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.
These are my top picks for innovations that most benefit personal investors.
#6: Decimal pricing. Do you remember when stocks were priced in fractions? Like 23 and 3/8? This was not cool. Not only was it clunky, but it meant that bid/ask spreads were usually stuck at 1/8 of a dollar per share, or 12.5 cents per share. Luckily, today most investments are priced in decimals. Some exceptions include bonds and the interest rates on most mortgages. How archaic!
#5: Free online investment info. Information used to largely come in paper form, and cost money. Or you could pay tons of money for Quotron… really not practical.
#4: Discount online brokers. My Dad used to pay $50-$100 per stock trade — over the phone with a broker. Today some of my ETF trades are free, many of my trades average about $1, and my most expensive trades cost $8.
#3: Exchange-Traded Funds (ETFs). ETFs fix most of the problems with mutual funds such as high(er) expenses and lack of intra-day trading. ETFs also open up a wide variety of investment options including access to commodities, leveraged funds, and precious metals.
#2: Index investing. Index investing brings two huge advantages. First, incredibly low costs. Second, maximum diversification. Index investing has, and continues to revolutionize the investing playing field.
#1: 401(k)s (and IRAs). Named after a once-obscure IRS code, 401(k)s, or 401Ks, offer investors decades of tax-deferred growth opportunity. IRAs offer a similar advantage. Finally Roth IRAs offer similar tax-deferral opportunities where the tax benefit is back-loaded.
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.
Walking to the Rockies game yesterday, I was struck by the bustling entrepreneurial spirit on display. From the myriad pop-up game-day parking lots (ranging from $25 – $40 per spot), to the ticket sellers (“I buy tickets”, means “I sell tickets”), to the independent street vendors outside the ballpark marketing peanuts and beverages for half the in-ballpark price.
I have been an entrepreneur in training for most of my life. For much of that time I didn’t associate the term entrepreneur with what I was doing, nor would I have been able to spell it. Yet there were several entrepreneurial things I did even before graduating from high school.
- Ran a paper-route (at age 12)
- Door-to-door newspaper sales. To get more revenue and “signing bonuses”
- Picked up odd jobs to make a few bucks. Jobs like fence painting, baby sitting & lawn mowing
- Traded collectible cards… for fun and for profit
- Built a “sluice-box” and panned for gold
In college I did even more. I was trading and auctioning collectible cards via Usenet and the Web… in addition to trading face-to-face. I found that trading up (trading several lower-value cards for one or two high-value cards) was my most lucrative strategy for making money. I had to give up my personal collector’s mindset; to be willing to break up my collections when good deals became available. I learned to put together targeted, marketable, ready-to-use (turnkey) sets in order persuade folks to part with one of their rare, sought-after cards. As I got more market savvy, I learned to trade high convenience for high value. This helped hone my fledgling negotiation skills.
I built up a reputation as a trustworthy vendor/trader who represented the quality of my cards honestly, who mailed them promptly, and packaged them carefully so they arrived in good condition. I was doing this before anyone ever heard of eBay.
In college, I developed a software product called Visual Math 3D. Looking through my notes, the proposed company structure was:
EngimaSoft, a division of Paradigm Software, a branch of Millennium Corp.
No shortage of boldness there! I see now that others have grabbed most of these names. Good for them, they are good names.
Visual Math 3D had a logo and marketing pitch for the cover of the box. Unfortunately, I had too much school work (and school play) to bring the software to market. Had I been more business-savvy at the time I would have brought in one or two partners to help market the product. Who knows… it could have grown into a competitor of Mathematica, AutoCAD, or Excel — it had aspects of all three.
I continue to be an entrepreneur in training. I’ve learned a few things.
- Business cards: I have business cards now!
- Smile, listen, and mingle.
- Listen to feedback.
- Keep your sales pitch short, then converse like a real human being, not a sales droid.
- Market both yourself and your company/venture. Online and offline.
- Market to people who are actually interested. Don’t waste time selling ice to Eskimos.
- Advertising. A necessary evil. Yes, you will likely have to part with some capital to grab the right people’s attention in a positive way.
- Branding. Logos, tag lines, style. Done right branding creates a sense of professionalism, familiarity, and trust.
Financially my most successful ventures have not been lofty, swing-for-the-fences efforts. Balhiser LLC’s rental property has earned over $10,000 and prospects remain good. The Sigma1 proprietary-trading group is currently up $2700, but markets are fickle. My card trading activities netted about $1200 over 4 years. My paper route earned about $1100 over 1.5 years.
Except for the rental property business, all my business ventures have been self financed and operated on shoe-string budgets. They have also been part-time, night and weekend activities. I have a full-time career in engineering, and while my employer hasn’t given me the golden handcuffs yet, I do wear a nice silver pair. Thus entrepreneurship will continue to be a part-time activity
My entrepreneurial successes have been modest, yet I am undaunted (at least most of the time). Today I am a minor league entrepreneur. I believe that within the next ten years I am likely to make it to the majors, because I have good ideas, tenacity, and passion. Luckily I know several successful entrepreneurs, and I listen to and learn from them. They encourage and inspire me when I need a little emotional support.
Entrepreneurship is not for everyone. It is difficult, if not impossible, to teach in a classroom; entrepreneurship must be experienced. It can be fraught with setbacks and dead ends. Passion can turn lead to burnout and frustration. Yet entrepreneurship can be exhilarating, stimulating, empowering, fulfilling and fun.
Entrepreneurs continue to drive the US economy. The best, most concise, most creative ideas come from entrepreneurs . Entrepreneurs also deliver mundane, but necessary goods and services ranging from car washes, to restaurants, street-side baseball snacks, and rental properties.
The entrepreneurial spirit is alive and well in the US. Recessions wipe out jobs, and some of the unemployed try out an entrepreneurial path. While many fail, some succeed. Some that succeed thrive, and build the businesses of tomorrow. These people create not only jobs for themselves, they create jobs for others. They drive innovation and keep America competitive.
I am not expert on entrepreneurship, but I am an entrepreneur. I work with other entrepreneurs and admire their spirit. While Washington pays lip-service to entrepreneurs, it seems to be ignoring the obstacles it puts into place, impeding entrepreneurs:
- Self-employment taxes. Small business pays Social Security and Medicare twice on every dollar earned. Even on the very first dollar.
- Employment and payroll rules and regulations. The red tape is one reason I hesitate to hire any employees.
- Regulations. The only reason my hedge fund is not open to the public (at least to select accredited investors) is the mountain of regulatory requirements.
Even against daunting odds and government red tape, entrepreneurs find a way. There are many who let red tape and taxes cause them either not enter the entrepreneurial game or quit it out of frustration. This is a shame, and a loss for the US economy. There are those who give up one entrepreneurial path (their first) choice, to pursue an alternate entrepreneurial path. This, too is a loss, but perhaps not a severe. Finally, there are some small businesses that simply stop growing… not from lack of opportunity, but to avoid the deep, sticky, red tape of employment law.
Right now I’m the category of entrepreneurs who are forgoing (for now) my first venture: the Sigma1 Hedge Fund, and pursuing my secondary venture — financial blogging. I have a couple accredited investors willing to invest with me, but I have told them for now to put that on hold.
It’s not that financial blogging is not enjoyable, it’s simply far more difficult to make reasonable profits from a finance blog. Given a choice, I’d rather make $250,000/year from blogging than managing a hedge fund. It’s much more likely that managing a hedge fund has a greater chance of making that kind of money. That, dear readers, is why blogging is my second choice for a business undertaking.
Entrepreneurs, I’d love to hear your stories. How you succeeded, how you failed, what you learned? Has government (federal, state, local) red tape gotten in your way? Have you found ways to succeed in spite of all that?
40 years old is still several years off for me, but I it is very likely I will be a millionaire by the time I reach 40. In fact, if you count my contributions to Social Security (including my employer’s half), the current value invested in my personal “Social Security Trust Fund” puts me there already. But I’m certainly not counting on Social Security.
So, I’ll be rich right? Wrong! First there’s inflation. Many economists say US inflation has been about 4% per year over the last century. There’s a handy rule of 72 that says, for example, 72/4 = 18. That means 4% inflation means that a million dollars today is only worth $500,000 in 18 years and $250,000 in 36 years.
Second, there’s taxes. Over $300,000 of my holdings are in tax-deferred accounts such as 401k accounts and IRA accounts. Sure this money is part of my net worth, but when it comes out at retirement I’ll likely be paying something like 30% tax on it. That’s about $90,000 to Uncle Sam. Poof! Gone!
Back to inflation. Inflation works like a stealth tax. According to government CPI figures, US inflation increased just 1.5% in 2010. That simply doesn’t jive with my experience. My HOA fees increased 7%, my electric and water bill increased 8%. Car insurance, home insurance, satellite TV, health-insurance premiums, internet, rooms at my favorite hotel, and meals at my favorite restaurant went up, by 4-10% last year. Even the local sales tax increased almost 1%, making everything that much more expensive on top of everything else. In Balhiser World 2010 inflation was about 4-5%, rather than the 1.5% according to the CPI. Thus I have some new ideas about what CPI stands for…
- Cagey Price Index (Price? What price? Prices are relative.)
- Calming Price Index (Nothing to see here. Relax. Inflation is under control.)
- Clairvoyant Price Index (Far away someone is substituting chuck steak for Filet Mignon. Meat is meat. And prices are low.)
- Creative Price Index (2+2=3 for sufficiently small values of 2)
- Cowardly Price Index (Please don’t be mad, prices aren’t that bad… see?)
Of course CPI officially stands for Consumer Price Index. Let just say that for the next 72 years the official CPI is 4%, but actually inflation is 5%. That handy rule of 72 says that at 4%, one million dollars today will be worth $62,500 of buying power. At 5% buying power is cut in half to $31, 250. Of a long enough time a 1 percent difference in inflation is a big deal.
So what? Well, the CPI is used for a lot of things such as government cost of living adjustments, tax bracket adjustments, Social Security benefit increases, and money paid on Treasury Inflation-Protected Securities, to name a few.
It’s bed time so I’ll cut to the chase.
- One million dollars is not what it used to be, and is certain to be worth much less in the future.
- To try to remain solvent (and avoid unpopular austerity measures) the US Government has a powerful incentive to under-report inflation.
- Many investors and economists are beginning to believe that the CPI significantly under-reports inflation. Examples: “CPI Controversy”, “Bill Gross says so”, “Forbes, pastries, and gold say so too”.
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.
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.
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.
With only a few weeks remaining in 2010, now is a great time to make any tax-planning adjustments.
Step 1 is determining your general current capital gains and gross income situation. Do you have carry-forward tax losses? What are your current 2010 realized net short-term and long-term capital gains? What are your unrealized capital gains? What is your 2010 “ordinary income” situation looking like?
Answering these questions gives you a starting point for year-end tax planning.
For example, if you have big long-term capital gains because you sold a bunch of company stock to make a down-payment on a vacation property, you make ask yourself, “is paying 15% tax on these gains a good deal, or do I want to try to offset them with a few capital losses?”
Or, you may ask the inverse question… “I have a bunch of unrealized long-term capital gains; Should I sell now and realize them for the ‘bargain price’ of 15% tax?”
Some of these financial questions are tough to answer. That is why I pay my CPA $80/hour to help me answer them. [This is a bargain price; my previous CPA was $150/hour. Finding a good one for $80/hour was a godsend!] If your struggling to answer them, I’d encourage you to set up an appointment with your CPA, or if you don’t have one a local CPA. Bring your best answers or guesses, and you might be surprised how much they can enlighten you in one short hour.
A little year-end tax planning could save you $500, $1000, possibly several thousand dollars. If you have to pay $80, $100, or even $250, for this I’d say its money well spent.
Simply put, the House will go to a Republican majority. The Senate is likely to maintain in Democratic hands, though by a small margin (say 51/49, with independents caucusing Democratic).
Meanwhile, there will be a lame-duck House and Senate sessions. The biggest item this Congress will face is expiring tax cuts. There are two ways this can go. 1) A compromise is reached before year-end where cuts under a certain number (say $400,000) are retained. 2) No compromised is reached and the tax cuts sunset. Forced to bet, I’d predict option #2 happens. If this occurs, this sets up an interesting 2011 where the President’s veto pen and the Senate are the checks against a strong Republican push to retain the Bush tax cuts.
In 2011 the status of income taxes, inheritance taxes, dividend taxes, and capital gains taxes is up for vote. The strong Republican shift in the House will put more attention on these issues in 2011. The minority status of Republicans in the Senate will make it challenging for Republicans to put significant changes on President Obama’s desk. The biggest wildcard will be how President Obama will deal with this dramatically changed legislature.
In summary, I predict that the next 2 years will be marked by gridlock on many fronts. I predict that the Bush personal income taxes will be retained for those with incomes $200-250K or less… I’ll hazard that even up to cuts for this with incomes up to $500K will be retained. The fate of dividend tax cuts it less certain. I suspect that the 15% rate will be retained for those with incomes up to $500K. I suspect that capital gain rates will lapse to the higher pre-Bush levels. These are my best guesses.
The beta computation saga continues. I came up with a modified version of the example beta computation method from:
I incorporated a couple modifications (specific to Excel 2010):
- Install the “Analysis Toolpak” Add-in:
- File->Options->Add-ins->”Go…”->”Analysis Toolpak”
- Data->”Data Analysis”->Regression
- You will have the option of “R Square”. You will have a couple coefficients, the first (top) is alpha, the second (bottom) is beta.
The “Babson Method” is equally effective. Take your pick. Beta and “R square” together are more useful than beta alone. Remember that a low R-square (say <0.5) means that (historic) beta is not particularly useful for explaining the movement of the stock or asset in question. Moreover either method also supplies a (historic) alpha… a measure of that assets excess return versus the benchmark.
Like any backward-looking analysis, historic alpha, beta, and R-square provide ways to look a that asset’s past. One hopes that they provide some measure of an asset’s future… this may or may not prove to be the case.
I still see a minor factor that makes either method slightly imperfect…. the lack of accounting for total return. The basic method don’t account for (re-invested) dividends. However this is fairly easily remedied by factoring in dividend payments into the asset returns. It is likely that there are other refinements to be found.
Previously I started blogging about the very different approaches my parents took with respect to money and investing. In this blog post I continue that discussion with a story of how I became even more passionate about investing.
My parents divorced not long after I started attending college. Because of the way divorce law works, my Mom received the majority (perhaps two-thirds) of the family assets plus a fairly significant monthly alimony payment. Over the next ten years Dad rebuilt his financial life, benefiting from the remarkable 90′s bull market and intelligent investing. Over that same period, Mom’s financial fortunes floundered. I witnessed both financial journeys as a powerless spectator.
The sad irony is that Dad, the savvy investor, was willing to listen to my investing ideas, whereas Mom stubbornly refused almost all of my investing advice. I saw Mom make one bad investing decision after another. She put the house on the market but could not sell it because her asking price was about $100K too high. She loaned money to business partners without a written contract… money that was never paid back. Most upsetting to me: She let her investment adviser, Sam W., manage her IRA, losing money with highly under-diversified utilities stocks and funds in the midst of this tremendous bull market. The contempt and disappointment I feel towards Sam still lingers with me to this day. That Mom blindly trusted this man, who likely had little interest in her well-being, and shunned her son’s financial advise left me with stunned disbelief.
I was interested in investing from the time I learned about compound interest at around the age of 9. I was fascinated by the math of computing compound interest monthly, daily, hourly, continuously. I was intrigued by the concept of companies, shareholders, stock exchanges, and business. But it was in watching and living the real-world consequences of my parent’s good and bad investing actions, that my lifelong passion for investing was forged.
These experiences are probably why I am so driven to help people avoid making big financial blunders. I’ve seen and felt the effects of load funds and self-serving financial advisers. I’ve seen the impact of poor diversification. I’ve seen the tears of losing a home, losing a business… due to poor financial choices.
I’m often looking for ways and words to become more persuasive. I’m looking for ways to help people build interest and confidence in shaping their own financial destinies. I’m working to develop tools to simply and explain the financial world. I’m working to create this financial education blog which will someday become part of a personal finance book.
Finance is my passion. This passion is often hard for people to understand. Perhaps this blog article will help people understand. Probably some of my readers share a passion for personal finance and investing. If you have a similar passion, I hope you will consider sharing your financial stories that shaped your financial lifestyle.