Tuesday, April 29, 2008

The Good Sense of a Hedge Fund Manager

Thankfully the one interviewed in this series was rather intelligent, because his interviewer was as dense as lead. Reading this was painful at times, given the absurdity of some of the questions asked. Our intrepid hedge fund manager answered each question with grace and poise. I know, had it been me, I'd have been ripping the interviewer's throat out before the end of part I.

I will admit that the best part (and there are many good bits) has to be our hedge fund manager's quote about why Bear Stearn's management took the $2 per share deal from J.P. Morgan. Quote:

"So I think for these guys it wasn’t just, 'I’m risking 2 dollars if I say no,' it was, 'I’m risking 2 dollars plus anal rape in jail.'"


There really should be a law against people who don't know anything about an industry writing articles about that industry. Really, what's the point? The interviewer is adding no value beyond transcribing words. So entirely sad.

Monday, April 28, 2008

The Time of Reckoning...

...is almost upon us. And its not sneaking up; its running up.

Get out while you can, kids.

Thursday, April 24, 2008


You'll notice I removed a few links from the navigation on the right. It is simple enough to return those links if there is demand, but I know that I didn't check many of those sites regularly, if ever. They are effectively dormant, and since they weren't adding value, they had to go. I mean, I know I post sporadically but damn! I'll have a few new sites that are climbing my personal hit list in the near future.

So much other stuff going on that I'll have to save it for a future post. I'm still with ya! Just trying to get these houses sold off and these consulting obligations wrapped up has consumed more time than I would have imagined.


Thursday, April 17, 2008

Latest News

This is just a quick update since I haven't been posting as regularly as I was last week. There has been some news, but I have been so busy working out and just enjoying life that I haven't been here to report too much.

First, the self-directed Roth IRA did get opened as previously mentioned!

I've made some changes to my withholding as well, so that I can put more capital to work in my portfolio and paying down my debt. We'll see exactly how that works out. I think I have enough deductions that I can probably decrease the withholding even more. After I see the impact of this most recent change, I'll adjust accordingly. I definitely want to increase the 401(k) contributions so that I can take advantage of the AGI decrease. That is literally my favorite reason for contributing to my 401(k)! Tax deferred growth is all good and fine, but along with the losses in my business interests and the carryover investment losses I have, keeping the AGI down has the most impact on my annual tax bill.

(There are so many great ways to not pay any more taxes than absolutely necessary! I think I've spoken on this before. People need to pay attention to this more carefully.)

Now that the self-directed Roth is open, I am working on adding options trading to my brokerage account. I don't see myself opening a futures trading account until I have at least $50,000 US to fund it with. That's a bit of an aggressive goal for this year, given the others I've already set, so I think that will show up on next year's list.

Anyway, that's it. Good stuff happening here, but the weather is so nice (at least here in the DC metro), you REALLY need to get outside and experience it if you haven't. Summer looks like it'll be a warm one. Got those natural gas futures ready?

Until next time, boys and girls...

Tuesday, April 15, 2008

Testosterone Driven Trading?


I'm not even sure how I'm supposed to feel about that, which probably explains both my curiosity and indifference.

Long Overdue

It's about time!

"Premature accumulation" - I LOVE that!

Apologies for the gap in posting, but life caught up with me again. I've been working to dig out of a real estate foibles for the past few weekday mornings. I guess that'll be the subject of another post. And I plan to respond to Teresa Lo's comment at length, which means taking some time to actually craft an intelligent response.

Anyway, I liked that quote so much I had to post it. However, I think default rates are going to hit record levels in this recession. You can figure out for yourselves what that generally means, from a portfolio perspective.


Monday, April 07, 2008

David Einhorn's Book

Now this looks like a good read!

I vaguely remember this story, and have read about it at various points in time. It will be great to see the entire situation chronicled by Einhorn himself.

But hedge funds are locusts, right?


The Great Dilemma


Not that I think the Paulson plan is THE solution. Or even A solution. Or that the Fed is the right agency to carry it out. Not even close.

The rating agencies need less power, distributed over more firms (competition) and a system for rating varying products differently instead of the needlessly confusing manner they have been rated.

The SEC needs more oversight power and more investigators, and needs to be able to pay them more. Merging the CFTC with them is a good idea, and the merged organization needs the power to put someone's nuts on the chopping block and make a wish when they fuck up. Going the other way -- to the CFTC's weakened oversight -- is WRONG.

The Fed needs to be destroyed, central planning Communist cocksuckers that they are.

Did I miss anything? Probably but that's what comments are for! :)

Until next time...I'm still catching up on reading and thinking about this self-directed IRA paperwork...

Friday, April 04, 2008

Thoughts on Portfolio Reconstruction

I recently finished reading Teresa Lo's excellent series on building your own portfolio. Now I find myself rethinking my portfolio's construction even more intently than I already have been.

Its not that I think my portfolio is poorly constructed, but it is an amateur's portfolio. I know it has weaknesses, the biggest of which (in my opinion) is the number asset classes. It really is too many. As Teresa excerpted from David Swensen's book, Pioneering Portfolio Management, a theoretical ideal floor may be 10% of assets per class. I have experienced this problem within my asset allocation, and it has irritated the hell out of me. Many of my re-balancings tend to be done outside of the portfolio entirely, mostly because I want to invest more in the under-performing or under-invested classes. As many of my asset classes stand, they are underrepresented within the portfolio, which dilutes their impact. So reducing the number of represented asset classes would tend to simplify the entire process.

The other big problem I find myself facing is that I like the "core and explore" approach, with alpha overlays on top of a core portfolio. However, I've never been quite sure what the complexion of the core portfolio should be. All I've known, in the back of my head, is that I have too many asset classes which I consider core which really aren't. In fact, I'd go so far as to say that most of them have been considered "core". Teresa's series really covers this issue well, and I must say it was a breath of fresh air for this amateur.

The "money shot", so to speak, is part 4 of the series. However, part 4 cannot be taken in a vacuum, so I recommend starting at the beginning and working your way through. It won't take very long.

I think Teresa's series is the best prose, short or long form, that I have read on the subject to date. That's why InVivo Analytics is joining my recommended blog list immediately. I mean, I've caught some of her work from the powerswings.com site, but this series sold me completely. Simply explained, well reasoned, quantitative, and with solid results. I also am totally on board with the idea of frequent re-balancing. The average investor who knows little about investing (and is happy as such) can keep the annual re-balancing schedule. I, however, find various asset classes going way over their target allocations far to frequently. I also like to capture those moves to my advantage, and the only way to do so is frequent re-balancing. The best example I can give of the benefit of frequent re-balancing has been performance in my old 401(k) due to the recent run-up in Treasury prices (a so-called Flight to Quality). I used this opportunity to let go of a nice sized piece of my Treasury allocation, and the resultant strength in the remaining asset classes has helped keep my old 401(k) buoyant. (Even though no new funds have been added in 2 years, that account keeps growing steadily. The only explanation I can come up with for its performance is the regular re-balancing. Good asset allocation probably plays a role as well, but it is still a bit too diversified.)

Now, there are some other things out there I plan to read. For starters, Investopedia has a guide to portfolio construction. And it goes without saying that reading Swensen's book moved up several notches on my to do list. But for the money and time, Teresa Lo has the best practical guide to portfolio construction I've seen. She put into words things I could only say I've assumed or "felt" (that is, instinctively known).

I think that, with a little bit of effort, I can come up with a suitable re-balancing model that will work for me. Having direct access to Teresa's model doesn't interest me beyond the educational value. The theory is well established with me, so its not a matter of implementation, and every implementation will vary because every investor has different goals.

Now to formalize what I've learned in the last few hours! Woo hoo! There will be more on this topic in the future.

Until next time...

Note: The above link to Pioneering Portfolio Management is a sponsored link. Yes, I'll be rewarded if you purchase via that link. I think I get 1/200th of a cookie or something like that.

Wednesday, April 02, 2008

Balance Sheet Adjustment

So before I go to bed tonight, I just want to briefly touch on some balance sheet updates I'm preparing to make.

First is the self-directed Roth IRA that I am planning to open for 2007. I should probably bump this priority up since 15 April is right around the corner. I figure I'm going to have to do an extension anyway, and I definitely won't owe this year. However, once I leave my current employer, I plan to roll over my old 401(k) accounts into this Roth IRA. We don't know what the future holds tax-wise. (I do believe that the Roth will probably lose its tax advantaged status at some point, personally.) So for now, its the best bet considering that almost any position I take in the future will likely offer a 401(k). Between the 401(k) and the Roth IRA, with its immense flexibility for contributions, its really a handy combination of abilities. I also plan to investigate the Roth 401(k) a bit more closely, but I don't see as many advantages there just yet so that's a much lower priority option.

I've also finally re-obtained the forms to add equity options trading to my brokerage account. This is so long overdue that I'm somewhat upset with myself. However, as I touched on in a previous post, adding options trading and possibly some futures trading will give my portfolio a bit of extra bit of alpha while helping to hedge some of the weakness in my other accounts. We're not swinging for the fences here, just looking to add a few points on the upside. And we're definitely not looking to pick up nickles in front of steamrollers. I'll re-focus on this after I get the self-directed Roth IRA setup, as that is a bit more pressing.

So that's it. A few small things that will hopefully allow me to tweak the composition of my asset mix and add some alpha. Nothing major, at least not yet. Of course I'll keep you posted on how things unfold.

And I didn't get those re-balancing trades done today. From around 2:30 PM EDT until 11:00 PM, I was knocked out. I blame the melatonin and the Simply Sleep that I took. I needed the rest anyway. So I guess I'll get up around 5:30 AM to work out and get started on my day. Which means, it is now time to go.


Income Statement Adjustment

Man, have I been busy!

So in the spirit of my dedication to being wealthy, I have spent time over the last 2 days normalizing my life.

First, I updated my spreadsheet with new net worth information. Things are progressing steadily there, although as I write this, I get the feeling I won't be able to re-balance and execute trades before the end of today's trading. Oh well.

I then adjusted my 401(k) contributions. While not changing the percentage this time, I changed the elections to be a bit more aggressive. While I'm well aware of Warren Buffett's admonitions that future earnings on equities will likely be in the mid to low single digits annually for some time, I think this holds less overseas. Thus, I increased the money market contribution to 15% (so I have some more dry powder); moved 20% to the emerging markets option (401khelp.com's recommendation); moved 20% to the international company index fund (401khelp.com recommended 30%); moved 20% to the small company fund and 20% to the large company index fund. I can't remember 401khelp.com's suggestions on those but I believe I'm in line with them. They recommended 10% in the REIT selection, while I ratcheted down from 10% to 5% there. (That's where the money market increase came from.) We'll see how this goes. All of this year's performance has come from contributions, both individual and employer. I'm down a bit over $2000 just on market performance.

I also checked my pay stub and found that my next check will be a bit larger due to the reduced 401(k) contribution. Most of this will either end up directed into a new savings account for investment, or toward my credit card debt. Even after all of this, my spreadsheet is showing $500 which is unallocated and basically unaccounted for.

I also restarted tracking my expenses in my spreadsheet again. I'd been off this through February and March, to my chagrin as I now have catching up to do. This will show me if I really have that extra $500 every month; I expect to fill in March just to get a recent baseline. If I do, I'll apply most of it to the credit card (maybe 80%) and the remainder to savings or fun. Most likely it will be fun since I have a bunch of plans for enjoying the summer with my friends and family.

The extra $500 in monthly income is a bit unnerving, however. I say that because I feel as though I'm on the edge financially, or at least closer than I'd like to be. Maybe that's because of my aggressive savings goal due to my underfunded emergency savings account. However, I think the bigger concern is that I haven't tracked expenses for the last 2 months so I'm just nervous about how much I may be overspending. It's all in your head, right?

There will be a few other changes coming, so stay tuned...

Fun with Home Equity

Ha ha ha ha ha ha ha!!!!!

Isn't that just perfect? I can't wait to hear stories about these audits. Gotta find out more about this!

Tuesday, April 01, 2008

Stop Wasting My Oxygen!

The title of this post is a quip I've liberally borrowed from various posters on a mailing list I am a member of. It has been said countless times by any number of people who used to work for the same company I did (and still do work for, in the loosest sense). I think it also reflects how I feel about stupid people and their bitching and moaning about their own stupidity. I hate the welfare and entitlement mentality, and personally, I think all stupid people should be taken out back and shot. Literally. Yes, I feel that strongly about it. Stupid people ARE a waste of resources, and they cause more problems than they can ever solve.

Now, what has me up in arms now? Its this fuckin' retarded ass story from CNNMoney.com. As soon as I got to the fourth paragraph, I wanted to shoot both of these morons.

Let's start at the top. How in the hell do you have $10,000/month in expenses??? Are you fuckin' stupid? (Yes, you'd have to be, but the rest of the article will show that.) First and foremost, the home equity line. If that isn't a code word for "I am so stupid I don't deserve to live", I don't know what is. (I bet we'll find good alternatives later in the article.) So you buy an expensive ass house in San Clemente and cash out the equity? And before having at least $60,000 in liquid savings for an emergency too?


Moving on, we have gems like this one -- "...they've made cutbacks: trading in Kent's Corvette for a Suburban...". I know I'm not the smartest person on the planet, but just reading that snippet gave me a headache. Someone, for the love of God, please explain to me how exchanging a Corvette for a Suburban is trading down. PLEASE, ANYONE, EXPLAIN THIS!!! I don't think its possible to explain that away, unless you inhabit some fantasy land. So you traded down from one gas guzzler to another? What is this supposed to solve? You already live in one of the regions with the highest per-gallon fuel costs in the nation. Trading down means that you go from a Corvette to a Toyota Corolla, or Honda Civic, or a Prius, but not to a damn Suburban. THAT defies all logic and again, I don't see how anyone can make any justifications for that. Its just stupid.

Now, the article doesn't mention which model year of either vehicle that Kent owned/owns. However, I'm sure that a quick check over on www.fueleconomy.gov will show that they made a huge error on this trade. In fact, from the 2007 numbers, the Corvette is MORE fuel efficient on both city and highway. On the highway, its dramatically more fuel efficient! So clearly this couple lacks basic reading and comprehension skills. WTF? The one advantage I could see the Suburban having, if any, is lower insurance costs. There is a possibility the Suburban has better maintenance costs as well, IF the Corvette is an older model. However, on the face of it, this looks to be one of many absurd decisions these former 6 figure financial geniuses made.


So it seems that in order to keep this dream house, which, given how things are going, they will probably lose anyway, they have blown through all of their savings and Mysti's 401(k). Without harping on the tax implications of that move, what is the point of this delusional attempt to maintain a lifestyle? The whole effort was doomed to failure from the start, but clearly these former executives couldn't see that. They should have immediately tried to short sale the house and found a place to rent, if they didn't have the savings in place to last at least 6 months. (A year would be better, and you have to save even more to account for the fact that they live in Orange County, CA which is ungodly expensive. I know because I lived in OC for 2 years.) This next sentence really encapsulates the naivete of these people's thinking:

"We're going Mach 1 into a wall. When we run into it, then we've got to decide what to do next."

You don't say! Maybe you should plan BEFORE you hit the wall? Of course, why should we even expect people who couldn't plan in advance of their problems to plan out their strategy for addressing those same problems? They don't even seem to care. If you're that non-chalant about the whole situation, with no sense of urgency, the all I can think to myself is that you're a completely hopeless.

I think what pisses me off the most about this is the fact that Kent is 59 years old. He's 2 years younger than my father. That means he was old enough to experience the horrific, well documented stagflation of the 70s. The key part of the word stagflation, as it relates to this post, is "stag". You're describing an economy in which there was stagnant growth (and actually, 2 recessions occurred during that decade). Now, if after living through that, you don't have a modicum of foresight or the slightest inclination to say "I'm not going to allow myself to be that exposed to a recessionary economy", then all I can say is that you really get what you deserve. Kent has lived through the 70s, the early 80s recession induced to kill the 70s inflation, the recession of the early 90s, and the recession in the wake of the dot com boom. You're telling me after all of this life experience, he had not yet learned to put away substantial sums in case of emergency?

Even his wife, being only 5 years older than me, should have learned that lesson. Where was she during the early 90s recession or the 2000 - 2002 recession? Obviously she learned nothing from those experiences. I cannot fathom how people just blithely and unconsciously wander through life like this. I mean, this is your life - your "dream home", your child's future, your lifestyle which presumably you've worked up to over the course of years if not decades.

Oh, here's another good one -- they both worked in the same industry! Now, I don't know how many financial advisers and writers have spoken on the topic of income diversity, but this one takes the least amount of intelligence to "get". Clearly, getting over that bar was not within this couple's abilities either. If they sat idly by and watched the industry implode around them, without making any changes or preparations for what the impact of said implosion would be on them, all you can conclude is that they both knew this was coming and they were comfortable with that fact.

The Mortgage Lender Implode-O-Meter dates New Century's bankruptcy filing as 2 April 2007, as does the accompanying CNNMoney.com article about "Subprime's Ghost Town". That means Kent had a good 4 month window between New Century's failure and his own layoff. In that time, it never occurred to him that since he was in the same industry, his job might be at risk? He's just watched his wife's employer, the professed second largest subprime lender in the nation, collapse and he couldn't see the writing on the wall for his own firm? At that point, I figure scratching my head in wonderment and disbelief is a waste of energy. This couple literally stood by and watched their life crumble without lifting a finger to prepare for what was an inevitable future.

Finally, for all of you socialists out there, we have this bit of entitlement drivel:

"We were New Century. We were a large corporation. We were the No. 2 subprime lender in the industry," she recalled. "You figured someone would come in and want to invest and take it over."

Sheesh! If you hadn't noticed, I haven't a bit of respect or sympathy for this formerly dual six figure income couple. I fail to see how they deserve it; they deserve to be punished for their lack of intelligence. They literally have made innumerable financial blunders, and from what little I can tell, they expect someone else to save them from themselves. Please, someone put these boneheads out of their misery. People like this couple are exactly why I am against bailing anyone out. If you make bad choices, then you need to learn not to make bad choices, and the best way to learn that lesson is to have to deal with the repercussions of your bad decisions.

Now, I know some of you are probably going to come down on me for coming down on the Copes. That's fine. I admit that there may be some missing information, and I've written this response based solely on the material found in the CNNMoney.com article. There could be other factors that were outside of their control which have contributed, if not had a material impact, on their situation. I agreed to all of that. However, everything this article mentions was either directly or indirectly a factor within their control, and they screwed the pooch in their handling of these events.

Starting with not being prepared when 3 decades worth of experience and southern California's high cost of living should have told Kent the importance of being prepared, to waiting until the layoffs occurred before doing ANYTHING, to trading a sports car (sort of) for a hulking SUV as a way to trim gasoline expenses (WTF?), their response to the situation they found themselves in has been downright inane and stupid. I'd really like to hear how anyone could think otherwise.

Until next time...

P.S.: Maybe its me, but I swear that there is just something wrong with the name Mysti. I think some of you probably know what I mean. This is completely irrelevant to the conversation above but I just needed to get that off my chest.