The Investment Scientist

Archive for November 2011

At 2:24pm on 11/5/2011, my second son Caden arrived in the world. Upon seeing his face, my heart sank since there appeared to be a tiny piece of flesh dangling from his nose.

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Less than a week after we were done with settlement on a rental home purchase, we bought a house for our primary residence. The decision process for our primary residence purchase was vastly different from that of the rental property. For one, I didn’t use cap rate to evaluate the primary residence. Instead, we followed these five decision steps.

1. School district

My two sons will grow up in this house, so the right school district was of the utmost importance. My wife did thorough research, and she declared Whitman to be the best school district in the whole state of Maryland, followed closely by Churchill. The first is in Bethesda, the second is in Potomac. These two areas happen to be the most expensive areas in Maryland.

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Owning a rental property as investment may sound attractive to a lot of people who are sick and tired of the volatile stock market.  However, owning a rental property is like owning a business. Do you know what it takes to be a landlord? Listen to Paula Pant talks about it.

Podcast: Becoming a landlord

Table of contents

Consumerism Commentary Podcast[00:00] Introduction from Tom Dziubek
[00:36] Interview with Paula Pant
– [00:54] Owning rental properties
– [01:51] Analyzing a property’s profitability
– [03:04] Expenses involved
– [04:08] Things to look for in a property
– [05:19] Renting to professionals
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[Guest post by Tom Warburton] Market timing is alluring, but, you have to be right twice – when to get out and when to get back in – over and over.  We have NEVER found evidence of anyone successfully practicing this tactic over a statistically significant period of time.

Market timers get out hoping they have ‘called a market top’ – OR – get in hoping they have ‘called a market bottom’.  But then the agonizing work begins because market timers not only have to be right on When To Get Out Of Their Seat but also When To Get Back In Their Seat.   It is this second decision that is so terribly difficult.  When markets move up, or down, they do so VERY quickly.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

History Demonstrates That If Investors Miss The Best Market Days

Their Long-Term Returns Are Dramatically Reduced.

Best Days Worst Days Missed

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[Guest post by Tom Warburton] Who could forget the recent World’s Series?  Man, was that sixth game otherworldly or what!

The day after the sixth game a buddy wandered in – remorseful that he, while watching the Cards vs Rangers, had gotten up out of his seat to go out in his backyard with his dogs (to do who knows what) only to return to his seat and discover that he had missed the walk-off Home Run by Freese – arguably the climactic play of the season!

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My second child was born with a minor deformity in his nose. He looks like he has a cleft nostril.

When I first saw that, my heart sank like a rock. I began to imagine that if he grew up like that, the ridicule and rejection he would have to endure. I also worried that it might be a symptom of a major sickness. What about his nose, mouth, and brain? Are they normal?

Suddenly, I could empathize with parents who had a cleft lip baby. I knew how they felt, except that their emotions are probably 100 times more intense than mine.

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For folks who think we got a great deal on our investment property, they have to balance that with the hassles we were put through. All in life is fair; there is a reason why these houses are sold cheap.

A short sale is like a tripartite dance between the buyer, the short seller, and the bank that holds the title, and that’s not counting the buyer’s mortgage lender. Any one of these can trip up the others, and the deal will fall through.

Here is the list of 10 troubles we went through:

1. The seller was willing to sell at $170,000, and he said the bank had pre-approved the price. Once we accepted the price, the bank (Bank of America) reneged. It would not release the title unless the price was $180,000. After a few weeks of negotiation, we split the difference – $175,000.

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Invest in a house

In December of last year, a real estate agent who is a close friend brought our attention to a townhouse in short sale. The townhouse is in the fastest growing neighborhood inMaryland. It is within walking distance of the town center and a short drive away from an interstate highway.

The seller bought the townhouse for $350k five years ago, and he was now asking only $170k.

I did a quick search on Zillow and found out that similar townhouses in that area are renting for about $1,700 per month. I did another search on the county planning board and found that a new hospital is being planned nearby. Then, I went with my wife to check out the place, and it was in relatively good condition. We decided to buy it on the spot.

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[I wrote this two weeks ago.]

clear sky

Clear Sky

On September 12, a client of mine called me to get out of stocks altogether.

He used a vivid analogy: “The storm is raging; I will wait until the sky clears before I get in again.” The storm he referred to was the European debt crisis. Judging by my many interactions with investors, he is not alone.

This morning, I woke up to great news: the Europeans have finally hammered out a debt deal in which Greece only needs to pay 50% of what they owe to the banks. With this debt reorganization, it looks like we will not have a Greek default (even though this is really a default by another name, but that’s the subject of another piece).

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10. Is PE ratio a useful stock valuation measure?

9. Why asset class diversification is superior?

8. The 2011 estate tax changes

7. America’s top financial advisors: how they are made?

6. Recession and stock market performance

5. Variable annuity fees you don’t know you are paying

4. 2011 year end tax-planning tips for individuals

3. Why doctors don’t get rich

2. Bonus depreciation: Congress wants businesses to invest in 2011

1. Profit from Harry Dent’s prediction? think again!

Also see Top 10 last month.


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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