When I last updated my “play money” (Crazy Ivan) account info it was worth $25,953. As of market close yesterday it is worth $28,174. Equity and ETF positions have changed slightly. Then now include DTN, INTC, IVV, JNK, PBP, SPLV and XLE. I like all of these positions, however XLE has been a short-term disappointment. I hold XLE as only a hedge against rising gas prices.
All in all not bad performance for an account valued at $15,784 in October 2005. (There have been no deposits or withdrawals during the whole time.) This is about 11.2% annualized performance.
The idea is so simple, it is surprising that no one (that I have heard about) has proposed it. One big problem the US government faces is the enormous pile of mortgage-backed debt held by Fannie Mae and Freddie Mac. Another problem is that many “home owners” are underwater with their mortgages. [How can you be a home owner if you have negative equity?] Finally, the popping of the housing bubble continues to be a drain on the US economy.
The solution I propose is making interest on mortgage-backed securities tax free for five years. This plan would immediately drive up the value of these “toxic” assets and drive down mortgage interest rates below historic lows. This would provide a tremendous boost to Fannie and Freddie and even the Federal Reserve. Increased demand for tax-free MBS would spur banks to issue more mortgages under easier terms, which would help prop up home prices. Naturally, fewer home owners would be under water.
This would also be a boon for investors, giving them access to another tax-free asset class. The incentive of tax-free MBS would be so powerful, it would threaten to take money away from tax-free municipal bonds. To help offset this risk, part II of my plan would make long-term capital gains on municipal bonds tax free for seven years. Like Cain’s 9-9-9 Plan, my plan would have a numeric title, the “5&7 Plan”. (To avoid confusion with the 5-7 Pistol, the “&” symbol is used rather than a dash.)
The long-term capital gains provision gives investors an incentive to hold municipal bonds for at least one year. The extra two years for municipal bond gains gives investors an added incentive to hold long-maturity municipal bonds.
The 5&7 Plan would expand the tax-free bond universe and introduce the concept of tax-free interest investing to a new group of investors… the middle class. Typically only high-income earners benefit from tax-exempt bonds because they offer lower interest rates than taxable bonds. Because high-income taxpayers face higher marginal tax rates, tax-free municipal bonds make sense despite lower interest rates. If the 5&7 Plan becomes law, higher-yielding MBS will become lucrative to savvy middle-class investors.
I encourage the 2012 presidential candidates to consider adopting the 5&7 Plan. I could see Romney offering the 5&7 Plan as a way of “cleaning up Newt’s Fannie and Freddie mess.” Similarly I could see Gingrich pitching the 5&7 Plan as a way of “fixing the Democrat’s Fannie and Freddie problems.” Finally, I could see Obama selling the 5&7 Plan as “an innovative way to clean up America’s mortgage crisis”.
If the 5&7 Plan gets enough press, it will revitalize the mortgage debate. It will help turn the debate towards real solutions and away from political blame games. And, if passed, 5&7 will energize the mortgage and housing markets in explosive ways compared to the tepid response all the other failed legislation of the past 3 years. If you like the 5&7 Plan, share this link. If you don’t, please share why. I will publish all non-spam replies. Let’s get the 5&7 debate started!
In a word: stats. Baseball has statics for almost anything of relevance that happens on the field. Finance has statics like expense ratio, yield, price-to-earnings ratio, total return, alpha, beta, R-squared, Sharpe ratios, and the Greeks (delta, vega, theta, rho)… just to name a few. I suspect most of my readers are more familiar with baseball stats like batting average, on-base percentage, slugging percentage, OPS, ERA, K%, BB%, GB, and the like.
Today’s blog will start with the simple concept of batting average. In baseball batting average is the number of hits divided by the number of official at bats. Since a typical baseball player can have 400 at bats per baseball season, there is a lot of statistical significance to his batting average for one year.
In contrast, a fund manager could be said to have about 4 at bats per season — one per quarter. It would take a 100-year career to have as many “at bats” as baseball player has in one. Even if you decided to count fund performance on a monthly basis, it would take 25 years to match a baseball season’s worth of data.
The most common financial definition of batting average counts a hit as outperforming the market (say the S&P 500) over a given time period, say 3 months. An out is under-performing the market. Generally a .500 batting average is analogous to the the Mendoza line in baseball. Sadly, many fund managers and financial planners bat below .500. And often those that do exceed .500 get there by early luck… luck which generally fades (back below .500) with time.
Just like in baseball batting average is not the most useful static in finance. OPS (on base plus slugging percentage) is probably a better financial stat… if it existed. Instead financial stats like Sharpe Ratio and alpha fulfill a similar role of financial performance measurement. The problem with all these financial stats for measuring fund managers is there are simply not enough “plate appearances” to reliably measure a fund manager’s performance until his or her career is almost over! It is only after a long financial career that the difference between skill and luck can be accurately sorted out… a bit late I’d say for investors looking to pick fund or fund managers.
There is a factor other than stats that financial and baseball matter share. In a recent conversation someone mentioned that baseball is the only major sport where the player scores [directly]. In other words the runner himself (herself) scores by getting safely to home plate. Basketball, football, and hockey require an object (ball or puck) to cross a threshold. Football requires a ball + a player to score a touchdown, but a field goal does not directly require a player to fly through the uprights! Only in baseball does the player himself score a run.
This analogy can be extended to the idea that the investor herself can be the only thing that matters (that scores). At the end of the day it the investor who determines how successful she is at meeting her financial goals. The Sabermetrics of finance may help her get there, but ultimately it is the investor herself who has a winning, losing, or World-Series-Championship financial season.
I’m starting to look back on 2011 numbers for the Balhiser Investing Blog. The first thing that caught my attention is this investing blog has been visited by all 50 states except Wyoming. Thanks all other 49 states for taking a browse.
I’ve been reviewing which topics and blogs have been the most popular. Computing beta was the most popular topic, followed by my CBOE visit, then financial baseball. Popular searches were what CPI stands for, bitcoin inflation, entrepreneur jobs, possible investments and living below your means.
Some analytics stats are better than last year, some are worse. The most improved stat was time per visit which is up 70% to 2 minutes and 6 seconds per visit.
Finally, the financial blog has passed 150 blog posts. This blog post will be #156.
Take for instance the recent run up in stocks, up ~20% in the last year, and up a total of ~40% in the last two years. This stock run up in the financial economy is in spite of the dismal real economy which was (still is?) in the midst of the Great Recession. The classic explanation for this jump in stock prices is anticipation of strong economic growth that many were guessing was just around the next fiscal quarter or two.
But continued lackluster economic growth, high unemployment, and inflation fears have the stock markets retreating 4% in the last month. QE and QE2 have driven commodity, gold, silver, and oil prices up (and the dollar down to a degree). Low interest rates have also helped fuel the commodity boom. I don’t say commodity bubble, I say boom, because I don’t believe it is a bubble… merely a precursor to higher inflation.
Further the prospects of Congressional legislation past and present loom as large economy and business-dampening prospects.
- Dodd-Frank Act regulating all sorts of financial and non-financial items.
- Obama Care.
- The real possibility of tax increases as part of debt ceiling deal.
The danger of Dodd-Frank, which deals primarily with the financial economy, is that it may spill over into the real economy as well — a form of fiscal contagion. Obama Care hits right in the solar plexus of the real economy soon. Potential tax increases are a kidney shot to the real economy.
Also on the horizon is the debt crisis in Europe, currently centered around Greece, but with dominoes in Portugal, Spain, Italy and Ireland ready to fall.
So, why on earth would I be neutral to mildly bearish (long term) on US equities? The title “Wired on High Finance” sums it up.
- Wired, as is in connected, by wire, cable, fiber optics, or wireless. The continuing computational and connectivity revolution is only accelerating. This helps business productivity, which helps business (the real economy) and inevitably the financial economy (the stock market).
- High Finance. High finance in the US eventually finds a way. Take for instance GE which managed to pay zero income tax last year. Big money always finds a way. Call it industriousness, creativity, or greed… it gets things done.
Without all of the governmental fiscal and regulatory “headwinds” (as Bernanke has called them), my outlook would be bullish. Despite them, I believe that the power of a wired world of high finance will find ways to resist the government onslaught. Either through back-room deals (the new and no-so-new crony capitalism) or the ballot box (voters tired of 9% unemployment), these “headwinds” will be reduced, skirted, or avoided.
And while CPI stands for Consumer Price Index, most commonly, it also stands for Cycles Per Instruction — one measure of computer processing speed. So while the mainstream CPI may understate prices, the other CPI is very favorable to computation power. (In both cases keeping true CPI down is desirable.)
Notice I am neutral to mildly bullish on the US (and global) economy. That is why I, personally, am increasingly invested in investments that reflect that believe — namely covered-call market-index strategies. That is why I have switches some of my ETF investments from SPY (an S&P500 index EFT) to PBP (an S&P500 covered-call ETF). Inflation fears and low interest rates have continued to cause me to shy away from most bonds and bond fund… with the exception of high-yield (junk) bonds.
Disclaimer: These are my personal investing thoughts, opinions, and choices as of today. No one can reliably predict the markets (stock, bond, futures, options) or interest rates, certainly not me.
When it comes to business and finance I have two things in common with Lady Gaga and Frank Sinatra; I have my own style, and I do it my way. I blog about finance for several reasons: my readers, as a financial journal, to clarify financial ideas and strategies, and as a business venture. Today I explore the business of financial blogging.
The business plan for the Balhiser Financial Blog consists of three main phases:
- Build an audience of financially-minded readers and investors.
- When readership is sufficiently high, sell ads on the site.
- Write one or more financial books, published electronically, and sell for a modest price (say $2.99).
Currently, I’m focused on phase 1, audience building. As I blogged in May the Balhiser Finance Blog has had over 58,000 unique visitors and counting. Had the blog been running ads, the finance blog may have earned about 500 dollars in revenue. Clearly the blog is a small business. This estimate is based on an earlier time, when web traffic was lower, and the blog accumulated just over 15 dollars in revenue. These low numbers persuaded me to postpone running ads until traffic increased.
So I looked at my traffic using Google Analytics (a great and free tool). Comparing this month’s traffic with last month’s showed visits up 89%, page views up 182% and average time on site up 273%. Comparing to 12 months ago visits are up 4,400% and page views are up 9,380%. Yay! While the Balhiser Investing Blog is a small business, it’s a growing small business.
I know a lot of web professionals, who give me all sorts of advice on growing blog readership. The common themes, ideas, and rules that have worked best for my blog:
- Blog frequently
- Know your audience
- Write good content
I have amended rule #3 to “Write interesting content.” Following rule #2, this means writing content that the blog’s audience finds interesting. Three way of finding what’s interesting to the blog’s audience are:
- Most-read posts
- What search keywords bring the most visitors?
- Comments from readers
What’s humbling for me is that the blog articles I consider my very best work are seldom the most popular. My most recent surprise was the popularity of the post Financial Baseball which sought to explain the mortgage mess around synthetic CDOs using an analogy to fantasy baseball. Based on the positive response I penned the article Financial Baseball and the Finance of Baseball discussing what I’d consider if I was in a position to buy an MLB franchise. Sorry readers, neither of these blog posts would make my personal “Best financial articles of this decade” list. I’m glad many of you enjoyed reading them.
Occasionally a financial topic that I am passionate about also gets great readership. That happened with the blog article CPI Really Stands for… which talked about the Consumer Price Index (CPI). Consequently, I plan to write more blog articles about the CPI, the definition of CPI, the shortcomings of the current CPI, and alternative price measures to the CPI.
Some advertising and media pros have suggested that I add more news and web trending topics, relating them back to finance. Such as how Rep. Antony Weiner’s situation will effect the House and pending financial legislation, or how a divorce could effect Rep. Weiner’s finances. There are practically an “infiniti” of trends if one follows Google Trends: blogging about the financial impact of Gabrielle Giffords’ tragic injury and the roll of short-term disability insurance, blogging about how trendy celebrities like Colin Farrell, Ice T, and Jessica Simpson make and invest (or lose) their money, even talking about the finance of NASCAR versus Formula 1 (perhaps the most expensive sports enterprise on the planet). Actually, I kind of like the NASCAR v. F1 idea… it could be fun to research.
Mostly I’ll stick with the 3 tried-and-true rules above. If and when my audience grows an additional 10-20 times, I’ll probably start running ads again (even though they can be a bit annoying). And I’ll keep on blogging.
Much rhetoric today is focused against “Wall Street”, bankers, hedge funds, and speculators. People are upset about the effects of the Great Recession, but are often misguided about the causes. I submit the idea that the foremost cause of the Great Recession was the business cycle (or economic cycle). If we are to blame the people and institutions behind the business cycle for the Great Recession we must also applaud them for the periods of growth between recessions. To one degree or another we are all participants in the business cycle.
Of course, there have been behaviors ranging from ethical violations to fraud, particularly in the arena of mortgages and mortgage-backed securities, and (MBS) credit default swaps.
While there are flaws and imperfections in the US financial system, the accomplishments of the system deserve some attention. The United States represents an economic marvel of the 20th century and 21st century financial achievements of the American financial system. Like Rome, the United States incorporates the best of other systems. The stock exchange did not originate in the United States, but the US and Europe improved upon it. To the best of my knowledge, the index fund and the ETF both originated in the US.
Right now, today, US investors have access to:
- Low cost online brokerage accounts. It is easy to find brokerage accounts that charge less than $8 per trade and have a list of commission-free ETF trades. With effort, it is possible to find accounts with trades costing less than $5, or even lower.
- Free stock and ETF market data. (For example Yahoo! Finance and Google Finance).
- Superb ETF offerings. (SPY, VTI, SCHB, BND, VEA, VEU…)
- Excellent order fulfillment and pricing (with most brokers).
Just imagine a world without stock exchanges. Could you imagine placing a classified ad or holding a garage sale to trade stock certificates? Ludicrous, right?
The current US financial system is indeed a modern marvel. English, Canadian, and European exchanges have been similarly efficient and successful. Other exchanges around the world are playing catch up, and doing so quickly.
The global world of finance is constantly evolving, but as of today the options available to US investors are quite spectacular. We are wise to take advantage.
Intangibles, short for intangible assets, are what economists and accountants call things that are not easily measured, valued, or counted. In life, it is the intangibles that matter.
Summer-like weather has me thinking about the reasons I work hard, save hard, and invest. My home has tangible value, and has appreciated in spite of the rough housing market. The intangible aspects also have value to me. Planting trees and watching them grow, year after year. Maintaining my yard, and enjoying the first emerald green grass of the year. Watching the flowers and flowering bushes come out in their sequence. And of course, enjoying summer parties in the backyard.
I enjoy my modest home and the myriad home improvements I have made over the last decade. Not only has been a reasonably good investment, my home has made me feel a greater connection to my community.
When I bought my house, I was approved for a much larger mortgage. But I insisted on buying a cheaper house. My first real estate agent kept showing me homes 10 of thousands of dollars above my price range. After a couple months of that, I fired him, and selected another agent. My next real estate agent actually respected my price range… only going over by a few thousand dollars, under the idea that we could make a lower offer conforming to my price range.
It worked. After another several months of near misses, I found a house I really liked and offered $2500 below the asking price… valid for 24 hours. After about eight tense hours at a friends house, my realtor called and said that the sellers had accepted.
For the last couple years I’ve been thinking that I’d like a larger house, with amenities like a 3-car garage. We’ve even thought about buying land and building a custom home and looked at a few lots. But so far I’ve resisted, partially because real-estate commissions and seller-side closing costs could eat easily up $15,000 of net worth. In-town moving expenses would probably add another 3,000 dollars, and buyer-side closing costs (assuming we buy rather than build) another 7,000 dollars. Something like $25,000 down the drain to step into a new, upgraded dream home.
So the plan is to stick it out in the current home or another 5 or so years. In order to enjoy it more we continue to make upgrades large and small. About half of the upgrade work is DIY, the rest we contract out. The return on investment for DIY work is probably 200%, the work contracted out will only pay back 50-60 cents on the dollar.
There is something nice about working on the home. A sense of progress and accomplishment that is enjoyable.
I keep telling myself the cons of buying a dream home for twice the cost the current home. Property taxes will double, utilities will go up, real-estate commissions and other costs will eat up a big chuck of equity, moving will be a hassle, etc. And of course, do I want to live here for the next 10, 20 years? Hard to say. Until I make the next big move on the housing front, I plan to delay and enjoy my current home and neighborhood. Take some walks, host some parties, and do some gardening. Enjoying the intangibles of home ownership and try not be to hasty in my desire to keep up with the Joneses.
I was having lunch and one of my friends said that something was troubling him. He said that he worked out the numbers and, by his calculations, he needed to save 25% of his gross income for retirement. And taxes took another 25%. So, that meant he only got to use half of his income. Only half! Only half? Were his calculations wrong?
My first reaction, was no, his computations sound about right. But, I said, “Please tell me more. Maybe I’m missing something too?”
He explained that his projections were 8% return while he is saving, and then 5% while in retirement mode. He explained that he had talked with his parents and other retired folks to estimate what their expenses are.
I asked him about how inflation factored into his calculations. He said that he was estimating about 3-4% for inflation.
So, yes, his estimates made sense. Knowing his age, and assets, etc, made me think that he had it about right.
So he confided, yeah, but I also have a mortgage and property taxes and insurance? That takes, more, maybe another 30%. So that leaves me with, like, 20%. How am I supposed to do anything with that?! My income is whittled down to almost nothing!
I could only sympathize. Yes, I said. You’ve sussed it out. I hope that nonetheless you are enjoying your life. Living responsibly for your future is not easy. You and your family will, hopefully, thank you later. The twin tyrannies, taxes and inflation, are the saver’s ever-present adversaries. Facing them taxes the soul. The intelligent saver faces them nonetheless, perseveres, and is better for it.
That was the best advice I could offer. It is the advice I give myself. It is unsatisfying, it is adult, it is realist. Are taxes and inflation such tyrants, such a drain? Historic facts say yes. It is the harsh truth. The wise face that truth, and succeed in spite of it. Best wishes, and hang in there. You can do it.
President Obama and other sources confirm that Osama Bin Laden is dead. Reports say he was killed by Navy SEALs working closely with CIA agents, and DNA tests confirm that the body is indeed OBL.
The impact of this news on U.S. and global markets is yet to be seen, but the Nikkei’s performance is positive — up about 1.5%.
The impact of the 9/11 attacks had a traumatic multi-year impact on the U.S. economy, and a proportionally lesser, but nonetheless dramatic, impact on the world economy.
What can I add, but that this is very good news, both financially and in general.
Number of visits (pairs of eyeballs) to balhiser.com so far, based on web analytics data. (More technically, 58,087 absolute unique visitors.) By web standards for a web-based business, that’s not much. But it is a start. And it is dramatically more visits than for my younger, sister-blog sigma1.com. Of course I predicted that balhiser.com would only interest 1 out 10 people on the planet and sigma1 (Σ1) only 1 out a 100. Still 58 K for balhiser.com is underachieving relative to those ambitious goals.
Visits, per se, doesn’t mean much. Repeat visits say more. And recurring visits say even more still. Each seems about an order of magnitude less (one tenth) the previous.
Still, by those calculations I have, possibly, maybe, hopefully 500 or so regular or semi-regular readers. Other data puts that estimate closer to 100. Its not an exact science, at least not for a web analytics neophyte like me. (I know an expert analyst, but can’t afford her expertise.)
Sadly, that means that balhiser.com is not currently getting enough traffic to get in the black, financially. I do have a plan B. Taking the 119 and counting financial blog posts and using them as raw material for an e-book. (FYI, plan A is to keep blogging until, somehow, balhiser.com content gets picked up and syndicated, or keeps building momentum until critical mass or singularity occurs).
Most small businesses don’t grow to medium-sized businesses. And many medium-sized business fail to grow to big businesses. However, many big businesses started out as small businesses. Two examples, Microsoft and Hewlett-Packard, immediately spring to mind.
If, somehow, against the odds, balhiser.com (and Balhiser LLC) become big business, this blog will detail the financial and other aspects of its early ascent.
If not, it still may provide lessons learned and other insights for a) other small business owners and entrepreneurs, b) people interested in personal and business finance.
From a financial perspective, we are more than our (paper) net worth. We also possess something economists call “human capital”. I’d call it expected earnings potential. Whatever you call it, it is an asset and is worthy of upkeep and proper maintenance.
So lets say you’ve learned some valuable skills and have a desk job with a comfy office chair… and free juice and soda. Well, cool — until your age surpasses your waste line. Your waste line gets jealous and tries to catch up. This is not cool. It is time to start exercising your human capital — literally. (Or swear off the soda.)
Some financial advisers would say its time to think about insurance, especially life insurance. Possibly. I’m thinking the best returning investments are exercise and diet. One’s a four-letter word and the other is even more unpleasant. Both, however, pay dividends. Benefits include longer life expectancy, better wellness, healthier appearance, and often improved mental function. Yes, your mileage and results may very, and please consult your doctor. Keeping yourself fit and healthy is a good investment. It is often challenging and frustrating, but many investments in the self are.
Another investment to consider is education and training. I’ve read articles saying that a master’s degree beats a bachelor’s degree, even after educational expenses and a ~2 year delay in entering the workforce. I’ve also read publications claiming the opposite. I think its a toss up and depends on many factors including major. What I strongly believe is that a four-year college education is both financially desirable as well as rewarding for many people, and that in general state colleges and universities provide a better overall return on investment than expensive private colleges.
I also believe that there is such a thing as too much school, from a financial standpoint. In many fields, a Ph.D. is no more valuable than an M.S., and is sometimes even a liability.
Some folks are not that into traditional classroom-based learning. I love the classroom, but if I had the talent (aka a better arm, better glove, better hitting, and better speed) I’d be a professional baseball player. Right fielder for the San Diego Padres sounds perfect. Sorry, Will Venable, I want your job.
The long and short of this financial blog post is that an important component in investing in your financial future involves investing in yourself. For me that takes a lot more emotional effort. Nonetheless, I am making that effort.
Inquiring minds want to know, how profitable is Major League Baseball? Well, the inside baseball says “very profitable”. This after a surreptitious release of Pittsburgh Pirates’ confidential financial documents. Which makes me wonder, how did the LA Dodgers drop the big money ball?
Well, in the business of baseball, it appears that its all about winning the mighty dollar. I’m actually impressed. Major League Baseball is, after all, a business and the cliche “business is business” applies.
One parting thought: What would baseball be like if there was a baseball team owned like the Green Bay Packers?
Ostensibly, the CPI stands for Consumer Price Index. I have a few alternate suggestions:
- Contrived Price Index
- Controversial Price Index
- Captive Price Index
There are several thing that I don’t like about the CPI, specifically the CPI-U (The Consumer Price Index for All Urban Consumers). Most troublesome, is that it is used interchangeably with the term “inflation” or “US inflation”. While CPI-U includes food, energy, and medical expenses, for example, it does so in ways that are far removed from the way many consumers purchase.
For me, the CPI-U appears to understate the inflation I’ve seen in the last 10 years. The price of my satellite/cable TV has doubled. The share of health-care insurance that comes out of my paycheck has gone from $20/month to $200/month. I still remember getting a Big Mac value meal for $2.99, but now it’s about $5.00. It’s hard to believe that consumer inflation has averaged just 2.3% annually over that time period.
I’ve read a number of articles saying CPI-U understates inflation by about 1.0-1.5% annually. If so, this is a big deal. Real interest rates are not only negative they are substantially negative. And real GDP growth is dramatically overstated.