A few months ago, I stumbled upon a report about a homework essay written by a nine year old girl, Jia Jia, in rural China. The title of the essay was “If I live to be a grownup 如果我能长大.” It turns out Jia Jia suffers from thalassemia, a blood disease that requires a blood transfusion every 40 days. Without them, she would die. Jia Jia was abandoned by her own parents because they could not afford the medical treatments, but her grandmother refuses to give up on her.
Jia Jia is very aware of her own mortality, but she still has dreams. In the essay, she wrote how she was heartbroken to see her grandmother weep because she did not have enough money for her granddaughter’s treatment. She also wrote that if she lives to be a grownup, she wants to take care of her grandmother so she never has to worry about her again; she wants to become a doctor, so she can treat those people who can’t afford medical treatments.
I was so touched by the overflow of love despite their tragic situation that I called the reporter to get the grandma’s phone number and home address. Read the rest of this entry »
When I was in California last week, I met with a prospective client and did a second-opinion financial review of his situation. He has $5mm in his company’s ESPP (employee stock purchase plan.) I can’t help but feel a bit dizzy, that feeling you get when you’re standing on the edge of a tall building without any protection.
I have a friend who was a senior engineer at MCI Worldcom. He also participated in this company’s ESPP. In only a few years, Worldcom went from being a no-name, little known company to acquiring the second largest telecom at the time – MCI, and its stock price went up tenfold. The value of my friend’s ESPP account went from $300k to over $3mm and he looked extremely smart by not diversifying at all.
The rest of the story you all know. MCI Worldcom filed for chapter 11 in 2002 due largely to corporate fraud committed by their executives. Its stock price plummeted to zero and my friend lost every dime in his ESPP.
So what exactly is an ESPP?
An ESPP enables a company employee to purchase company stock through payroll deduction.These kind of plans are very popular among high-tech companies because they are considered a very effective way to align the interests of the employees and the firm. Read the rest of this entry »
This is, unfortunately, an all-too-common story I have heard. A new client of mine told me that hisfather bought a $500k whole life insurance policy for him 26 years ago, hoping that when he died he would leave half a million dollars to his children. (26 years ago, that was a lot of money.)
The premium for the insurance policy is $9000 a year. At some point, his dad asked him to take over the premium payments.. Between the two of them, they have already paid in a total of $234,000, but the cash value of the insurance is only $103,000.
Next year, his dad will turn 80 and here is the in-force illustration the insurance company gave him. Basically, even if he continues paying the premium, his insurance will lapse when his dad turns 83, a mere four years from now. If that happens, they will have paid $270,000 to the insurance company, all for nothing. To avoid that outcome, his dad literally has to die in within the next four years.
When his dad turns 80, the mortality expense of the life insurance escalates to $40k – $50k per year, far more than the annual premium. The shortfall has to be drawn from the cash value. That’s why the cash value will dwindle fast. When there is no cash value left, Read the rest of this entry »
I took the sensationalist title from a CNBC article I read yesterday. The articles talks about, and I quote, ” … hedge funds, as a category, is experiencing the worst quarter of outflows since the bottom of the financial crisis … there were an avalanche of stories about the industry’s nearly systematic underperforming.”
Readers of my newsletter and blog, The Investment Scientist, can thank me later for warning them years ago.
On April 28, 2011, I published “A Balanced Portfolio to Avoid (II): Hedge Funds Don’t Deliver Outstanding Returns.” Let me quote my former self: “Hedge funds are often peddled as an unique asset class that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.” The unspoken message is: you should expect to lose money.
On August 15, 2012, I published “Why You should Avoid Hedge Funds.” I wrote that article after I read the book by former hedge fund industry insider Simon Lack, “The Hedge Fund Mirage.” I summarized the book in one sentence for my readers: “Between 1998 and 2010, hedge fund fees totaled $440 billion vs. $9 billion profits for investors. Read the rest of this entry »
At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.
Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.” The Financial Times said “Brexit” had the makings of a global crisis. “[This]represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”
What about those self-proclaimed financial gurus? Motley Fool wrote: “Sell Everything! How Brexit Can Shatter Share Market” and Jim Cramer wrote: “Don’t Buy! Why the Mass Brexit Sell Off is Worth Riding Out.”
It turned out there was no “mass brexit sell off.”
It’s true UK got a new Prime Minister, and the Pound Sterling fell to 35 years low. But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Read the rest of this entry »
Recently, I did a portfolio analysis of a prospective client who has a Wells Fargo “financial advisor.” Here is the result …
Let me explain …
Load is the initial kickback (coming directly from your account) the fund gives to the broker for directing money to the fund. There are so many no load funds out there, you shouldn’t be paying load. A broker only does that to line his pocket, there is no benefit to you whatsoever.
Expense ratio is what the fund charges every year. As my rule of thumb, any expense ratios higher than 0.5% are too high. Any expense ratios higher than 1% are exorbitant. As you can see, all the fund expense ratios here are either too high or exorbitant! The broker who directed your money to these funds gets to share a portion of the loots ever year. Can you see a conflict here?
Turnover is how often the fund manager churn the investments. The higher the churn rate, the higher the costs to investors. Typically, a 100% turnover translates into about 1.2% in return reduction. As my rule of thumb, any turnover higher than 10% is too high, a turnover higher than 100% is exorbitantly costly! Read the rest of this entry »
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 »