the rest of this entry »

 

hard-times.jpgRecently, I had a Review and Discovery meeting with a physician in her late 50s. When I first saw her, she looked  burnt out and stressed. Who can blame her? She has been dealt a very bad hand in life.

  • One of her children suffers from down syndrome and requires lifelong care.
  • Her husband, also a physician, passed away several years ago, leaving behind a financial mess
  • The financial professionals who were supposed to help her, led her to make disastrous investments. She lost her house and had to declare personal bankruptcy.
  • Her father recently passed away, also leaving behind a financial mess.
  • Her mother is so dependent on her now that she cannot continue her medical practice.

She told me she almost wanted to pull her hair out when thinking about her responsibility to her patients, her children, her mother and yet she can’t even sort out her own personal finances.

I did not mince words in telling her how dire her financial situation is. When I told her how much she needs to retire, she almost fell off her chair.

Read the rest of this entry »

tumblr_m2hyojmKqo1qes27do1_1280.jpgI was an amateur pilot. I remember vividly an episode happened during a training class ten years ago.

That was a very windy day. Up to that point, I had only experience flying in calm weather. As soon as my Cessna took off, I immediately felt the difference. My plane was tugged and pulled in all directions by cross winds. I felt like I was losing control of the plane, and fear swelled up from the bottom of my spine to the top of my head. I sat stiffen in the pilot seat and my sweaty palms grabbed tightly at the control handles like a sinking person holding onto a straw.

My trainer sensed my tenseness and she asked: “Are you OK?”. Not willing to acknowledge my fear, I asked her instead: “Is it more dangerous to fly in turbulent weather like this?” The trainer smiled and said: “It is not more dangerous to fly in turbulent weather. The plan was built to withstand any turbulences. But occasionally, an amateur pilot would lose his cool and do something stupid. That’s the real danger.”

Read the rest of this entry »

According to research by Dimensional Fund Advisors, Inc, only 33% of mutual funds that outperformed the market in the last five years continue to do so in the next five years.

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A week from now, there will be a referendum in Great Britain to determine if the UK should stay in EU or should leave for good.

A mere month ago, the stay vote still won by a comfortable margin. Just showing how political wind can shift, the odds are now 50/50 that the leave vote might win.

Here are some consequences I believe a leave vote would entail:

  1. Copycat referendums in other EU states, and within a few years, EU might not exist.
  2. London’s reputation as world financial capital on par with New York may be diminished.
  3. Disruptions to trades and investments, since UK’s relationship with Europe and the rest of the world, will have to be renegotiated.
  4. Pound Sterling, London stocks, and property prices might go south. Potential capital flights from the UK.
  5. More volatility in global stock markets.

As an investor, what should you do about it?

Well, all of the above can be called informed speculations. They are not actionable Read the rest of this entry »

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On May 27th, 2005, I started MZ Capital Management as a hedge fund with  “Double Your Return” as my first marketing tagline.

Shortly after the Enron debacle, Congress passed the Sarbanes-Oxley Act, which  requires company insiders to report their trades to the SEC electronically within a day of the trades taking place. I created a computer program to query the SEC’s database in real time. So as soon as, for example, IBM’s CEO reported that he bought 10000 shares of IBM, I would know it right away.

On a typical working day, I would be half naked lying on the beach of Palm Beach and I would get a text on my dumb cell phone (sent to me by my computer working hard on my desk.) I would call my broker right away to follow the trade. Then the news would get to the WSJ one week later, the price of IBM would pop and I would sell for maybe a 5% to 10% gain.

Just like that I was making 20% to 30% return every month!I calculated that at this rate of compounding, I would become a trillionaire in about 10 years. I was so confident, I started the hedge fund to share the wealth.

Lest you don’t know yet, I did not become a trillionaire hack, not even a billionaire. So what went wrong?

A few months into my hedge fund, I noticed a small website, where for a $20 a month Read the rest of this entry »

Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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