Friday, June 29, 2007

Order's important when tapping into assets -- USA Today

A pretty good overview of this subject.

I'll throw out for you one idea not in the article, useful if you have built up your investments nicely, and are blessed with substantial money in taxable, tax-deferred, and even tax-free (Roth IRA) accounts. What follows is of course directed at US readers.

You can tweak where you take the money from to legally play the tax code like a violin, in other words, minimize your taxes. For example, you could take out money up to the top of the 15% tax bracket from your 401(k) or traditional IRA -- these distributions are taxed as ordinary income; than take additional money from the taxable account at long-term gains rates on the portion that is LT gains; finally, even a bit more from the Roth when you have to. All of this bearing in mind the relative amounts you have to work with, and avoiding depleting any one of the three types of sources unduly. Cool, huh? Not always very easy to execute, but the concept is powerful., and it beats a simple-minded "hit the taxable account until it's gone, then the IRA/401(k), then last, drain the Roth" approach. I am an IAR and have my own RIA firm, and am not a tax practitioner now, so before using this or anybody else's neat ideas, you be certain to check out what your own tax adviser says.

Investing: Order's important when tapping into assets -

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Do-Or-Die Time Nears for Old Investment Indicator -- Bloomberg

Chet Currier has some interesting thoughts on how much cash mutual fund managers have, and other old 'market indicators'.

Pretty nifty one-liner from the article: "Fund managers are good stock pickers but poor market timers". I love it. If most actively managed mutual funds fail in the longer run to keep up with their index benchmarks through stock-picking, then how bad would they be when attempting market timing? Opinion

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Thursday, June 28, 2007

Mr. Buffett and the Unknown Advisor Differ on That!

"Buffett blasts system that lets him pay less tax than secretary." He did not pay less than his secretary. He made $46 million and paid 17.7 percent, or $8,142,000 in tax. She is said to have made $60,000 and to have paid 30 percent in tax, or $18,000. Hmmm, now, eight million is more than eighteen thousand.

He apparently did pay a smaller percentage of his income in taxes than she did. So what. Presumably, he used every trick the tax code allows, and well, the cost of those things is typically lower investment performance. So he traded some investment performance away for lower taxes. I would too. So would you. Also, we are dealing here with capital, not wages. His salary, being greater, would indeed have been taxed at a higher rate. Buffet is being mendacious here. He knows all this, he just wants you to have higher taxes, to build a new age of big government, funded by big tax rates, under his favorite Presidential candidate, whose initials are HRC.

If taxes go up, investors will invest to have something left after taxes, rather than to maximize their long term gains. So our investment outcomes will suffer. Then we will all eat cat food and cut pills in half in our old age, excepting him, Hillary and Bill. He'll still be able to afford his cheeseburgers, and to buy theirs also.

Buffett blasts system that lets him pay less tax than secretary - Times Online

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WSJ (subscription) "A Cool Million No Longer Buys You a Luxe Retirement"

Yes it's old news, in a sense, but don't give up!

If you are young, a few simple actions will make your future much more comfortable. Use your opportunities for tax-deferred investing. Put enough into your 401(k) to get any available employer match. Contribute to your IRAs, both traditional and spousal.

Go beyond tax-deferred. If you can, put something, say, one hundred dollars a month away, for the very long haul, not to buy a flat-panel TV. To get started, put the money in a savings account. Then, when practical, in a taxable brokerage account. Learn how to invest the taxable account money for the long haul, not the fast buck, not as "mad money", and in a tax-efficient way.

Avoid becoming financial-services road-kill.
Avoid load funds like the plague. Like the plague. No-load mutual fund accounts, at the fund, are one good way. Companies such as Vanguard and T. Rowe Price are known for low expenses and good investor-friendly values. That's not a commercial, just the truth. I'd suggest avoiding the mutual fund companies which advertise over and over all the day long on CNBC and Bloomberg. Big ad budgets are paid for in high expense ratios! You want financial service pros whose highest priority is good client outcomes, not client-gathering marketing. Never go to an investment "seminar" even to get the free meal. It will really, really cost you. Don't invest through variable life or variable annuities, they're usually heavily-commissioned, "fee and expense you to death", poorly-performing, all around sorry deals. As you might have guessed, I don't like them much. Stir well, wait patiently while it simmers for twenty-five or thirty years, and voila! Magnifique! If at some point along the way you want a financial advisor, find one with low fees who doesn't sell commissioned investment junk products, and emphazises good fiduciary standards.

Getting Going -

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New Yorker: Hedge Clipping - get above-market returns on the cheap? "FundCreator"

Remarkable article. A few good quotes:

"Funds of funds hold stakes in a variety of hedge funds, so they are somewhat safer. However, as the executive made clear to Kat, investing in them is costly."

"...people who invest in funds of funds are effectively paying a three-per-cent management fee plus a “success fee” of thirty per cent 'three and thirty.' ”

“ 'Who wants to pay that kind of money?' Kat asked the executive who was interviewing him. 'You can’t seriously expect there to be anything interesting left after somebody takes out three and thirty.' The executive was nonplussed. 'I don’t know,' he said. 'But they pay it.' ”

So Mr. Kat sets out to craft a program to replicate specific hedge funds, such as George Soros' Quantum Fund NV. This is where it gets interesting.

The World of Business: Hedge Clipping: Reporting & Essays: The New Yorker

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China at 45 Times Earnings = Bubble

Yes China's economy is growing. Its' financial markets may go on up higher for some time. But no, it cannot grow fast enough to justify such valuations. Period. Simple enough? For you and for me, um-hum. For all the speculators out there praying for greater fools to keep coming in, and for investing newbies, 'fraid not. We are living in interesting times. Exclusive

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Wednesday, June 27, 2007

UBS Cited By Massachusetts for 'Dishonest, Unethical' Hedge Fund 'Quid Pro Quos'

This sort of thing smells soooo bad. Worldwide

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In today'a WSG: Brit Hedge Fund GLG Settles Short-Selling Accusations

The SEC's claim is that GLG, which purely coincidentally is going public itself, made illegal short sales in connection with 14 public offerings.

You know, you could almost do a "Hedge Fund Scandal of the Day".

I have a modest little proposal ...

Might I suggest: Before anyone invested in a hedge fund, what if they asked for and require written statements by authorized persons that the fund has not and will not violate short selling rules, has not engaged in and will not engage in or collude with other hedge funds in attempts to manipulate the market, has not and will not falsify its reporting to clients, will not lose most of their money and abscond with whatever is left, or engage in any other illegal practices whatsoever, and that the fund will disclose upfront how much leverage it will use and will not exceed that amount of leverage. Perhaps the fund should also be required to produce objective proof of its claimed superior trading skills!

Just a modest proposal. We might also add sort of a scarlet letter concept, a simple English one page disclosure of every regulatory scrape the fund or its executives have ever been in, however they might have been resolved.

GLG Settles Short-Selling Accusations -

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Monday, June 25, 2007

More on the Bear Stearns Mess -- Investors like Steerage Passengers on the Titanic?

Do you remember reading how the steerage-class passengers on the Titanic were locked below decks and could not get up on deck until all the lifeboats were gone?

"The decline turned into a tailspin last month when Bear Stearns Asset Management, which had more than $29 billion of 'structured-credit assets' as of Dec. 31, suspended redemptions in the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund ...
Barring investors from withdrawing money from a hedge fund typically is the first sign of an impending collapse." Worldwide

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Sunday, June 24, 2007

Falkenstein/Mahalanobis takes apart Private Equity

With the understanding that I don't think we are in a broad market bubble, this is a pretty good, succinct quick take on the problem with private equity. There is not much meat in that sandwich. The guys behind the counter are eating it up.


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Saturday, June 23, 2007

Lost money yesterday? Thank a hedge fund. In this case, Thank Bear Stearns.

Is that over the top? Or is it fair?

When these guys roil up the markets, as a long-term investor, if you truly are a long term investor, you can just be above it all. And yet. Nine or ten-to-one leverage (in this instance). High fees. Unquantifiable risk. Illiquid underlying holdings. Falsely implied superior trading skills. Some folks have lost money here. Perhaps they were "qualified investors". That doesn't mean they are truly sophisticated investors. They just have (or had) more money than some folks. Which means it is OK with the regulators to sell them heavily-commissioned investment "stuff". This system needs work. The only problem is that the politicians are as bad or worse than the people who create and sell investment junk "products".

BBC NEWS | Business | US bank bails out mortgage fund


Sunday, June 17, 2007

WSJ looks at fund-of-funds fees, gets a shock -- well, not exactly

Don't you be the one getting a shock! Funds of funds are mutual funds which create a new product by using other funds in the same family as components. An innocuous example is Fidelity's Four-in-One Index Fund, FFNOX. Others are not innocuous. You pay one expense ratio for the fund of funds. But in some instances you could not easily tell what the underlying funds were charging you. It was deep, deep in the prospectus, in craftily worded statements, perhaps without a total, or it could even be changeable, if the fund of funds could reallocate its holdings among the underlying funds at different times. This is actually one area where the regulators have been working to good effect, as now it will be harder to obfuscate on just what the total expense ratio actually is.

I will suggest the Unknown Advisor's Law of Really Bad Disclosure: It is never an accident or oversight.

Green Thumb -


Saturday, June 16, 2007

A little note on posting frequency

Yes, I know that the blogging experts all say you must post regularly. I will when I can, but I'm busy now with the business. So I guess I'll just do it my way. So no posts doesn't mean I've quit the blog. Just working hard for the clients.


SEC allows short sales after down-tick, and vows to stop naked short selling

I don't know what the effect of either will be! The old rule barring short selling after a down-tick was of limited effect, that's for sure. You just had to create an up-tick first. It's the naked short selling that's got to be shut down. Chairman Cox called it "a fraud that the commission is bound to prevent and to punish." The linked article discusses the ludicrous situation of, on the Regulation SHO list of stocks with heavy 'fails to deliver' for 538 days. Good grief.

SEC ends decades-old price limits on short selling - International Herald Tribune


Tuesday, June 05, 2007

Markets Made 'Unchanged' Into 20 Percent Gain: Chet Currier of Bloomberg

"If this steady-as-you-go spell has been tough on traders, it has gone down just fine with buy-and-hold investors in the stock market and stock mutual funds." -- Mr. Currier. Pithy and true. If you have been trying to game the Fed, building some sort of trading approach around what will, you hope, go up when an interest rate cut comes, then you haven't made much, or maybe you've even lost ground. If you were just well-invested, well allocated, and so on, you've reason to be smiling as you read this.

Is there a lesson in this? You bet. What has worked in investing continues to work. Opinion

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Monday, June 04, 2007

UBS Hedge Fund Loss -- Dillon Read Capital Management LLC

This is a remarkable situation. It truly is. Earlier this year we were reading about the losses and resulting dissatisfaction at Goldman Sachs' hedge fund. If neither Goldman nor UBS can run their hedge funds with satisfactory results, then why should you consider one? It might be just that simple a question. What, after all, does a hedge fund have to give you to provide a rational basis for believing in its ability to make money for you? Its alleged superior trading skills? The larger, more highly-developed brains of its people?

As the linked Bloomberg article notes, UBS lost about $700 million back when Long-Term Capital Management collapsed in 1998, and the damage from this new iteration of 'good hedge funds gone bad' will approach that level. It, like all these stories, is a good read. I would guess that it lives worse than it reads, especially for the investors. One hopeful note in the story, is that investors balked at the fees, 3 percent of assets and 35 percent of investment gains. At least now we know at what point people will say "No thanks". They then "sweetened" the deal for all but UBS to 0 percent af assets and 40, yes forty percent of gains. Then they lost money for UBS' account in subprime mortgages. UBS acted. Exclusive

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