Showing posts with label family finances. Show all posts
Showing posts with label family finances. Show all posts

Tuesday, April 20, 2010

Financial Chess

Tomorrow I will make another financial chess move.  We are refinancing the mortgage on our house, to a super-low interest rate, at a shorter term. We close on the deal in the morning.  My father often criticizes me for “always worrying about money,” but discovering a financial advantage and having the guts to take advantage of it have been the ways in which I have gained my economic freedom.

During the nadir of the financial meltdown in March 2009, I was smart enough not to panic, even though I worried about my investments and what my wife and I had achieved, in stock gains, over many years.  As the market came back over the past year, I vowed to take into account that worry.  I sold stock, and Laura and I decided to use those gains to pay down our mortgage and so shorten the years of our mortgage debt.

When I was younger, I had almost 100 percent of my investment money in stocks, stock mutual funds, and only an emergency fund in bonds.  As I have gotten older, and with the experience of 2009 fresh in my mind, I have realized I want to preserve more of what I have, and not to focus only on growing it.  So I adapted.  Adapt or die, I say, to any would-be investor.

Yet the bonds I have purchased have been on the short-end of the yield curve, because I expect interest rates to go up.  They can hardly go down any further, so the best bet is that they will either stay stable for a while, or go up.  When interest rates go up, the prices of bonds go down: an inverse relationship.  So any bond that is long-term (i.e. greater than ten years) will be hurt more by a one percentage increase in interest rates, than a bond that is short-term (less than three years, or just one year).

Another financial chess move I have made over the past three years is to increase my foreign stock allocation.  When I teach an investment analysis course, I always give my class the current total stock market capitalization of the world, and what portion belongs to the United States.  Since the 1970s, the American share of world stock market capitalization has declined.  The world outside the U.S. is growing faster than the U.S.  Brazil, India, China, and South Korea are great growth stories.

Even individual American companies I purchase for my portfolio I examine in light of their foreign revenues: companies with their eyes on foreign markets will simply have less of their eggs in one (domestic) basket.  If you think our budget and trade deficits will have a negative effect on the dollar (I do), then you will benefit by having companies earning their revenues in Euros, Yuan, Won, and Yen.

I also expect taxes to go up.  Why?  We have these gigantic deficits and lack the political will to tackle spending on entitlements and the military nationally, and on state and city government budgets and bureaucracies locally.  I blame both Republicans and Democrats for this situation, and think they will come together when they are forced to come together.  Crony capitalism on Wall Street and dysfunctional politics in Washington have left us in a mess, but I don’t think it’s the end of the world.  I believe the Tea Party activists are overstating their case.  I see reported profits for S&P 500 companies higher than expected, and perhaps there is a chance we can grow out of this deficit hole.

Right now I would vote for Obama again.  Why?  He has been pragmatic when faced with the economic cleanup of the Bush mess.  Obama has forced consumer protections on credit-card companies and is actually regulating, as the government should, the practices of financial institutions which drove the American economy into a ditch.  The laissez-faire, I’m-a-deregulator philosophy of Bush allowed the powerful to take advantage of the weak and uninformed, and the well-connected to seek a public bailout when their crazy risks exploded in their faces.  And ours.  We can’t let that happen again.


Wednesday, September 9, 2009

Investment Character

I am reading the biography Snowball: Warren Buffett and the Business of Life, by Alice Schroeder, and thoroughly enjoying it. Years ago I read Benjamin Graham’s The Intelligent Investor; I teach parts of Graham and Dodd’s Security Analysis; each year I read Berkshire Hathaway’s annual report to understand some of what they are doing and why.

I would not consider myself a Buffettologist in the sense that I copy whatever stock investments Warren Buffett makes. But I do try to understand what he does and why, and apply those principles to companies and industries I am familiar with. Do your own homework, I say. Understand where your money is, and why it’s there. That’s the way to be an intelligent, independent investor.


As I’ve read this biography, I am not surprised to learn Buffett was/is good at math and calculating odds; I am not surprised to learn his friend Charlie Munger is much the same way. Ideas pour out from their heads; they are passionate about investing, and they believe they are right. ‘Didactic,’ is how they describe themselves. Other words that come to mind are ‘relentless,’ ‘iconoclastic,’ ‘anti-social,’ and ‘obsessed with details.’ They are also honest, self-critical, and loyal to those whom they think deserve loyalty.


When I have taught my summer course on Investment Analysis, I have always argued that number-crunching is only half the battle to becoming a good investor. The other half, and maybe even the most important part, is having the right kind of character to be a successful investor. I think you can train someone to understand and calculate the right figures from annual reports, 10-K reports, and 10-Q reports. I think you can teach someone to use discounted cash flow analysis to get a sense of whether the current stock price correctly values, or undervalues, future earnings.

(I’m not surprised Ben Graham did not give much weight to future earnings, because I also believe projections into the future are dicey figures easily manipulated to prove whatever you want to prove. Understand the nature of the business at hand, and how it can remain profitable forever, or be easily susceptible to margin pressures, inflation, taxation and so on, and that’s how you can truly value ‘future earnings.’ You won’t get an exact number, but you’ll get a sense of whether this business is worth owning. It’s better to be approximately right than exactly wrong. I think Buffett said that.)


But my point is that while number-crunching is largely teachable, having the right investment character is for the most part not. I don’t care what anybody else thinks, and I don’t look for others’ approval of my investment ideas, nor for my clothing, nor for my unorthodox political positions, nor my blog entries. I have always been that way. As a toddler, my mother called me ‘viejo Josisah,’ which was the name of a crotchety old man she once knew in Chihuahua. I was grumpy; I loved being alone; I was, in a word, ‘didactic.’ Now I am a rumpled, ornery man on Broadway, with what I consider to be a plain look on my face but which my wife Laura says looks like a permanent scowl.

That kind of investment character makes it easy to go against the crowd, to not panic when others are decrying the end of capitalism as we know it, or to not join the party when the champagne corks fly to the ceiling because of Internet stocks, China, or whatever the next new fad is. I also don’t like debt. I try to keep things simple. I try to see things as they are, not as I wish them to be, at least for my investments. The recent market meltdown, although painful, was not enough to change my ways; I had enough liquidity to survive.

So ‘Know Thyself,’ that Socratic maxim, is so important to me as an investor. If you know you don’t have the right kind of investment character, then lowering your costs with an index fund is about the smartest thing you can do. If you think you have the right math skills and character, and you start running your own individual stock portfolio, and then you panic when others head for the hills, or you slavishly follow the momentum of euphoria, then learn from that. Those that learn from clear-eyed self-reflection and analysis will be winners on Wall Street. Those that don’t will embody Mr. Market’s schizophrenia.

Tuesday, May 5, 2009

Cinco de Mayo: A Victory for the Underdog

One of the many hats I wear is that of an investor. For decades, I have invested in the stock market, beginning after college when I had saved a few thousand dollars. I enjoy the number-crunching of investment analysis, finding undiscovered small companies, and putting my money where my mouth is. It is always a challenge, and I have made mistakes, but I have also returned to my mistakes to learn from them. Serious investing is investigative and practical. It is also a recursive process in which you are constantly evaluating your premises for a particular investment, as well as your evolving skills and sensibilities as an investor.

One of the things I learned about myself, during this vicious bear market, is that I need to increase my allocation for bonds in my overall portfolio. There is nothing like a heart-thumping drop in the stock market, month after month, to force you to reevaluate your strategy. I did not sell any individual stocks or mutual funds, so I did not panic and I have benefited from this bounce back from recent lows.

But in March I did feel financially vulnerable, since in four short years my older son Aaron will attend college. Now that the S&P 500 is above 900 at least for a day, I won’t go back to my 80/20 split for stocks and bonds, but instead will keep adding new money primarily into my bond portfolio. I am focusing on short-term bonds, because I believe interest rates are at historic lows, and can only go higher. Short-term bonds will be hurt the least when this happens. Remember, bond prices go down when interest rates go up, and vice versa, and this relationship is more pronounced the longer the maturity of the bond.

I am a contrarian, and this belief in my head was indeed proven by what I did with my hands and feet. I did not panic as the Obama administration got a handle on the financial mess it inherited, and as credit markets froze and threatened to turn a deep recession into a depression. I did not panic as a few mega-banks teetered near insolvency, as deficits soared because of federal bailouts, as swine-flu hysteria gripped the nation. It is important to assess how you reacted in critical situations to get a sense of who you are. You don’t know what kind of soldier you are until the bullets whistle past your ears.

We are not out of the woods yet. Corporate earnings may turn more negative than they have been so far, or we may experience flat to weak economic growth for many years, or some unforeseen event, like a run on the dollar, may undermine financial stability. The second and third waves of past flu epidemics have often been deadlier than the initial wave. So I am still wary, but I have taken steps to take advantage of overreactions and to be better prepared for the next crisis.

I am a relentless cost-cutter, and this attitude has helped me to evaluate what we spend money on and whether it is worth it. This cost-cutting also helps me to be better prepared for crises: companies and individuals who are careful with their money and carry little debt are better able to weather downturns. That’s a truism we should live by as investors and as responsible parents.

Sometimes my writer friends, who are terrible at managing their own financial affairs, ask me why I worry so much about money. Invariably this happens a few days after they’ve asked for a loan. I tell them what I’ve always told them. Investing is not about getting rich, or having more toys, or impressing others. It’s about independence. It’s about doing what you want, when you want, and not having to ask an ornery friend or a boss for more money, and not getting it.

Cinco de Mayo celebrates the underdog Mexico defeating powerful France at Puebla in 1862. The individual investor is the underdog in today’s investment world. Do your homework, know thyself, and think independently, and perhaps you will also reap an unlikely victory. Happy Cinco de Mayo.

Monday, March 2, 2009

Bear Market Blues

Another day, another drop in the Dow. We had an interesting discussion as a family yesterday: how to cut back on expenses to save as much money as possible. Laura and I told the kids about our investments, and how along with everybody else in this country we are suffering from this vicious, relentless decline in equities. We are okay, and I have never invested in anything fancy with the small portfolio of stocks I have, mostly in healthcare. Our portfolio has done better than the S&P 500 over the past fourteen months, yet it’s little solace to be down 35 percent even if the market is down 50 percent. The kids suggested turning off more lights to save electricity and eliminating cable and just watching TV on the Internet. I suspect many families across the country are having these discussions, and I know many are making much tougher decisions than whether or not to keep cable.

I wonder how this deep recession will affect our long-term attitudes. We have never been big spenders, and I have always paid off my credit card balances at the end of the month. I don’t like the punishing interest rates or late fees from plastic. I pay our mortgage fifteen days early each month; I try to be responsible. In our living room, I still have the speakers I had in college twenty-five years ago, but we do spend heavily on books and about once a week I buy a few culinary treats from Zabar’s. This economic downturn has forced me to ask myself many questions. Have we been careful enough with our finances? Are we ready for a long-term decline in the economy, in the stock market? Should we have saved even more money, and invested it even more conservatively, so that our kids can afford college in four years?

There is a great deal of self-doubt, self-assessment occurring in my head. I know I have not been reckless with our family’s finances. In comparison to what I hear in the news, of people investing in mortgages with teaser rates, of credit-card holders paying only the minimum with exorbitant interest rates on massive balances, of spenders who did not save much for many years but instead took out home-equity lines of credit, I know I did none of these things. We spent what we needed; Laura and I have saved 10-20 percent of our income each year; and I invested it. My friends and family have assured me I have been conservative with our finances, and yet I still feel I am failing. I simply want my family to be okay; I want my children to go to whatever college they want in four years.

Besides questioning myself, I am also angry. Angry at the ridiculous 21st Century version of American democracy. I find it more akin to several mobs shouting at each other, trying to sway the middle who simply wants to live in peace and with a modest prosperity. The democratic political and economic discussion to solve our problems, I have always believed, would only be as good as the character of the participants in this discussion. But what happens when ‘character’ is defined and warped by the means of communicating your message? We are losing newspaper editors and reporters every year, but TV pundits and braggarts on the radio, both experts of pithy sound bytes, define, ambush, and drive ‘political discussion.’

What will happen when we don’t even remember that there used to be a time when careful, self-critical, and even profound political debate defined at least a significant part of what occurred in the great American conversation to solve our problems? When we don’t even have the memory of a better political discussion, I believe we will become more mob-like, and less democratic. I believe we will be prone to radical influences with simplistic solutions, which in reality solve nothing. Be careful whom you pay attention to: the more you pay attention to them, the less you will be able to decide for yourself why you began to pay attention to them in the first place.

These are sobering times. Will we get sober leaders to help us out of this mess? Will we even have the capacity to listen to them anymore? I don’t know, but I am still hopeful.