TopicPoint

Continue reading "Paying off Credit Card Debt vs. Contributing to a 401k Retirement Plan" »

Posted by spotsearch at 03:00 PM | Permalink | Comments (0) | TrackBacks (0)

Continue reading "Prosper Decision: Choosing a Group (To Join or Not to Join)" »

Posted by spotsearch at 01:06 AM | Permalink | Comments (0) | TrackBacks (0)

In investing, it can be good to be a little bit lazy.  To do well, you don't need to trade every day or watch the prices fluctuate by the minute.  You can just pick a few well-chosen mutual funds, contribute regularly (preferably with a monthly automatic investing plan) and rebalance just once, or twice a year at the most.

Paul Farrell, of Marketwatch, has been tracking a few Lazy Portfolios for a few years now.  They vary from having as many as 11 mutual funds in a portfolio to as few as 3.  All of these portfolios have beaten the standard S&P 500 benchmark for the last 1, 3, and 5 year periods ending July 2006.

One thing to consider though, the more funds your lazy portfolio has, the more transactions you need to do.  Be careful that your transaction fees don't add up to too much.  Also, it may be easier to implement a lazy portfolio in a 401(k) or other retirement account.  For non-retirement accounts, consider something even simpler, such as a targeted date retirement fund.

Posted by spotsearch at 09:49 PM | Permalink | Comments (0) | TrackBacks (0)

One of the key principles in building a portfolio of investments (stocks, bonds, mutual funds, ETFs, cash, etc) is managing the amount of risk you're willing to take.  Risk is a difficult thing to measure, but, a number of web sites and tools attempt to do that.  I'll briefly outline a few I have used:

RiskGrades - is a web site that provides risk evaluation.  Currently it's a free service, you just need to sign up for it.  It lets you enter your investments, such as stocks, mutual funds, etfs, or cash, and it calculates the risk from them.  It also lets you simulate events (such as 9/11, Black Monday, and more) to see how your portfolio would have performed under stress.  It is a nice tool but the web site seems rather slow and sometimes is a bit flakey.  The user interface needs a lot of work.

ETrade Risk Analyzer - this risk analysis tool is licensed from RiskMetrics, which makes the RiskGrades tool.  However, I think ETrade's version has a simpler, easier-to-use interface, and is more robust and better organized.  Also ETrade's risk analyzer is free for ETrade customers, and lets you easily assess the risk of your portfolio.  It can plot your risk compared to various standard benchmarks and lets you simulate stress events as well.   Highly recommended.

FinancialEngines - provides monte carlo simulations of your portfolio.  It's a very nice site that lets you gauge the likelihood that you will reach your target goals for retirement with a given portfolio.  Whereas the other sites mainly measured risks of your portfolio, FinancialEngines simulates the likelihood of reaching a retirement target date with the desired amount of assets.  It provides nice ways to let you explore different variations on your portfolio too.  It costs some money to subscribe, unless you get access through your employer 401k plan if they have a subscription.  The site is nicely designed, easy to understand, and useful.

Morningstar Risk Analyzer - This tool is the simplest of the risk analysis tools.  It's available to you if you have a paid subscription to Morningstar.  It shows you the risk of each component of your portfolio.  You can adjust the amount of risk you want and the tool then shows you the allocations that would be needed to meet the chosen risk level.

Morningstar Instant XRay - Although not quite a risk analysis tool, it does help you get the big picture of your portfolio.  It's an excellent tool that shows you your overall asset classes.  If you're a paid subscriber to Morningstar, you can also see their automated computer analysis of your portfolio.  What's neat about this tool is that if you own a a portfolio of mutual funds and/or ETFs, it will use the underlying stocks, bonds, or other assets to calculate a true snapshot of what is in your portfolio.  Overall an excellent tool.

Posted by spotsearch at 12:14 AM | Permalink | Comments (0) | TrackBacks (0)

Lately I've been finding that doing my taxes is becoming a big chore.  Tracking of individual stock transactions and mutual fund transactions is a big pain!  For non-retirement accounts, if you are trying to build a diversified portfolio of stocks, mutual funds, bonds, and ETFs, doing dollar cost averaging every month, and doing occasional rebalancing, it generates a LOT of transactions.  That's why I've lately been thinking about simplifying my life, to get just ONE FUND that provides total diversification and simplicity.  Well, I'm too much of a do-it-yourselfer to totally commit to one fund, but, perhaps for, say, 66+% of my non-retirement assets, it might be something I'd consider.

There are a couple of choices I've come across, each with its own merits.  First, there are the "life cycle" or "target retirement" funds, and second, there are global allocation funds (those will be the subject of a future article).  With life cycle funds, you pick your retirement date, and the fund that most closely targets that date, and the fund has a diversified portfolio targeted for your age that gradually changes from risky to conservative as you approach your retirement age.  My target retirement date is about 2035.  The three top contenders I found are:

TRRJX - T. Rowe Price Retirement 2035
0.84% Expense Ratio
Returns:  2006 5.9%, 2005 8.1%

VTTHX - Vanguard Target Retirement 2035
0.2% Expense Ratio
Returns:  2006 5.6%, 2005 6.3%,  2004 12.0%

FFTHX - Fidelity Freedom 2035
0.75% Expense Ratio
Returns:  2006 4.3%, 2005 9.0%, 2004 10.9%

TRRJX is a bit more aggressively allocated (89% stocks)  than FFTHX (81.7% stocks) or VTTHX (75.6% stocks).   Also, TRRJX has a higher weight of foreign stocks (20.7%) vs. FFTHX (19.9%) or VTTHX (14.8%), but the tradeoff is, TRRJX has higher expenses.  Although none of these target retirements fund is my perfect choice, I'd give a slight edge to TRRJX.  I can always augment the core fund with other assets of my choice to round out my overall portfolio.  Personally, I prefer a bit higher weighting in foreign markets, and exposure to some more alternative investments such as real estate, emerging markets, and commodities. 

I think these new lifestyle allocation funds are superior to the fixed allocation retirement funds of the past (aggressive, moderate, conservative) because they gradually change their allocations over time.  The simplicity of one core portfolio fund is definitely tempting.  For many people, especially those that don't like to think about asset allocations and investing, it's an easy way to invest (hopefully regularly) in a diversified portfolio.  And even for the do-it-yourselfer, it can help reduce the number of investments to keep track of and simplify tax reporting and record keeping in the future.

References:

One-fund Retirement: Buy and Forget

Target-date funds: Retirement Planning Made Easy?

Posted by spotsearch at 10:33 PM | Permalink | Comments (0) | TrackBacks (0)

I like thinking about asset allocations, and I innovative ideas, so, this is my attempt at creating an aggressive income and dividend portfolio.  You usually don't see the word aggressive combined with income and dividends.  A portfolio like this might be good for those with a medium to long time horizon and an appetite for high risk and high returns, and also wish to generate a steady stream of income. 

The theory of the "Waterfall Portfolio" is that a series of income-generating assets cascades income into a cash allocation (money market account) that can then be allocated to investments or used as income to live off of.  The assets are:

Allocation             Asset
-----  ---------------------------------------
13%  Money market account, 4.62% interest
14% WTDHYE - WisdomTree DIEFA High Yld Equity, 4.65% div+3.35%
14% DODIX  - Dodge & Cox Income (bonds), 5% interest
12% WTHYE  - WisdomTree High-Yld Equity 4.05% div +3.95%
15% EGLRX - Alpine International Real Estate 5% dividends +3%
32% prosper loans - 11% interest (mix of A and AA fundings)

Note, I broke the returns into a interest income or dividend portion and a growth portion.  They are derived based on the "return with 3% inflation" estimates from PortfolioSolutions.  I'd expect this portfolio to generate around 8.1% total annual returns over the long term, though anything could happen in reality.  In addition, due to the prosper loan payoffs, a continuous stream of cash amounting to around 2.8% of the total prosper loan amounts is generated, which can be reinvested in prosper or shifted to other investments for rebalancing as needed.  One WisdomTree ETF covers U.S. markets and one covers foreign markets, so that there is some geographical diversification.  Also, the Alpine International Real Estate fund provides further geographical diversification, so a total of about 29% of the allocation above is international.  Since these ETFs and funds invest in companies, they face stock-market volatility and risks.  The other assets, the money market fund, bond fund (DODIX), and prosper loans, provide stability.

 The weightings are based on the dividend or interest portion, as a fraction of the total expected dividends or interest.  Probably a more conservative allocation would be equal weighting in all categories.  I'd recommend rebalancing every half year or year to make sure allocations don't go too out of sync with the targets.  The amount of risk (and returns) can be of course further tuned by selecting higher risk, higher return loans on the Prosper loan segment.

 (DISCLOSURE:  I am considering some or all of the above investments in my own portfolio)

Posted by spotsearch at 10:19 PM | Permalink | Comments (0) | TrackBacks (0)

Prosper brings a lot of great things to investors.  It opens up a whole new arena of fixed income investments, promising credit-card like interest rates to investors (and the associated risks as well).  In addition, it allows you to fund peoples' dreams, or help people reach their goals.  It's satisfying to know that your money is really making a difference in someone's life, and it's fun to watch the progress of loan payments.

Loans on Prosper.com are unsecured debt, meaning they're not backed up by any assets, just by the promise of the borrower that they'll pay you back.  First a technicality in terminology. Although prosper refers to people bidding on loans as "lenders" technically, you are a more accurately a loan repurchaser, as Prosper actually puts up the money and does the actual lending and then sells you the loan. Prosper currently has only 3 year loans. The loans can be up to $25,000, and the interest rates are often capped by state lending limits. The first thing you need to know about Prosper as a lender is the risk. Lending to people is RISKY. Just how risky depends on the borrower and his or her situation. The most important thing to look at is the borrower's credit grade. This Prosper link shows the default rate for various credit grades:

Rating Avg. Default 
  AA     0.20%
  A      0.90%
  B      1.80%
  C      3.30%
  D      6.20%
  E      10.40%
  HR     19.10%
  NC Cannot estimate (no credit history)

Credit Grades used by Prosper are based on the Experian ScoreX PLUS credit scoring system. What you'll notice is that High Risk borrowers have a really high default rate, in other words, almost 20% of high risk borrowers are likely to default on your loan, so be careful when considering who you lend to.  Fortunately, Prosper lets you spread out your risk by letting you bid on small fractions of a large loan- in fact, you can bid as little as $50 on a loan.  All bids are pooled together in funding a loan, and the loan is filled by the set of lowest interest rate bids which fully fund the loan.  Thus, you can spread bids across a variety of loans and build up a portfolio of loans.

So what happens if someone doesn't pay?  There are a couple of stages, starting with a late payment, which progress from being late, 1 month late, 2 months late, 3 months late, to being in default.  When a loan goes in default, a credit collection agency (which you chose before bidding on the loan) will attempt to collect.  In addition to the threat of collection agencies, Prosper.com also reports late payments to major credit rating agencies, so lenders can damage their credit by not paying.  It's a well-thought out system, and I'm quite happy with it. 

Once you decide to become a lender, you'll find it a fascinating and rewarding new world.

Posted by spotsearch at 10:45 PM | Permalink | Comments (0) | TrackBacks (0)

One of the most important things about getting funded on Prosper.com is writing a good loan description. A good loan description will have to accomplish several key things:
1. Describe why you need the loan.
2. Describe your current expenses. If you're getting rid of loan debts, what are the current debts and interest rates you're paying?
3. Describe your income (and/or your spouse if applicable).
4. Describe your insurance situation (are you covered with health, life, auto, home insurance).
5. Give confidence to the lender of your ability to repay the loan.
6. Tell your story - give the lender a good view of who you are, what your situation is. Let your personality shine!

Here are some examples of well-written loan requests on Prosper:
I Want to be Free - good detail
Debt Consolidation - good detail
Help Consolidate High Interest loans - good detail and story
Help Bring Barking Dog Coffee to Life! - Telling a good story

A few other useful hints:
* Include a nice picture of you and/or your family. Since the lenders can't meet you in person, it helps to make your request more personal.
* Don't end your listings on weekends or strange hours. Ending your listing during normal hours is better because as your listing is about to expire, it shows up high on the list of soon-to-expire listings and you want to maximize the people that see it near the end.
* Be honest. It's all about trust here, and your honesty will be appreciated.
* ONLY join groups that do 100% reward sharing.  Groups that don't do full reward sharing are basically tacking on a fee for your loan, and there's nothing a borrower hates more than someone adding fees.

See Also:
Prosper Decision:  Better Joining a Group or Not (Choosing a Group)?

Posted by spotsearch at 11:43 PM | Permalink | Comments (0) | TrackBacks (0)

I've been searching for a good way to invest in dividend-paying stocks. The standard ETFs for this include:
* DVY - iShares Dow Jones Select Dividend Index, which covers mid-cap and large-cap dividend-paying U.S. companies.
* PEY PowerShares High Yield Dividend Achievers

Those are fine for covering the U.S. markets, but, now, investing in foreign dividend-paying companies got much simpler. A new ETF start-up, WisdomTree has launched a fantastic array of dividend-focused ETFs, for both U.S. and foreign markets. These are a great way to diversify your investments.

WisdomTree has a pretty good list of superstar names in the investing industry behind it, including Wharton professor Jeremy Siegel, and Arthur Levitt, former SEC chairman.

Posted by spotsearch at 11:43 PM | Permalink | Comments (0) | TrackBacks (0)

One of the things I worry about is if I'm saving enough. MSNBC has a GREAT Special Report on Retirement Savings. Over 49% of GenX'ers are likely not saving enough for retirement. That's almost half the population in the future! That means people will have to work longer, or not retire at all. Perhaps even more alarming, over half the U.S. workers aged 55 or higher have less than $50,000 saved for retirement! Many of them may be able to rely on social security or pensions though, but pensions are fast becoming a thing of the past.

Posted by spotsearch at 11:42 PM | Permalink | Comments (0) | TrackBacks (0)

As I mentioned earlier, my lending philosophy on Prosper is to give to people that I believe in. I'm not just out to make a quick buck- I like the social aspect of lending to help out someone and seeing them succeed at their goals. I just funded two loans on Prosper.com (Technically, I repurchased fractions of loans from Prosper, as lenders on Prosper are actually loan repurchasers). My first two loans, I believe, are great ones, and I am quite positive about them, and feel great about helping out these people.

The first is a loan to BloggingAwayDebt, a blogger who has put her financial life online for everyone to read. She is writing about tackling her large amount of credit card debt and gives interesting tips along the way. It's fun just reading her blog- check it out. If you're interested in reading about the borrower's perspective on Prosper, read her posts here.

The second loan was to the owner of Barking Dog Coffee, a (soon-to-be-started) dog-friendly Coffee House located inside The Book Worm Book Store. There's a yard area too, where dogs can be tied, and walked around. They'll have not only coffee, but smoothies, milkshakes, baked goods, and doggy treats. This is such a great idea, and, I believe the owner has the experience and enthusiasm to make it a success.

Both borrowers had great credit grades (A and AA), both are married with dual incomes (usually helps in that it's less likely both people in the couple would end up being unemployed at the same time), and both exhibited great enthusiasm for reaching their goals.

Posted by spotsearch at 11:40 PM | Permalink | Comments (0) | TrackBacks (0)

As a lender, you have a choice of a range of borrowers based on credit ratings, from AA through HR (High Risk). The rate you get goes correspondingly higher the more risk the loan.

Here's an example of the Credit ratings and default rates that Prosper cites from historical Experian data.

Rating Avg. Default
AA 0.20%
A 0.90%
B 1.80%
C 3.30%
D 6.20%
E 10.40%
HR 19.10%
NC Cannot estimate (no credit history)

Reasons borrowers request a loan are interesting and varied. There are some downright bad borrower ideas- for instance, borrowing money (at rates around 10% or more) to invest in the stock market. This is just plain dumb because you are starting off with a 10% handicap, and over long periods of time, the U.S. stock market (S&P 500 Index) returns around 10.2% so you are unlikely to make much money borrowing at 10% interest. The fact is, most PROFESSIONAL mutual fund managers are unable to consistently beat the S&P 500 Index.

Another often-seen borrower on Prosper is someone looking into borrowing money to lend to more risky borrowers on Prosper. Borrowing (even at reasonable 7% rates) to lend to riskier borrowers is a rather risky proposition. You're starting with a 7% or more rate handicap due to your loan interest, and you're exposing yourself to a huge amount of risk as a borrower lending to even more risky borrowers.

So, should a lender part a fool from his/her money? Or should a lender try and educate them on their folly? Or just avoid these loans altogether? Hard to say. My inclination is to find loans that are for a good purpose, loans that will help someone, make a difference in their lives in a positive way, while earning a fair return.

Posted by spotsearch at 11:39 PM | Permalink | Comments (0) | TrackBacks (0)

It's kind of addictive browsing listings on Prosper.com. For investors that like to take personal control of their finances, it gives you a whole new class of fixed income investment options. Deciding who to fund can be rewarding in multiple ways- the prospetcts of helping out others, and earning a higher rate of return than most fixed income investments. Risks abound, of course. People often put up their sometimes sad stories of misfortune, and your heart goes out to them. Yet, at the same time, it's a question of trust, as they are difficult to verify. Some have poor credit records, and are on the brink of financial disaster. Although Prosper does credit checks to try and prevent fraud and verify identities, Prosper doesn't seem to have any fraud protection guarantees. Paypal for instance, provides at least some guarantees against fraud and partially reimburses those who were defrauded. One mitigating factor however, is that you can select a collection agency so that if a loan goes into default, the agency will try and collect for you (while taking a HUGE cut of what they are able to get).

Well, despite the risks, I decided to jump right in as a lender. Unfortunately, the way Prosper handles new accounts, it takes quite a while for you to get rolling. First, you apply for an account, which gets approved fairly quickly - it takes about 15 minutes. Then, you have to verify your bank account- they make a deposit and withdrawal that you need to enter to verify your account- this took 3 days for me (I signed up on a Saturday). Then, you need to wire transfer money to your account which takes another 2 to 4 days. This is in sharp contrast to the speed and efficiency of doing the same thing with my ETrade account. ETrade has "instant" wire transfers- talk about great customer service and instant gratification! ETrade probably does this by doing a quick balance check, and initiating the transfer from your bank, but then they actually temporarily put up their own money in your account while the transfer is happening so you can start investing immediately. Prosper needs to learn a few tricks in improving their operations and customer experience here.


(Disclosure: I own stock or options in ETrade at the time of this writing)

Posted by spotsearch at 11:38 PM | Permalink | Comments (0) | TrackBacks (0)

I just came across a new site, Prosper.com. Prosper is a fusion of Ebay+P2P+Lending. It's a site where people can post their loan requests, and then lenders (individuals like yourself) can then bid on them to lend them the money. It's a fantastic idea, with the power to transform a whole industry, similar to what EBay did with product auctions.

I just signed up for it as a lender.... we'll see how it goes. Signing up is straightforward but you need a bit of information, such as your drivers license, a bank account routing number, and information from your credit report (it asks you questions based on the report it pulls from you to verify your identity, such as the servicer of your last auto loan, or a previous employer name).

The attraction to borrowers is that they can try and get loans at lower rates than would otherwise be possible, since people are bidding and competing to get their loan. Also, some people in difficult situations (poor credit) might be unable to get loans otherwise. People with good credit may be just looking to get a better deal or pay off some debt. The lender is there to get a better deal than their traditional fixed income investments. In addition, it's actually gratifying to help someone out of a difficult situation. Risks abound for the lender. But it's a bold and interesting experiment.

Posted by spotsearch at 11:38 PM | Permalink | Comments (0) | TrackBacks (0)

I just came across a new site, Prosper.com. Prosper is a fusion of Ebay+P2P+Lending. It's a site where people can post their loan requests, and then lenders (individuals like yourself) can then bid on them to lend them the money. It's a fantastic idea, with the power to transform a whole industry, similar to what EBay did with product auctions.

I just signed up for it as a lender.... we'll see how it goes. Signing up is straightforward but you need a bit of information, such as your drivers license, a bank account routing number, and information from your credit report (it asks you questions based on the report it pulls from you to verify your identity, such as the servicer of your last auto loan, or a previous employer name).

The attraction to borrowers is that they can try and get loans at lower rates than would otherwise be possible, since people are bidding and competing to get their loan. Also, some people in difficult situations (poor credit) might be unable to get loans otherwise. People with good credit may be just looking to get a better deal or pay off some debt. The lender is there to get a better deal than their traditional fixed income investments. In addition, it's actually gratifying to help someone out of a difficult situation. Risks abound for the lender. But it's a bold and interesting experiment.

Posted by spotsearch at 11:38 PM | Permalink | Comments (0) | TrackBacks (0)

This post is part 2 of my series on the recent Berkshire Hathaway annual meeting. The topic: Warren Buffett's thoughts on investing. These are my notes and *interpretations* of Warren Buffett and and Charlie Munger's answers on various investing-related questions.

On Investing in Tech Companies
Tech companies are hard to predict. Five years from now, who know what's going to be hot, or who's going to be on top? We know the edge of our competency- if you don't know your edge, you don't have a competency.

Economics of investing in ethanol?
Agricultural processing has not earned high rates of return in the past. It's hard to have competitive advantages. It also takes too much fossil fuel to be worth it.

Is there a Commodity Bubble?
Not in agriculture, perhaps in copper and oil. At the start of a bubble, it is driven by fundamentals. What the wise man does in the beginning, the fool does at the end. We don't know how far up a bubble can go. Be careful that everyone will turn into pumpkins at midnight (and there's no clock on the wall).

Investing in South America and Emerging Markets
We invested in PetroChina (would have like to buy more). Brazil is not off limits. In general, due to emerging market uncertainties, we want cheaper prices.

Investing in Russia
Bad experiences in the past working with Solomon- oil drilling in Siberia. Hard to develop confidence in Russia.

Exposure in Silver?
Used to own silver, but sold it. Consumption of silver is down in photography, but there are few silver mines. It's non-interest bearing, there may be overconsumption.

Investing in Regions of High Per-Capital Natural Resources
This is too macro a trend. We don't play big macro trends.

Views on Chinese Currency and Debt
High probability of a weakening dollar. Expect higher inflation. Fiscal and current account deficits are bad.

Does the CPI track Inflation?
It's not great. The core CPI doesn't include food and oil. The rental factor is lagging and housing factor is not accurate. Overall it understates inflation.

Investing in Newspapers
Circulation is down, advertising in papers is down. Demographics change is going the wrong way (younger people tend not to read them).

Modern Portfolio Theory
Modern Portfolio Theory doesn't make sense. Modern Portfolio theory is assinine. Jeremy Siegel is demented.

Naked Short Selling
There's nothing evil about short selling. But it's dangerous.

(Disclosure, I own stock in Berkshire Hathaway at the time of this writing)

Posted by spotsearch at 11:36 PM | Permalink | Comments (0) | TrackBacks (0)

Asset allocation (modern portfolio theory), that is, diversification of investments into non-correlated asset classes, is a core principle espoused by many financial advisors. The core idea is that having non-correlated assets reduce risk and maximize returns.

But, what is now happening is that previously uncorrelated asset classes are now becoming more correlated! The core idea of asset allocation is unchanged, but, it seems that commodities, hedge funds, and small cap stocks, which have been touted as good diversification assets are now much more correlated with the S&P 500 than they used to be. This makes what was a previously low risk diversified portfolio a little more risky.
According to this Fortune article, the correlations of various assets has changed from February 2000 to February 2006:


Asset classes 2000 2006
--------------- ----- -----
T-bills 34% -58%
LongTrm Treas. 37% -54%
Commodities -14% 33%
Small stocks 62% 94%
Hedge funds 35% 96%
Non-U.S. stocks 32% 96%

(Correlation of Asset classes to the S&P 500)


Buffett and Munger dislike Modern Portfolio Theory
At the 2006 Berkshire Hathaway annual shareholders meeting, both Warren Buffett and Charlie Munger expressed their dislike of modern portfolio theory. They also strongly disliked the views of the wizard of Wharton, Jeremy Siegel. In fact, Charlie Munger called it assinine! Strong words from some of the most respected investors in the world. They would rather buy good solid companies with predictable earnings. Well, it's worked for them! I can see their point somewhat- if you want to maximize your returns, just pick the best companies, instead of diluting your investments with companies or assets that are not as good. The problem is, a lot of random events cause unexpected things to happen. In addition, for many people who do not live for reading company reports and balance sheets, it's impractical to expect someone to do the level of research needed to select the best companies. Maybe if Warren would publish a book about how he values companies, that would help out some of the rest of us :)

Diversification and asset allocation will probably not give you the highest possible rate of return, but will give you a reasonable return with reasonable risk. Nevertheless, we should all be open to criticisms of popular investing strategies, as often what works for one time period ceases to work for another. Here's an excellent article discussing flaws of MPT. And here's another article on the criticisms of MPT.

Posted by spotsearch at 11:35 PM | Permalink | Comments (0) | TrackBacks (0)

The Berkshire Hathaway Annual Shareholders' Meeting is a BIG event. This year, over 24,000 people attended. It was held in Omaha, at the Qwest Convention Center, which was pretty much filled with shareholders. It was also of interest that we were sitting in the same room as the two richest men in the world, Bill Gates and Warren Buffett. Bill Gates happens to be on the board of directors of Berkshire Hathaway (BRK), while Warren Buffett is the founder of BRK.

In order to attend, you have to own at least 1 share of his company stock, which doesn't sound like much, but is actually quite a bit because he doesn't believe in splitting his stock. The class A shares, BRK-A, cost about $90,000 a share. The class B shares, BRK-B, cost 1/30 of that, about $3,000 a share today.

We got to the convention center around 6am, well ahead of the 7am door opening. There were already what seemed like a thousand people in line ahead of us. Fortunately waiting in line was not too boring, as there was entertainment to keep you somewhat occupied. Among the entertainers were a guitar player, a man on stilts, a bull(?) rider, and abortion protesters. As the doors opened, the crowed hurried in. Apparently, it's good to be at the front of the line because then you have a chance to snag one of the spots for asking questions by standing in front of a microphone. Since the meeting doesn't start until 8:30am, after snagging a set, you have about an hour and a half to wander around the exhibit floor filled with Berkshire company products.

The meeting portion starts off with a short fun movie about the company. They apparently make a new one each year. This year's movie featured "Omaha Idol", a spoof on American Idol, where entrepreneurs pitched ideas to Warren Buffett and Charlie Munger. My favorite invention was the Specks Pod (iPod with wearable video). Also featured in the movie was Bill Gates and his quest for a present for Warren's 75th birthday.

The meeting itself is rather long- over 4 hours of question-and-answer. Warren Buffett and Charlie Munger field just about any investing-related question. Getting the views of one of the most successful investors of all time is a great experience. His knowledge of a wide range of topics gives you confidence that he's aware of the details in a wide range of economics topics. And, unlike many other CEOs, he's willing to share his opinion.

(Stay tuned, future posts will talk about specific things Warren Buffett and Charlie Munger addressed)

(Disclosure: I own stock in Berkshire Hathaway at the time of this writing)

Posted by spotsearch at 11:35 PM | Permalink | Comments (0) | TrackBacks (0)

It's here... the Berkshire Hathaway Annual Shareholders' Meeting. This is the big yearly "Woodstock for Capitalists" event that Warren Buffet holds. This year I'll be checking it out for the first time.

See Also:
Warren Buffet acolytes descend on Omaha

(Disclosure:  I own stock in Berkshire Hathaway at the time of this writing)

Posted by spotsearch at 11:34 PM | Permalink | Comments (0) | TrackBacks (0)

GM has been getting a lot of press recently about its deteriorating credit ratings, its underfunded pension, and its possibility of bankruptcy due to deteriorating financials. One of the biggest problems is its huge number of retirees, and the pensions it needs to pay to them. In the past, they have forecast a 9% rate of return for their expected pension returns, which some say is rather optimistic. The traditional media has a particularly annoying habit of leaving out the real details, so I had to do a bit of research on my own to find out what GM's pension situation is really like. I though it'd be particularly interesting to look at their asset allocation in which they plan to use to achieve this 9% rate of return.

According to this ValueLine report, GM has $115.9 billion in pension assets as of September 2005, but its pension obligation is listed at $184.9 billion. So, exactly what are they doing with their huge pension fund? Here's a published report on GM's Pension from December, 2003 that gives some details on asset allocation.

U.S. Equities 24-28%
Foreign Equities 17-21%
Global Equity 41-49%
Global Bonds 32-36%
Real Estate 8-12%
Alternatives 9-13%

This contrasts with their past history of allocating:

Equities 55-60%
Bonds 30-35%
RealEstate/Priv. Equity 10-15%

The report states that they had considered shifting more into bonds to lower volatility, but that was deemed non-optimal due to low returns. Instead, they opted to shift assets into asset classes where active management generated higher excess returns with low correlation to stocks and bonds. In particular, such assets might include emerging market equity, emerging market debt, domestic high yield, small cap equity, real estate, private equity, and absolute return (hedging) strategies.

They consciously reduced exposure to large cap equities and diversified quite nicely into non-correlated assets. Overall, it looks like a reasonable financial plan. Diversifying to non-correlated assets makes financial sense. The main risks, however are that they are relying upon the skill of active managers to deliver outstanding returns. It's a big question mark whether those managers can do that. Unfortunately, the report doesn't give any more details on the asset classes and managers chosen.

Posted by spotsearch at 11:30 PM | Permalink | Comments (0) | TrackBacks (0)

A quick post here..... I came across this very interesting page on asset allocation strategies:

http://www.geocities.com/finplan825/ModelPortfolios-Data.html

I think these are all underweighting foreign markets, which now constitute around half the total world market capitalization of stocks, and completely ignore commodities, which are an important inflation hedge.

Posted by spotsearch at 11:29 PM | Permalink | Comments (0) | TrackBacks (0)

The Yale Endowment is one of the most successful long-term investors. Last year (2005) their return was over 22%. And they have a long-term 20 year track record of over 16% in annual returns. They achieved these remarkable returns by careful asset allocation strategies. Anyone interested in asset allocation should read the Yale Endowment Report, which reads like a blueprint of their asset allocation strategy. It's interesting to see their historical graphs on how their asset allocation strategy has changed over time from being U.S.-centric 20 years ago to being much more diversified.

Some of the things they favor include hard assets, small caps, and value investing. They have a surprisingly small amount devoted to fixed income. They also tend to like active management and trying to beat benchmark indices.

Their current target allocations are:
Domestic Equity 14%
Fixed Income 5%
Absolute Return 25% (hedging strategies)
Foreign Equity 14%
Private Equity 17% (VC and leveraged buyouts)
Real Assets 25% (Real estate, oil, gas, timber, commodities)
Cash 0%

Posted by spotsearch at 11:28 PM | Permalink | Comments (0) | TrackBacks (0)

Energy prices have been at record highs in recent months. The price per barrel of crude oil is around $66, which is near historical absolute highs (prices not adjusted for inflation though). So, with such high energy prices, everyone, even (surprisingly) President Bush, is suggesting we look at alternative energy sources. Socially responsible funds might fill the bill here- there are a few that I'm looking at.

At the top of the list is the Winslow Green Growth Fund (WGGFX) which invests in environmentally responsible, environmentally benign, or best-of-the batch (least irresponsible) companies. It is not a pure energy focused fund, but diversifies into various industries, including alternative energy, software, health care, and industrial materials among others. It currently has a 5 star Morningstar rating. It's a bit risky though, with a high beta of 1.81, and it is weighted more in small-caps. It's a no load fund with a 1.45% expense ratio (higher than I'd like, but within the range that I would consider).

Another SRI fund is the New Alternatives Fund (NALFX) which is more focused on the energy and industrial materials sectors than WGGFX - more concentrated, if that's what you're looking for. This fund has a 1.32% expense ratio, however, has a HUMONGOUS 4.75% front load- rather ironic that a socially responsible fund is gouging its investors charging such an outrageously high fee- Shame on them!

See also:
* Top Morningstar SRI Funds
* In the year of the oil boom...

(Disclosure:  I am considering investments mentioned in this article)

Posted by spotsearch at 11:27 PM | Permalink | Comments (0) | TrackBacks (0)

It's rare to find a web site that is so useful and so well done that I would recommend it to just about everyone I know. I just came across MoneyChimp, and I think it is one of THE BEST investing education sites on the web. What sets it apart is, it does an exceptional job of explaining why and how things work, using interactive calculators and graphs. It makes great use of the interactive medium of the web. It also delves into the details of how things work in a clear, concise way. If you like to know the real math behind things, or the background references behind a concept, this site also gives you those details. Some of the many topics covered include:

Index Funds
Stock Valuation
Modern Portfolio Theory


Highly Recommended!

Posted by spotsearch at 11:20 PM | Permalink | Comments (0) | TrackBacks (0)

One of the biggest factors in investing performance is your asset allocation. What areas are you in and what are you not. I was looking at my investing portfolio's asset allocation, with an absolutely amazing tool on the web, Portfolio X-Ray. It's available from Morningstar or T. Rowe Price.

It's a FREE tool that lets you enter your stocks, mutual funds, bonds, and ETFs, and it shows you detailed breakdowns of your portfolio in all different ways, such as by:
* Asset Class (cash, u.s. stocks, bonds, foreign,)
* Stock Style (large cap, midcap, smallcap, and growth or value)
* Stock Sector (such as software, hardware, healthcare, energy, etc... even compares your allocation vs. the S&P 500)
* Stock Type (high yield, distressed, hard assets, cyclical, slow growth, classical growth, aggressive growth, speculative growth)
* Word Regions (your allocation in various foreign markets)
* Fees & Expenses (how you're doing vs. the average fund)
* Stock Intersection ( a total portfolio view of the stocks you hold and where they are held, by counting shares held even within your mutual funds and ETFs)

This is an incredibly useful tool, and opened my eyes to a missing asset class in my portfolio (small cap stocks). If you like looking at numbers and data, you'll love this tool. It's rare to find such a useful, well-thought out financial tool, and the fact that it's free is all the more amazing.

Posted by spotsearch at 11:16 PM | Permalink | Comments (0) | TrackBacks (0)

It's pretty tempting to invest in China's growth, and no other place to me seems more tempting than the growth of the Internet in China.

As of July 2005, internet users in China totalled over 100 million people [see reference], nearly as large as the U.S. internet population. In addition, as of today, the #5 (baidu.com) and #6 (sina.com) most visited web sites in the world are from China [See Alexa Global Top 500]. Even with so many Chinese people already online, there's still plenty of room for growth given China's staggering 1.3 billion population. Due to the low incomes in China, it will take years or decades for a significant fraction of the Chinese population to get online, but then, that's also years to decades of growth ahead. For those with nerves of steel and a long time horizon of several years, it's a attractive, though risky place to invest.

The Case for China
Many economists and politicians think Chinese currency is undervalued. The exact amount is up for debate, but this paper pegs it as about 22.5% undervalued. This would work in favor of those owning assets in Chinese companies and in favor of owning companies profiting in Chinese currencies.

The Case for Sina.com
Sina.com is one of the largest web portals in China and also provides mobile phone data services, web hosting, and more. I view it like a "Yahoo of China", they do a little bit of everything. As of today, it actually has a reasonable forward P/E of 23.16 (current quote: SINA). It's profitable and should benefit from the overall growth of internet use in China.

The Case for Baidu.com
Baidu had a spectacular IPO earlier this year. Its offering was at $27 a share, but on the opening day it closed at $123.90 a share. You'd be hard-pressed to find someone that would say it's undervalued with a forward P/E today (November 13, 2005) of 166.79! In addition, some analysts think its current fair market price should be around $45/share (see Baidu Shares Appear 'Extremely Overvalued'). I think that it's certainly true, it's overvalued by any normal measure. But what if you look into the future, say 5 years from now. According to this article research firm Piper Jaffrey thinks the China search market will grow from $134 million today to $1 billion by 2010. Currently Baidu has a 44.7% market share, but if that erodes due to competition by 2010 to around 30%, that means Baidu would be pulling in $300 million in revenues. Expenses at search companies tend to be low, around 30% of revenues, so earnings might be around $210 million. That puts my Baidu at a valuation of between $4.2 billion and $6.3 billion (assuming a P/E of between 20 and 30), compared to its current market value of $1.68 billion when the China search market reaches $1 billion. Whether it will happen in 5 years or not is a big question, and whether the competition will acquire, or kill Baidu is another big question, since 5 years is a long time in Internet time. Interestingly enough, Google also has a minority investment in Baidu.


Also of interest:

Speech by Baidu's Cofounder Robin Li

Web traffic at Baidu today is about 1/3 of Google's U.S. traffic, according to Alexa.com. See the current traffic numbers here.

How Do Search Engines Handle Chinese Queries - A comparison of Chinese search engines.

(Disclosure:  I own shares of BIDU and SINA at the time of this writing)

Posted by spotsearch at 11:14 PM | Permalink | Comments (0) | TrackBacks (0)

I've been noticing over the past few years (as many others also have noticed) that China, India, and other emerging markets have been growing quickly. Anyways, recently I have finally decided to take action and expand my investments to these emerging markets.

There are two basic approaches I see to benefitting from emerging markets. First, invest in companies that are in those emerging markets, and second, invest in companies that would be affected by emerging markets (in particular, emerging markets will have a large effect on raw materials and commodities as they grow industrially and build infrastructure). The podcast China: Stalking the World's Commodities discusses the long term trend in the growth of commodity prices and usage due to increasing demand from emerging markets such as China. It's worth listening to.

The best way to get exposure into a market is through an index fund. For investing in companies in emerging markets, I chose the BLDRS Emerging Markets Fund(ADRE) which is an index of 50 stocks in diversified emerging markets. It has a low expense ratio (0.3%) and is an ETF so can be traded just like a stock. At the time of this writing, the fund's top country holdings included Brazil (24.7%), Korea (15.4%), China (13.0%), Mexico (12.4%), Taiwan (10.7%), and India (7.0%). See the ADRE fact sheet for more information.

As for commodities, it's a bit harder for individuals to directly invest in commodities themselves (such as oil, natural gas, etc.), so I chose a mutual fund that invests in companies that own or are involved in the development or processing of natural resources, the T. Rowe Price New Era Fund (PRNEX). Although not exactly investing in commodities, this fund should benefit from rising demand for commodities.

(Disclosure:  I own shares of PRNEX and ADRE at the time of this writing)

Posted by spotsearch at 11:09 PM | Permalink | Comments (0) | TrackBacks (0)