The Investment Scientist

Archive for May 2013

I wrote this article at the thick of the financial crisis. I followed his advice and my clients were able to get back even before many other investors. My first client to get even was on Christmas of 2010. The overall market only gets back to pre-crisis level in January of 2013. Here is how I implemented his four point advice:

  1. Though it was extremely uncomfortable, I kept my clients on their asset allocation plans. In fact, we rebalanced into equity at the bottom of the market.
  2. We rebalance out of the rallying treasuries to invest in tanking corporate bonds.
  3. We know the limit of our intelligence, we just keep to our asset allocation plans.
  4. We only invest in index funds and asset class funds. No actively managed funds were used at all.

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The Investment Scientist

This is based on an interview David Swensen done on Fox News Network.

1. Have a strong decision-marking process

Investing success requires sticking with decisions made uncomfortable by the variance of opinions. In his own words:

Think carefully how it is that you are gonna allocate your assets and stick with it. Too many individuals were excited about the equity market 18 months ago and were despairing 3 months ago. It should have been the other way around. They should have been concerned about valuation 18 months ago and excited about the opportunity to put money to work at lower prices 3 months ago.

2. Sell mania-induced excess, buy despair-driven value

On his favorite area of despair-driven value, David Swensen has this to say:

I think the most interesting area is the credit market. Bank loans are trading at extraordinary low value. High-grade corporate debts, below investment grade corporate debts…

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It has been one year since Facebook IPO. Most of my top 10 reasons last year arguing against buying FB stocks are still true today. Remember the hype leading up to the IPO, then ponder this line of mine: “The more successful the Wall Street money machine is, the less likely you will get rich.

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

The Investment Scientist

Facebook IPO

1. Facebook is a great service to help you keep in touch with friends and family. But a great service does not equal great investment.

2. When was the last time you clicked on a Facebook ad? I can’t recall when I ever did. The click-through rate for Facebook ads is 10% that for Google ads, for good reason. Google ads are delivered at the moment you have actionable intent, while Facebook ads are delivered when you don’t want any distraction.

3. As more and more people use mobile devices to access Facebook, this will present a big challenge since it is nearly impossible to display distracting ads on tiny mobile screens.

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New York Stock Exchange

New York Stock Exchange

Recently, I got a call from a physician client of mine who asked a fantastic question. The Shiller PE of the S&P 500 index is at 24 now, much higher than the historical mean of 16 – is the market headed for a fall?

What is the Shiller PE?

This is a stock market metric invented by Yale Professor Robert Shiller. Basically, it is the average of the PE ratios of ten consecutive years. Because of that, Shiller PE is also called PE10.

Professor Shiller found it to be a reasonably good measure of valuation of the whole market: the higher the Shiller PE, the more expensive the market.

Back to my client’s question, I told him right away that I don’t know the answer. I don’t make investment decision based on opinion. I have to research historical data. After I hung up the phone, I asked my assistant to study the relationship between the Shiller PE and forward one-year and forward three-year returns.

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Tax planning tips

Tax planning tips

Last week, I went to a luncheon seminar hosted by Fidelity Charitables, a division of my custodian company Fidelity Investments.

I went there because 30% of my clients are business owners. I know that one-third of them have strong charitable intent, and helping them do well by doing good is part of my responsibility.

Part of the dilemma of successful business owners who have charitable intent is this: They make a lot of money when they are running their business, and especially at the time they sell their business. But they give away their money to the causes they care about usually in retirement when they do not have as much income to write off. Without careful charitable planning, they will end up paying a lot more in taxes and have a lot less to give to charity.

Here comes the rescue plan: Donor Advised Fund (DAF).

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Morgan Stanley Smith Barney

Morgan Stanley Smith Barney

Last weekend, I went to New Jersey to meet a potential client who is an executive at a pharmaceutical company.

He told me that, as part of the executive benefit package, the company refers executives to Morgan Stanley where they get “free” financial advice. I smirked and said: “Well, we will find out how free it is. One thing I know, though, Wall Street firms are not known for charity.”

It turns out that Morgan Stanley advised him to open several, separately managed accounts (SMA), each with a management fee of 1.5%. The reason for the multiple accounts?

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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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