This Time It's Personal Finance

I have taken some time to clarify my investment style for this blog and for myself without making any specific investment recommendations.

• Value, concentrated investing – While many seek the diversification of the full market portfolio, I speculate on a few investments I believe to be a great value. Growth companies have historically underperformed value stocks as investors systematically overestimate growth. Earnings growth regresses to the mean, and value typically is a better investment. A purely quantitative black-box strategy could evaluate the entire market and find value stocks. However, I am examining a company’s strategic position, financial statements, and conference calls. A portfolio of a small basket of investments that are in different sectors will get most of the benefits of diversification.

• International exposure – Most investors in any given country have a home bias. While there are barriers in understanding and in regulations to investing in other countries, it seems excessive. I seek to invest a high percentage of my investments outside the United States in emerging markets. In the cases where I cannot buy individual stocks, I buy exchange traded funds that give exposure to a particular country or region.

• Liquidity is not all that important – Most of my investments are fairly liquid at this point in time since I am unable to invest in private equity and venture capital. However, I am willing to make illiquid investments if I am compensated for that illiquidity. You can maintain liquidity on tap with credit lines at a very low cost to maintain.

• Leverage – At this time, I have cheap access to credit to borrow against investments in my portfolio. While leverage increases risk, I am in a great position to assume that higher risk. With a greater base of assets, my return on equity will be higher assuming my asset’s returns are greater than my borrowing rate.

Thanks to Dave Albrecht for asking me to write about my investing philosophy

We are HTC

HTC has been a major producer of smart phones for the last several years, but many of their phones barely acknowledged where their origin. I have an HTC Tytn II, which is better known has an AT&T 8925 or AT&T Tilt. HTC is now bringing its name to the foreground with an advertising campaign, "You."

I really appreciated the images and music used in the commercial. Here's the script -

It’s the first thing you see in the morning.

And the last thing you see at night.

It stresses you out.

And calms you down.

It helps you remember.

It helps you forget.

It keeps you connected.

It’s the only thing that is alway within an arms reach.

Which is why you don’t need to get a phone.

You need a phone, that gets you.

And you. And you. And you.

And we are HTC.

It seems that someone really understands how people use their phones and people's connection to their phones. HTC has such a broad line of products across price points, feature sets, and operating systems their advertisements have to be about experience not specific features, apps, and utility. (Contrast to an Iphone ad)

Corporate Speech

I recently found myself in an argument about the rights of a corporation to speak on political issues. To give some context, it was a long discussion beginning with talk of the bailouts and financial regulation and moving towards whether corporations have a right to speak and corporate personhood in general. While there was plenty of fodder for blog entries, I am addressing the corporate speech issue.

Shareholders have interests in a company doing well and sometimes regulation or tax policy is a critical issue. Shareholders and directors acting on behalf of themselves have the right to advocate for or against various issues. I think most people would agree to that proposition.

However, in order to be effective in promoting the interests of the shareholders the speech needs to be coordinated. In practice, the transaction costs are far too high not to do so and shareholders are not neccessarily aware of all the issues that are relevant. They have appointed directors to deal with that and anything else in the day to day operation the the company.

In principle, people do not lose rights when they pool their resources and appoint agents to represent them.(a corporation) "Issue" ads are exactly the type of speech that was intended to be protected. To prohibit corporate speech in favor or against policies is to tie the hands of the shareholders and effectively prevent them from promoting their interests.

Responding to Incentives

I believe that people can be intelligent consumers of health care with the right information like anything else. A big part of the problem with health care is that the true cost is not borne or known by the users of health care. While there will always be a need for catastrophic health insurance to cover unexpected events, the more frequent costs could be covered by consumers. Tax policies have encouraged "all you can eat" health care paid for by a third party. No surprise that people in this regime would consume more health care at greater and greater costs. Not only is the demand higher, there is an incentive to shift costs on to third party payers.

Given this background, I found this piece from the WSJ interesting on new websites to assist with finding pricing information for medical procedures. http://online.wsj.com/article/SB10001424052748704222704574499623333862720.html

No, you're wrong

I was not thinking about this until I saw an article about the Social Security "freeze." For those of you that don't know, Social Security benefits are indexed to inflation (the CPI). I will not get into the messy details of how the CPI is calculated, but the basic idea is that if the cost of living rises 5%, Social Security benefits will rise by 5%. For 2010, there will likely be no increase since we are currently experiencing deflation and the purchasing power of dollars is increasing. However, the law does not allow for a reduction in benefits if there is deflation. I see it again and again -- people do not understand real purchasing power versus nominal dollars.

That means a freeze in Social Security payments will translate into a drop in real purchasing power for many seniors, said Jo Wiejahn, a senior citizen in South Bend, Ind.

“Any time the ... income stays the same but everything goes up from the groceries, car maintenance — everything — you are actually going backward,” Wiejahn said. “Even though I work, the fact that my Social Security is going to stay the same is tough, because that’s basically the money I depend on.”

http://www.msnbc.msn.com/id/32544620/ns/politics-more_politics/

Actually, since there is deflation right now, everything isn't going up. Since there is deflation right now and the law prevents a reduction in benefits, the purchasing power of social security benefits is rising -- but don't tell that to Rep. Phil Hare D-ILL

U.S. Rep. Phil Hare, D-Ill., called it "unconscionable" that Social Security recipients won't get a cost-of-living increase next year.

He said he would support any congressional action aimed at reversing the decision, including introducing legislation if necessary.

http://www.qctimes.com/news/national/article_49734f92-91cc-11de-8c31-001cc4c002e0.html

In the interest of fairness, some do make the point that healthcare costs are still rising and the elderly disproportionately spend on healthcare. While this does illustrate a problem with the CPI in general (consumers have different baskets of goods they buy), my main point is that everyone needs to understand their real purchasing power, not the nominal they have.

Speculator, you say that like it's a bad thing

I guess you would say I'm a speculator. I have some assumptions about the world and I look for pricing that differs from those assumptions. If I win, I get to keep my profits. If I lose, I don't get bailed out by anyone. (The same can't be set for some major investment banks with proprietary trading arms)

Speculators have been blamed for rises in oil prices, driving down stock prices through short-selling, market crashes, etc. The reality is that we need speculators able to act on their beliefs, to buy or to sell. Politicians often judge that one price is too high or another is too low. I think it would be foolish after what we have seen over the last couple years to say that the market always get the "right" price at every point in time. However, the alternative is the government setting prices, which I have far less confidence in than the market.

A restriction on the activity of speculators would severely reduce liquidity in markets. Information would travel slower and those with the best estimates of the future would be less able to bring a market back to equilibrium.

Real Change

These are two photos I took from the Jefferson memorial. I really liked the quote in the second photo.