Armchair Fiduciary

Leverage = The Enemy

noreply@blogger.com (Unknown) — Sun, 18 Jan 2009 01:37:00 +0000

This whole financial crisis is the result of only one problem really. Too much leverage in the system. People borrowed money on the assumption it would always be available and they could delay paying it back indefinitely. That is never true. My advice to the extent you can follow it is to reduce leverage as quickly as possible over your lifetime. Pay down your house if you can. Pay down those student loans. Never carry a balance on your credit card. Don't have a car loan. Only buy what you can afford. I have always followed these rules, but I must admit on the house I did wonder if I was doing the right thing by paying down as much as I could (not fully there yet). The government does incentivize me to NOT do that by making the interest tax deductible. But, it is still the right thing to do. Even now, when you can borrow as cheap as ever and house prices are no longer absurd, I would still advise paying it down. The piece of mind of owning your home is worth it (or at least I hope it is) and once you have paid it off you can build wealth with a safety net under you.

Responsible Homeowers: Your Bailout Has Arrived

noreply@blogger.com (Unknown) — Sat, 10 Jan 2009 03:17:00 +0000

Mortgage rates have never been so low (5% 30 Yr. Fixed or Better). If you are one of the millions of responsible Americans with good credit scores who are able to pay their mortgages and still have jobs, your bailout has finally arrived in the form of record low mortgage rates. If you are paying anything over 5.75% and plan to stay in your house for several years it is definitely time to refinance with a fixed rate mortgage to lock in these cheap rates. Check out Bankrate.com to find someone offering a low rate in your state. You can also use their refinance calculator to determine if refinancing is a good deal for you.

CostCo Convert!

noreply@blogger.com (Unknown) — Sun, 04 Jan 2009 03:08:00 +0000

After a very serious hiatus, the Armchair Fiduciary is back in the saddle. I have been kept quite busy by these crazy markets and more importantly a beautiful little girl who had colic (over now, thank goodness!). Let me just say if you have the miracle cure for colic you can be a gazillionaire because the shell shocked parents of babies with colic would buy with reckless abandon. Anyway, while I was away I "discovered" Costco. We had previously been Sam's Club shoppers, but Costco after inspection is far better. I love their gas... its super cheap (I haven't found cheaper around me) and it seems they have it with their stores more consistently than Sam's. Also, they sent us about $1000 worth of coupons of which my wife found more than $50 we will definitely use. That alone pays for our membership. By the way, if you review their financials you will find that their profit basically adds up to their membership fees which means they really charge the bare minimum they can get away with on their merchandise. If they didn't charge a memberhship fee they would lose money, isn't that nuts? Bottom-line, I really think there is no better deal than Costco and I've been converted.

Update from the Sleepless Armchair Fiduciary

noreply@blogger.com (Unknown) — Tue, 19 Aug 2008 17:34:00 +0000

Well, my wife had our baby on August 15th. I have to say being a dad is the coolest thing in the world. Of course, it comes with its fair share of challenges too (like six hours of crying last night). In any case, I will probably continue to be rather preoccupied with the new baby and staying awake at work as opposed to the blog. Rest assured that I will return with more posts as things settle down and I learn relevant personal finance lessons. In the meantime I have received a number of request to review 401k options after people read the Generic Guide to Investing a 401k. I am happy to help in any way I can, keep the questions coming...

Update from the recently absent Armchair Fiduciary

noreply@blogger.com (Unknown) — Wed, 23 Jul 2008 01:36:00 +0000

Sorry folks, but I have been quite busy preparing for the arrival of our new bundle of joy and generally settling in to our new house. These crazy markets have also kept the new job busy. In any case, it is already clear to me that the arrival of our daughter will limit the frequency of my posting. I have shared a lot of what I have to share in the last year or so, so from now on it will likely just be incremental stuff. In other news, our house in Denver closes tomorrow. We managed to get it under contract in a mere 7 days and after quite a wrangling period over the inspection (I mean who really expects a 1906 house to be like new construction? Seriously!). Ulitmately, we are selling for about 5% less than our asking price. We bought the place in 2003 and did a ton of work to it. All in we will make a modest profit despite selling in the worst housing downturn in years. It is also a good time to have some extra cash flowing in so I can average down on my recent purchase of mutual funds which is under-water for now. I intend to wait for the next major sell-off in the market before putting some money to work as I beleive this rally will not last for more than a month or two. I think there will be a chance to average in at the lows again in the fall.

Getting More Fully Invested

noreply@blogger.com (Unknown) — Mon, 16 Jun 2008 01:19:00 +0000

Remember that cash I kept on the sidelines when I bought some mutual funds a few weeks ago? Well, I was able to put some of it to work last week then the market followed Lehman into the toilet mid-week. I bought more of both JARFX and MINDX. At this point I am fairly fully invested (at least until I sell my house). I just think cash and bond yields are too low given the completely obvious presence of inflation if you have filled up your car or gone to the grocery store lately. I would rather own almost entirely stocks at this point in time. I also believe that the U.S. market has at least begun to discount the recession we are about to experience. Stocks usually start to bounce before the economic data does. The election of Barrack Obama will probably not be well recieved by the market (I think he is likely to win) and could set us up for another more leg down in fall. Nonetheless, I think he will surround himself with smart people and will avoid being a "tax and spend" liberal, but ought to rather be a "tax and balance the budget" liberal. Furthermore, I think the fed funds rate at 2% ought to stimulate the economy by early 2009. Overall, while it may not be a straight line up, with a long-term view I think now is a good time to own stocks as they are one of the few ways to fight off inflation's devastating effects on your wealth.

When Facebook Doesn't Cut It: The Case for Attending Reunions

noreply@blogger.com (Unknown) — Mon, 09 Jun 2008 02:50:00 +0000

Facebook is a great tool for staying in touch with old friends. With its help I have learned when my friends got married, changed jobs, moved, had a baby, or just got a little too drunk last weekend. However, there is no substitute for hearing the story about those drunken escapades from the horses mouth or meeting someone's new spouse. For some things the difference between Facebook and seeing someone in person is akin to the difference between playing Guitar Hero and actually playing the guitar. I for one can annihilate Slash in Guitar Hero, but on the real guitar the only thing getting annihilated would be my audience's ears.

In any case, I decided Facebook wasn't cutting it for me and went to my five year college reunion this weekend. I ended up being absolutely stunned at the efficiency of the event. I saw my four roommates who live in Michigan, Ontario, New York, and Washington D.C. One of my friends was in from Shanghai. I saw friends that I hadn't seen or spoken to since graduation and I even got to spend time talking with some people that I didn't know that well when I was in school. From a financial perspective (how else would I think about it?) the experience of my college reunion was extremely cost efficient. The whole weekend ended up costing me about $1,000 including a flight and lodging. It would have cost many multiples of that to see all those people in any other setting. More importantly I reconnected with lots of people that I care deeply about and had a great time doing it. The next time you get an invite to a high school or college reunion, I highly recommend going. Once you get there you will be very glad you did (and your wallet will be too because the alternative is quite costly).

The best last minute travel deals on the planet? Lastminute.com

noreply@blogger.com (Unknown) — Mon, 09 Jun 2008 02:48:00 +0000

So if you didn't notice from the lack of an Armchair post, I needed to take an unexpected trip last weekend for family reasons. While this type of trip is not ideal, lastminute.com kept it reasonable for me from a financial perspective. I got a plane ticket and a car rental for several days for around $400. The process was easy and the trip came off without a hitch once I booked it.

Lastminute.com is probably not for everyone -- it does have some drawbacks. The tickets are non-refundable and non-changeable. The "packages" which include car rentals or hotels tend to be better deals than one item alone. The inventory is limited. For instance I wanted to fly into one particular city and by the time I decided to book the ticket (after about 20 minutes of deliberations) the original flight itinerary was no longer available. Instead I had to fly to another city about 45 minutes away from my ideal destination. It was a minor inconvenience, but in the grand scheme of things it was worth it to pay $400 for what otherwise might have cost me $1500.

Do you know any other websites that offer great last minute deals (or deals generally)? If so, be sure to share them in the comments.

Book Review: The 4-Hour Workweek

noreply@blogger.com (Unknown) — Wed, 28 May 2008 01:35:00 +0000

During my five hours of "mechanical delays" on United Airlines this weekend, I read "4-Hour Workweek" by Timothy Ferriss. While I would view some of the book's suggestions as a little impractical, in a way Tim's ability to think outside the box and dream outrageously is what makes the book an inspiration. Despite thinking there is no way I could do some of what this guy suggests, I did find myself thinking about a lot of other things that I could do beyond what he suggested. The four key principles I took from the book were as follows:

1) Dream big-- its ok! Chase those dreams.
2) Retirement is not a dream.
3) When you aren't on track to fulfill your dreams, change direction. This can be scary, but often the costs are way less than you think.
4) Global arbitrage isn't just for corporations. You can benefit by outsourcing some of your work or at least capturing the arbitrage on vacation in low cost geographies (too bad the dollar has weakend so much since he first published the book in early 2007).

At the end of the day I'd say this book was a good read. It will force you to evaluate your life and determine whether or not you are living by the golden rule of happiness: "Do what you enjoy."

Making Some Bets

noreply@blogger.com (Unknown) — Wed, 14 May 2008 01:56:00 +0000

Well, I decided to make some bets today. I am putting new capital to work in several mutual funds including: RRPIX, MINDX, EUROX, and JARFX.

This will leave my current allocation of funds not invested at my employer as follows:
FNMIX - 3.9%
MAKOX - 11.4%
MINDX - 12.2%
EUROX - 12.2%
RRPIX - 19.6%
JARFX - 20.3%
CASH - 20.4%

The rational for the new buys is as follows:

RRPIX -- this is a 125% inverse of the 30 yr. treasury bond fund. I think inflation will tick up here over the next year or so to between 4-6% and expectations that the fed will raise rates will increase. People will sell 30 yr. treasuries as a result.

MINDX -- I like India long-term. The 20% sell-off this year represents a good opportunity to start investing in that view.

EUROX -- I also like Eastern Europe long-term. Russia still cheap given the move in oil. This fund has big bets in Russia for now. I hope the managers will allocate to other Eastern European countries as Russia gets more expensive.

JARFX -- I like this divesified international fund. Driven by a team of stock pickers, this fund keeps sector weightings that match the index. It has consistently generated alpha since its launch in 2005.

CASH -- I am keeping plenty of ammo in case there is another flight to quality (as I think there likely will be) so I can add to all of these purchases.

In case you are wondering why I buy mutual funds and not individual securities (since I pick equities professionally for a living) the reason is simple: The trading restrictions at many investment firms are very stringent (including mine). If I have a good individual idea I am obligated to put it in my fund for investors. Because I don't pull the trigger on any of the individual mutual fund holdings (the fund's manager does), I am allowed to trade the funds freely under our compliance policy. I do generally eat a fair amount of my own cooking (i.e. allocate the majority of my liquid capital to the fund I work at) because I think it aligns my incentives with our investors'.

Is the Inflation Beast Coming to the U.S.?

noreply@blogger.com (Unknown) — Mon, 12 May 2008 01:01:00 +0000

I think there is a high likelihood that inflation is coming to the U.S. in a bigger way over the rest of 2008. So far there is little evidence of serious inflation. Indeed for the first 3 mos. of 2008 the CPI ticked up at only a 3.1% annual rate. After a 4.1% increase in 2007 this doesn't appear to be too alarming. But, here is why I think inflation may tick higher. First, the Fed just injected a bunch of liquidity into the economy (by drastically cutting interest rates) and that tends to drive inflation. Second, with oil at $125 I think we should see that creep into the cost of many goods. Finally, with the dollar weakening and many of our goods coming from outside the U.S. I would expect many finished goods consumers buy to creep up in price. Goods from China in particular where the government is letting the Yuan strengthen should become significantly more expensive in dollar terms over the next few years.

There is not a lot you can do about inflation. You can hope that your wages will increase at the same rate as the goods you buy, but my guess is they won't. The only thing I can really suggest is that you save a little more than usual. Why? Because as things get more expensive you may need to tap into that savings to buy goods that are still quite affordable now. Furthermore, if inflation does rear its head then the Fed is likely to raise rates to put the breaks on it. If the economy is not healthy by then it may slow further as a result of higher interest rates. If that happens there may be higher unemployment and if you are one of the unfortunate ones to experience downsizing you will need that extra savings. Something I am thinking of doing (I still haven't pulled the trigger yet) is buying an inverse long bond fund that will hopefully benefit if inflation takes off. I have a hard time believing investors will accept 1% or lower real yields on long-term treasury bonds for too long . For those of you wondering
"real yield" means the yield after taking into account inflation -- for instance the "nominal" yield on the 10 year treasury note is 3.77% today, if inflation is 3.1% then the "real" yield is a paltry 0.67%. If inflation takes off, I think that bond yields will also likely rise (and the bonds themselves will fall) so the inverse long bond funds should perform quite well.

How much is YOUR free time worth?

noreply@blogger.com (Unknown) — Sun, 04 May 2008 18:31:00 +0000

I went to the full-service car wash today. This is the first time I have ever done it since there were a lot of automatic washes in Denver and then I usually would just vacuum by myself. However, here in Dallas there are very few automatic washes (it must be because they allow hose washing which Denver didn't for several years due to water restrictions). So anyway, I decided to go to the full service wash for the first time ever here in Dallas. I took both of our cars. Each car took 20 minutes and cost me $20 per car. Had I done this myself "for free" with a hose wash it would have taken me at least 3 hours. Inherently then I have decided that my free time is worth at least $40/2.33 or $17 per hour. In reality I think I paid even less for my free time because I was able to read a book (something I wanted to do) while I waited for them to wash my car. I probably saved 2.75 hours of "free time" by paying to have the cars washed at a net cost of $14.54 per hour. The whole thing got me thinking though, what is my free time worth?

This is no easy question to answer. The simple mathmatical answer is that free time is probably worth at least your annual net after tax and work-related expenses income/the number of hours per year that you work. For instance if you make $75k per year net of taxes and work 40 hours per week, then on a per hour basis your time is worth 75,000/52*40 or about $36/hour. You can use this calculator to get a more complicated answer that states your leisure time in terms of the number of hours you work to get an hour of free time and how much you are paid for those work hours. However neither of these approaches seem like a wholly satisfactory answer because for most people they really couldn't choose to work 3 more hours on a Sunday (when I had my car washed) and make an extra $108. It seems that different hours of the week should carry a different value. Likewise the marginal value of certain hours is high while for others it is low. For instance if you are sleeping four hours per night then an extra hour of sleep is probably of high value to you. But if you are sleeping nine hours per night already an extra hour of sleep is probably not worth that much to you.

However, the confusion doesn't stop there. You then have to factor in intangibles. For instance, I have been reading a lot of books about being a dad since I have a little miss Armchair on the way. One word of advice that hit home with me was the reality that when a father is on his deathbed he rarely says "I wish I had worked more," but he often might say "I wish I had spent more time with my children." So then how do I value time I will spend with my daughter knowing that it is time that I will never have the chance to spend with her ever again? What is the opportunity cost of working, washing the car, or mowing the lawn instead of participating in my daughters first word, first step, first whatever?

The bottom-line is that I need to think about all these questions and come up with my own way to value my free time. After thinking about it though the $14.54/hour I just spent on the car wash to buy some free time sure seems like a good deal!

If you have thoughts about how you value your free time please share them in the comments.

Sun Prairie Beef: Better than Whole Foods!

noreply@blogger.com (Unknown) — Fri, 25 Apr 2008 00:56:00 +0000

My wife loves organic food. The penny pincher in me really doesn't like organic food, but tasting is believing and my wife makes darn good meals with the organic food that she buys! Rather than be penny-wise pound foolish I enjoy my wife's organic habit night after night even if my pocketbook doesn't. However, with organic grass-fed beef from Sun Prairie Beef I get the best of both worlds. I get better beef than I have ever tasted anywhere and I get it at up to half Whole Foods prices.

Sun Prairie beef is a true "grassroots" organization. It's run by a father and son team out of Yuma, Colorado. In addition to producing some darn fine grassfed beef, they are also genuinely great people, the kind you want to support with your pocketbook. Most importantly though, their grassfed beef is simply the best on earth. Better yet, for the first time since they started the business in 2005 they can actually air freight beef virtually anywhere in the U.S. (Thank goodness since I am moving to Texas!). Don't take my word for it though, go to http://www.sunprairiebeef.com/ and order yourself some today. You will want a rather large freezer (or a second one) as 25 lbs. is the minimum order size. You won't be sorry you ordered and in fact you'll wonder why you didn't order 100 lbs!

How to Find a Real Estate Agent to Sell your House

noreply@blogger.com (Unknown) — Tue, 22 Apr 2008 02:56:00 +0000

We signed up a real estate agent to sell our house in Denver. We interviewed several brokers (I'd recommend that you do too) and decided on this one for several reasons:

He was confident enough that he could sell our house that he offered a reduced commission (3.0% instead of 3.2%).
Included in his commission is the cost of an appraisal, professional photos, professional staging, and cleaning of the house prior to photos.
We liked how he planned to market our house with a big focus on the Internet (which is how we looked searched for houses in Dallas).
His firm was listing several houses in our neighborhood so they clearly knew the area.

I recommend asking the following questions when interviewing a real estate broker.

How long have you been in the business?
What % of asking price do you typically sell a house for?
What is the average length of time a house listed by your agency is on the market before it sells?
How many agents does your firm have?
How many houses is the agency listing right now?
How do you plan to market my house?
What repairs/improvements do you think I need to make to my house before putting it on the market?

I'll keep you posted on how our listing and (hopefully) sale goes.

Cash Rates are Terrible and So Are U.S. Treasury Yields: Time to Buy Stocks?

noreply@blogger.com (Unknown) — Fri, 18 Apr 2008 04:29:00 +0000

Well money market rates are officially pathetic right now. According to Bank Deals 4.0% APY is about as good as you can get and most places yields are much lower. Pretty soon I bet 3.0% is the high. Going out to long term US treasuries isn't too appealing either with the 10-year yielding a pathetic 3.7%. This basically tells me that there has been a flight to quality (i.e. panic). My plan is to take a long-term view and move towards being more fully invested in some much riskier assets now that we have had a nice correction across both the credit and equity markets. I will look at lots of international equity mutual funds. I may even look at some retail and financial specific sector funds since those secotrs have both been hammered. I am also considering looking at an inverse long-term US treasury bond fund or ETF to take advantage of what I view as unsustainably low yields on US treasuries. When I finally make some moves I will be sure to let you know what I did. They will probably be gradual over the next 3-9 months. Anyone else have any thoughts on where to put capital now? Leave them in the comments.

Real Estate: A Truly Local Market

noreply@blogger.com (Unknown) — Wed, 09 Apr 2008 23:29:00 +0000

Well, I was recently reminded about how local the real estate market truly is. As part of our move my wife and I were recently looking for houses in North Dallas. I was fully expecting to see many houses on the market for a long period of time. However, the reality was that there aren't that many houses on the market in North Dallas (I houses for sale are up about 25% y/y in Dallas) and that many of the good houses were selling in two weeks or less. Towards the end of our house-hunting trip we saw a house that we liked. It had been on the market for only one day. We decided to put in an offer and I cringed as my wife basically took the contract from my hand an wrote something just below the asking price on our offer. However, she was right. That house ended up having four offers in its first day on the market. We ultimately ended up pursuing another house, but it was definitely an interesting reminder that national headlines about how slow the real estate market is don't necessarily mean that any one particular neighborhood or market are necessarily slow. I just hope our neighborhood in Denver is as healthy as the one in Dallas was...

Lots of Changes for the Armchair Fiduciary

noreply@blogger.com (Unknown) — Wed, 09 Apr 2008 00:57:00 +0000

It has been a while since my last post. There have been a lot of changes for the Armchair Fiduciary in the past few weeks. I quit my job, took a new job, and am moving from Denver to Dallas. There will obviously be plenty of posts to come about both the hunt for a new house and the sale of my existing house. Likewise chalk up a move to Dallas (where my wife's family is from) as an additional "cost of baby."

One Year Blogiversary of Armchair Fiduciary

noreply@blogger.com (Unknown) — Sun, 23 Mar 2008 20:54:00 +0000

Well, time flies when you are having fun... it has been an entire year since I started this blog!
I have made 62 posts since day one. Some of them have been big hits, others total flops. A few of you have emailed me for help with your 401k which was fun, but most of my email has been junk. I hope a few of you learned something along the way (as I have). I look forward to another year of "boldly trying to help you build a stable financial future and save money one post at a time." Below you can see some statistics about this blog in its first year.

My top 5 most visted posts have been:
Wells Fargo PMA, the best financial combo around? (344 views)
How to Invest Your 401k: A Generic Guide (328 views)
Should I Stick with Countrywide Savingslink? (328 views)
Should I Pay Down My House Early If I Can? (220 views)
Should I Loan Money to a Friend? (153 views)

My traffic has been generated from the following sites:
Google (organic) 44%
Digg (referral) 12%
Direct 12%
Blogger.com (referral) 6%
Pfblogs.org (referral) 5%

The top key words generating traffic to Armchair Fiduciary were:
Countrywide Savingslink 5% (I am the 6th link on Google)
How to invest your 401k 3% (I am the 10th link on Google)
Armchair Fiduciary 3% (I am the 1st link on Google)

I have had visitors from all 50 states and from 53 different countries in total. (Sorry non-U.S. vistors I write with a distinctly American perspective though many of the money savers still apply to you too.)

Learn Something From Bear Stearns!

noreply@blogger.com (Unknown) — Sat, 22 Mar 2008 21:17:00 +0000

Well, it was a crazy week on Wall Street this week. However, the biggest lesson of the week came on Monday when Bear Stearns was bought by JPMorgan (at the urging of the Fed) for $2 per share. Bear Stearns employees owned nearly 30% of the company's stock. While I am all for being a team player, you should keep as few assets invested in your employer as possible purely for diversification purposes. All your income depends on your employer, why would you want any more of your savings to depend on your employer than you have to according to company policy? The people at Enron learned the hard way. The people at Bear Stearns learned the hard way. It's a terrible thing that happend to all those people, but some good can come of it. If you own a bunch of your company's stock in your 401k or profit sharing plan are allowed to sell some of it and put it into something else do it. Not tomorrow. Not a week from now. Not a month from now. Diversify today! You never know what may lie ahead for your company. Bear Stearns thought they were fine just a couple of weeks ago.

The Financial Impact of Baby Series: Part I

noreply@blogger.com (Unknown) — Mon, 10 Mar 2008 03:03:00 +0000

Well there's great news in the world of Armchair Fiduciary, my wife and I have a little munchkin on the way! Of course, now that she is through the first trimester and is starting to grow a pooch, the financial impact of the baby is starting to grow as well. Even now, well before the baby is born, we have seen his or her financial impact a little.

First, I went out and got life insurance when we started trying to get pregnant. Why so early? Because if something happend to me while my wife was pregnant and I hadn't I wouldn't be able to forgive myself (then again I would be around to be forgiven). You can read all about how I thought about life insurance and the process here. The bottom-line is that it was a big hassle, but it is well worth the time and the ~$1000 annual premium to know that my wife and baby will be provided for if something happens to me.

Second, we have had numerous copays since my wife started going to the doctor. Thankfully we have great insurance so the total cost to us has been minimal. But not everyone will be so lucky. Be sure to know what your insurance will and won't cover. We had one snafu early on where the doctor sent us to a lab for bloodwork that wasn't covered by our insurance. In the end most of it was covered after the doctor changed the coding of it, but it still cost us a lot of worry and a couple hundred dollars.

Third, as my wife's pooch has grown her clothes haven't. While she is extremely frugal, we have still had several hundred dollars worth of spending for maternity clothes. This is somehting everyone should plan for. Hopefully the second time around this expense item won't cost as much if my wife keeps her maternity clothes.

Check back later for more expenses as they crop up and a future post which will include my "baby budget."

Online Eyeglasses Experiment: Part 4

noreply@blogger.com (Unknown) — Sun, 02 Mar 2008 20:00:00 +0000

Well, I finally have all my glasses. Let me just say the best service of all was my lense replacement on my old frames performed by eyeglasspeople.com. The whole transaction went seamlessly and they even called me with a couple questions about my order to make sure they had it right. I would highly recommend them. Likewise optical4less.com took a while to deliver my entirely new glasses because they came from Hong Kong, but the glasses are great. Finally, after a lot of hassle including a trip to my eye doctor to find out my glasses were made wrong 39dollarglasses.com even delivered me a pair of glasses that work. I had such a hard time I would never recommend them to anyone, but at the end of the day they delivered the product they promised, it just took way too long.

So after all this would I buy glasses or replacement lenses online again? Absolutely. The cost savings are just too great. I got 2 new pairs of glasses and a replacement lense for less than the price of my original glasses. Despite some bumps along the way, the process was relatively easy with the exception of 39dollarglasses.com. I think online eyeglasses are the way to go.

Watch out for gift card expiration and fees!

noreply@blogger.com (Unknown) — Sun, 24 Feb 2008 21:14:00 +0000

Well the holidays have come and gone. If you were a good boy or girl, chances are you got a gift card from somebody for something for Christmas, Hanukkah, or New Years. Now that the dust has settled, don't forget to use those cards instead of letting their issuers get the better of you by charging you extra fees or worse yet deeming your gift card expired.

Thankfully, the fine folks at Bankrate have you covered when it comes to gift cards. They have a pretty extensive list of gift card providers and the various "catches" associated with them. They also have a great article on the pitfalls of gift cards.

The bottom line with gift cards is pretty simple. If you have a "credit card" style gift card from Am Ex, Discover, MasterCard, or Visa hurry up and use it because it is wasting away as we speak due to the fees they are charging you. Likewise, cards from malls waste away quickly with all the fees they charge. Many retailer gift cards lack fees, but some may expire so be sure to know the fine print.

Happy shopping!

What is a hedge fund?

noreply@blogger.com (Unknown) — Mon, 18 Feb 2008 20:34:00 +0000

The conversation usually starts like this.
"Hi. I am so and so, nice to meet you Armchair. So Armchair what do you do for a living?"
"I work at a hedge fund."
Blank stare...
Then the question.
"What's a hedge fund?"

I probably give a different five minute answer every time I have to answer the question, so I figured I would put it down in writing so I can give the same consistent answer every time I get the question from now on.

What is a hedge fund?
A hedge fund is typically a limited partnership that is put together with the goal of generating investment returns. These partnerships are very loosely regulated by the government (in certain instances they must register as investment advisers and file 13Fs). They are typically run by a "general partner" who is either an individual or investment team. The general partner makes all the investment decisions, while the "limited partners" contribute their capital to a common pool and share in the gains or losses incurred by the general partner. The limited partners typically pay a fixed management fee of 1-2% of assets annually, plus an incentive fee equal to 20% of any profits that are generated.

For example if a $100 mil fund is up 20% in a year the fund will take a 2% management fee of $2 million and 20% of the $20 mil in return they generated as an incentive fee- in this case $4 million. The investors will be left with $114 mil or a 14% "net of fees" return. Many funds have a high water mark meaning investors do not pay incentive fees again until the fund recoups any losses it incurs. Management and incentive fees can vary widely among different funds.

Hedge funds are generally limited to 100 limited partners and are only available to accredited investors which are defined as individuals with $300k in annual income or $1 million net worth (excluding the value of the individuals home). Hedge funds are not allowed to advertise publicly like mutual funds which helps contribute to their aura of secrecy and mystique. Typical clients of hedge funds include: wealthy individuals, pension funds, endowments, and other hedge funds (often referred to as "funds of funds"). Hedge funds generally employ or are allowed to employ leverage (i.e. borrow money) to enhance their returns.

Hedge funds are also known for their ability to short sell. When a fund shorts a security, it sells a security that is borrowed from their broker right now. The fund hopes to close the position (referred to as covering the short) by buying that same security back at a lower price and giving it back to their broker. The firm captures the difference between the price they sold it at and the price they buy to cover at as a profit. So if a fund shorts 100 shares of CSCO at $30 and buys CSCO to cover at $25 a week later they book a $500 ($5 x 100 shares) profit. Shorting is considered risky because the potential losses can technically be infinite while the potential gains are finite.

The underlying concept of hedge funds (and the reason people invest in them) is that they are supposed to generate good investment returns with much lower volatility than traditional long-only equity funds because they can "hedge" their bets. They are also typically not supposed to be directly correlated with the individual bond or equity markets.

Strategies
A little like the many ways there are to lose money at a casino (blackjack, poker, roulette, craps, slots, etc.) there are many different strategies that hedge funds employ to generate their returns. I have listed a few of them and a layman's explanation of what they mean below:

Long/Short Equity -- These funds typically make long and short equity bets. They may be net long the market, or net short, or anywhere in between.
Short Equity -- These funds are only short equities.
Market Neutral Equity -- These funds balance long and short positions equally. Returns are generated only by a manager's skill and not by broad market movements.
Merger Arbitrage -- These funds typically try to profit from differences in pricing between acquirers and acquirees.
Convertible Arbitrage -- These funds typically try to profit from discrepancies between the price of a companies equity and its convertible debt. Usually these funds short the equity and own the convertible debt.
Fixed Income Arbitrage-- These strategies try to capture returns by taking advantage of the discrepencies in the pricing of very similar bonds.
Global Macro-- These funds basically try to profit from macro analysis. They use foreign currency, equity, bonds, swaps, etc. to express their macro view and try to profit from it.
Funds of Funds -- These funds own several different hedge funds. They are meant to diversify risk as any one individual fund or strategy might be quite risky. However, investors pay dearly for the diversification as they are often charged a double incentive fee structure (i.e. they pay incentive fees on the individual funds and the fund of funds).

Famous Funds

Quantum Fund -- Probably the most famous of them all, this was George Soros's global macro hedge fund. He put hedge funds on the map when he "broke the Bank of England."

Tiger -- Run by Julian Robertson and spawned a bunch of other famous funds including Maverick and Lone Pine.

Citadel -- Started by Ken Griffin shortly after his stint as a hedge fund manager in is Harvard dorm-room. The first major multi-strategy hedge fund.

Renaissance -- King of the Quants. Fund founded by James Simons. Known for stellar returns and eye-popping fees (5% management fee, 44% incentive fee).

Centaurus Energy -- Run by former Enron energy trader John Arnold (age 33). Took the other side of the Amaranth trade and landed on the Forbes 400.

Infamous Funds

Long-Term Capital -- Fund blew up in 1998 (lost $4.6 billion) and had so much leverage the Federal Reserve had to negotiate the bail-out with the counterparties.

Amaranth -- Energy fund that had an epic implosion in September 2006. Rumored to be down 65% on their $9 billion fund.

Sowood -- Fund that blew up $1.5 billion in July 2007; Cidatel bought their positions for pennies on the dollar.

Other Reading

New York Magazine has a great if somewhat dramatized series of articles all about hedge funds and the personalities in the business.
Barton Biggs's Hedge Hogging is a great read about hedge funds and the personalities that run them.
Steven Drobny's Inside the House of Money is a good read about some famous hedge fund managers and their strategies.

Life Insurance: It Takes Forever

noreply@blogger.com (Unknown) — Sat, 09 Feb 2008 21:41:00 +0000

For those of you considering life insurance, let me warn you that it takes forever and is quite a hassle. I went through the process last year. First you contact your life insurance broker. You send him a bunch of forms, then he gives you some quotes. One you pick which plan you want then he sends you the official forms. This whole process takes 2-3 weeks. Then you have an appointment with a paramed where they will take your blodd pressure and blood and urine samples. You can expect this to take another 2-3 weeks to get setup. The life insurance company may call you and ask you to verify your medical history orally. Finally, they will spend several weeks reviewing your paperwork. All in the process took me almost three months to complete, so be prepared. Despite all the hassle, rates are as low as they have been in years so now may be the time to consider some term life if you have people that depend on your income. For more about life insurance see my prior post on the topic.

Online Glasses Experiment Part 3: Optical4Less Delivers!

noreply@blogger.com (Unknown) — Sun, 03 Feb 2008 04:11:00 +0000

Well, they took a couple weeks to get here (as is to be expected when they come from Hong Kong), but my glasses arrived and they work great-- no space alien looking cats! Total cost including shipping: $75. I highly recommend optical4less.com. I now must send my old glasses to the eyeglasspeople.com to have my lenses changed, I will be sure to let you know how it goes. Finally, I am still waiting for 39dollarglasses.com to send me a label to send the glasses that were made wrong back. Their customer service has been abysmal. I would avoid buying anything through them.