Big brokerage firms are starting to clue in that people are overwhelmed by the amount of paperwork and disclosures they have to deal with. Firms trying to make correspondence in "better English" are Bank of America, Morgan Stanley, Wachovia and Smith Barney (Citigroup). Excerpt from the WSJ below:
Wall Street Aims to Simplify
Disclosures for Clients
By JAIME LEVY PESSIN
October 31, 2006; Page D2
NEW YORK -- New Morgan Stanley customers will no longer have to read through 14 documents -- amounting to 136 pages -- to get their accounts running. Soon, their financial advisers will hand them a single, 48-page document.
Streamlining efforts like Morgan Stanley's are under way at several Wall Street firms, an acknowledgment that firms -- while satisfying a legal obligation to disclose information -- aren't necessarily informing or educating their customers.
The brokerage industry has an obligation to make multiple disclosures to their clients. Product prospectuses, possible conflicts of interest and the distinctions between fee-based brokerage and advisory accounts, among other things, must be disclosed at various stages of brokerage and advisory relationships.
Bill Lutz, a professor emeritus at Rutgers University who consults regulators and financial firms on incorporating plain language into disclosures, said he has seen companies lose clients because investors were exasperated by the lack of clarity.
Not only do more-understandable disclosures make for better customer service, he said, they reduce firms' liability in cases where customers claim they don't understand what they have signed.
"People have successfully argued, 'We just didn't understand what you were telling us,' " Mr. Lutz said.
Tuesday, October 31, 2006
Saturday, October 28, 2006
Hacking of online brokerage accounts starts to grow
According to a report in Moneywatch.com there has been a recent increase in the hacking of online brokerage accounts. The article points out the risk of using public computers to access your accounts. We are talking about any computer that you do not have control over. This includes a computer at a hotel, library or Internet Cafe. Hackers can load keystoke logging software onto these computers and capture your username and password.
Foul Fish Report
I subscribe to a couple of financial news mailing list. Everyday my inbox gets filled with the day’s happenings in the world of finance. Unfortunately I am too busy to read these stories everyday and I end up dragging the emails to a “save for later” folder. Today I thought it would be interesting to go through my “save for later” folder of financial news and dig out all the negative stories. I call this inaugural list of wrong doings, “The Foul Fish Report”, in keeping with the Pennyjar little fish vs. BIG fish theme.Sept. 13 HP CEO Patricia Dunn resigns.
Her efforts to catch boardroom leakers last year led the Palo Alto, Calif., company to hire a contractor that scrutinized the private phone records of H-P's own directors and nine journalists.
Sept. 22 Dead guy gets stock
Cablevision Systems Corp. awarded options to a vice chairman after his 1999 death but backdated them, making it appear the grant was awarded when he still was alive
Sept. 27 Health insurance premiums rise 7.7%
The WSJ reports The average family premium rose 7.7% in 2006. That compared with a 3.8% rise in wages and inflation of around 3.5%.
Oct. 4 Intel investigation.
WSJ reports European Union investigators believe they have enough evidence to pursue formal antitrust charges against Intel Corp., a critical step in their five-year probe of the computer-chip maker, according to two people with knowledge of the case.
Oct. 4 Down on Dunn
HP Chairperson Patricia Dunn was named in felony complaints in California Wednesday along with four others related to a mole hunt undertaken at Hewlett-Packard while she was chairwoman of the computer maker
Oct. 4 401(k) fees too high
St. Louis attorney sued seven big employers-- Bechtel Group, Caterpillar, Exelon, General Dynamics, International Paper, Northrop Grumman and United Technologies--for allegedly allowing their employees' 401(k) plans to be hit with too-high fees, in violation of the Employee Retirement Income Security Act (ERISA).
Oct. 10 Tip of the Iceberg
The Department of Justice has begun an inquiry into potentially anticompetitive behavior among some of the world's leading private-equity funds (WSJ)
Oct. 15 Hey you caught me!
United Health CEO William McGuire plans to retire in the wake of a probe of the company's past stock-options grants. At the end of last year, Dr. McGuire's cache of unexercised options was valued at $1.78 billion. “Hey let me steal $1.78 billion and I would take the punishment of having to retire.” The beat goes on and on with this story. Here is latest list of 120 companies under scrutiny for past stock-option grants
Oct. 20 No bonuses for Costco execs
President and Chief Executive Jim Sinegal and Chief Financial Officer Richard Galanti won't receive bonuses this year.
Oct. 24 Guilty
David Kreinberg pleaded guilty to securities-fraud charges in federal court in New York. The former finance chief of Comverse Technology is the first person to plead guilty in the stock-options backdating scandal.
Oct. 24 Yikes! What happened to FORD?
Ford Motor Co.'s $5.8 billion third-quarter preliminary net loss
Oct. 26 Mutual-fund kickbacks
The SEC has launched a probe of 27 mutual-fund companies that the agency says have accepted kickbacks totaling hundreds of millions of dollars.
Oct. 26 Slick OIL.
Exxon's profit rose to $10.49 billion in the third quarter, the second-highest quarterly profit ever for a publicly traded U.S. company.
Friday, October 27, 2006
WSJ Piece on Latest Mutual Fund Investigation
SEC Probes Mutual-Fund Firms
After Settlement in Kickback Case
By TOM LAURICELLA
October 26, 2006; Page A1
The Securities and Exchange Commission has launched an investigation of 27 mutual-fund companies that the agency says have accepted kickbacks totaling hundreds of millions of dollars in recent years.
The investigation centers on alleged arrangements in which independent contractors agreed to pay rebates to mutual-fund companies in order to win lucrative contracts for jobs like producing shareholder reports and prospectuses. The probe stems from a $21.4 million settlement the SEC reached last month with Bisys Fund Services Inc., an administrative-services provider owned by Bisys Group Inc.
Regulators say Bisys, which is based in Roseland, N.J., paid a total of $230 million in kickbacks between July 1999 and June 2004 as part of an effort to win work from mutual funds. Bisys settled the civil charges without admitting or denying wrongdoing.
While the alleged kickbacks would have taken only a tiny toll on individual investors, perhaps shaving a few hundredths of a percent a year off their fund accounts and returns, the latest investigation comes as the fund industry is struggling to rebuild its reputation after a series of trading scandals that triggered regulatory crackdowns and fines totaling more than $1 billion.
Critics have long complained about fund companies using shareholder money for their own benefit. For example, funds are allowed to use trading commissions, which are deducted from shareholder funds, to pay for research that may not benefit individual fund investors. They can also levy fees on their investors for marketing, although attracting more investors benefits the fund company and not necessarily its existing shareholders. Both these practices are highly regulated to prevent abuses. Nonetheless, regulators and other observers say the latest scandal is part of a distressing pattern of fund companies misusing shareholder money.
"This is far worse conduct" than previous fund-trading scandals, said Mercer Bullard, a law professor at the University of Mississippi who specializes in mutual-fund matters. "Receiving a kickback that comes indirectly out of the pockets of shareholders is the functional equivalent of embezzlement."
In part based on information from Bisys, the SEC has sent letters to some of the 27 fund companies asking them to provide details about their ties to Bisys, according to people familiar with the probe. They didn't identify any of the companies. However, the investigation is unlikely to include many of the very largest fund companies, which tend to have in-house units that handle administrative functions.
Most of Bisys's clients were bank-run funds, many of which tended to be smaller firms with several billion of dollars under management. A handful of banks, however, do rank among the larger fund managers.
The SEC says the alleged kickbacks involving Bisys and other service providers worked with the help of secret side agreements. The service providers charged shareholder accounts for administrative services but, unbeknownst to the funds' investors or independent board members, the providers agreed to rebate part of that money to fund advisers, who would then use it to cover their marketing expenses. In exchange for the kickbacks, the advisers would recommend to their funds' boards that the service providers' contracts be renewed.
At issue in the probe is whether fund companies misused their investors' money and misled their boards about why they were hiring certain service providers, according to people familiar with the probe. "These matters raise questions about whether there was a breach of duty to shareholders," said Philip Khinda, an attorney who represents a number of fund boards that have been investigating their funds' arrangements with Bisys.
In its complaint against Bisys, the SEC described the actions of one fund company, which it referred to as "Adviser A," that allegedly demanded millions of dollars in kickbacks in return for recommending that Bisys's contract be renewed. Another 26 fund families had similar deals -- some written, and some only oral -- with the firm, the SEC said.
The agency didn't identify any of the fund companies in the complaint but, according to people familiar with the investigation, "Adviser A" is AmSouth Funds, which was then a unit of AmSouth Bancorp of Birmingham, Ala.
AmSouth Bancorp declined to comment on whether or not it is the company referred to as "Adviser A," but it said it is cooperating with the SEC.
In 2005, after the alleged arrangement with Bisys had ended, the AmSouth Funds, which then totaled $5.5 billion in assets, were sold to Pioneer Investments. A spokesman for Pioneer declined to comment.
The SEC's Bisys complaint says a senior executive at "Adviser A" told Bisys in 1999 that if it didn't agree to a kickback arrangement, one of its competitors would. Indeed, the SEC alleged in its complaint that "other administrators" besides Bisys cut such deals.
Bisys's main competitor is SEI Investments Co. A spokesman for SEI, which is based in Oaks, Pa., said that as a matter of policy the company wouldn't comment on whether it had received inquiries from the SEC nor on whether it had similar rebate agreements with fund companies.
Bisys accepted the deal with "Adviser A," and over the next five years, funds totaling $17.3 million were deducted from shareholder accounts at the fund company, according to the SEC. The money was used by "Adviser A" mainly to cover marketing costs that would normally come out of its own pocket. The adviser also used some of the money to pay the initiation fee and monthly dues at a country club, the SEC's complaint says.
In the arrangement with "Adviser A," Bisys would be paid 0.20% of fund's assets, the SEC said. However, Bisys kept only roughly one-quarter of that amount. About one-third was paid to "Adviser A" in an above-board contract, the SEC says, while the remainder was kicked back to the adviser through a "marketing budget."
In its settlement with the SEC, Bisys agreed to terminate such agreements and change its policies. It disciplined or fired a number of employees.
Last summer, AmSouth gave its own version of its dealings with Bisys. At the time, it disclosed that the SEC had informed the bank it intended to bring civil charges against it related to the service provider. It said that the probe related to "past arrangements under which Bisys used a portion of the fees paid to it by the fund family to pay for marketing and other expenses."
The mutual-fund industry has been dogged by scandals in recent years. In 2003, it came under fire after revelations that a number of big companies let favored clients conduct short-term trading, earning profits at the expense of ordinary shareholders. The following year, regulators cracked down on fund companies that used stock-trading commissions, which are deducted from shareholder accounts, to pay for marketing activities the companies would otherwise have had to cover themselves.
After Settlement in Kickback Case
By TOM LAURICELLA
October 26, 2006; Page A1
The Securities and Exchange Commission has launched an investigation of 27 mutual-fund companies that the agency says have accepted kickbacks totaling hundreds of millions of dollars in recent years.
The investigation centers on alleged arrangements in which independent contractors agreed to pay rebates to mutual-fund companies in order to win lucrative contracts for jobs like producing shareholder reports and prospectuses. The probe stems from a $21.4 million settlement the SEC reached last month with Bisys Fund Services Inc., an administrative-services provider owned by Bisys Group Inc.
Regulators say Bisys, which is based in Roseland, N.J., paid a total of $230 million in kickbacks between July 1999 and June 2004 as part of an effort to win work from mutual funds. Bisys settled the civil charges without admitting or denying wrongdoing.
While the alleged kickbacks would have taken only a tiny toll on individual investors, perhaps shaving a few hundredths of a percent a year off their fund accounts and returns, the latest investigation comes as the fund industry is struggling to rebuild its reputation after a series of trading scandals that triggered regulatory crackdowns and fines totaling more than $1 billion.
Critics have long complained about fund companies using shareholder money for their own benefit. For example, funds are allowed to use trading commissions, which are deducted from shareholder funds, to pay for research that may not benefit individual fund investors. They can also levy fees on their investors for marketing, although attracting more investors benefits the fund company and not necessarily its existing shareholders. Both these practices are highly regulated to prevent abuses. Nonetheless, regulators and other observers say the latest scandal is part of a distressing pattern of fund companies misusing shareholder money.
"This is far worse conduct" than previous fund-trading scandals, said Mercer Bullard, a law professor at the University of Mississippi who specializes in mutual-fund matters. "Receiving a kickback that comes indirectly out of the pockets of shareholders is the functional equivalent of embezzlement."
In part based on information from Bisys, the SEC has sent letters to some of the 27 fund companies asking them to provide details about their ties to Bisys, according to people familiar with the probe. They didn't identify any of the companies. However, the investigation is unlikely to include many of the very largest fund companies, which tend to have in-house units that handle administrative functions.
Most of Bisys's clients were bank-run funds, many of which tended to be smaller firms with several billion of dollars under management. A handful of banks, however, do rank among the larger fund managers.
The SEC says the alleged kickbacks involving Bisys and other service providers worked with the help of secret side agreements. The service providers charged shareholder accounts for administrative services but, unbeknownst to the funds' investors or independent board members, the providers agreed to rebate part of that money to fund advisers, who would then use it to cover their marketing expenses. In exchange for the kickbacks, the advisers would recommend to their funds' boards that the service providers' contracts be renewed.
At issue in the probe is whether fund companies misused their investors' money and misled their boards about why they were hiring certain service providers, according to people familiar with the probe. "These matters raise questions about whether there was a breach of duty to shareholders," said Philip Khinda, an attorney who represents a number of fund boards that have been investigating their funds' arrangements with Bisys.
In its complaint against Bisys, the SEC described the actions of one fund company, which it referred to as "Adviser A," that allegedly demanded millions of dollars in kickbacks in return for recommending that Bisys's contract be renewed. Another 26 fund families had similar deals -- some written, and some only oral -- with the firm, the SEC said.
The agency didn't identify any of the fund companies in the complaint but, according to people familiar with the investigation, "Adviser A" is AmSouth Funds, which was then a unit of AmSouth Bancorp of Birmingham, Ala.
AmSouth Bancorp declined to comment on whether or not it is the company referred to as "Adviser A," but it said it is cooperating with the SEC.
In 2005, after the alleged arrangement with Bisys had ended, the AmSouth Funds, which then totaled $5.5 billion in assets, were sold to Pioneer Investments. A spokesman for Pioneer declined to comment.
The SEC's Bisys complaint says a senior executive at "Adviser A" told Bisys in 1999 that if it didn't agree to a kickback arrangement, one of its competitors would. Indeed, the SEC alleged in its complaint that "other administrators" besides Bisys cut such deals.
Bisys's main competitor is SEI Investments Co. A spokesman for SEI, which is based in Oaks, Pa., said that as a matter of policy the company wouldn't comment on whether it had received inquiries from the SEC nor on whether it had similar rebate agreements with fund companies.
Bisys accepted the deal with "Adviser A," and over the next five years, funds totaling $17.3 million were deducted from shareholder accounts at the fund company, according to the SEC. The money was used by "Adviser A" mainly to cover marketing costs that would normally come out of its own pocket. The adviser also used some of the money to pay the initiation fee and monthly dues at a country club, the SEC's complaint says.
In the arrangement with "Adviser A," Bisys would be paid 0.20% of fund's assets, the SEC said. However, Bisys kept only roughly one-quarter of that amount. About one-third was paid to "Adviser A" in an above-board contract, the SEC says, while the remainder was kicked back to the adviser through a "marketing budget."
In its settlement with the SEC, Bisys agreed to terminate such agreements and change its policies. It disciplined or fired a number of employees.
Last summer, AmSouth gave its own version of its dealings with Bisys. At the time, it disclosed that the SEC had informed the bank it intended to bring civil charges against it related to the service provider. It said that the probe related to "past arrangements under which Bisys used a portion of the fees paid to it by the fund family to pay for marketing and other expenses."
The mutual-fund industry has been dogged by scandals in recent years. In 2003, it came under fire after revelations that a number of big companies let favored clients conduct short-term trading, earning profits at the expense of ordinary shareholders. The following year, regulators cracked down on fund companies that used stock-trading commissions, which are deducted from shareholder accounts, to pay for marketing activities the companies would otherwise have had to cover themselves.
Wednesday, October 18, 2006
Brokers cost you Billions
I have been reading a study by Daniel Bergstresser and Peter Tufano, both at Harvard Business School, and the University of Oregon's John Chalmers.
The reports compares the performance of mutual funds bought through a broker compared to funds bought directly. The conclusion is that, through brokers, "consumers pay extra distribution fees to buy funds with non-distribution expenses. The funds they buy under perform those in the direct channel, even before deductions of any distribution related expenses."
Statistics don't lie. The statistics say that, by using a broker, you are
1. paying higher sales fees
2. to buy funds with higher management fees
3. that get crappy returns.
The crappy returns cost investors approximately $9 billion per year, and that is not including distribution expenses.
Why is this happening?
I go to the section 9, titled "Do Brokers Merely Sell what they are Paid to Sell?
Here, the authors refer to the obvious hypothesis that "brokers may give priority to their self-interest or to the interests of the management companies whose funds they sell."
The statistical evidence indicates that higher fees paid to brokers result in higher sales for the mutual fund paying the fee. According to the report, "These results suggest that sales incentives are more effective in the broker channel, consistent with the old saw that funds are sold, not bought - and that paying a salesforce on a higher piece-rate scale may induce additional sales"
Ultimately, all the fees and commissions come from the investors. Your money.
Do you know what you are paying in fees?
Do you know how much of your money your broker is getting?
The reports compares the performance of mutual funds bought through a broker compared to funds bought directly. The conclusion is that, through brokers, "consumers pay extra distribution fees to buy funds with non-distribution expenses. The funds they buy under perform those in the direct channel, even before deductions of any distribution related expenses."
Statistics don't lie. The statistics say that, by using a broker, you are
1. paying higher sales fees
2. to buy funds with higher management fees
3. that get crappy returns.
The crappy returns cost investors approximately $9 billion per year, and that is not including distribution expenses.
Why is this happening?
I go to the section 9, titled "Do Brokers Merely Sell what they are Paid to Sell?
Here, the authors refer to the obvious hypothesis that "brokers may give priority to their self-interest or to the interests of the management companies whose funds they sell."
The statistical evidence indicates that higher fees paid to brokers result in higher sales for the mutual fund paying the fee. According to the report, "These results suggest that sales incentives are more effective in the broker channel, consistent with the old saw that funds are sold, not bought - and that paying a salesforce on a higher piece-rate scale may induce additional sales"
Ultimately, all the fees and commissions come from the investors. Your money.
Do you know what you are paying in fees?
Do you know how much of your money your broker is getting?
Coming Up Short
Mutual-fund investors' real results are often surprisingly poor.
• Over the past 10 years, owners of diversified U.S. stock funds collected 7.3% a year, less than their funds' 8.8% published return.
• In 19 stock markets, investors underperformed a buy-and-hold strategy by 1.5 percentage points a year since 1973.
• Over seven years, broker-sold stock funds lagged behind directly sold funds by half a percentage point a year after expenses.
Sources: Morningstar Inc.; academic studies
• Over the past 10 years, owners of diversified U.S. stock funds collected 7.3% a year, less than their funds' 8.8% published return.
• In 19 stock markets, investors underperformed a buy-and-hold strategy by 1.5 percentage points a year since 1973.
• Over seven years, broker-sold stock funds lagged behind directly sold funds by half a percentage point a year after expenses.
Sources: Morningstar Inc.; academic studies
Tuesday, October 17, 2006
130/30
So what is the 130/30 strategy?
Let's start at the beginning. The "Alpha".
I am not referring to the first letter of the alphabet or the biggest gorilla in the troupe. In finance, alpha has a different meaning.
It is a measure of how well an investment, usually a mutual fund, performs in comparison to the overall market. In an oversimplified example, if the whole market goes up 10% and your specific investment goes up 10%, then the alpha of that investement would be zero.
Things get a little more complicated because Alpha also considers the relative risk of whatever stocks are being bought. If a fund manager invests in stocks that are very stable (i.e. prices don't fluctuate too much), the alpha is calculated differently than if the fund manager invests in very volatile stocks.
Conventional wisdom states:
Stable stocks are safer - volatile stocks are riskier.
Therefore, if one invests in risky stocks, the potential profits should be higher. Alpha takes that into consideration. A mutual fund specializing in nanotechnology start ups would have to deliver much higher profits than a collection of blue chip mega-corporations to get the same "alpha" ranking.
So, getting back to 130/30. The goal is to increase the alpha while maintaining low volatility. It works like this:
Let's assume $100 investment.
1. Buy $100 of large cap stocks
2. Sell short $30 of the stocks in your portfolio
3. Take the proceeds of the short sale and buy more large cap stocks.
Confusing? Just a bit. Selling short is like betting that a share price will go down. How this is achieved can be complex and possibly another post on the blog. These days, shorting often involves trading of options and derivatives. The important thing to know is that the more a stock falls, the more profit the investor makes.
The tacit assumption is that the managers of the 130/30 fund are good at picking winner and loser stocks. Ultimately, that is going to determine performance.
The cool thing is that this strategy limits losses when markets turn downward. This is how risk is reduced, without sacrificing performance. It could limit profits in a crazy bull market. But in the long race, it is often profitable to bet on the tortoise, not the hare.
Let's start at the beginning. The "Alpha".
I am not referring to the first letter of the alphabet or the biggest gorilla in the troupe. In finance, alpha has a different meaning.
It is a measure of how well an investment, usually a mutual fund, performs in comparison to the overall market. In an oversimplified example, if the whole market goes up 10% and your specific investment goes up 10%, then the alpha of that investement would be zero.
Things get a little more complicated because Alpha also considers the relative risk of whatever stocks are being bought. If a fund manager invests in stocks that are very stable (i.e. prices don't fluctuate too much), the alpha is calculated differently than if the fund manager invests in very volatile stocks.
Conventional wisdom states:
Stable stocks are safer - volatile stocks are riskier.
Therefore, if one invests in risky stocks, the potential profits should be higher. Alpha takes that into consideration. A mutual fund specializing in nanotechnology start ups would have to deliver much higher profits than a collection of blue chip mega-corporations to get the same "alpha" ranking.
So, getting back to 130/30. The goal is to increase the alpha while maintaining low volatility. It works like this:
Let's assume $100 investment.
1. Buy $100 of large cap stocks
2. Sell short $30 of the stocks in your portfolio
3. Take the proceeds of the short sale and buy more large cap stocks.
Confusing? Just a bit. Selling short is like betting that a share price will go down. How this is achieved can be complex and possibly another post on the blog. These days, shorting often involves trading of options and derivatives. The important thing to know is that the more a stock falls, the more profit the investor makes.
The tacit assumption is that the managers of the 130/30 fund are good at picking winner and loser stocks. Ultimately, that is going to determine performance.
The cool thing is that this strategy limits losses when markets turn downward. This is how risk is reduced, without sacrificing performance. It could limit profits in a crazy bull market. But in the long race, it is often profitable to bet on the tortoise, not the hare.
Monday, October 16, 2006
Hedging Stocks
Many millions of ordinary people have, over the past 25 years, been steadily bombarded with the voices of conventional wisdom telling them over and over how stocks outperform every other form of investment. They have collectively entrusted their individual retirement accounts to the markets.
Alternately, they have entrusted their public retirement benefits, namely social security and medicare, to the government. The government has mismanaged these programs and now finds itself with trillions of dollars of unfunded liabilities, going forward. (i.e. the system is headed for bankruptcy)
Hmm. Stock market and government. Who should we trust less?
I would contend that people can, really and truly, only depend upon THEMSELVES. To trust politicians and Wall Street sharks to take care of your money has got to be the height of mass gullibility. Ordinary people learning to take care of their own financial lives is why we started Pennyjar. It's not as complicated as the "experts" would have you believe; and it can be fun, with the right approach.
But I digress.
It is quite true that one can become very wealthy through owning stocks, but for the majority of us, it simply has not come true. So many ordinary people lost money in the dot.com bust. So many ordinary people have watched their mutual fund based retirement portfolios wallow in mediocrity since the bull market ended in 2000.
So who is really making money with stock?
In very basic terms, there is a class system in play in this country.
The working class has basically nothing. They are living paycheck to paycheck and are prisoners of debt. They are depending on social security and medicare to take care of them after they finish working. There are some uncertain times ahead for this group of 50 million or so unfortunate Americans. Fact of the matter is that they may not be able to retire and will probably have to keep working to make ends meet, until they cannot.
The middle class has invested trillions of dollars in mutual funds, most of them invested in a basket of US stocks. When stocks go up, they win. When stocks go down, they lose. Very simple game. Of course, the brokers, investment advisors, mutual funds, corporate executives and tax man all win, no matter what. All the risk of loss is in the hands of the individual holding the stocks (i.e.: YOU).
The rich are a very different story. The rich, that is to say, people with a liquid net worth of more than a $ million, are able to be designated as “Accredited Investors” and can invest their money in “private equity funds”, often better known as hedge funds. They, like the middle class, buy stocks with the anticipation that they will go up in value. Unlike the middle class, however, rich investors also may have a percentage of their investments configured so that if stock prices drop, they also make money. This is known as hedging and is where name “hedge funds” originated.
So what can you do if, like most ordinary people, you don’t have over a million dollars available for investing? To begin with, it is possible to do some hedging of your own.
There are some relatively new products available. Some in particular caught my eye recently. They are newer mutual funds utilizing a 130/30 strategy. It is a strategy that hedges against stocks going down and is available for ordinary people. The managers of these funds "short" 30% of theirs stocks. I will post more on 130/30 strategy later.
There are also some relatively new ETFs (exchange traded funds) that are engineered to move inversely with the market. That is to say, if the market drops, the ETF goes up. If the market goes up, the ETF goes down.
Using hedging as a strategy is most certainly not good for everyone. But it is an option, and it is utilized by a lot of very rich people, so there must be something in it.
Alternately, they have entrusted their public retirement benefits, namely social security and medicare, to the government. The government has mismanaged these programs and now finds itself with trillions of dollars of unfunded liabilities, going forward. (i.e. the system is headed for bankruptcy)
Hmm. Stock market and government. Who should we trust less?
I would contend that people can, really and truly, only depend upon THEMSELVES. To trust politicians and Wall Street sharks to take care of your money has got to be the height of mass gullibility. Ordinary people learning to take care of their own financial lives is why we started Pennyjar. It's not as complicated as the "experts" would have you believe; and it can be fun, with the right approach.
But I digress.
It is quite true that one can become very wealthy through owning stocks, but for the majority of us, it simply has not come true. So many ordinary people lost money in the dot.com bust. So many ordinary people have watched their mutual fund based retirement portfolios wallow in mediocrity since the bull market ended in 2000.
So who is really making money with stock?
In very basic terms, there is a class system in play in this country.
The working class has basically nothing. They are living paycheck to paycheck and are prisoners of debt. They are depending on social security and medicare to take care of them after they finish working. There are some uncertain times ahead for this group of 50 million or so unfortunate Americans. Fact of the matter is that they may not be able to retire and will probably have to keep working to make ends meet, until they cannot.
The middle class has invested trillions of dollars in mutual funds, most of them invested in a basket of US stocks. When stocks go up, they win. When stocks go down, they lose. Very simple game. Of course, the brokers, investment advisors, mutual funds, corporate executives and tax man all win, no matter what. All the risk of loss is in the hands of the individual holding the stocks (i.e.: YOU).
The rich are a very different story. The rich, that is to say, people with a liquid net worth of more than a $ million, are able to be designated as “Accredited Investors” and can invest their money in “private equity funds”, often better known as hedge funds. They, like the middle class, buy stocks with the anticipation that they will go up in value. Unlike the middle class, however, rich investors also may have a percentage of their investments configured so that if stock prices drop, they also make money. This is known as hedging and is where name “hedge funds” originated.
So what can you do if, like most ordinary people, you don’t have over a million dollars available for investing? To begin with, it is possible to do some hedging of your own.
There are some relatively new products available. Some in particular caught my eye recently. They are newer mutual funds utilizing a 130/30 strategy. It is a strategy that hedges against stocks going down and is available for ordinary people. The managers of these funds "short" 30% of theirs stocks. I will post more on 130/30 strategy later.
There are also some relatively new ETFs (exchange traded funds) that are engineered to move inversely with the market. That is to say, if the market drops, the ETF goes up. If the market goes up, the ETF goes down.
Using hedging as a strategy is most certainly not good for everyone. But it is an option, and it is utilized by a lot of very rich people, so there must be something in it.
Sunday, October 15, 2006
San Mateo County: Renters beware!
Developers are not building new rental units in San Mateo county and many landlords are converting their apartment buildings to for-sale units. Why? The high cost of building in San Mateo county. When developers build condos they can sell them and see an immediate return on their investment. Rental properties can take years to break-even. Full story can be found at condo construction outpacing rentals. The end result will be an acute shortage of rental units. This means that rents will go up. According to the housing Leadership Council of San Mateo County the median price for a 2-BR apartment is $1,536 while the median mortgage on a condo is $3,239 ($550,00 & 30yr mortgage). I have been counting on the spread between owning[$3,239] and renting[$1,553] to remain the same or even increase. I belive in the housing bubble logic presented on Patrick.net. I want the spread to remain the same or increase because this means I get more value for my rental dollar and I get to stash money away for a down payment on a home. My stashed money gets invested in things like ETF and stocks. So we all know that housing cost are sky high and this article leads me to believe the median rent will increase beyond $1,553. According to The Housing Council of San Mateo County, 27 percent of households are living beyond their means (PDF) and renters need a salary of $61,440 to afford the average rent on a two bedroom aparment. We are all getting squeezed. Home owners living on the edge will fall off as ARMS ratchet upward and renters will be hard pressed to find a decent place for their families. Frankly it is too late for those who bought homes with the idea of flipping the home in a year or two. The slowing appreciation rate has singled the end of this game. However RENTERS now is your time to optimize your budgets, invest wisely and wait on the sidelines for the decline in Bay Area housing prices.
Friday, October 13, 2006
Market Madness
The Dow has pushed past previous "records" to hit new all time highs. Don't be fooled by these numbers. They do not reflect reality.
Never mind that the previous record was in January 2000 dollars. Inflation eaten up 15% (or more, unless you actually believe the government inflation numbers).
Never mind that the US dollar is worth 30% less in the world now than in 2000.
The fact of the matter is that the market index is reported in "nominal" dollars. It doesn't take into account the lower purchasing power of dollars today as compared to seven years ago.
If you had left your money in cash from 2000 to today, you would be up almost 21%.
Even accounting for dividends paid by Dow companies, this investment is barely break even for 7 years.
Since many ordinary investors buy the Dow through mutual funds, they are getting additional fees removed from their holdings, year after year after year. Over the 7 years, mutual fund fees of 1.5% would have removed another 10% from your nest egg.
Never mind that the previous record was in January 2000 dollars. Inflation eaten up 15% (or more, unless you actually believe the government inflation numbers).
Never mind that the US dollar is worth 30% less in the world now than in 2000.
The fact of the matter is that the market index is reported in "nominal" dollars. It doesn't take into account the lower purchasing power of dollars today as compared to seven years ago.
If you had left your money in cash from 2000 to today, you would be up almost 21%.
Even accounting for dividends paid by Dow companies, this investment is barely break even for 7 years.
Since many ordinary investors buy the Dow through mutual funds, they are getting additional fees removed from their holdings, year after year after year. Over the 7 years, mutual fund fees of 1.5% would have removed another 10% from your nest egg.
Thursday, October 12, 2006
You are responsible for your retirement, not your company
There was a time in American when it was not usually to work your entire life for one company and then retire with the security of knowing that every month a company retirement check would show up in your mailbox. As I am sure you realize those days are long gone. Outsourcing, mergers and overseas competition have changed the landscape of the America workforce. I work in IT and recent studies have shown that on average folks change companies every five years in IT.
Gone too are the days were a company would provide a pension plan to its employees. With a company pension plan every employee knew exactly how much money they would have when they retired. The companies funded the pension plan and the employee was not responsible for making any investment choices. The company took care of it all. When you retired you would get a retirement check for the REST OF YOUR LIFE.
Can you image the dismay felt by thousands United Airline workers when their company declared bankruptcy and was allowed by the courts to default on billions of dollars of employee retirement money? This is just one of several recent examples where company funded pensions have failed. The mantra of this posting is “you are responsible for your retirement”.
Most companies have shifted from company funded pension plans to 401(k) retirement plans. With these plans employees put a portion of their earning into tax-deferred investments. Sometimes a company will match a portion of the dollars the employee contributes. The two big differences between a traditional company funded pension plan and a 401(k) are:
- You are not guaranteed a retirement check for the rest of your life.
- The company provides a selection of investment choices and it is up to the employee to research and understand the investment choices.
You are responsible for your retirement, not the company. You, not the company, need to make sure you are not living in a run down apartment and eating canned food when you are 70 years old.
You need to save and invest for your retirement NOW. Time is your enemy. Now is the time to start taking responsible and learning about your 401(k) investment choices. Now is the time to start putting money aside each month to make investments. You need to make your money work for you now or you have no chance of enjoying the 20 or more years you expect to live when you retire.
As the first step I urge, beg and implore you to watch the PBS Frontline documentary entitled Can you afford to retire?. You can veiw the show for free online. The instructions state that you need Microsoft media player or Real Player. I cound not play the show using Media Play, but was able to using Real Player. If you do not have the time or bandwidth to watch the show online you can visit your local library and see if they have a copy.
The picture in this posting is meant to be distrubing I want you to seriously think about where you will be 10 years after you retire. Example: my rent is $1,000/month and my food bill is about $500/month. So food and housing is $1,500/month for me.
I want to live and have fun for at least ten years after I retire. How much do I need? $1,500 X 12 = $18,000 per year
10 years = $180,000
Now this is very basic and actually $180,000 won't even come close to being enough money to live on for ten years. The key is learn about investing and start making your money grow now. This is the only way to increase your chance of having the retirement you have dreamed of. Now go watch the video. Check back in at Pennyjar and let's learn together how to invest wisely.
Monday, October 09, 2006
Why Pay Commissions
Trade stocks for free.
Today, zecco.com debuted commission free stock trading.
$2,500 minimum balance
40 stock trades per month
Zecco makes money through advertising on the site, interest on cash balances and margin accounts and charges for some other things like options trading.
Zecco is a kind of stylized mesh of the words: Zero Commission Online
Today, zecco.com debuted commission free stock trading.
$2,500 minimum balance
40 stock trades per month
Zecco makes money through advertising on the site, interest on cash balances and margin accounts and charges for some other things like options trading.
Zecco is a kind of stylized mesh of the words: Zero Commission Online
Thursday, October 05, 2006
Direct stock purchase programs
Do you want to invest in the stock market but feel you do not have enough money to even join the game? It can be costly just to poney up the money to join a discount broker like Charles Schwab or Etrade. Charles Schwab requires a minium of $2,500 to open an account and Etrade requires $1,000. On top of that they charge you about $13.00 everytime you want to buy or sell a stock. Hardly a winning combination for a tight budget. However all is not loss (pun) there is a way for the little fish to get in on the action. For as little as $50 a month you can buy shares of blue chip companies. The secret is buying the stock directly from the company using a company's direct stock purchase program or DRIP (dividend reinvestment program). Not all companies provide these programs, but a signifcant number of well-known and well-run business do. A sample list of companies that sell stocks direct to the public are
O.K. now I have shown you a real life example of how you can join the big fish and own stocks for as little as $25/month. Believe it or not that is the easy part. My question to you is "So is (NYSE:BUD) a good stock to purchase? Is this stock right for your investment portfolio?" Yes that's right now that you can join the game you need to learn to play the game. Stay tune to PennyJar in the weeks to come I as we take a closer look at our bud-light friend and see if it is the kinda stock we think will make us some money
- McDonald (nyse: MCD)
- Walt Disney Co. (nyse: DIS)
- Intel (nasdaq: INTC)
- CVS (nyse: CVS)
O.K. now I have shown you a real life example of how you can join the big fish and own stocks for as little as $25/month. Believe it or not that is the easy part. My question to you is "So is (NYSE:BUD) a good stock to purchase? Is this stock right for your investment portfolio?" Yes that's right now that you can join the game you need to learn to play the game. Stay tune to PennyJar in the weeks to come I as we take a closer look at our bud-light friend and see if it is the kinda stock we think will make us some money
Stock Picking
At pennyjar we are always scouring the cyberworld for interesting and useful tools for the small stockpicker. Here are a couple of newer ones that have come up on our radar. Have fun.
Wednesday, October 04, 2006
Discretionary Income : choose your path
Let’s start of by defining discretionary income. It is a big word but a pretty basic concept. Discretionary income is defined as the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of.
This basically means taking care of your needs before you worry about your wants. Now we have all been in situations where we have had to choose between what we need and what we want. For instance you need to pay your mortgage or rent but you want to take a vacation. You cannot have both and as grown ups we understand that we need to pay the rent and delay the vacation. Part of growing up is learning how to delay gratification and developing a sense of self-worth. How well we develop these two behaviors goes along way toward satisfying our basic needs and clarifying our wants from life.
The choices we make with our money are inexplicably tied to our behavior. Noted psychiatrist Dr. William Glasser developed “Rational Choice Theory”. Rational Choice theory postulates that people calculate the likely costs and benefits of any action before deciding what to do. The benefits of taking a vacation do not exceed the cost of losing a place to live. Like Maslow’s hierarchy of needs, Rational Choice theory believes humans are driven by the basic need for survival and the psychological needs of belonging, power, freedom and fun. So discretionary income is the money we have after we have taken care of our basic needs and is used to satisfy our psychological needs of belonging, power, freedom and fun. So once we have some "extra" money our goal should be learning how to effectively utilize discretionary income toward a better life. How does one effectively utilize discretionary income toward a better life? The first step is to understand the choices you have with discretionary income. To illustrate this I have created a road map named the Money Quadrant. Its purpose is to show the four basic paths you can choose with your deiscretionary income.
- Shopping
- Saving
- Gambling
- Investing
With wealth you will more often do things because you want to not because you have to.
Sunday, October 01, 2006
ETF vs.Traditional Mutual Funds
ETF stands for Exchange-traded fund. ETFs are index mutual funds that can be bought and sold like stocks. Unlike mutual funds whose price are set once a day at 4 pm, ETFs are priced the same way stocks are priced with prices fluctuating throughout the day based the laws of supply and demand. EFTs have many of the features of stocks. You can set market limit and stop-loss orders. You can buy them on margin and sell them short. This not to say you should do these things. The same logic that governs why you should not buy on margin with stocks applies to ETFs. The main advatange of ETFs over traditional mutual funds is cost. Generally ETFs have lower expense ratios than mutual funds.
ETFs advantages over Mutual funds.
**Data is as of 10/31/2005 from 2006 Morningstart ETFs 100
The downside to ETFs is that because they are traded liked stocks they are subject to transaction fees. The advantage that ETFs have in lower expense ratios can be negated by active trading of ETFs. Because of this it is often recommended that ETFs be bought in bulk rather building up a position by continually buying shares. Also some ETFs are narrowly focused and as such become volatile for example the iShares MSCI Netherlands Index NYSE:EWN mirrors the Dutch stocket martket index (MSCI). It is has a YTD return of 19.49% contrast this with Internet HOLDRs (HHH) at -(25.37%) YTD.
As for me I recently sold some poor performing stocks (held less than a year) and bought an ETF that tracks GOLD. I believe that the USD is going to continue to lose value against other currencies. This is a discussion for another time. If you are looking for a cost efficient alternative to mutual funds now is the time to consider buying an ETF. For starters compare iShares S&P 500 to mutual funds that track the S&P 500.
ETFs advantages over Mutual funds.
- Lower expense ratios
- Price set throughout the day. Thereby eliminating the possibility of illegally timed trading.
- Tax advantages from low turnover
Types of ETF | Average Expense Ratio % |
| U.S. Equity ETF | 0.39 |
| International ETF | 0.68 |
| Fixed Income ETF | 0.17 |
| Traditional Actively Managed U.S. Equity Fund | 1.48 |
| Traditional Actively managed International Equity Fund | 1.75 |
| Traditional International Index Fund | 0.84 |
| Traditional Actively Managed Taxable Fixed income fund | 1.13 |
| Traditional Index Taxable Fixed Income Fund | 0.49 |
The downside to ETFs is that because they are traded liked stocks they are subject to transaction fees. The advantage that ETFs have in lower expense ratios can be negated by active trading of ETFs. Because of this it is often recommended that ETFs be bought in bulk rather building up a position by continually buying shares. Also some ETFs are narrowly focused and as such become volatile for example the iShares MSCI Netherlands Index NYSE:EWN mirrors the Dutch stocket martket index (MSCI). It is has a YTD return of 19.49% contrast this with Internet HOLDRs (HHH) at -(25.37%) YTD.
As for me I recently sold some poor performing stocks (held less than a year) and bought an ETF that tracks GOLD. I believe that the USD is going to continue to lose value against other currencies. This is a discussion for another time. If you are looking for a cost efficient alternative to mutual funds now is the time to consider buying an ETF. For starters compare iShares S&P 500 to mutual funds that track the S&P 500.
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