Archive for the 'Quick News' Category

7 + 1 Life Lessons from the Very (and Not So Very) Wealthy

Over the weekend Barry Ritholtz published an excellent column in the Washington Post listing 7 lessons he’s learned through his interactions with high net-worth clients.  The lessons reflected a number of the values we have at Below Your Means.  Under #3 – Memories are better than material objects, he writes:

The rule of diminishing returns is a harsh mistress with luxury goods. Do you really think $100,000 audio speakers sound 20 times better than a pair of $5,000 speakers? (They don’t). Is a $250,000 sports car five times faster than a $50,000? (It is not). These days, you can buy quite a lovely home for $1,000,000 (and much less in the country’s interior). Those $10,000,000 manses are not 10 times roomier. Anyone who has owned a $10,000 Rolex will tell you that a $39 Casio keeps better time.

We like this one a lot – and it’s a common problem.  As your income increases, there is no requirement to increase your spending!

Ritholz continues (emphasis ours):

When discussing the benefits of wealth, I have heard again and again about amazing experiences, family get-togethers, vacations, shows, sporting events, weddings and other events as these people’s most important life experiences. While these things cost money, nearly every family can afford reasonable versions of them.

This leads to our addition to the list:

8.  Don’t think you have to have money already to start living richly

As with anything that requires discipline (losing weight & getting in shape, for example), too many people make the mistake of thinking “this would be so much easier if I already had X”, where X is being at a certain weight, or fitness level, or having a certain income.  It is just as easy to blow through a $100K/year salary as it is to blow through a $50K/year salary.  Now, if you are reading this and trying to make ends meet on a $50K/year salary, this statement may make you angry.  But trust me (and the experience of many people who have seen their expenses grow as their income grows) – it is just a matter of making a decision to live within your means.  Of course, if you are dealing with large medical bills or a house that you can’t afford after a job loss, you have an immeidate problem that requires more complex solutions than we are offering here.  But for a large portion of the population, the issue is more choosing to start living within your means, finding ways to increase your means, and growing your net worth than it is one of mere survival.  We’re not saying money doesn’t help, but it isn’t a requirement.  The authors of this blog certainly started before they had the incomes that they enjoy now.

Another point Ritholz makes that we love (emphasis added):

I am struck by how many very wealthy people I know — especially tech entrepreneurs – have expressed being grateful for their good luck. Again and again, I have heard the phrase: “Being smart is good, but being lucky is better.” Rather than leave you with the impression that success is simply a roll of the dice, I am compelled to remind you what the Roman philosopher Seneca the Younger was reputed to have said: “Luck is where preparation meets opportunity.” I don’t know whether it’s better to be smart or lucky, but I would suggest that making the most of the opportunities takes more than just dumb luck.

Opportunities will come your way all the time.  Living within your means is one way to ensure that you have the freedom to take advantage of those opportunites.  The second – don’t be too proud.  The most successful people we know will do everything from negotiate a seven-figure deal to dig a ditch, if that is what it takes to sieze the opportunity in front of them.

Over to the Washington Post for more…

7 Life Lessons from the Very Wealthy | The Washington Post

SEC May Charge Ratings Agencies with Fraud

The Wall Street Journal reported this morning that the SEC is considering fraud charges against the ratings agencies that were responsible for evaluating the CDOs, or collection of loans, that ultimately led to the sub-prime mortgage crisis.  For those of you who may not be familiar with the issue, part of the strategy of selling the mortgages was to bundle a variety of loans into a single package (the CDO).  The bundles contained high-risk and low-risk loans, but because they were bundled up in a package, the ratings agencies gave the package a solid rating despite the high-risk loans bundled within.

According to the paper, lawyers point out that regulators commonly accuse financial firms of fraud if they intentionally or recklessly misrepresent information.  The WSJ reports that the ratings agencies under investigation could face allegations that they “relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems” in the mortgage industry.  By doing so, they rated the products too high and misled investors as to their quality.

The Big Short: Inside the Doomsday Machine a fascinating book about the mortgage crisis by Michael Lewis, paints the ratings agencies as naive rubes who fell prey to the sophisticated selling tactics of the Wall Street trading firms.  In it, he points out that ratings agencies are paid to rate securities, and their customers (in this case, banks) want good ratings.  To us, the conflict of interest is obvious.  According to the Wall Street Journal (emphasis added):

To be sure, the credit-rating companies aren’t responsible for the accuracy of the data supplied to them to rate securities. But they could be accused of ignoring obvious flaws in the data, such as it failing to reflect the deterioration of the mortgage market, according to lawyers.

We’d add to that: or failing to conduct enough of their own research to establish independence from the organization submitting the security to be rated.

The continuing lesson for us at BYM: Wall Street deals are naturally stacked in favor of those who are closest to the market and the deals (and therefore know the most).  Much like the recent round of tech IPOs, it’s the traders who are going to make the most money.  Organizations like Moody’s are merely selling their opinion, which may be as uninformed as the man on the street.  In fact, when these agencies are dead wrong, they use the first amendment as defense.  The WSJ reports:

In May, the credit-rating firms notched a legal victory when a U.S. Court of Appeals ruled that they can’t be held liable for their ratings of mortgage-backed securities. Their ratings, the judges wrote, were “merely opinions” and protected by the First Amendment, a defense the firms have often used in the past.

And all of this is fine.  It’s just business, and we shouldn’t stop people from running businesses.  Our objection is when these businesses are treated like civic institutions, to be trusted implicitly, and rescued at taxpayer expense.  While Moody’s and Standard & Poor’s didn’t get bailout money, there were definitely part of the problem, and part of the system that we’ve propped up.

As always, let the buyer beware.

Raters Drawing SEC Scrutiny (premium content) | The Wall Street Journal

 

Apparently We Don’t Have Enough Fraud at Home; We Import It Too

Clare Baldwin of Reuters ran an interesting article yesterday describing the swagger of two investors attending DealFlow Media’s annual conference, who say they are making a fortune shorting the stocks of fraudulent Chinese companies.  The conference dealt with so-called “reverse mergers” in which a (usually larger) private company is able to become public without going through an IPO by merging with a (usually smaller) public one.  Apparently, according to these investors at least, since the process avoids an IPO, it’s a ripe for fraud.

“It’s not a matter of whether they are fraudulent companies, it’s just a matter of who they are cheating,” 62-year-old Texas-based investor John Bird, who has been very public about his short positions, told a panel at DealFlow Media’s Reverse Merger Conference 2011.

and another:

“The realization I have come to recently is that it’s a giant Ponzi scheme. It’s all going down,” declared Rick Pearson, another investor who holds short positions on some Chinese stocks.

The article continues, pointing out that others at the conference feel like the whole issue is overblown, especially since the Chinese are easy targets:

Some pointed out that highly regarded companies — such as Warren Buffett’s Berkshire Hathaway — were created through reverse mergers.

They also argued that while some U.S.-listed Chinese companies may have had some problems, that is the exception and not the rule, and suggested China is an easy target because of American resentment about its growth as an economic power and its clout as a big owner of U.S. debt.

“I think with China, there’s a total overreaction,” said David Rees, a partner at Vincent & Rees law firm in Salt Lake City, Utah. “It’s an easy target.”

And of course, the motives of those bringing the reports of fraud to the market were called into question:

Most attendees were quick to say that they wanted fraud rooted out, but they became uncomfortable or even angry at the thought that someone could profit even if their allegations ultimately proved false.

“What it comes down to is, is the information truthful and accurate? And, also, do you have an economic motive or an opportunity, assuming it’s false…to profit personally because you’re intentionally putting out this false information?” asked Perrie Weiner, international co-chair of DLA Piper’s Securities Litigation practice.

Whether you are tempted to believe the shorts or the longs, this article reminded us of our general attitude towards the markets: it’s hard to know what is going on with any of these companies unless you are close to the deals.  Let the buyer beware.

Insight: For short sellers of Chinese stocks, it’s time to reap | Reuters

Thumbnail Photo Credit: Carmela Songer

Pandora’s Stock Is Not Looking So Hot

Cue the shareholder lawsuits in 3, 2, 1 …

Yesterday we posted about Pandora’s IPO and how the price action looked very similar to LinkedIn (LNKD).  Unfortunately, things just went from bad to worse.  The stock is down again hard today, with shares plunging almost 25% just today!

I think the “Investing Wisely” lessons learned here are simple:

  • The current wave of “Dot Com 2.0” IPOs are very risky at best
  • I would avoid being an early buyer of any future IPO such as Facebook or Groupon
  • Don’t try to “catch a falling knife”, based on fundamentals some analysis are calling for Pandora to got o about $5.80 a share!

Sick Pandora Chart

 

Finally! Glass-Steagall like plan coming to the UK

The WSJ is running a story saying the UK Treasury is going to announce a plan to force banks to separate their risk taking side (investment houses) from their safe and sound deposit (banking) side.  This dear reader, is good news!

Of course, you might be saying – “wow that seems like a really good idea, why didn’t that rule exist before”?  In fact, it is a really good idea and it did exist before.  For it was from the very hard learned lessons of the Great Depression that such a good idea was born. An idea that helped keep our banking system safe, secure and sound for 80+ years.  That is of course, until it was repealed!

Here are some highlights of what this will mean in the UK:

“The goal of ring-fencing is to insulate risky activities, such as trading, so that deposits won’t be put at risk by banks’ investment-banking operations. Proponents say it could also make a failing bank easier to unwind in a crisis. In backing ring-fencing, the British government is going much further than its counterparts in the U.S. and Europe.”

[sarcasm] Well that’s just crazy! Why on earth should deposit-taking banks that we trust to keep the foundation of the economy running (savings, checking, payroll, mortgages, ATMs, etc.) be prevented from making risky Vegas style bets on with our money?

“Mr. Osborne is also expected to reveal that he will require deposit-taking banks to hold additional capital, which could signal that the U.K. will go beyond tough new global rules on the amount of capital banks must hold to protect against losses—another example of how the U.K. wants to position itself as a leader on financial reform.”

[sarcasm] Again, this is just nuts!  Do we really want our risk-adverse deposit-taking banks be on solid and sound financial footing?

If you are not familiar with the Glass-Steagall Act you should beWe desperately need this act reinstated here in the US.

 

Plan to Rope Off Bank Peril | The Wall Street Journal

Apple market cap now greater than MSFT + INTC combined

With Friday’s close leaving Microsoft (MSFT) down 1.45% to $23.87 and Intel (INTC) down 1.38% to $21.78.  The total combined “market cap” or market capitalization of Apple (AAPL) is now greater than that of Intel and Microsoft combined.  (Market capitalization is a measure of what all outstanding public shares of a company are worth.)

With a market cap of of approximately $317.6 Billion, the market is telling us that Apple is the second most valuable company in the world, second only to the oil giant Exxon Mobil (XOM).

The article notes:

With the Worldwide Developer’s Conference fast approaching (June 6th-10th), it would appear that Apple has nowhere to go, but up. As a result, according to Yahoo! Finance, the current market cap for Apple is $317.54 billion USD. Additionally, Yahoo! estimates that the 1 year estimated stock value per share will be at $448.33.

No doubt, the author is pretty bullish on the stock.  And why shouldn’t he be? After all, analyst James Altucher thinks Apple’s will be the worlds first $1 Trillion dollar company.  You can see this video here:

This same analyst is so confident and bullish, he actually raised his estimate again, not even 2 weeks later, to $2 trillion.

In the same video, he actually says $3 trillion is reasonable.  Your take is that if and when Apple’s stock does hit $1000, it will not be because Apple is able to sustain 90% year over year ad infinitum, but because the value of the US dollar will drop by 50% or more in the future.  If a dollar is worth 1/2 of what is today 5 years from now and nothing else changes at Apple, there is no reason the stock price won’t be $700 or more in nominal terms.

Regardless, I recommend Apple investors proceed with caution and consider setting some stop orders in place to protect any gains they have realized in the last couple years.  After all, the market may be due for a correction.

 

Apple surpasses Microsoft + Intel in market cap | Neowin.net

Peter Diamond Withdraws – Partisan Politics and the Federal Reserve

Economist Peter DiamondOver the weekend, Federal Reserve Nominee and Nobel Prize winner Peter Diamond withdrew from consideration in an op-ed column in the New York Times, citing strong Republican opposition.

… I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?  The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.

The question of whether or not senate approval committees know enough about the field of policy for which they approve is an interesting one.  One thing is certain, however.  The state of economy, the skyrocketing of the national debt, and the devaluation of the dollar are the central political questions of our time.  We can expect a more dogmatic approach as experts from different schools of thought or political affiliations are discredited out of hand.

We believe that rising government debt and continued destruction of the dollar has to stop.  Honestly, we’re not so sure the Federal Reserve is a good idea to begin with.  If there is going to be a Federal Reserve, though, we’d prefer it be stocked with economists that don’t think we can print our way out of the current problem.  The interesting question for anyone in a time of crisis: do we believe it enough to reject, without consideration, the merits of any argument (or in this case, nomination) that is embraced the position we oppose?  More on this subject, and on the Fed in general, in the weeks to come.

When A Nobel Prize Isn’t Enough | The New York Times

Photo: Donna Coveney/MIT