Why I Don’t Pick Stocks
Posted on: August 18, 2016
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 »
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I visited a physician client in Wisconsin while on vacation in Chicago this week. He has been my client for several years now and his personal finance is in very good order. As I was driving the four hour stretch of highway, I thought: What idea I could bring to him that could make his situation tens or even hundreds of thousands of dollars better?
This physician client of mine is easily in the top income tax bracket, meaning marginal tax rate for him is nearly 50% combining federal and state. He also gives away about $10k to various charities a year. He plans to retire in about 10 years.
When he retires, he will continue to give away $10k a year. In fact, there is a good chance he will give away more since people become more charitable inclined when they get older and having a meaningful impact becomes much more important to them.
If he lives another 30 years after retirement, he will give away a minimum of $300k. Here is the problem, he will have little income to write off, thereby wasting up to $150k worth of tax savings.
Alas, but there is a way to recapture these tax savings, it’s called Donor Advised Fund or DAF.
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When Going Gets Tough
Posted on: July 19, 2016
Recently, I had a Review and Discovery meeting with a physician in her late 50s. When I first saw her, she looked burnt out and stressed. Who can blame her? She has been dealt a very bad hand in life.
- One of her children suffers from down syndrome and requires lifelong care.
- Her husband, also a physician, passed away several years ago, leaving behind a financial mess
- The financial professionals who were supposed to help her, led her to make disastrous investments. She lost her house and had to declare personal bankruptcy.
- Her father recently passed away, also leaving behind a financial mess.
- Her mother is so dependent on her now that she cannot continue her medical practice.
She told me she almost wanted to pull her hair out when thinking about her responsibility to her patients, her children, her mother and yet she can’t even sort out her own personal finances.
I did not mince words in telling her how dire her financial situation is. When I told her how much she needs to retire, she almost fell off her chair.
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The Real Danger of A Market Decline
Posted on: June 30, 2016
I was an amateur pilot. I remember vividly an episode happened during a training class ten years ago.
That was a very windy day. Up to that point, I had only experience flying in calm weather. As soon as my Cessna took off, I immediately felt the difference. My plane was tugged and pulled in all directions by cross winds. I felt like I was losing control of the plane, and fear swelled up from the bottom of my spine to the top of my head. I sat stiffen in the pilot seat and my sweaty palms grabbed tightly at the control handles like a sinking person holding onto a straw.
My trainer sensed my tenseness and she asked: “Are you OK?”. Not willing to acknowledge my fear, I asked her instead: “Is it more dangerous to fly in turbulent weather like this?” The trainer smiled and said: “It is not more dangerous to fly in turbulent weather. The plan was built to withstand any turbulences. But occasionally, an amateur pilot would lose his cool and do something stupid. That’s the real danger.”
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According to research by Dimensional Fund Advisors, Inc, only 33% of mutual funds that outperformed the market in the last five years continue to do so in the next five years.
Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.
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Brexit: What to Do About It?
Posted on: June 17, 2016
A week from now, there will be a referendum in Great Britain to determine if the UK should stay in EU or should leave for good.
A mere month ago, the stay vote still won by a comfortable margin. Just showing how political wind can shift, the odds are now 50/50 that the leave vote might win.
Here are some consequences I believe a leave vote would entail:
- Copycat referendums in other EU states, and within a few years, EU might not exist.
- London’s reputation as world financial capital on par with New York may be diminished.
- Disruptions to trades and investments, since UK’s relationship with Europe and the rest of the world, will have to be renegotiated.
- Pound Sterling, London stocks, and property prices might go south. Potential capital flights from the UK.
- More volatility in global stock markets.
As an investor, what should you do about it?
Well, all of the above can be called informed speculations. They are not actionable Read the rest of this entry »
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Double Your Return … What I Learned!
Posted on: June 3, 2016
On May 27th, 2005, I started MZ Capital Management as a hedge fund with “Double Your Return” as my first marketing tagline.
Shortly after the Enron debacle, Congress passed the Sarbanes-Oxley Act, which requires company insiders to report their trades to the SEC electronically within a day of the trades taking place. I created a computer program to query the SEC’s database in real time. So as soon as, for example, IBM’s CEO reported that he bought 10000 shares of IBM, I would know it right away.
On a typical working day, I would be half naked lying on the beach of Palm Beach and I would get a text on my dumb cell phone (sent to me by my computer working hard on my desk.) I would call my broker right away to follow the trade. Then the news would get to the WSJ one week later, the price of IBM would pop and I would sell for maybe a 5% to 10% gain.
Just like that I was making 20% to 30% return every month!I calculated that at this rate of compounding, I would become a trillionaire in about 10 years. I was so confident, I started the hedge fund to share the wealth.
Lest you don’t know yet, I did not become a trillionaire hack, not even a billionaire. So what went wrong?
A few months into my hedge fund, I noticed a small website, where for a $20 a month Read the rest of this entry »
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My Gratitude Trip to China
Posted on: April 29, 2016
- In: Life
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Recently, I took a one-week trip to China, primarily to thank my English teacher. Since late last year, it had dawned on me that I had been so busy chasing my own success that I had forgotten to properly thank those people who made my success possible in the first place. So my new year’s resolution was to identify those people who had the most positive impact on my life and go thank them personally.
Teacher Huang is one such person. He started the first ever English immersion program in China, and he poured his heart into teaching us English. Without him, I wouldn’t have the language skills to accomplish what I have now
He lives in Guangzhou, China though, which takes nearly 24 hours of travel to get there. No matter, I made up my mind to do that. I wrote him a thank you letter, carried it with me, and I read it out loud in front of him and his family. We both were choked up in tears. This is a picture of me with my English teacher.
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I learned that Teacher Huang has kept me in his memory for all these years. He filled me in with many details of my middle school years that I had forgotten.
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Seeing his white hair, I felt like I had been an ungrateful student who took 30 years to come thank my teacher. But seeing how happy he was, I also felt like I’d made amends. Read the rest of this entry »
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Recently Department of Labor issued a fiduciary rule that requires that financial advisors who manage retirement accounts must act in clients’ best interests.
Here is the quote from a Wall Street Journal report …
About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Still, reflecting intense lobbying from the financial industry, which has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications.
This might come as a surprise to many people that financial advisors do not need to act in clients’ best interests up until this day.
Alas, as I explained in this article, there are really two types of financial advisors: Read the rest of this entry »
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What Can a 60/40 Portfolio Deliver?
Posted on: April 4, 2016
The 60/40 portfolio, one that consists of 60% equity and 40% bond, is very common. Most of my clients use a variation of this portfolio. Because of this, I want to understand how this portfolio performed in the past.
For this study, I use the S&P 500 for the equity portion and the 10 year treasury bond for the bond portion. The market data I use is from 1928 to 2015. Note that this period includes the Great Depression.
The portfolio is rebalanced every year to maintain the 60/40 allocation. Then I examine five return intervals: 1 year, 2 years, 5 years, 10 years and 20 years. For each return interval, I calculate the average return, best return and worst return.
| Interval | 1 year | 2 years | 5 years | 10 years | 20 years |
| Average | 8.55 | 8.55 | 8.55 | 8.55 | 8.55 |
| Best | 32.85 | 25.75 | 20.15 | 16.04 | 14.78 |
| Worst | -27.55 | -20.6 | -5.37 | 1.8 | 3.48 |
- The 60/40 portfolio can still be quite risky in the short term. Note that the worst returns for the 1 year and 2 year intervals are -27.55% and -20.6% respectively. These are steep losses nobody likes. Read the rest of this entry »
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Recently a client asked me why we bother with investing in international markets. After all, the S&P 500 has done quite well in the last year. Indeed, it has outperformed foreign markets three years in a row, and by a huge margin to boot. Take 2014 for example-the S&P 500 was up 13%, while the international markets on aggregate were down 5%.
So why then? Well, let’s look at this table …
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Recently, I did a long horizon return study based on 100 years of stock market data and inflation from 1916 to 2015.
The study assumes a 20-year investment horizon. If your primary reason for investment is for retirement security, this is the horizon that should apply.
In the study, I looked at rolling 20-year stock returns, inflations and (after inflation) real stock returns. I present the results in the table below. The first and second columns are the beginning and ending years of the 20- year period. The third column shows the nominal growth of $1 invested in S&P 500 in the corresponding period. The fourth column shows the shrinkage of $1 due to inflation in the corresponding period. The fifth column shows the real (after inflation) growth of $1 invested in S&P 500.
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During the last 100 years, inflation (cash is losing value) is the norm, while deflation (cash is getting more valuable) only occurs during the Great Depression.
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In the 20-year span that has the worst inflation (between 1968 and 1987,) cash loses 71% of its value.In the medium case, cash loses 45% of its value in 20 years.
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During the last 100 years, stocks always make money in any given 20-year period. Even in the worst 20 years (between 1929 and 1948) which includes the Great Depression, you get $1.95 for $1 invested in stocks. (If you use my dividend strategy, you could do a lot better.)
- In the medium scenario, stocks give you 4 times real return; In the best scenario, stocks give you 10 times real ret Read the rest of this entry »
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It seems every other d
ay or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?
In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.
What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.
For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.
But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.) Read the rest of this entry »
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Investors Gone Crazy
Posted on: January 11, 2016
Here is the culprit of the global market selloff in the first week of 2016: The CSRC (China Securities Regulatory Commission) instituted a stock market circuit breaker in the new year: a 15 minute trading pause after a 5% drop in the main index, and the market closes for the day after a 7% drop.
The purpose of the circuit breaker was to temper the crazy volatility in the Chinese market. Talking about unintended consequence, it achieved the exact opposite effect. Retail investors there, fearful they couldn’t sell their shares fast enough, rushed for the exit, driving the main index down 7% (thereby triggering the circuit breaker) for 2 out of the first 4 trading days of the new year.
The CSRC did a quick about face and suspended the circuit breaker, basically telling investors now you could sell to your hearts’ content. You know what? The selling stopped, and the market came back about 2%.
This just shows how crazy and irrational Chinese investors can be. A circuit breaker should have no value impact on stocks whatsoever, and yet they brought their stocks down more than 17%. Read the rest of this entry »
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In the last two days I have been doing tax loss harvesting for my clients.
According to Google,
Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining the optimal asset allocation and expected returns.
That sounds simple enough, but actually I learned a few things doing tax loss harvest. 1) You can make money and still claim a tax loss. 2) The difference between TTM Yield vs 30 Day SEC Yield and how to use them to select a bond fund.
Take one high net worth client for example, he has about $500k of DWFIX, an international bond fund. I sold that to realize a $31k loss that he can use for tax deductions. But during the three years that the position was in his portfolio, it generated more than $100k in incomes. So he makes money in this position but still gets to claim a tax loss. How nice!
The Investment Scientist 