Tag Archives: investing

The Man Who Sold His Fate to Investors at $1 a Share

28 Mar

This is an interesting story in Wired about a 30-year-old part-time entrepreneur named Mike Merrill who decided to sell himself on the open market. He divided himself into 100,000 shares and set an initial public offering price of $1 a share:

But, like many entrepreneurs before him, Merrill soon learned the downside to taking on outside funding. In the ensuing months and years, 128 people bought shares of Merrill, and he fell victim to competing shareholder interests, stock price manipu­lation, and investors looking for short-term gains at the expense of his long-term well-being. He was overwhelmed by paperwork and blindsided by takeover interest. He found himself beholden to his shareholders in ways he had never imagined, ruining personal relationships along the way. Through it all, Merrill clung stubbornly to the belief that since an IPO had worked for Google and Amazon, it should work for an individual too.

Initially, shareholders voted on a variety of small projects. On February 15, 2008, for example, Merrill asked whether he should make a short video to market shares in himself. His investors voted that idea down, but a month later they approved an investment of $79.63 in a Rwandan chicken farmer.

I’ve seen advertisements for www.upstart.com before, but it was good to read the start of this thought process of investing in someone.

 

Tags: ,

Duke Students on a Portfolio That Pays

2 Feb

Over the past year, I’ve been reading up on all kinds of investments and trying to determine where I can find some yield. So I enjoyed this New York Times story on Duke students who’ve come up with a “portfolio that pays.” The winning portfolio:

They were bullish on United States stocks, especially those of large companies, based on their predictions of a continuing recovery in housing, rising consumer confidence, strong retail sales and the continuing impact of the Fed’s quantitative easing program. They were also optimistic that Congress would avoid the so-called fiscal cliff and other threatened political calamities. But they were pessimistic about Europe and emerging markets, given the euro zone crisis and what they saw as slowing growth in countries like China and Brazil.

The team’s contest entry called for allocating 43 percent to United States stocks — 30.3 percent to a Russell 2000 index fund and 12.7 percent to a Russell 2000 fund that invests in midsize companies. They made no allocation to international stocks. Like more traditional models, they maintained a large allocation to fixed income, but weighted it heavily toward Treasury inflation-protected securities, or TIPS, whose yields rise with inflation. They allocated 32.1 percent to TIPS and 24.9 percent to an aggregate bond fund.

The result was a 9.7 percent projected annual return, with less volatility than the model funds they examined.

Personally, I think it’s a mistake they’re neglecting the international sector (especially emerging markets). I am also not as bullish on TIPS as these students. I do like the allocation to a more diversified Russell 2000 index than the broader S&P 500 index. Anyway, food for thought.

Tags: , , ,

How to Reduce Taxes on Your Investments

20 Nov

I was reading an article on reducing your 2012 taxes at Fidelity this morning. A lot of it was already familiar to me, such as this bit about investing in municipals:

If generating income is one of your investment goals, you may want to consider using a taxable account to invest in tax-free municipal bond and money market funds—especially if you’re in a high tax bracket. These funds typically invest in bonds issued by municipalities and their earnings are generally not subject to federal tax. You may also be able to avoid or reduce state income tax on your earnings if you invest in a municipal bond or money market fund that holds bonds issued by entities within your state. Interest income generated by most state and local municipal bonds is generally exempt from federal income and/or alternative minimum taxes.

But I would venture to say not a lot of investors may be familiar with tax-loss harvesting:

Use ongoing tax-loss harvesting. Tax-loss harvesting is the practice of selling investments that have lost value to offset current- and future-year capital gains. Unlike one-time or occasional loss sales, however, a systematic tax-loss harvesting strategy requires diligent investment tracking and detailed tax accounting. That means continuous analysis of every tax lot (shares purchased at a given price and time) to determine when the tax-loss benefit warrants selling appreciated positions. Trading a specific tax lot with a specific cost basis is different than selling all of your shares in a particular fund or stock, which may have been purchased at different times over many years and could have significantly different tax implications as a whole than they would individually.

I also found the below table very useful. Especially notable, if nothing changes before end of the year, is that all dividends will be taxed at your income level in 2013:

Your tax rate schedule in 2012 and 2013.

Read the full post on Fidelity here.

Tags: , ,

The Rise and Fall of Medbox

16 Nov

Earlier this week, WSJ/MarketWatch published a piece “How to Invest in Legalized Marijuana.” One of the suggested stocks mentioned was Medbox ($MDBX), a company that creates medical-marijuana dispensing machines:

For regular investors looking to get in on the action — and without having to actually grow or sell drugs — there are several small-cap stocks that stand to gain from marijuana’s growing acceptance. Medbox , an OTC stock with a $45 million market cap, for example, sells its patented dispensing machines to licensed medical-marijuana dispensaries. The machines, which dispense set doses of the drug, after verifying patients’ identities via fingerprint, could potentially be used in ordinary drugstores too, says Medbox founder Vincent Mehdizadeh. Based in Hollywood, Calif., the company already has 130 machines in the field, and it expects to install an additional 40 in the next quarter…

That article propelled the stock to a meteoric rise from roughly $4/share to a whopping $215/share in a matter of two days (thereby increasing Medbox’s market capitalization from $45 million at the start of the week to a staggering $2.3 billion by Friday). So much interest was expressed in the stock that company executives had to go on record to “dampen investor enthusiasm.” It seems to have worked: the stock traded in a wide range today, ultimately finishing at $20/share.

Pretty wild stuff.

Tags: , , , , , ,

Investing Gangnam Style

3 Oct

This is a really interesting piece in The Economist that underscores investor confidence and stock mania:

A MID-SIZED sized Korean semiconductor firm named DI makes products with distinctly un-sexy names like “Monitoring Burn-in Tester” and “Wafer Test Board”. It has lost money in each of the past four quarters. And there have been no changes to its fundamentals that might explain why its share price should shoot up from 2,000 to 5,700 won (from $1.80 to $5.12) in the space of just three weeks—including another 15% gain today.

But DI’s chairman and main shareholder, Park Won-ho is no ordinary mortal. He is the father of Park Jae-sang, better known as PSY (as in “psycho”). “Gangnam Style”, if you haven’t heard, is now number one in Britain’s pop charts and number two in America. Local retail investors—referred with the derogatory gaemi-deul (“ants”) by professionals—are piling into DI shares because of it.

Quite how they expect the horse-dancing YouTube phenomenon of 2012 to help DI sell more of its Wafer Test Boards is a mystery. But convoluted investor logic is of course not a new thing. DI is merely the latest example of Korea’s “theme stock”—the local equivalent of the 17th-century Dutch tulip, Pets.com and the like going into 1999, or the Chinese walnut.

Wikipedia has almost 200 (!) references for the article on Gangnam Style. My favorite section is the song’s presence in academia:

According to a blog post published on the Harvard Business Review by Dae Ryun Chang, Professor of Marketing at Yonsei University, one primary factor that has contributed to “Gangnam Style”s international success is the song’s intentional lack of a copyright. This allows people to easily adopt, re-stylize and then spread the song.[6] Brian Gozun, Dean of the Ramon V. del Rosario College of Business at De La Salle University, writes that the absence of a copyright and the use of crowd-sourcing are just some of the more innovative ways that Psy has marketed his song.

Dan Freeman, Marketing professor at the University of Delaware, remarks that Psy’s achievement is an anomaly which counters the typical trend of successful international artists, because foreign music poses a difficult challenge due to language issues, making it unlikely for a song to catch on “when you don’t even understand the words”. Freeman asserts that Psy owes his success in the United States to YouTube, because of YouTube’s effectiveness in reaching a broad market.

David Bell, marketing professor at the Wharton School of the University of Pennsylvania, suggests that “Gangnam Style” lacks a certain aggressive attitude that many find offensive in the rap genre, and “Gangnam Style” is like a classic rap video from a few years ago with girls and cars—”not as offensive and in your face, but with a humorous edge”. Bell argues that it is Psy’s accessible image, not his message, that has made the song so popular.

As per The Economist piece, this entry would be incomplete without the video:

Tags: , , , ,

Mark Cuban on the Business of Wall Street

21 Sep

Mark Cuban dishes out a lot of questions in his latest blog post:

The important issue is recognizing that Wall Street is no longer serving the purpose  what it was designed to. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings.  What percentage of the market is driven by investors these days ?

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past 5 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

This was the most important reasoning from Cuban, I thought:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades (hit every trade on a stock held less than 1 hour with a 10c tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 1 year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. 

Full post here.

Tags: , ,

The Surprising Business of Life Insurance Policies

15 Aug

Are you worth more dead than alive? That’s the premise behind this fascinating New York Times Magazine piece, which goes into depth behind life insurance policies.

First, the author drives one point home:

Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of how much longer the seller has to live.

There are many, many reasons why selling your own policy can be a bad idea:

For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.

The investors who buy policies from others must be diligent (even if what they are doing is unsympathetic):

Life-settlement investors, like those in other sectors, crave timely information about their holdings, and the key metric for predicting portfolio performance is the health status of the policyholders. To acquire this sensitive information, Fred says a Vespers representative would call and question the policyholders — or their adult children, nurses and doctors — as often as quarterly. He would then receive tracking reports summarizing what the company learned.

Much of what I’ve read in the NYT piece I’ve read previously, in different concoctions, at other sites. So the biggest takeaway from the piece, for me, was near the end:

Back in 1921, a Stanford University psychologist, Lewis Terman, selected 1,528 kids for a study on what demographic and psychological factors enabled students to excel, in both their early years and later in life. The children were regularly assessed even as they grew into adults, got jobs and had families. After Terman’s death in 1956, the project was taken up by other researchers, who continued tracking the participants all the way into the 21st century. That the study hadn’t been designed to analyze longevity scarcely mattered to Friedman: here was a large group of people who had undergone standardized assessments from age 11 till death. Friedman and his colleagues exhaustively mined the Terman data for statistically valid correlations between the “psychosocial” profiles of the participants and how long they lived. “Surprisingly, the long-lived among them did not find the secret to health in broccoli, medical tests, vitamins or jogging,” Friedman wrote in his 2011 book “The Longevity Project.” “Rather, they were individuals with certain constellations of habits and patterns of living.”

Friedman’s findings buck much of the conventional wisdom on longevity. For instance, the cheerful study participants were less likely, on average, to live to a ripe old age than the more serious ones, in part because happy-go-lucky people are prone to “illusory optimism,” meaning they underestimate health risks and are less likely to follow medical advice. Highly sociable people, on average, did not live longer than less gregarious ones as is commonly believed, because they tended to drink, smoke and party more. Over all, Friedman found a longevity edge for the successful nerds of the world, the scientist types over lawyers and businesspeople. “The findings clearly revealed that the best childhood personality predictor of longevity was conscientiousness — the qualities of a prudent, persistent, well-organized person — somewhat obsessive and not at all carefree,” Friedman wrote.

Sounds like it’s good to be a nerd!

But really, if this topic is new to you, I suggest reading the entire piece. The topic is macabre, but it’s quite fascinating.

Tags: , , ,

Ben Horowitz: Venture Capital Investor, Proponent of Rap

21 Feb

Ben Horowitz is a prominent venture capital investor. He started the venture capital firm Andreessen Horowitz with Marc Andreessen, the co-founder of Netscape, and the firm made vast amounts of money on investments in companies like Groupon and Skype (and will make even more when Facebook files for IPO).

But it’s his stance on the importance of rap in teaching business lessons that is intriguing. Throw business classes and books out the window, Mr. Horowitz says, and listen to rap lyrics instead:

Mr. Horowitz uses rap as an introduction as he philosophizes about business challenges like how to fire executives, why founders run their companies better than outside chief executives and how to stand up to difficult board members.

“All the management books are like, ‘This is how you set objectives, this is how you set up an org chart,’ but that’s all the easy part of management,” Mr. Horowitz said in an interview in his spacious office here on Sand Hill Road, the epicenter of tech investing.

“The hard part is how you feel. Rap helps me connect emotionally.”

How to deal, for instance, with the stress of the 11th-hour, late-night auditing mishap that almost stymied the $1.6 billion sale of Opsware?

Listen to the Kanye West song “Stronger”: “Now that that don’t kill me/Can only make me stronger/I need you to hurry up now/’Cause I can’t wait much longer/I know I got to be right now/’Cause I can’t get much wronger.”

Much of rap is about business, whether the drug business, the music industry or work ethic, said Adam Bradley, an associate professor specializing in African-American literature at the University of Colorado at Boulder who wrote “Book of Rhymes: The Poetics of Hip Hop” and co-edited “The Anthology of Rap.”

Read more at The New York Times.

Tags: , , , , , , ,

Equity and the Banking System

17 Feb

Writing in London Review of Books, Andrew Haldane provides a brief history of banking (with emphasis on the U.K. banks) and considers the too-big-to-fail conundrum:

Consider the effects of the too-big-to-fail problem on risk-taking incentives. If banks know they will be bailed out, those holding their debt will be less likely to price the risk of failure for themselves. Debtor discipline will therefore be weakest among those institutions where society would wish it to be strongest. This encourages them to grow larger still: the leverage cycle isn’t merely repeated, but amplified. The doom loop grows larger. The biggest banks effectively benefit from a disguised, and growing, state subsidy. By my estimate, for UK banks this subsidy amounts to tens of billions of pounds per year and has often stretched to hundreds of billions. Few UK government spending departments have budgets this big. For the global banks, the subsidy can reach a trillion dollars – about eight times the annual global development budget.

We have arrived at a situation in which the ownership and control of banks is typically vested in agents representing small slivers of the balance sheet, but operating with socially sub-optimal risk-taking incentives. It is clear who the losers have been in the present crisis. But who are the beneficiaries? Short-term investors for one. More than anyone else, they benefit from a bumpy ride. If their timing is right, short-term investors can win on both the upswings (by buying) and the downswings (by short-selling) in financial prices. Bank shareholding has become increasingly short‑term over recent years. Average holding periods for US and UK banks’ shares fell from around three years in 1998 to around three months by 2008.

Bank managers have benefited too. In joint-stock banking, ownership and control are distinct. That means managers may not always do what their owners wish. They may seek to feather their own nests by making decisions that boost short-term profits and thereby justify an increase in their own pay. Such decisions may also increase banks’ vulnerability to shocks. In an attempt to avoid this problem, shareholders have sought to align managerial incentives with their own. One way of doing that, increasingly popular over the past decade, has been to remunerate managers not in cash but in equity or using equity‑based metrics. This can generate hugely powerful pecuniary incentives for managers to act in the interests of shareholders. At the peak of the boom, the wealth of the average US bank CEO increased by $24 for every $1000 created for shareholders. They earned $1 million for every 1 per cent rise in the value of their bank. But such equity-based contracts also set up some peculiar risk incentives. In the 19th century, managers monitored shareholders who monitored managers; in the 21st, managers egged on shareholders who egged on managers. The results have been entirely predictable. Before the crisis, the top five equity stakes were held by the CEOs of the following US banks: Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley and Countrywide. We know how these disaster movies ended.

The evolution of banking as I have described it has satisfied the immediate demands of shareholders and managers, but has short-changed everyone else. There is a compelling case for policy intervention. The best proposals for reform are those which aim to reshape risk-taking incentives on a durable basis. Perhaps the most obvious way to tackle shareholder-led incentive problems is to increase banks’ equity capital base. This directly reduces their leverage and therefore the scale of the risks they can take. And it increases banks’ capacity to absorb losses, reducing the need for taxpayer intervention. Over the past few years, this case has been pushed by regulatory reformers. Under the so‑called Basel III agreements struck in 2010, banks’ minimum equity capital ratios will rise fivefold over the next decade, from 2 per cent to close to 10 per cent of assets for the largest global banks. That is a significant shift. Will it be enough?

 

Tags: , , ,

The Golden Age for the Individual Investor

15 Feb

Tadas Viskanta, founder and editor of financial blog Abnormal Returns, writes that there has never been a better time to be an individual investor. Citing the advent of low-fee ETFs, blossoming of options markets, and most importantly the rise of technology and social tools, Tadas explains his argument:

  1. Easier:  Investors today can with a brokerage account and a computer is now only a few mouse clicks away from a globally diversified portfolio of ETFs that in terms of expenses rivals what institutions paid a decade ago.  For all intents and purposes the expense ratio on the big ETFs is closer to 0.0% that 1.0%.  Many brokers now allow online trading of individual bonds and overseas securities.
  2. Cheaper:  Brokerage commissions continue to get driven towards $0 over time.  In fact, many brokers today provide commission-free trading of a range of ETFs.  Options strategies that would have been cost-prohibitive a few years ago are now viable strategies today.  Do you remember when you used to have to pay extra for real-time quotes?  Today real-time quotes are a commodity.
  3. Richer:  The range of asset classes, sectors and strategies available via ETFs is truly dizzying.  It is even for interested parties hard to keep up.  Will most of these more exotic strategies fail?  Probably.  But sometimes a strategy, like low volatility investing, that is based in deep academic research, becomes available to investors.
  4. More social:  Blogging and microblogging (StockTwits & Twitter) has opened up the world of idea generation to the masses.  Anyone with a computer these days can put his or her ideas out there for the world to see.  The blogosphere and Twittersphere is a meritocracy, albeit imperfect, where the smartest and most generous contributors rise to the top.  The social model is pushing into things like earnings estimates with Estimize and institutional-grade services like SumZero.  Many bloggers these days make fun of the raft of ‘free’ webinars that go on these days.  But if you think about it the software and Internet speeds were not there to make mass online seminars possible not all that long ago.
  5. Smarter:  The raw material for investment analysis and trading is of course data.  Financial and price data is for the purposes of most individual investors is free these days.  Many firms are using data in interesting ways.  In the area of fundamental data some firms likeTrefis and YCharts are making fundamental analysis easier.  A firm like AlphaClone allows you to track the moves of (and invest) like the big hedge funds.  When it comes to portfolio level data firms like Wikinvest are aggregating account data making analysis easier for investors.
I’ve been following Tadas’ blog for about six months now, and his daily links are superb. Indeed, Abnormal Returns (and its Twitter feed) is a blog I peruse daily.

Tags: , , , ,

← Older Entries

Follow

Get every new post delivered to your Inbox.

Join 528 other followers

%d bloggers like this: