Investment Journal

On Investing

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Investing has changed significantly during the 25 or so years that I have been following both the market and also the tools available for an investor to participate within the market.  The following trends are key:

  • The cost of trading and investing has declined significantly.  Trades used to cost more than $25 and now are essentially free in many cases.  Mutual funds used to have “loads” of 5% or more standard when you made an investment, meaning that $100 invested only went to work for you as $95.  These sorts of up-front costs have almost totally been eliminated
  • ETFs have (mostly) replaced mutual funds.   ETFs “trade like stocks”, meaning that you can buy and sell anytime (mutual funds traded once a day, after being priced with that day’s activity) and they don’t have income tax gains and losses unless you actually make a trade (mutual funds often had gains due to changes in the portfolio that you had to pay taxes on even if you were just holding the fund)
  • CDs and Government Debt are all electronic.  You used to have to go to a bank for various governmental bond products or to buy a CD.  Now you not only can buy all of this online, you can choose from myriad banks instantly rather than settle for whatever your main bank (Chase, Wells Fargo, etc…) offers up to you
  • Interest Rates are Near Zero.  One of the key concepts in investing is “compound interest”, where interest is re-invested and even small, continuous investments held for a long time can end up amounting to large sums (in nominal terms, because inflation often eats away at “real” returns).  However, with interest rates basically near zero, you need to earn dividend income or take on more risk (i.e. “junk bonds”) in order to receive any sort of interest income.  There is no “safe” way to earn income any more

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The Liquidation of Markets

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Every weekend I read Barry Ritholtz’s recommended reading and there are a lot of gems in there. Recently he posted this Credit Suisse graphic about markets at the turn of the 20th Century by market share and compared it with 2014 on the topic of global equity investing.

US_stocks

In his article he mentioned the fallacy one might fall into as a UK equity investor in 1899… why bother investing in the USA when the UK market is so much larger? And then this line of thought ends up missing the huge growth in US market share over the next century.

However, the real issue here isn’t the relative change in market share by the different countries; it is the fact that almost all of these markets were entirely extinguished at one time or another by political, economic or military events that wiped out the investors.

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Investing Related Items

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Over at Trust Funds for Kids I’ve been updating the portfolios and researching relevant topics for detailed analysis.

One interesting item to me is ADR’s or American Depository Receipts, which represent foreign stocks trading in US markets. “Sponsored” ADR’s trade on NYSE and NASDAQ and “unsponsored” ones trade on the OTC or “pink sheet” markets. Recently one of my stocks (Siemens) went from a sponsored to non-sponsored ADR status and I started researching it here.

I also researched the impact of currency moves on a portfolio, focusing on the Australian dollar vs. the US dollar and its effect on a particular Australian Bank Westpac. It is interesting to view the two elements in an intertwined fashion, since the US dollar was a poor performer over the last 5 years relative to many other currencies.

Finally I look a bit at performance over the last year and marvel about how easy it is to assess performance these days with free graphing and overlay tools, compared to the manual effort in past years’. It still is difficult to always properly factor in dividends and the timing of cash flows (investments), but that’s a different story.

Cross posted at LITGM

America 2.0 Looks To Be Worth Around Twenty Five Cents on the Dollar

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A while back I dissected the debt of Detroit, the classic America 2.0 case. By this, I mean a gigantic government presence, working with manufacturing and unions to push off obligations into the future with no clear plan of really what to do. In the end, of course, it all came crumbling down and yesterday we got a slight glimpse into just how bad it can get.

To review, here is the diagram I had to make after reading several sources on the subject, to help wrap my head around the calamity that was the city of Detroit’s books:

This looks crude, and it is, but it really helped me get my brain around the nightmare.

From everything I have been reading, Kevyn Orr is getting ready to propose that the general obligation and pensions get settled out at .25 on the dollar. That sounds a bit expensive to me, and as Lex Green said to me in an email certainly isn’t “fire sale” prices yet, but that is what the consensus seems to be saying.

In an odd bit of news, many private foundations have been trying to gather enough money to offset an auction of Detroit’s art collection, estimated by some to be worth up to a billion dollars. If I were Orr, that would have been the first thing I would have done is liquidate that stuff, but I am quite a bit less sensitive than I would need to be to ever consider a career being a politician.

All of this is subject to the whims of the BK judge, but if I were a retired Detroit fireman, I would certainly begin tightening the belt stat, if that wasn’t done already.

This may affect municipal investments, but honestly I imagine any fallout from it is already baked into the pie.

Is Chicago next? We shall soon see.

From a political standpoint, the Republilcans should make the Democrats own this just like they should own Zerocare ™ and the nightmare in Illinois/Chicago that is coming down the tracks. How easy can it get for a Republican? All they have to say is “look at that” and they should get easily elected in any of a number of districts in 2014.

(Disclosure – I have many different municipal investment vehicles in my portfolio).

Cross posted at LITGM.