Personal Finance 

AIG’s $443k Party to Celebrate $85B Bailout

It’s absolutely insulting that AIG spent $443,343 on a retreat just days after the Feds bailed out the company with a $85 billion infusion that sucked 80% of the firm away into the Federal abyss.

It’s my personal opinion that C-level executives are overpaid by the conventions of mere mortals but the reality is that their salaries and benefits are the result of what the market will and can bear. Goldman Sachs CEO earned $74M last year, Lehman Brothers chief Richard Fuld defended his $71.9M payday (it wasn’t as much as before the bankruptcy though!), and ex-CEO of Bear Stearns James Cayne earned $49.31M over the last two years. It’s an ungodly sum of money, especially for companies that are either dead or on life support, but that’s how the game is played. You take the heat with one hand and the cash with the other.

What AIG did? Spending nearly half a million on a retreat at the St. Regis Report in Monarch Beach? That’s like someone spitting in your face. If I had any business with AIG, I’d seriously reconsider it.

Rock Out With Your Bailout [The Smoking Gun]


Past Returns Are Not Indicative Of Future Results

Bear Stearns had 85 straight years of profits followed by one bad quarter and then a fire sale at $2.30 to JP Morgan Chase, which was increased to $10. (though the mid-2007 catastrophic failures of two big hedge funds, the High Grade Structured Credit Enhanced Leverage Fund and the High-Grade Structured Credit Fund, might have indicated things were a little shaky at Bear Stearns)

Bill Miller, chairman and CEO of Legg Mason Capital, beat the market for 15 years straight before “hitting a wall in 2006.” Since then he’s bad some spectacularly unlucky moves by investing heavily in Countrywide, KB Homes, and Bear Stearns.

Roulette wheels show the history of the spins not because it’ll give players an edge in picking the next number, they do it to entice you to bet. Intellectually, people understand this. Emotionally, they throw caution to the wind if they see five red numbers hit in a row. They’re putting their smart money on black. (then it comes up red again!)

So, if we need to pick a mutual fund and we shouldn’t rely on the past, what should we rely on?


The one thing you can predict and control about a particular mutual fund is the amount in fees you’ll pay. When selecting a fund, be sure to remember to take a look at the fees involved because they directly impact your rate of return. A 1% annual fee is a 1% decrease off your returns, which can be significant over the court of 40 years. A $1,000 investment that gains 10% each year will be worth $6,727.50 after 20 years, the same fund with a return of 9% a year is worth only $5,604.41 – a 20% difference in value! (and that’s based on a tiny starting investment)


How does the fund stack up with your other investments? You need proper diversification to reduce risk and improve returns, so make sure the fund fits properly into your portfolio. While you can’t control the performance of the funds that make up your portfolio, you can at least ensure that you aren’t over-extended in one particular area. While this means that you won’t be hitting any home runs, you’ll be getting more base hits than strike-outs (think Ichiro Suzuki and not Alfonso Soriano).

Returns & Standard Deviation

While past returns are not indicative of future results, that doesn’t mean you shouldn’t pay attention to it! 🙂 The key, however, isn’t to focus entirely on the returns but to check out the standard deviation of those returns. That will give you an indication of how wide future swings may be and you might not want a fund that can just as easily return 30% as lose 30% (or you do!).

So, when reviewing funds, don’t look just at the returns because they don’t mean much. Look instead at the things you can control (fees and your own diversification).


The 151st Carnival of Personal Finance (amazing, one hundred and fifty one carnivals…) is available at Alpha Consumer, my post about laddering CD’s at ING Direct was included this week.

 Personal Finance 

Early Mistakes are Lessons in Disguise

Last night I had dinner in San Francisco with J.D., his lovely wife, and Cap and we somehow got on the topic of how JD made the fantastically not awesome decision to buy Sharper Image. Cap lamented about how he was poor and didn’t invest in stocks (to be honest, I forgot what he said so I put in a typical Cap comment :)), I chimed in about how I erroneous Worldcom (I said Enron earlier but I got the two mixed up) on bad news but that it was a good lesson for me.

That got me thinking to something my father told me many years ago. He said, and I’m paraphrasing, that you either learn a lesson in the classroom or you learn it in real life, the one in real life is far more expensive (in both time and money) and dangerous. The best analogy I can think of were the “fights” I saw on the fraternity quad in college. Ever see two “tough guys” step up to each other, bump chests, and challenge each other? That, in part, goes back to when people would fight for territory and weakness meant someone else was going to swoop in on your livelihood.

On the fraternity quad of a private engineering school, you probably didn’t learn the lessons of the street growing up and probably didn’t realize that if you bumped up against the wrong chest, you’d be floored. In the fraternity quad of a private engineering school, the chest puffing stopped at just that, chest puffing.

Then my friend Howard from New York City showed up, a real cool Asian kid who stood all of 5′ 7″, but he had street smarts; where he came from, chest puffing and “go ahead, hit me” statements were soon followed by the very thing you asked for. One night he had a run in with some punk, there was shouting, some “go ahead, hit me”s were thrown around, and he swung. The guy didn’t fight back, but bless his bravado, he said “hit me again!” And he did. And again. Until the guy ran. (He later returned with five of his fraternity brothers, at which point we called him a [not nice name] and told him to [go home])

That other guy, he got a lesson he should’ve learned in the classroom – don’t pick a fight if you aren’t going to fight. Howard used his fists, depending on the street and the circumstances, it could’ve been clubs, knives or guns. The other guy got off cheap.

After that little trip down memory lane, it struck me, losing money on Worldcom was very good for me. At the time it was catastrophic, a loss of a thousand dollars in a Roth IRA that had only three or four; but it taught me that I really need to do a lot more due diligence before I’d be ready to invest any money in individual stocks. Due diligence is not an hour reading news stories, due diligence is poring over financial records, understanding how markets price stocks (biggest lesson is that it’s about growth, not intrinsic value; don’t quote me though because I’m terrible at investing), and a whole pantheon of factors I can’t even begin imagine, let alone enumerate. That’s precisely why I like index funds (though I’m waiting for the research that says index funds suck, you know it’s coming!).

That thousand dollars has probably saved me countless dollars over the years since and it definitely was the main reason why I didn’t buy Bear Stearns this past month.

Those who cannot remember the past are condemned to repeat it.
                — George Santayana, Reason in Common Sense


Don’t Buy (or Sell) Stocks On Emotionally-Charged News

Late last year, when there was blood in the streets, a well known discount broker (Company A) was said to be on the verge of bankruptcy and the stock tanked 50% in one day. Not only did it tank 50% but the prognosis on the street, at least perpetuated by mainstream media, was that company was hosed and that they were going under. They didn’t have a rich history of being able to fight off adversity, they were relatively new in the financial business and lots of people figured they’d collapse. SIPC insurance would have to be initiated to save accounts and it was going to be yet another one of the casualties of the sub-prime mess. Would you have sensed that the market had panicked and bought shares? Or would you have joined the bandwagon and watched the shares fall into oblivion?

Now consider this scenario. Several months later, an 85 year old investment firm (Company B), well known throughout the world, looked to be royally screwed as traders were concerned that the firm wouldn’t be able to fund future transactions. Their lifeblood, capital, appeared to be bleeding out as investors were pulling out their funds in the firm. Until their last quarter, they had never posted a loss. That’s 85 years worth of straight profits. On a Friday, their shares fell 10% to a five year low of around $57. By Monday, they closed at $30 on those same credit concerns. Did you see this as the market offering a huge discount on a valuable commodity? Or did you see it as the end of pretty good eight-five year old run?

Well, if you guessed, based on the setup, that Company A recovered and that Company B didn’t… you’d be quite astute. You’d be more astute if you made those determinations as the events were unfolding, rather than right now. Company A was E*Trade, which was the impetus for a topic focused on what would happen if your brokerage went bankrupt. Company B was Bear Stearns. JP Morgan Chase recently announced that they’d buy the firm for $2.30 a share, with funding from the Federal Reserve. While the ink isn’t dry yet on that deal, it was announced this past weekend in conjunction with a weekend 25 basis point cut by the Federal Reserve (an event almost as rare as Halley’s Comet, the last weekend rate cut announcement was October 6th, 1979).

The moral of this story is that you shouldn’t even buy individual stocks based on (emotionally-charged) news. The broader corollary to that moral is that you shouldn’t buy individual stocks without careful inspection of its fundamentals, but avoiding emotionally-charged news is always a great first step.

For the record, I thought E*Trade was going under and Bear Stearns would be fine. I didn’t buy shares of either because I’ve been burned (and rewarded) in the past about ignorantly buying on bad news (now I stick to index funds like a good boy!). In the past, I bought Enron because I thought people were over-reacting but one can never underestimate the pervasiveness and severity of outright fraud. I was rewarded when I bought shares of Xerox in 2000 when it was in single digits because I figured a firm with that storied a history probably was going to make it (or at least be acquired). Though it’s like they say, tell your kid that the stove is hot won’t sear in the message quite like actually touching it.


We Liquidated Our Target Retirement 2050 Fund

Stock MarketMy fiancee and I put a portion of our savings, that is those funds aren’t earmarked for future taxes, weddings, or other purposes; in a Vanguard mutual fund account that is fully invested in the Vanguard Target Retirement 2050 fund (and a high yield savings account). The latest rattlings of the stock market have unnerved me and while my brain is telling me “think long term,” my heart is telling me to sit out the next month or so and let everything settle down. I know a lot of you will probably respond by saying “you should be thinking long term! why are you trying to time the market!?!?” and a less open blogger would’ve probably never mentioned it, but I feel that it would be remiss if I didn’t share with you my decision and why I did it.

(Click to continue reading…)


With Risk Comes Reward, And Risk

Hedge funds have been getting a ton of notoriety lately because of their gigantic returns and people are going nuts over them and their fantastic returns. The short description of a hedge fund is that a limited number of individuals (accredited investors) are allowed to invest in a hedge fund and, because they are open only to accredited investors, they aren’t regulated by anyone such as the SEC. As such, they are basically free to invest whatever they want (subject to whatever agreements they made with investors) and they’re paid based on asset size and performance and they’re paid very handsomely. They’re generally riskier than a mutual fund but usually you don’t care because you want the rewards.

With risk, comes reward. And for the poor souls who invested in Bear Stearns’ High-Grade Structured Credit Enhanced Leveraged Fund and High-Grade Structured Credit Fund, they were told last week that they done. Finished. The High-Grade Structured Credit Enhanced Leveraged Fund was now worthless, losing essentially all $638 million, and the High-Grade Structured Credit Fund lost 91% of its $925 million – all because they were highly leveraged in the sub-prime lending industry. For those of you keeping score at home, that’s over $1.4 billion dollars lost. One point four billion dollars.

With risk comes reward… but don’t forget the risk.

Accredited Investor: In the US, for someone to be an accredited investor, they must satisfy some qualifications according to the Securities Act of 1933. The qualifications are that you must have net worth of $1M or have made at least $200k each of the last two years ($300k if you’re married) and can expect to earn that much this year.

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