Thursday, June 21, 2012

89 business cliches

I could barely get through these because they are so painful.  But you might use them in your next game of buzzword bingo.

HT: George.

Some good news about state finances (one state in particular).

These days we hear a lot about the sorry state of state finances.  Usually such discussions involve mention of  California which seems to have taken financial dis-functionality to a new level.  But here's a good news story about my own state; North Carolina.

Municipal finances (those of towns, cities and counties) in NC are generally in pretty good shape largely because of a little known organization called the "North Carolina Commission".  The job of the Commission is to basically stop the finances of the municipalities in the state from running off the rails.  And by all accounts they do a good job.  Read about it here.   The key to the success of the Commission is that it deals with problems before they get out of control, rather than trying to clean up messes once they've been made.   Sounds pretty sensible really.

HT:Ron at

Monday, June 18, 2012

Do active managers earn their fees?

From Gene Fama...the answer, as readers of my blog well know, is no they do not.

Who pays for "free" music?

An excellent open letter written by David Lowery (of the band Cracker) on the subject of "Free" music.   Lowery also teaches a Music Business Economics course at the University of Georgia.

If you've copied/downloaded/ripped/ music to add to your collection, then you should probably read this.  

Monday, June 11, 2012

Private REITs

A fairly new (to me) blog that I've been following is by Josh Brown, aka "the reformed broker".   Josh has a great post on private REITs.   For those who don't know, a REIT is a "Real Estate Investment Trust".  These are basically companies that only invest in commercial real estate and Josh doesn't like them.  He invokes his 4 rules.
1. Brown's Law of Brokerage Product Compensation states that the more money a broker or financial salesperson is paid to sell you something, the worse it is for you.  The commissions on non-traded REITs are in the range of 7% versus the $5 trade you could do to buy a public REIT. 
2. Opacity is always indicative of information assymetry, and information assymetry always benefits The Street, not the clientele.
3. High-fee funds or vehicles will never match the underlying index by definition - the fees act as a drag in bull markets and add insult to injury in bear markets.
4.  The only self-justification brokers ever had in recommending private REITs was that because they don't trade and reprice publicly each day, they somehow served to "smooth the volatility" of a client's portfolio.  Which is Bullshit to the second power (BS²).
It won't come as any surprise that I completely agree with him.   In particular, I think that #4 often gets ignored, even by well informed institutional investors.  For example, it is not at all uncommon to see Private Equity investments in pension funds and college endowments for the alleged purpose of reducing volatility.  Private Equity reduces volatility because it is only valued periodically, and the valuation is done by the manager of the fund.  It's like saying your cholesterol is stable because you only get it checked every 5 years.   Just because something has a low recorded volatility doesn't mean that it is actually reducing the risk of your fund, all that is happening is that the risk is being ignored because it can't be measured.

Facebook's growth (or lack thereof).

According to a recent article in the Wall Street Journal, the growth rate of Facebook is slowing quite dramatically.  This is quite normal for large companies - as when they get really big it just becomes a lot harder to grow at a fast rate.  In fact apparently 71% of all internet users in the USA are already on Facebook - so any further growth here either has to come from trying to persuade the other 29% to get on board, or to get the current users to click on more ads.

For Facebook this matters a lot.   FB's PE is around 70 compared to Google's which is around 17.  For FB to have the same valuation as GOOG, it will need to more than quadruple its earnings, or see its stock price drop to single digits.   My guess is that the end result will be somewhere in the middle.

Sunday, June 3, 2012

Who's responsible for the oil price decline?

The price of oil has been going down of late and it got me thinking - who's responsible for this?  Then I remembered that according to the media, it is the Wall Street Speculators who set oil prices.  So I just wanted to say a big thank you to them.  Thanks for getting the oil price lower just in time for summer road trips.

Turns out that the Grumpy Economist also had the same feelings of gratitude.

For a more complete discussion of the role of speculators, see here.

A safe savings rate

How much of your annual income should you save for retirement?

On one hand you can take a conservative approach and assume a very low rate of return.  This is along the lines of what Zvi Bodie argues, and I personally work on the assumption that my portfolio will earn about 3% in real terms which means that I have to save more.  Contrary to Bodie though, I don't invest all in TIPs, instead I have a more typical asset allocation.  The trouble with this method is that you can over save - meaning that you sacrifice too much now for the future.

Another approach  is detailed in a paper that was sent to me by one of my students (thanks Ben).   In this paper, the author estimated the proportion of income should be saved over 30 years to create a portfolio large enough to generate 50% of that persons salary into retirement.  The author used the past long term market performance to run the model.  The conclusion reached from the analysis is that you need to save about 16% of your income to fund your retirement.

There are some big caveats to this number though.  If you start late and only save for 20 years, then you'll need to save 30% of your income.

Bottom line:  If you are not saving between 15% and 20% of your income, then you better hope that your kids do well, because you're going to end up living with them.