Bruce's Blog: Wiener Financial Management

News & Notes

Beware of Pundits

The pundits you hear in the media may be more glib than knowledgeable. Listen to what happens when I become part of the story.

Please view the video on your computer if you cannot access it on your cell phone.

Musical Treat
It's obvious that it has to be the Talking Heads.  Odd, engaging, and just plain fun. So many great songs to choose from! I've selected the upbeat Life During Wartime and Burning Down the House as well as the silly Stay Up Late.

News & Notes

What is the Stock Market?

 

An accountant recently told me that a number of her clients remained nervous about the stock market.  Apparently the residual fear from the great upheaval of 2008-2009 and the uncertain state of the world economy is making them extremely cautious.  I am sure that for many of these people the stock market appears to be a casino—a game of chance with no apparent explanation for its movements.

This perspective may be impacted, to some extent, by the growing popularity of index funds.  An article in Morningstar Advisor argues that the proliferation of index funds corresponds to "increased trading commonality among index constituents through the interactions of market participants."  Huh? 

In simpler terms, this suggests that the majority of stocks are rising and falling each day in the same pattern.  There is less of a distinction between stocks with an attractive valuation, which should arguably go up in price, and those stocks that seem overvalued and deserve to have their share price decline.  The market appears to be one of "risk on, risk off"—if we're feeling good about the world, most stocks go up; if not, most of them go down.  The fundamentals of any particular stock are of less importance.

At this point, it would be good to remember the two main functions of the stock market.  As the columnist Buttonwood points out in The Economist, one is to "encourage the efficient allocation of capital."  An astute colleague of mine describes the stock market as a mechanism to set prices for stocks so that money flows to the most promising business opportunities. 

The other function of the stock market is to allow savers to "participate in economic growth by linking their savings to business profits."  If we invest in companies that succeed, we shareholders—as co-owners of the businesses—should be able to reap the rewards.

The important thing to note is that these aspects of the stock market "are long-term goals that have virtually nothing to do with the daily fluctuations of the market."

Businesses do not always succeed and the stock market does not always go up.  Obviously, a downturn in the economy can limit business profits and cause them to be less valuable.  But separate from these rational considerations is investor psychology.  When investors have large mood swings about their desire to invest, then volatility can be exacerbated by this "risk-on, risk-off" mentality.  Index funds may make these mood swings even more prominent.

Nevertheless, we should keep in mind that the stock market, over time, allows us to participate in business growth.  The short-term gyrations of the market can easily make us lose sight of this concept. 

We may wish to heed the reasoned words of the First Eagle Funds in their recent Annual Report.  While acknowledging that we are in the midst of a challenging investment environment, they state:  "On a final note, we would like to express our gratitude to our investors—most of whom share our long term perspective.  If you are new to the fund and you do not share our three to five year horizon, you should consider closely the appropriateness of this investment as we will not attempt to mirror shorter term market movements... We are investing for the long haul, not the next quarter ..."


Words of Wisdom

Salesman: This deep-fat fryer can flash-fry a buffalo in under 40 seconds.
Homer Simpson: 40 seconds?  But I want it now!
—The Simpsons

News & Notes

 

The Value of Coaches

We can all look to improve in our professional life just like we can improve in golf or tennis.  At least I hope I can improve in golf.  I can't get much worse in tennis.

 

Musical Treat
My favorite cover of a Beatle's song shares the theme of assistance.  You can check out the old school version from Woodstock or the newer rendition, which has its own charm.

News & Notes

Medicare is Not Totally Free

 

For those of us of a certain age, it seemed like the distant future when we first heard the Beatles sing: "Will you still need me, will you still feed me, when I'm sixty-four?"  I clearly envisioned that, by that time, we would live in a world as depicted in The Jetsons.  But as that age approaches (or has been reached), mundane matters like Medicare start to impinge on our thoughts of flying cars and robot maids.

Of course, no one really wants to think about Medicare, with its jumble of letters—Part A, Part B, Part C, and Part D.  What a mess.  The basics on what this alphabet soup means can be found on Medicare's web site.

Beyond the details is an important point:  Medicare is not free.  OK, some of it is free (Part A for hospitalization has no premiums, although there is a deductible).  However, significant portions of the coverage, like doctors and medical procedures, require a premium and have deductibles and co-pays.  The same holds true for drug benefits in Part D.

Health care costs can be a large part of a retiree's budget even with Medicare.  These costs, including Medicare premiums, should be considered as part of retirement planning. 

You should also keep in mind that Medicare may not pay for all of your medical needs.  Private insurers offer Medigap coverage to pick up some of the costs not covered by Medicare.  An astute insurance agent that works with such policies can help you navigate the Medicare maze and help keep you protected.

Words of Wisdom

Age is a very high price to pay for maturity. –Tom Stoppard

News & Notes

 

 

The Universality of Cheetos Fingers

It turns out that knowing what to do with "Cheetos Fingers" is not common knowledge in all cultures.  This is a good reminder that we all come from different backgrounds and experiences. 

 

Musical Treat

Eating snacks can be fun.  But afterward, "The Thrill is Gone."  This great song has two amazing renditions that are totally different, but equally appealling.  Check out B.B. King's version and compare it to that of Jerry Garcia and David Grisman.  You decide.

News & Notes

Readers Write: Housing as an Investment

 

The great thing about having an engaged and intelligent readership—besides being able to publicly flatter them—is that they catch you when you fall short.  I recently attempted to discuss the value of an owner-occupied house as an investment.  My efforts to simplify a complicated calculation caused a number of you to point out some factors that were not included in the original piece.  Thank you for your assistance.

Please note that you will not be quizzed on this topic.  In weighing the distinct possibility of confusing you even more, I decided that it was still worthwhile to explore the matter a bit further for those so inclined.  For the rest of us, please skip down to the "Words of Wisdom."

The comments I received centered around two basic concepts: leverage and imputed rent.  Applying these concepts can cause the return on housing to be higher than I stated, but they won't necessarily allow a house to keep pace with other forms of investments.  As the articles cited later on indicate, the actual results will vary based on a number of factors.  The bottom line is that your house will not likely achieve returns commensurate with other investments even factoring in these concepts.

Leverage:  Most people don't pay for their house with a wad of cash.  The vast majority of us make a down payment and take a loan to finance the balance.  Because you are only paying a percentage of the purchase price up front, the returns you receive on the modest down payment are magnified when the house appreciates.  The problem, of course, is that losses can be magnified if the house depreciates.  Leverage in any investment situation exaggerates both the upside and downside.

Imputed Rent:  When you buy a home, you do not have to pay rent for a place to live.  This "imputed rent," or rent you save, can be considered part of your return on buying a house. 

For those wanting to dig deeper, excellent descriptions on how to calculate the returns on a house can be found in blog postings by the Oblivious Investor and Michael Dubis  as well as an academic article entitled "American Dream or American Expression?  The Economic Benefits and Costs of Home Ownership." 

These articles also consider tax-related comments from readers, such as the tax consequences of mortgage interest. 

This discussion is meant to introduce you to some additional concepts that reflect the complexities of the matter.  The devil is in the details.  I am, of course, always interested in your feedback.


Words of Wisdom

If I had to live my life again, I'd make the same mistakes, only sooner. —Tallulah Bankhead

News & Notes

A House is a Place to Live

 

Let's say you bought a single-family house in 1980 for $99,550, which was the median-price in California at the time.  (I was in my third year of college in Ann Arbor then, but we can pretend for a moment.)  By 2010, your dream house was worth $292,820 if it retained its median status.

Under this example, your house appreciated about 3.6% per year.  If you had the foresight to sell your house at the market peak in 2007, your annual average gain would have been even higher at 6.6%.

"Nice going," you say to yourself, "that's a pretty large return on my original investment."  However, your results are not actually as impressive as you may think. 

As the Wall Street Journal points out, a dollar invested in the stock market (Dow Jones) in 1980 would have grown significantly more than a dollar used to buy a house.
 

	Returns 1980-2007	Returns 1980-2010
$1 in House	$5.63	$2.68
$1 in Stocks	$14.41	$11.49

You should note that the appreciation of the price of a house excludes the 2% or more a year in costs that you typically incur in property taxes, maintenance, insurance and the like.  This sharply reduces the actual gains on a house.

Thus, while owning a house has many advantages, it should not necessarily be relied upon as an investment.  As we have seen, the housing market can be as volatile—if not more so—than the stock market.


Words of Wisdom

I want a house that has got over all its troubles; I don't want to spend the rest of my life bringing up a young and inexperienced house. – Jerome K. Jerome

 

News & Notes

A House is a Place to Live

 

Let's say you bought a single-family house in 1980 for $99,550, which was the median-price in California at the time.  (I was in my third year of college in Ann Arbor then, but we can pretend for a moment.)  By 2010, your dream house was worth $292,820 if it retained its median status.

Under this example, your house appreciated about 3.6% per year.  If you had the foresight to sell your house at the market peak in 2007, your annual average gain would have been even higher at 6.6%.

"Nice going," you say to yourself, "that's a pretty large return on my original investment."  However, your results are not actually as impressive as you may think. 

As the Wall Street Journal points out, a dollar invested in the stock market (Dow Jones) in 1980 would have grown significantly more than a dollar used to buy a house.
 

	Returns 1980-2007	Returns 1980-2010
$1 in House	$5.63	$2.68
$1 in Stocks	$14.41	$11.49

You should note that the appreciation of the price of a house excludes the 2% or more a year in costs that you typically incur in property taxes, maintenance, insurance and the like.  This sharply reduces the actual gains on a house.

Thus, while owning a house has many advantages, it should not necessarily be relied upon as an investment.  As we have seen, the housing market can be as volatile—if not more so—than the stock market.


Words of Wisdom

I want a house that has got over all its troubles; I don't want to spend the rest of my life bringing up a young and inexperienced house. – Jerome K. Jerome

 

News & Notes

 

Seeing Causality When It's Not There

 

Just because two events happen contemporaneously does not mean one of them caused the other to occur.  We love to see causality and connect things that are not necessarily related.

 

Musical Treat

Thinking of causality led me to the word "because," which in turn brought the song "Because the NIght" to mind.  The song was co-written by Bruce Springsteen and Patti Smith.  Patti Smith kills the song, but the Boss, who's pretty ripped in the video, doesn't do a bad rendition himself.

News & Notes

Investment Tricks You Can Do

at Home

 

Watch the video to learn how to analyze investment risk without any real knowledge of the underlying investment.  Impress your friends! 

  

Just remember, 10 year Treasury bonds are currently paying around 2% interest.  So the only reason someone would offer you  a 12% yield is to induce you to take on the added risk.  They are not paying such a huge premium above Treasuries because they love you.

 

Musical Treat

Hopefully, with the discussion above, you Won't Get Fooled Again.  It's amazing how this song is 40 years old and yet its lyrics are still relevant today.