Author Archive
A Simple Investment Principle
Posted on: December 5, 2010
MZ Capital 40/60 model vs S&P 500
Just like two sides of a coin, the capital market is made up of capital demanders (businesses) and capital suppliers (investors). What for businesses are costs of acquiring capital are for investors rewards of supplying it. It is a simple truth that
Costs of Capital = Expected Returns
Looking through this lens, many capital market phenomena can be explained.
Why small stocks tend to have higher returns than large stocks?
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Managing Investment Risks
Posted on: November 11, 2010
MZ Capital 60/40 model vs S&P 500
Once I asked a prospective client how he managed investment risk.
“Well,” he intoned, “I try to get in before the market rallies and get out before it tanks.”
It is not just lay investors who have this misconception about risk management; many financial advisors equate risk management to market timing as well. One only needs to watch those advisors talking on CNBC to see that many of them are in the fortune-telling business.
So how do I manage risks? There are three steps.
Read the rest of this entry »
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Warren Buffet on Hedge Funds
Posted on: October 31, 2010
These are Warren Buffet’s own words. As usual, they are as humorous as insightful.
“In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: it’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide.
“…The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these hyper-helpers. Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money”
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Active Money Manager Blah Blah
Posted on: October 12, 2010
Going Somewhere?
[Guest post by Tom Warburton] Most of us who have survived and thrived in the money management industry were trained under the traditional model of ‘getting in front of somebody and making a pitch’. Our ‘pitch’ was designed to make us look smart and normally started out with something like “our best idea right now is blah blah”.
Thanks to our persistence and personal charisma we succeeded in winning a few clients that referred more clients and ultimately created a book of business from which we could make a living. So off we went with more ‘best ideas right now’ and more ‘blah blah’.
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Taking Investment Risks
Posted on: September 30, 2010
Investment Risks
Risk taking is an integral part of investing, yet most investors are blissfully unaware of the risks they are taking, let alone managing them well. In this post, you will quickly learn the good, the bad, and the ugly of investment risks.
Nine Types of Risks
Idiosyncratic risk is defined as risk that is specific to a particular company. This type of risk can be eliminated simply by holding a well-diversified portfolio; therefore, taking this kind of risk is not compensated by the capital market. Examples of taking idiosyncratic risk include investing in individual stocks and buying annuities as investment.
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Who Should You Trust
Posted on: September 8, 2010
[Guest post by Tom Warburton] Almost every single day a buddy calls us to discuss the “Investment Pornography” coming from the brokerage houses or from the mouths of the talking heads on CNBC. Last week was different – almost all of our buddies only wanted to talk about Goldman-Sachs and the Senate Hearings.
The crux of the issue was proffered by Knut A. Rostad, Chairman, Committee for the Fiduciary Standard. His quote from Wealth Manager “Goldman Sachs, Suitability and the Fiduciary Standard”, April 21, 2010
“The Case Highlights The Wide Gap And Opposing Roles Of A Broker Who Is Permitted In Law To Further His And His Firm’s Interests At The Expense Of Customers, And A Fiduciary Who Is Required In Law To Put His Clients’ Interests First. This Is At The Core Of Why The Fiduciary Standard Is Important.”
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Finding Winning Fund Manager
Posted on: August 8, 2010
Can you find a needle here?
When it comes to mutual fund investing, the focus of most investors is to find outperforming fund managers. Many financial advisors justify their hefty fees by claiming they can do just that.
Finding a skilled manager is actually a daunting challenge, because it is hard to separate skill from luck. Take Bill Miller, the legendary manager of Legg Mason Value Trust, for example. He outperformed the S&P 500 index for 15 consecutive years. Iron-clad proof he has the skills, right?
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Small Business 401k, Big Plan Fees
Posted on: July 15, 2010
Your retirement fund?
A recent study of 401k fees by Deloitte has revealed a troublesome fact. For companies that have less than 100 employees, the average “all-in” 401k plan fee is 2.03% of plan assets each year; for plans that have assets less than $1mm, the average “all-in” fee is 2.37%.
As a point of reference, large companies that employ more than 10,000 people on average pay only 0.48%; the federal government’s own TSP retirement plan has an expense ratio of less than 0.03%!
Keep in mind that small businesses employing less than 100 people account for 99% of all US businesses and employ more than 50% of the workforce. Why should they suffer the injustice of paying 80 times the fee of federal employees to have a retirement plan?
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Investment Tax Hike One-Two Punch
Posted on: June 5, 2010
Most wealthy Americans (those in the top two tax brackets) are not aware that taxes on their investments will get a bump in 2011, and again in 2013. The first one is due to the expiration of Bush tax cuts; the second is due to a 3.8% new “Medicare” tax on investment incomes.
The following table sums up the investment tax increases for the top-bracket taxpayers. Read the rest of this entry »
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Jim Cramer on Greek crisis
Posted on: May 20, 2010
On April 15:
Bad news for the euro and Greece is good news for US. Get in at a better price than you should be able to, on the Dow 12,000 freeway
On April 26:
It because of Greece the market is going higher
On May 7:
Don’t buy any stocks until DOW 9000. The Dow’s decline was the natural result of Europe’s debt troubles and the riots in Greece. Investors should wait for the decline before they buy anything again
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Will Greece sink your portfolio?
Posted on: May 6, 2010
In the last few days, news of Greece’s bankruptcy has rattled the markets. Pundits are predicting a spiraling debt crisis spreading to other PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries. Investors are worrying out loud that the crisis is going to sink their portfolios, again.
Not if they have a balanced portfolio. Here is why …
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[Guest post by Mike Piper] Conventional investing wisdom states that the risk of holding stocks decreases as the length of the holding period increases. But is that true?
The answer depends primarily upon how you define “risk.”
Decreasing Risk Over Time
If you define risk as “chance of losing money,” then yes, stocks have historically become less risky the longer the holding period:
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When China runs out of cheap labor
Posted on: April 22, 2010
China has 1.3 billion people. In the last two decades, it is the source of seemingly limitless supplies of cheap labor to the world’s manufacturing industries. Believe it or not, this pool is about to run dry. When that happens, there will be huge implications for the world.
Even before my trip to China, I had read with incredulity that China’s exporting provinces are experiencing severe labor shortages requiring firms to raise wages 20%–30% just to keep the workers they have. My first stop in China was Shenzhen, a city that is home to Walmart’s worldwide procurement center. I stayed in the Evergreen Resort, a facility owned and operated by my friend Mr. Lin.
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Living with uncertainty
Posted on: April 15, 2010
[Guest post by Tom Warburton] Last week a buddy walked into my office distressed over unemployment, the economic malaise, gold prices, the prospect of inflation, government debt, currency fluctuations, trade imbalance and future prospects for the stock market. He basically covered the waterfront of issues we see on the front page of financial magazines and issues we hear talked about on CNBC.
When my buddy left my office (somewhat soothed – I believe – in the knowledge that his portfolio was positioned to achieve his financial goals without regard to the speculations of Jim Cramer), I found myself thinking about the many obstacles that humans have overcome and the unlikelihood that ‘conditions will last’.
In the words of John Allen Paulos, Professor of Mathematics at Temple University and versatile author with books on a wide range of philosophical topics:
“Uncertainty Is The Only Certainty There Is, And Knowing How To Live With Insecurity Is The Only Security”
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Is China a big bubble?
Posted on: April 1, 2010
What a difference eighteen years have made.
Eighteen years ago, I was awarded a scholarship to study mathematics in the U.S. The China I left behind was very different from the China of today:
- Then there was no private ownership of automobiles; now China boasts the world’s largest car market.
- Then there was no private ownership of houses; now there is little public housing left.
- Then China had a grand total of 28 kilometers (17 miles) of expressway; now China’s expressway network is second only to the U.S.
- Then there was no high-speed train service to speak of; now China has the fastest high-speed train service in the world covering the equivalent distance of New York to Chicago in three hours.
- Then China’s economy was the 13th largest; now it is the second largest.
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Inflation is the silent killer of wealth. It does not have the “bark” of a full-blown financial crisis, but it certainly has the “bite.” Just imagine if the inflation rate is 4% over the next 10 years; within a decade you would lose nearly 40% of your wealth if you didn’t do anything about it.
Inflation over the next decade is highly probably because of two simple macro realities:
- America – from the federal government to the states down to individual households – is heavily in debt. The easiest way to get out of debt is to print money. There is a tremendous political incentive to do so.
- China, which has been the low-price setter for the past two decades, has seen labor costs galloping at a 20% to 30% annual clip lately (thanks to the one-child policy). Before long, that will translate into higher prices at your local Walmart.
The Investment Scientist 