OnCubic

For you Warren Buffett Fans

And so the pursuit of active management magicians goes on. Mr. Wellington again delights us with his insightful take on Mr. Buffett. I think the most profound concept he offers is that any advantage Mr. Buffett has is already in the price. So investors in today's Berkshire Hathaway have no advantage at all because the share price has already been bid up to reflect the Warren magic...

-Christopher

Deconstructing Berkshire Hathaway

Weston Wellington, Vice President, Dimensional Fund Advisors

Berkshire Hathaway released its 2010 annual report last weekend, including the letter to shareholders from Chairman Warren Buffett that is always eagerly awaited by the investment community. We are gratified to find that Mr. Buffett's legendary ability to simplify complex issues remains undiminished and his trademark wit is as sharp as ever.

Financial journalists, eager for clues that might reveal Buffett's thoughts on where markets are headed, focused on his optimistic outlook for the future ("America's best days lie ahead") and his appetite to make further large acquisitions ("my trigger finger is itchy").

We prefer to focus on a number of issues touched on in the letter that offer investment wisdom that is equally useful today or ten years from now.

• As of year-end 2010, Berkshire held positions in excess of $1 billion in fourteen common stocks. Five of these were non-US firms: BYD Company Ltd. (China), Munich Re (Germany), POSCO (South Korea), Sanofi-Aventis (France), and Tesco plc (UK). Five years ago a similar list of twelve companies contained just one non-US firm, and ten years ago there were none. In his comments about the future of America, Mr. Buffett remarked that "human potential is far from exhausted" and that, despite many setbacks, the American system "has worked wonders for over two centuries." Judging by Berkshire's portfolio, it appears this notion applies with equal force throughout the world.

So how DO you choose a financial advisor?

For those of you (or those with friends/family) wondering what process to use when choosing a wealth management advisor, the National Association of Personal Financial Advisors has released this helpful guide.

- Christopher

Check out NAPFA's new Pursuit of a Financial Advisor Field Guide, which will walk you through all tof the steps to finding qualified financial advice.

Should You "Fix Up" Your House Before Selling?

I get asked this question all the time. "My realtor says I need to do all these things before I sell", people say.

Well, as it turns out there is only one thing with a positive return on investment as far as remodeling goes... Ready: changing the front door has a 2% return.  If you subtract the value of your time... well you do the math.

For every other home project, you are better off lowering your price by the amount of the remodel. Realtors, of course, want you to invest in the property to raise the price, and the size the of the commission they earn. The link below will allow to look at these numbers for your region.

- Christopher

http://www.remodeling.hw.net/2010/costvsvalue/division/west-south-central/city/austin--tx.aspx

Here's Why Pros Don't Beat the Market

For those of you who are going to spend your time finding mis-priced securities so you can beat the market like a "mini Warren Buffett", give this Wired Magazine story a read. Computers are taking information off the news wires and impacting prices in fractions of a second. Deep Blue has long ago beaten Gary Kasparov...here too.

- Christopher

Algorithms Take Control of Wall Street

Last spring, Dow Jones launched a new service called Lexicon, which sends real-time financial news to professional investors. This in itself is not surprising. The company behind The Wall Street Journal and Dow Jones Newswires made its name by publishing the kind of news that moves the stock market. But many of the professional investors subscribing to Lexicon aren’t human—they’re algorithms, the lines of code that govern an increasing amount of global trading activity—and they don’t read news the way humans do. They don’t need their information delivered in the form of a story or even in sentences. They just want data—the hard, actionable information that those words represent.

Lexicon packages the news in a way that its robo-clients can understand. It scans every Dow Jones story in real time, looking for textual clues that might indicate how investors should feel about a stock. It then sends that information in machine-readable form to its algorithmic subscribers, which can parse it further, using the resulting data to inform their own investing decisions. Lexicon has helped automate the process of reading the news, drawing insight from it, and using that information to buy or sell a stock. The machines aren’t there just to crunch numbers anymore; they’re now making the decisions.

More...

Bill Gross Chasing Returns?

Here the "Warren Buffett" of bonds, Bill Gross of Pimco, decides to chase equity returns. Folks, I don't know about you but I expect one the most famous active managers to do better than this.

NOW that the global equity market has essentially increased 100%, he's going to go into equities, which he's not known for. This is classic "return chasing" behavior. I agree that bonds don't look like the place to be,  but are we paying Gross, an asset class specialist, to allocate our portfolios for us?

Those of you with heavy bond portfolios may wish to take note of the potential for a stampede out of bonds, and into stocks.

- Christopher

Stocks Lure Bond-Giant Pimco

Bill Gross is Among Fixed-Income Investors Branching Out

By ELEANOR LAISE

The world's biggest bond fund may be losing its appetite for bonds.

Pimco Total Return Fund, managed by Bill Gross of Allianz SE's Pacific Investment Management Co., is expanding its investment guidelines, according to a regulatory filing made Thursday.

The giant bond fund run by Pimco's Bill Gross is expanding its investment guidelines to include stocks and convertible securities.

As early as the second quarter of next year, the fund will be able to invest as much as 10% of its assets in preferred stock, convertible securities and other equity-related holdings.

Pimco Total Return, which has more than $250 billion in assets, lost 4.3% from Nov. 4 through Wednesday, according to investment-research firm Morningstar Inc., amid a broad selloff in the bond markets.

Investors pulled $1.9 billion from the fund last month after pouring $18.3 billion into the fund in the first 10 months of the year.

The fund held 43% of assets in mortgage securities and 30% in government-related holdings as of Nov. 30. The Federal Reserve's bond-buying program "will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment," Mr. Gross wrote in investment commentary published last month.

More...



The "New Normal" Question

In this video, Dartmouth's Dr. Ken French discusses what kinds of returns we can expect during times of slow GDP growth... if that's what we have in the future. I think the answer will surprise you.

- Christopher

 

From the NYT, a Wall Streeter Comes Clean

Great piece about a former Goldman banker, currently suffering from cancer,  admitting it was all a lie.

- Christopher

A Dying Banker’s Last Instructions

New York Times

There are no one-handed push-ups or headstands on the yoga mat for Gordon Murray anymore.

No more playing bridge, either — he jokingly accuses his brain surgeon of robbing him of the gray matter that contained all the bidding strategy.

But when Mr. Murray, a former bond salesman for Goldman Sachs who rose to the managing director level at both Lehman Brothers and Credit Suisse First Boston, decided to cease all treatment five months ago for his glioblastoma, a type of brain cancer, his first impulse was not to mourn what he couldn’t do anymore or to buy an island or to move to Paris. Instead, he hunkered down in his tiny home office here and channeled whatever remaining energy he could muster into a slim paperback. It’s called “The Investment Answer,” and he wrote it with his friend and financial adviser Daniel Goldie to explain investing in a handful of simple steps.

More...

 

Roth IRAs - To Convert or Not

All of a sudden, it seems like everybody in the wealth management world is talking about Roth IRAs and Roth conversions.  In fact, an article in Financial Planning magazine--one of the trade magazines in our world--recently proclaimed 2010 "The Year of the Roth."

What's the big deal?  Roth IRAs are interesting to professionals for several reasons.  With traditional IRAs (and qualified plans like 401(k)s), the money goes in untaxed, and you pay ordinary income taxes whenever you take money out of the account--which might be years in the future.  The Roth reverses this; your contribution is made with after-tax dollars, but then there's no tax whenever the money is distributed.  If you believe (I personally make no assumption about future rates. History has shown this to be impossible to predict.) that tax rates are going to go up in the future, then paying taxes now and eliminating future taxes provides a net gain.

It could get better.  Having money in a Roth account gives you a lot more control over your tax bracket in retirement.  For instance, you might take out just enough from your IRA distributions to fill the 15% bracket, and then take the rest of your living expenses out of your taxable accounts and Roth.  Another version of this kind of planning might help higher-income retirees avoid the brackets where Social Security income is taxed. This flexibility certainly argues for a partial conversion.

Another interesting thing about Roths is that, unlike traditional IRAs, they don't have any minimum distribution requirements once you turn age 70 1/2.  So long as the money remains in the account, both Roths and traditional IRAs give you the benefits of tax deferral, which eliminates a significant drag on the growth of your money.  If you can afford to keep your money in the Roth account, and take retirement income from other sources, then the deferral can go on longer.

Active Investment Management Fails Again

Below is a story from the WSJ that perfectly illustrates one of the major problems with active investment management (trying to beat the market by foretelling the future). The story focuses on DE Shaw, a firm that, since its inception in 1988, focused on letting a computer decide when to buy and sell securities. I guess they had good (or lucky) results prior to 2006.

All of the sudden, in 2006, the managers decided to abandon the computer-as-crystal-ball concept and invest in raw land in New Mexico?????? What does a firm who purports to have a computer that knows the future about stocks and bonds know real estate development? Apparently nothing as they are soon going to lose all of their clients' $100 m investment on this boondoggle.

We call this "manager risk" or the risk that your active (the opposite of an active investment manager is a passive one who simply accepts the market rate of return rather than betting on certain outcomes) investment manager goes haywire and invests in something entirely different than you expected. The solution to this problem is to use a passive manager and to have a written investment policy statement (IPS) to guide your advisors.  The IPS constrains investment managers to certain asset classes and performance standards. To me, the DE Shaw affair is another nail in the coffin of the scam that is active investment management.

- Christopher

 

D.E. Shaw Land Bet Proves a Quant's Quagmire

By LINGLING WEI

For more than 300 years, a huge swath of land in what is now New Mexico endured the rise and fall of empires, the arrival of settlers and development of the surrounding area into the city of Albuquerque.

But the Atrisco Land Grant, handed down by Spain's king and queen in 1703, has never seen anything like the real-estate disaster now gripping hedge-fund firm D.E. Shaw & Co.

Known for its obsession with computer-driven investing, the New York company surprised many real-estate deal makers in late 2006 by teaming up with developer SunCal Cos. to buy the 55,000-acre property—twice the size of Boston—for $250 million.

The two companies planned to create a new town with residential, commercial and industrial areas. But the nationwide real-estate slump left the project stuck on the drawing board. Last month, lenders led by U.K. bank Barclays PLC foreclosed on the property. D.E. Shaw and SunCal have only a few weeks to come up with the money needed to pay off the lenders, or else the hedge-fund firm could see its roughly $100 million investment wiped out.

Read the full article...

Emerging Markets - Emerging Ideas - Emerging Solutions

Emerging markets play an important role in a well diversified portfolio.  Risks exist when investing anywhere and especially in emerging markets where higher perceived political risk is an important factor.  Volatility can be high, but the potential for return relative to risks and the possibility of reducing correlation (and thus risk) of an overall portfolio, can be an added benefit. 

What is an emerging market?  The term was coined by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank in 1981. It is generally defined as an economy with low to middle per capita income. These countries happen to constitute about 80% of the global population that represent about 20% of the global economy.  It sounds pretty straight forward but believe it or not, China and Peru can both be classified as emerging market economies!  So, it’s obvious that how you implement your emerging market strategy is critical due to risks and widely varying characteristics of countries that can be included in this category.  How then, is the best way to invest in this asset class?

Emerging markets play an important role in a well diversified portfolio.  Risks exist when investing anywhere and especially in emerging markets where higher perceived political risk is an important factor.  Volatility can be high, but the potential for return relative to risks and the possibility of reducing correlation (and thus risk) of an overall portfolio, can be an added benefit. 

What is an emerging market?  The term was coined by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank in 1981. It is generally defined as an economy with low to middle per capita income. These countries happen to constitute about 80% of the global population that represent about 20% of the global economy.  It sounds pretty straight forward but believe it or not, China and Peru can both be classified as emerging market economies!  So, it’s obvious that how you implement your emerging market strategy is critical due to risks and widely varying characteristics of countries that can be included in this category.  How then, is the best way to invest in this asset class?