The Investment Scientist

Archive for August 2012

house for sale

House for sale

I encourage my clients to invest a substantial portion of their assets in real estate for the following reasons:

  1. Real estate, like fixed income, provides a stable income stream – if managed well.
  2. The property value itself generally keeps up with inflation

According to David Swensen, the famed Yale Endowment investment manager, real estate has characteristics of both stocks and bonds; therefore, it should be an important component in any asset allocation. Read the rest of this entry »

Was ZeekRewards a pyramid scheme?

A month ago, I paid a regular visit to a dentist client of mine. He excitedly told me about a new business opportunity he was engaged in: a penny auction site. He and his wife excitedly talked for about 30 minutes, and I still couldn’t quite understand what business it was – and I thought I was a reasonably smart guy.

While I was there, my client was busy calling his friends to recruit them. In the end, he told me he gave ZeekRewards $20,000 and just watched his money grow 3% every day! All he needed to do was post some links. This was such an easy way of making money that he wanted to let all his friends know.

That immediately raised a red flag in my mind: if something sounds too good to be true, it usually is. However, they were so excited I did not want to rain on their parade. Instead, I told them I would take the material to read. If it was as good as it sounded, I might put some money in myself.

Read the rest of this entry »

Golf ball

Is a round of golf all the value you get from your financial advisor?

Why do you charge me 1% every year regardless how well you do for me? I would rather not pay you anything for the first 5% return and split anything above and beyond that.

This is a question a prospective client of mine asked me. Let me explain why this fee arrangement is not in the client’s best interest.

Historically, the mean return of the market is 10%, and the standard deviation of return is 15%. This means the market is equally likely to go up 25% in one year and go down 5% in another.

Despite what they want you to believe, financial advisors have very little control over the market.

Read the rest of this entry »

Judge’s gavel

Why do I need an expensive lawyer to do estate planning for me? Why can’t I just write my will on a piece of paper with two people as witnesses?

This is a question I got from a woman who owns 11 properties in 5 different states. Here is how I explained it to her.

It’s a bad idea to write your own will. Each state has its own descent and distribution law that governs the distribution of the estate of the deceased.

Read the rest of this entry »

Facebook Winners’ Curse

Back on April 9, Mark Zuckerberg announced that Facebook had agreed to acquire Instagram for a jaw dropping $1b.

What is Instagram? It is an iPhone app that allows people to swap photos with friends. The one and a half year old company has about 16 employees and its revenue is a cool zero.

Most commentators said that Zuck was either trying to pre-empt a potential competitor or to expand in the mobile market where Facebook is weak. There is nothing Instagram does that Facebook cannot replicate, make available to its 900 million users, and instantly kill Instagram. Why pay $1b for something that is essentially worthless?

Read the rest of this entry »

Hedge fund managers take their cut

There is a new book about the hedge fund “industry” by former insider Simon Lack. Its title says it all – The Hedge Fund Mirage – The Lesson of Big Money and Why It’s Too Good To Be True.

Not everybody has time to read books like this, but if you are ever approached by a hedge fund peddler – I get calls every week about an amazing alternative investment opportunity – at least look at the table below before you part with your money.

Between 1998 and 2010, hedge fund fees totaled $440 billion versus $9 billion total profits for investors.

Read the rest of this entry »

Is Refinancing Right for You?

Do you see any evidence of superior investment strategy for the last five years? Seems all is correlated and all is going nowhere.

This is a question I got from a reader of my newsletter.

I hate to be impolite, but I think he is focusing on the wrong thing. Yes indeed, over the last five years, the market has given us one disappointment after another – first the financial crisis in the US and now Europe.

There is a silver lining in all of these crises, though. Mortgage rates are at an all-time low. Five years ago today, the 30-year mortgage rate was 6.75%; now it is 3.5%. If you have a $400k mortgage on your house, do you know how much you save if you refinance?

Read the rest of this entry »

New York Stock Exchange

Value investing as an investment discipline was pioneered by Ben Graham and is practiced by Warren Buffett.  It has a long history of data collection and many rigorous studies done in the most prestigious research universities.

The idea of value investing is that undervalued stocks will ultimately outperform overvalued stocks in aggregate.

There are four simple measures one can use to determine if a stock is relatively undervalued or overvalued….

Read the rest of this entry »

Person holding house

I got my power bill yesterday for the first time after moving into my new house. I instantly felt half a million dollars richer.

When we purchased the new house, one of the biggest concerns we had was the utility bill. The previous owners showed us that they spent $1,000 on power and gas each month and that number was pretty constant year round. The house was in good shape, but the windows had not been replaced for 20 years and were leaky.

So the first thing we did after settlement was to replace all the windows.

Read the rest of this entry »

I met a CPA yesterday and we have a lively discussion about option writing strategies. He is torn between the benefit and the time needed to execute the strategy. I wrote an article 4 years ago that could reconcile the two.

The Investment Scientist

I wrote this article in early December 2008. Amazingly, it is one of the least read in my blog. Hadwealth-preservation someone read it and followed it, he would have earned 10% return so far in 2009.

– Michael Zhuang 3/10/2009

At the moment of writing this, SPY, the exchange traded fund (ETF) for the S&P 500 index, is trading at $85.95 and the near at-the-money call option (with strike 86 and only eight days until expiration) is trading at $3.45! (A call option is the right to buy the underlying stock at the strike price. At-the-money means the option strike price is equal to the price of the underlying stock.)

The at-the-money call premium is a full 4% of the underlying index price! Historically, that number has been in the 1% to 2% range.

What does 4% premium imply?

View original post 456 more words

My name is Dow. I was born in May 1896 to my father Charles Dow.

In 1900/1/1, I was 66. No, that was not my age, but my level.  People care about my level since the higher it goes, the richer they get.

In the first two decades of the 20th century, I wobbled around: 100% up and 50% down was the norm of the decades. Nevertheless, I ended the two decades at 108.

Dow 1900-1920

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Author

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

Twitter: @mzhuang

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