Ask whether these people are showing you the money. Hold them accountable for your money.
1. Your boss/company. Ask yourself first if you had a good year. If so, do some research on at you should expect to be earning. Try starting with Glassdoor. If you are not making what you want and are not moving in the right direction, consider moving to another company. But, be sure to do through research and then line up a job (in writing) before giving your notice.
2. Politicians. Are you getting reasonable benefit for your taxes? Grade by region. Here’s my grading: City C, County B, State B+, Federal D. If your grade is C or less, consider voting the bums out!
3. Social Security. Ever work out the rate of return on your projected Social Security payments versus the amount you have and will put in. Mine is about 0% return. And that is *if* I ever get *any*. Not much you can do about it, but something to consider when planning your own retirement…. What if I get nothing from Social Security when I retire?
4. Investment Adviser. How does my return stack up to A) The S&P500 total return (including dividends)? B) A 100% bond profile such as Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)? If, overall, it is under-performing both, fire your adviser. If it beats one… ask questions like why it didn’t do better. If it beats both, ask “what risks are you taking with my money!”? If you are your own investment adviser ask yourself the same questions. And, if you decide to fire yourself, consider getting advice from someone reputable and sane like Vanguard.
5. Your credit score. Know your credit score (FICO score). Guess what? If it’s below 711, it’s below average! [Technically below "median", but let's not split hairs.] 720 used to be golden, but today 750 is the new golden score. In some cases 770. If your score is below where you’d like it to be, start getting financially fit. And remember, success doesn’t happen overnight. Success takes time.
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.
In the previous blog post I wrote about the mechanics of options to help smooth out and reshape investment volatility. In this blog post I want to discuss another investment tool: short selling.
Short selling involves borrowing shares of stock and selling those borrowed shares. This immediately does two things to your portfolio: 1) It gives you a liability for the shares, 2) It gives cash proceeds from the sale.
An investor, Alice, may choose to short a stock (or ETF) because she expects its price to fall. She may expect one security to fall relative to another security. For instance, if Alice expects AAPL to outperform MSFT over then next six months, she could short MSFT and use the cash proceeds to purchase AAPL. Even if MSFT goes up, Alice will make money so long as the value of her AAPL holdings go up more.
Suppose things don’t go according to plan for Alice. For some crazy reason MSFT shares go way up, while AAPL shares remain flat. As this trend continues, Alice’s portfolio net asset value (NAV) erodes. This decreases Alice’s margin and increases her portfolios’ leverage. If the trend continues Alice will eventually receive a margin call and have to cover her short position by buying MSFT stock to close her short position.
There are a few details to be aware of before entering a short position on a security. The first is determining whether (and how much) stock is currently available for short-sale. Once you’ve determined that your chosen stock is available for shorting, you should find out the particular terms for borrowing the stock. For instance, you may forfeit a small percentage of your short-sale proceeds. Often highly liquid stocks will be cheaper to borrow than less liquid ones.
Once you’ve found an stock with short-availability and an acceptable borrowing rate, you can execute a short-sale. Since you will have a negative position (say -100 shares) you will pay rather than receive dividends on every share. See also this helpful explanation of how, where, and why short-shares become available.
That’s the basics of short-selling. Short-selling provides an alternative way to bet against a stock. Buying puts is one method, short-selling is another. Short-selling is allows going long-short… picking winners AND losers. Short-selling is a tool that opens many investing opportunities and exposure to additional investing risks.
While the Σ1 Fund is currently a real 100% privately-held investment vehicle, all language and speculative plans about its future are currently (9/28/2010) STRICTLY THEORETICAL. There is currently no SOLICITATION or even OPPORTUNITY for anyone other than Balhiser LLC shareholder(s) to invest in the fund. Further, there is currently no SOLICITATION nor OPPORTUNITY to invest in Balhiser LLC at present. Thus the HYPOTHETICAL and SPECULATIVE language is merely just words at this point and time. It is entirely possible that outside investors NEVER be given the opportunity to invest.
I’m wondering… should I revise my $10K minimum investment. Perhaps $5K-$9K with a ~2% up-front load ($5000 yields $4900 of principal, $5000 yields $5100). Increments above $5K are $1K with an up/down choice. Increments are also $1K for investments over $10K. Additional subsequent investments for current investors are $2K minimum with $1K increments. Withdrawals minimums are $5K or %100 plus optional $1K increments. Additional fund investments are subject to the same early withdrawal penalties as initial investments. ALL requested redemptions are FIFO by default.
Distributions (realized capital gains, dividends, etc) are annual. How they are distributed is TDB. My initial inclination is that there is an ex-dividend date on the last trading day of each month, and dividend income is distributed in proportion to #months held * #shares. Distributions are re-invested by default. Non-reinvested distributions are held in a non-interest-bearing manner until $500 is reached, upon which the total distribution will be paid in full by ACH or check. Non-reinvested dividends may be paid, upon request, before the $500 minimum is reached, but a distribution-collection fee of $50 will be assessed. For shareholders with >= $100K NAV none of these distribution restrictions or fees apply.
75% of redemption fees will be paid to Balhiser LLC, the remaining 25% will be paid to the Fund.
Requirements for potential investors:
- Minimum of 5 years experience investing in stocks, bonds, ETFs, and/or mutual funds.
- Acknowledgment that this is an investment of at-risk capital that may be subject to forced liquidation without notice during volatile and illiquid market conditions. This could result in severe or even total loss of investment.
- Acknowledgment that options WILL be part of the Fund’s holdings/obligations. While the primary target use of options is “covered-call” writing the notion of “covered” is not strict. The fund may consider an RNM (Russel 2000 mini call option contract) to be “covered” by ownership of “an appropriate amount” of SPY (S&P500 ETF) shares.
- Acknowledgment that ETF futures contracts may part of the Fund’s holdings/obligations.
- Signed (and notarized) legal waiver that specifies that in exchange for participating in this fund, fund participant, fund participant beneficiaries and/or heirs, agree to hold legally blameless the fund manager and Balhiser LLC for losses sustained by the Fund.
- Solid familiarity with E-mail and the Internet and Internet-based “paperless” documents and communication.
In exchange for these concessions, the fund manager agrees to the following “skin-in-the-game” and transparency conditions:
- So long as fund assets (or total net unredeemed funds invested) exceed $50K, the fund manager and/or Balhiser LLC will maintain a minimum of $25K invested in the Fund.
- So long as fund assets exceed $50K, the fund manager and/or Balhiser LLC will reinvest all fund net distributions and net fund management proceeds into the Fund.
- So long as FE>$50K. Fund manager and/or Balhiser LLC will be subject to same fees, terms, and conditions as all other investors PLUS will have to provide an ADDITIONAL 60-day advance notice to all fund shareholders (via email or other means) prior to any sale of holdings in the Fund.
- 100% of Balhiser LLC/fund manager redemption fees (fees incurred for “personal” withdrawals) will be paid to the Fund.
- End-of-month NAV reports will be delivered by email to shareholders. (delivered within 5 business days)
- Subject to NDA: Unaudited Annual Report detailing complete fund holdings (delivered within 20 business days). Disclosure to CPA is permitted.
- Subject to NDA: Upon request unaudited inter-year report (delivered within 30 business days). A $250 fee applies. Disclosure to CPA is permitted. Fee is waived once per year for investors with >= $100,000 invested in the Fund.
Base Management Fee Rates (similar, but not identical, to an expense ratio)
- 7.8 basis points per month (0.078%) of previous close-of-month fund NAV.
[~0.95% in simple interest, or ~0.9772% compounded annually] - Base management fee reduced by:
- 10% for investors with >= $50,000 NAV (or $50K net unredeemed investments).
- 25% for investors with >= $100,000 NAV (or $100K net unredeemed investments).
- 33% for investors with >= $250,000 NAV (or $250K net unredeemed investments).
- 50% for investors with >= $1,000,000 NAV (or $1M net unredeemed investments).
It’s official. Balhiser LLC now contains a proprietary trading group which manages a private fund. The fund, dubbed Sigma 1 (Σ1), seeks to be a covered-call balanced fund for the benefit of Balhiser LLC shareholders. Balhiser LLC’s initial investment in the fund is a modest $25,000. Like the CIA (Crazy Ivan Account) Σ1 is, in part, a test vehicle for trading and investing strategies. Unlike the CIA, Σ1 is a Balhiser-LLC-owned tool to put my theoretical fund management skills to the test.
As fund manager, I plan to apply more rigor than necessary for an LLC proprietary trading group. I plan to draft unaudited quarterly reports. I have crafted an outline of fund rules and guidelines.
With direct access to markets and exchanges, very low trading costs, and access to futures, options, forex, margin, algorithmic trading, etc., Σ1 should allow testing of trading strategies that were simply not practical before.
Despite the myriad choices available, Σ1′s initial ground rules and objectives will be pretty pedestrian. Here a some of them for the record:
Conceptual target allocation: 40% bond, 60% stock.
Bond Portion Parameters:
- Duration 0-7 years.
- Max. Foreign Exposure: 50%
- Max. Corporate Exposure: 50%
- Munis: 50% max
- Mortgage-backed : 50% max
- Treasuries/TIPs/Govt: 25% min
- Bond ETFs: Yes
Stock Portion Parameters:
- Foreign: 40% max
- Any single stock: 20% max
- Total single stocks: 50% max
- Diversified (largely index) ETFs: 50% min
Other parameters:
- Max Overall Stock Exposure: 80%
- Max Overall Bond Exposure: 60%
Margin:
- Never to exceed:
- 60% of NPV of holdings
- 100% of NPV of bond holdings
Stock Options:
- Covered calls: Yes
- (Cash/Bond)-Covered puts: Yes
- Uncovered puts/calls: only allowed intra-day while closing covered positions.
- Buying puts/calls: Yes, not to exceed 5% of NPV of holdings.
- Paired options (e.g. butterfly): Yes, VAR not to exceed 5% NPV.
Futures: TBD
Other Options:
- interest-rate: TBD (likely only as bond hedge)
- currency options: TBD (likely only as foreign-bond hedge)
Stock (ETF) Futures: TBD
Commodities:
- Futures: No
- Precious metals (ETFs): Yes, 10% max
- Covered calls: Yes
- Buy puts: Yes, as hedge
- Buy calls: Yes, 2% NPV max.
- Non-metal: No
“Uncovered” (value at risk) Derivative Exposure:
- Total 5% NPV max (on any trading day).
“Uncovered” Derivative Loss Limits:
- Not to exceed 10% in 4 rolling consecutive quarters. (10% of 4-quarter average starting NPV).
- How enforced: If previous 3 (or 2 or 1 or present) quarter(s) uncovered net derivative loss (NDL) is in excess of 5%, max uncovered-derivative VAR cap is lowered to 10%-NDL.
Short-selling:
- TBD, likely only allowed as a hedging technique.
Futures Options: TBD
That is a brief outline of Σ1. I will be providing updates as it moves forward.
Disclaimer: Σ1 is a private proprietary trading account and is not available to the public. Balhiser LLC is a privately-held company.
If Vulcans were investors they would:
- Save.
- Buy from Vanguard. (It’s the most logical choice)
- Buy no-load funds with low expense ratios.
- Do their investing homework before buying anything.
- Study historical market data (50, 100, 200+ years worth).
- Observe but detach from market sentiments.
- Invest for the long run.
- Diversify.
- Read the fine print.
- Just say “No” to stock pushers, brokers, and middlemen.
- Do their own research.
- Make their own decisions.
- Analyze the outcome of their decisions and learn.
My goal is to be a Vulcan investor. Naturally that is not entirely possible, however, I believe I come reasonably close. I save. I read the fine print. I say “No” to investing solicitations. I do my own research. I avoid loads and seek out low fees and expense ratios. I invest for the long run.
I acknowledge my emotion. I find outlets for it to leave my investing mind cool, logical, creative, and rigorous. One outlet is the Crazy Ivan Account (CIA). Using CIA play money releases my pent up investing emotions. Another outlet is occasional gambling. Why recklessly gamble big money on the stock/bond/options/futures markets when it is relatively easy to gamble small money at the casino and get free drinks to boot? A $200 or $300 bank roll tends to last quite a while at a $5 craps table, often for several hours, if the “bad bets” (bigger house advantage) are avoided.
I say the object of gambling is to gamble… To be irrational, even superstitious, and above all to have fun. Whereas the object of investing is to maximize return and minimize risk. Fun, generally speaking, should have little to do with investing. All things equal, I believe that the best investments tend to be boring. Accounting, and tax planning are also best when boring. Enron accounting might have been exciting… but it was also disastrous. The CIA allows me to bend this rule in a limited way, allowing my non-Vulcan desire for fun and impulsive investing to be contained.
I’m not a exactly a Vulcan investor, but I try to act like one. Are you a Vulcan investor? Do you want to be? Please share your thoughts by commenting on this post. Its easy. I look forward to hearing from you.
I’ve now got a spreadsheet where I can enter 3-year daily stock price data and get a beta versus the S&P500 as modeled by the ETF SPY. There are still a few finer points I don’t like about the modeling. The biggest remaining gap in the computation is that the model doesn’t account for dividends on either the stock or the S&P. Ideally it would add the dividend into the price on the ex dividend date. If I could find a source where that data is built in or I took the time to merge the data it I would be set… but I haven’t bothered to do so. Another nice feature would be an R-squared computation.
So now what? Probably nothing for a while. I’m already thinking about different things. Most are things I wish other people would do 
.
- Create a low expense-ratio ETF that tracks a passive covered-call index like BXM. (No, and not an ETN… I want collateral!)
- Create an open-source format for storing and sharing stock, index, portfolio, bond, ETF data. Perhaps XML-based. Nice features would be handling of splits, ticker symbol changes, dividend and ex-dividend dates, and market holidays. Support for different time periods would be a must. Support for earnings, book values, revenue and other supporting data would be nice. Perhaps such a format already exists?
- Glue together this format with cool graphing software like Open Flash Charts and/or something HTML5 based.
- Open source statistical tools to work with this format to compute volatility, beta, R-squared, P/E ratios, etc.
Until next time, happy financial modeling.
Balhiser LLC is entering the real estate investing world. As president, I am working on the last steps of financing a payoff and transfer of a ~$175,000 property to Balhiser LLC. So far, I have secured 65% of the capital and financing. Financing the remaining 35% is in the works, and I am hopeful that a line of credit Balhiser LLC has applied for will help close the gap. Alternately, I am prepared to liquidate some of my Vanguard portfolio, as required to complete the transfer.
The goal is to lease the property, a 3 bedroom townhouse, for $1150/mo. Info about the property is available here.
Investing can be more than just stocks, bonds, ETFs, and options. It is exciting to extend Balhiser LLC into the arena of real estate investment.
Just a quick note to…
Get this idea out into the blogosphere before someone tries to patent it:
Flex-flow deposits that automatically (and dynamically) re-balance a portfolio. A target asset allocation is set. Weekly/monthly inflows are initially proportioned account to these ratios. As time goes on and investments go up and down the inflows are adjusted to help keep to asset allocation close to target. More $ are invested in under-weighted funds (below tgt funds) and less $ are invested in funds that are over asset allocation targets.
There are lots of neat mathematical/algorithmic implementations. The simplest contributes to the most under-weighted fund 100% or whatever amount is need to bring into balance. Then the next most out-of-balance fund… etc. Another strategy is to perform a linear delta-weighted scaling factor. Another means is any number of non-linear delta-weighted scalings. In any case a unit-sum “percentage” vector (M-dimensional , where M is the number of funds in the target).
I’ve been reading through the prospectus for some of the Vanguard tax-exempt funds. There are four that generally cover the municipal funds markets:
Comparing Vanguard Tax-Exempt Funds
They all have great expense ratios of 0.2% and credit ratings (for what they’re worth) of AA or AA-. What is most interesting to me is a comparison of duration to yield. Duration, in brief, is a standardized measure of bond price sensitivity to changes in interest rates. High duration bonds (or funds) swing more to a 1% change in interest rates than lower duration bonds. When I graph the relationship I get a very straight looking line:
In essence this is the current yield curve for this family of funds. The leftmost point is the short-term tax-exempt bond fund, followed by limited-term, then intermediate term, and finally long-term.
So what was my decision? I bought into 3 of the 4, the short-term, medium-term, and long-term. They all look like great funds. I’ll keep you posted.
As we reflect on Thanksgiving, here are some personal finance things I am thankful for:
- Decimal stock pricing. Remember all those pesky fractions? Decimal pricing is so much easier. And the spreads are much better too.
- Online stock trading. I don’t know about you, but I don’t want to talk to a broker. I want fast quotes and cheap trades without the conversation.
- Free online financial data. Thank you all you online publishers of stock data. It’s 2:00 AM and I just have to know the market premium on the BEP closed-end fund — No problem.
- Index funds. Thanks John Bogle and others for these diversified, tax-efficient, cost-efficient funds.
- Good financial planning. Thanks, Dad, and others along the way who taught me money management, investing, and financial planning.
- 401K, IRA, and Roth IRA accounts. These tax advantaged accounts were spectacular ideas, and they work.
- Good accountants. Thanks for helping me make some sense of the US tax code.
- Buying opportunities. Every now and again a great investment comes along and a great price. Doubling my money on PCU comes to mind. Such opportunities are what make investing fun for me and keep me searching for the next great buy.
- Dividends. Even when stocks are down, many still pay dividends. A lot of stocks are currently repaying 3% dividend yields. These quarterly dribbles of cash do feel good to receive.
For investors, there is a lot to be thankful for. Yes, our equity investments are generally down, and our economy is lethargic. Equities have been a wild ride to nowhere in the last decade. But bonds and, yes, in many places even real estate have fared much better. And as long-term investor I am excited about the prospects finding buying opportunities. I wouldn’t say equities are cheap, but I am thankful that they are not all that expensive either. I am looking forward to the next 10, 20, 30+ years of investing.
$22,041. Covered calls on SPY not to be working optimally this round but losses are reasonably offset by SPY gains. BCS ADR has also rebounded nicely. Cash just sitting there doing practically nothing and earning practically nothing.
All in all looking pretty good.
The 2009 401k contributions limits are up from last year. You can contribute up to $16,500. If you are 50 or older the limit is a whopping $22,000 this year.
My employer has generously given our lab the day off to celebrate some of our recent successes, giving me a four-day weekend. What a precious gift — time. Time to relax and see a concert, time to clean the house, time to blog at balhiser.com. This gift off one day plus the Labor Day Weekend got me thinking about time and investing and how the two relate.
Time is a critical factor in investing. Interest and dividends are paid out over time. Inflation adds up over time, as does compounding. Annuities pay out over a lifetime. And, of course, pundits debate whether it is worth it to try to time the markets.
Time shows up in just about every financial formula, starting with the basic time value of money computations.
And, naturally, savings accumulates (or debts) over a period of time.
Putting this all together time is generally on your side as an investor. Especially if you are in your 20′s, 30′s, 40′s or even 50′s and investing in retirement. Having a 20-year plus time horizon is very likely to help smooth out the huge market ups and downs.
The biggest gotcha about time is inflation. Certainly inflation is my greatest concern. A dollar today is not worth what it was 10 years ago. I paid $1.00 for a Hershey Bar this week. 10 years ago I could have bought 2 for $1.oo. The other big gotcha about time is uncertainty. What will taxes be for IRA and 401(k) withdrawals? What will the economy look like? Will I have a job and will my pay keep up with inflation and taxes?
That said, I still believe time is on the side of long-term investors. Tax-deferred compounding of IRA and 401(k) assets is very helpful. The tax deferral of unrealized capital gains in taxable accounts is another investing boon. Finally the tax-free advantages of Roth IRA and 401K assets is another helpful option to help leverage the power of time.
Enough about that. A quick Crazy Ivan Account update: $21,750. Nice appreciation of late. Even my Barclays ADR (BCS) is up from the initial purchase price. Quite wild ride on the banks. The covered call I sold on SPY is in the red, but the 100 shares of SPY are in the black by more. That how covered calls generally work out — smoothing the volatility out of both the ups and the downs.
This week I bought back into the S&P500 Index via 100 shares of SPY. I didn’t intend to get out of SPY in the first place, but my call option was exercised right before the ex-dividend date. [No soup for you!]
SPY is my second favorite ETF after VTI. VTI is slightly better in terms of having an ultra low expense ratio of 0.07% and broader exposure to the whole US stock market. SPY with its not too shabby 0.1% expense ratio is comprised of 500 large companies from the S&P 500 Index.
I dabble with SPY in my play money “crazy Ivan” account because it supports my buy-write strategy. I buy 100 shares of SPY and then write (sell) a covered call option. SPY has a very robust and liquid options market around it. This tends to keep the spreads low.
Another convenient feature of SPY is that it was constructed to be priced at about one tenth of the S&P 500 Index. Simply put if the index is at 888 then SPY would cost about $88.80 per share.
So far the CIA has been weathering the market storm pretty well. It closed Friday at $20,427. It is currently comprised of BCS, SPY, and cash.
As an aside: Wow what a ride on BCS. I rode it down to $3.07 and back up to Friday’s close of $18.64. That’s a 6x run up and a six-bagger as Peter Lynch might say for those smart or lucky enough to have bought at the $3.07 low.
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