With enough assumptions, you don’t have to be correct

Does anyone pay any attention to the “retirement” investment advice that financial institutions provide? I do, once in a great while. Of necessity, these comparisons assume stable tax laws and regulations, and ignore state income taxes. That’s two unrealistic assumptions right there. So why should we worry if the rest of the example is wrong, too?

What brings this to mind is an article in the Fall, 2011 issue of a publication from a major  stockbroker. The story centers on Jane, the daughter of William Smith, who died in 2010. William left her a $900,000 IRA. What should she do? Three options are presented:

  1.  Transfer the IRA into her own name immediately. According to the article, this would yield $620,100, after taxes, all received in 2011.
  2.  Inherit the IRA thru the estate. Apparently IRS regulations provide that you can sit on it for five years, then must withdraw the entire thing. Assuming 6% annual returns (another assumption that we know cannot be correct), Jane would in 2015 then inherit $782,862, after taxes.
  3.  Be the IRA’s designated beneficiary. (This would require that William had made the designation, which seems to be the point of the article.) Under this scenario, Jane withdraws minimum annual distributions, with the result that, in 2036 when she is 65 years old, she will have withdrawn $1,221,117 plus she will have an IRA worth $1,652,117.

But, if Jane took options (1) or (2), what would she have done with the money? We have assumed she is in the 35% tax bracket, so plausibly she doesn’t need the money right away, but would prefer to pile up more. So she would invest it. And we can assume she’ll get the same 6% annual return that we assumed for everything else. Further, we will assume that she pays 35% tax on this income (whereas in reality she will probably pay a lower rate on at least some dividends and capital gains, and might be able to hide some). So, netting 3.9% what is her pile worth in 2036? For option (1), I calculate $1,613,803. And she had complete control of this money, she could invest it in things prohibited to IRA’s, she could use it to flee the country, anything she wanted not effectively criminalized. That’s over twice as much as our friendly discount brokerage firm asserted.

So did the broker make a mistake here? No, because at the bottom of the chart it says:

Source: Ed Slott & Co, LLC. [the broker] is not responsible for information, opinions or services provided by third parties.

Just remember this if you are tempted to spend time reading,  or worse yet taking, “investment” advice provided without charge by financial firms. It’s worth every penny, almost.

I really shouldn’t be spending time on this, I have serious responsibilities in the world, but one does what one is compelled to do.

Does Accurate Forecasting Get Attention?

No, not particularly.  CXO Advisory Group did a little study, comparing the accuracy of forecasts made by a number of investment  “gurus” who they monitor, to the magnitude of google searches.  Based on a couple of different formulations, there was basically no relationship. Of course google searches would be only one measure of fame, and CXO’s way of measuring accuracy isn’t the only reasonable one, but still it is not a surprise.  If I made accurate forecasts, I could prosper with only a few subscribers, who I might charge a high price and ask not to talk about me much.  But if my forecasting record is mediocre, I would want to get as much publicity as possible, because I would need to constantly attract new subscribers.

Tho no surprise, this is not good news for geoists.  At least investment advice can be measured in a more-or-less objective way.  But geoist reforms are in an arena where there are always extraneous factors.  You might get your local tax policy exactly right, for instance, but this could be overwhelmed by an unwise investment in, say, an incinerator.

Farmland owners profit by returning to suburbs

As the housing market tanked a few years ago, of course the price of farmland “ripe” for housing crashed along with it.  Meanwhile, many investors, noting impending food shortages and low interest rates, bought farmland in rural areas.  Now, no surprise, they’re selling their rural land and using some of the cash to again purchase suburban farmland, at the much lower prices. The profit, of course, is in buying and selling land, not producing anything.  I am grateful to Mary Ellen Podmolik for her article in the June 19 Tribune, which provides some details.

The limits of Econned

Over the years, Naked Capitalism has provided a fine, if discouraging, play-by-play of the worsening corruption of our financial and governmental powers.  Dense daily posts, plus links to relevant news stories, supported by thoughtful and knowledgable commenters, makes it one of the few sites I really ought to read daily. (Cute animal pictures are a bonus.)

When chief blogger Yves Smith published Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, I was anxious to read it. Which I finally did over the last couple of weeks. Continue reading The limits of Econned

Excess returns to Congress

Some may say excess never left Congress, but I am referring to something a bit different.  “Excess returns” is the phrase used to describe an investment result which is above average for the kind of investment made.  And according to a report from Barron’s Randall W. Forsyth, a new study shows that U. S. Senators achieve an excess return of 10.7% per year in their personal investments.  For members of the House of Representatives, the excess is 6.8%.  Forsyth points out that any professional investment manager who achived this result on a consistent basis would be quite phenomenal.  He concludes that

Members of Congress used inside information gleaned from their positions of power to enrich themselves in the stock market.

He is probably right, and I would be the last to accuse Congress of honesty, but there is another possible explanation.  Maybe Congressmen are just cleverer than the rest of us, and in particular are more difficult to deceive.  Congress itself is evidence that the broad public is easily fooled.

In this regard, I recall stumbling a few months ago on a link to the personal investment statements that Congressmen and some other federal officials file. (Curious that I did not bookmark it and can’t seem to locate it right now.) I picked a Congressman who I thought might be honest, Ron Paul, and looked up his statement.  Dr. Paul seemed to have most of his money in precious metals, I don’t recall the extent to which it might have  been bullion, mining stocks, or related investments.  Of course this strategy would have done very well over the past couple of years. Paul is associated with the idea that U. S. dollars should be backed with gold.  I don’t think he considers this realistic in the near term, but of course if it ever happened the effect would be to push the price of gold higher as bullion would be accumulated to “back” the money.  But does Paul endorse gold-backed money in order to increase the value of his investments?  Or does he invest in gold  because he expects its value to increase?  I’m pretty sure it is the latter.  Of course this kind of logic would apply only to honest Congressmen, so I suppose we could consider Ron Paul to be an outlier.

According to Forsyth, the source study, by Alan J. Ziobrowski of Georgia State University, James W. Boyd of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of August[a] State University appeared May 25 in the Journal “Business and Politics” and covers the years 1985-2001.

What bitcoin illustrates about fiat money

The value of bitcoin seems to have surged to over $7, from less than one dollar a couple of months ago.  This is a far faster increase than the price of gold, or silver, or other “hard” assets.

Bitcoin was invented by Satoshi Nakamoto, who must be a skilled and innovative programmer.  Anyone can generate bitcoins by setting their computer to solve specific mathematical problems.  As more bitcoins are generated, the difficulty of the problems increases.  Relatively few vendors currently accept bitcoins, but several dealers are willing to trade dollars for them.  And the reason their value has increased must be that people are willing to pay more dollars than previously.

Why pay more dollars?  One reason is that the total number of bitcoins is limited, so presumably they cannot suffer the kind of inflation that often occurs with paper currency. (Could that rule change? Yes, just as some new major deposit of gold or silver might be discovered.)  Another reason, of course, could be that people are just learning about bitcoins, and seeing the trend, expect it to continue.  Also, bitcoins give some indication of being truly anonymous, secure money.

Now, if I was a skilled programmer, I could invent my own bitcoin-ish system, and generate my own coins.  But unless someone is willing to accept my coins in exchange for something people want, they’ll have no value.  Perhaps Satoshi Nakamoto is not only skilled, but also charismatic.

Bitcoins have intrinsic value in the sense that it takes a lot of work (done by the computer) in order to generate one, much as it takes a lot of work to discover, mine and refine precious metals. But, whereas I could use precious metals to make jewelry or tableware, I can’t think of anything that anyone could do with a bitcoin, other than spend it or save it.

So it seems to me that bitcoin shows that fiat money could work quite well, provided that the proper amount of it is issued.  If bitcoin’s deflationary trend continues, it might be a good investment but would lose usefulness as actual currency.  I think the most likely outcome will be, either, a decision to produce more bitcoins (however that might be made), or the creation of other alternative currencies operating in parallel.

Interesting times.

Short term loan at 0%, and how you can get one

Not from the Federal Reserve; surely none of my readers are “too big to succeed” and therefore qualified for direct quantitative easing. But an arm of the U S Government actually will sell you cash, in $250 increments, accepting credit cards without surcharge (you get any usual rebates or bonuses that your card provides) and with free shipping. The only catch: Your cash is in the form of dollar coins.

Stated purpose of the program is “to make $1 coins readily available to the public, at no additional cost, so they can be easily introduced into circulation—particularly by using them for retail transactions, vending, and mass transit.”  (Your government does not want you to just deposit them in the bank, but CTA farecard machines accept them.)  Altho coins cost more to produce than dollar bills, they save your government money because they last a lot longer.

For those of us who do not love the Federal Reserve, there is also the consideration that the coins are issued directly by your government, the closest thing we have to greenbacks (more about the advantages of greenbacks).

This program apparently has been going on for a couple of years; I learned about it recently from this old post.  It really works; I placed an order January 17, it arrived (by ordinary U S mail!) about a week later, and I will pay for it next week.  Presumably you could roll it over by placing another order.

Of course, what with credit cards, checks, direct bank transfers, etc., I don’t spend $250 cash in any month.  But maybe we’d all be better off if there was more use of the anonymous cash economy, which this seems to encourage.

Privacy Policies

Every organization seems to have a privacy policy.  Of course the one (pdf) at the Henry George School recognizes that we rely on and are subject to forces beyond our control, and can really only promise to do our best.  But most privacy policies (for example here) seem to have provisions like:

We may share your Information with any third party outside our family of companies as permitted or required by law or as expressly authorized by you.

Which imho could be equivalently stated as:

We will do anything we damn well please with your information as long as we don’t think it’s illegal.

That’s why I was struck some years ago by the  privacy policy of the iconoclastic but quite successful Mairs and Power Funds

We do not disclose any nonpublic personal information  about our shareholders, past or present, to nonaffiliated third parties, such as consultants or accountants, except as authorized by shareholders or required by law.

Which I restate as:

We’ll give out your information only if you, or guys with badges and guns, want it given out.

Unfortunately, somebody seems to have told Mairs and Power that investors really don’t care about privacy, and policy now says:

We do not … disclose … information … unless … permitted by law.

It’s really too bad, but what else are we rentiers supposed to do?

Car plague and bankster plague intersect

I have long tried to avoid any dealings with the various tentacles of Chase Morgan Stanley, figuring somehow or other I would be injured by them.  Apparently, at least in Colorado, some (or all?) of their staff are exempt from prosecution for assault.  Google finds only two reports, one from the UK Daily Mail , one from the Vail Daily, local to the event.

In case these links disappear, the first three sentences from the Daily Mail story give a pretty good summary.

A financial manager for wealthy clients will not face charges for a hit-and-run because it could jeopardise his job, it has been revealed. Martin Joel Erzinger, 52, was set to face felony charges for running over a doctor who he hit from behind in his 2010 Mercedes Benz, and then speeding off. But now he will simply face two misdemeanour traffic charges from the July 3 incident in Eagle, Colorado.

And from the Daily Vail:

Erzinger, an Arrowhead homeowner, is a director in private wealth management at Morgan Stanley Smith Barney in Denver. His biography on Worth.com states that Erzinger is “dedicated to ultra high net worth individuals, their families and foundations.”

Erzinger manages more than $1 billion in assets. He would have to publicly disclose any felony charge within 30 days, according to North American Securities Dealers regulations.

The decision to drop felony charges was made by the local prosecutor, over the victim’s objections.  One infers from the articles that the Erzinger will pay some monetary restitution.

More details from the Daily Vail:

Erzinger drove all the way through Avon, the town’s roundabouts, under I-70 and stopped in the Pizza Hut parking lot where he called the Mercedes auto assistance service to report damage to his vehicle, and asked that his car be towed, records show. He did not ask for law enforcement assistance, according to court records.

Erzinger told police he was unaware he had hit Milo, court documents say….

Meanwhile another motorist, Steven Lay of Eagle, stopped to help Milo and called 911.

It appears that neither the perpetrator nor the victim is British, so it’s kind of curious why the Daily Mail covered this.  Or maybe more curious why only one paper in North America did.

ht Naked Capitalism

Are you smarter than a hedge fund trader?

As for me, I’m just a little dumber than average, among the people who undertook the Trader’s Brain Scan, a test of memory and pattern recognition skills which presumably are important to profitable trading in financial markets.  Nothing on the test about bribing Congressbeings or extracting inside information from officials. Maybe that’s in one of the other modules.

This is among a dozen tests for (actual or aspiring) investors, traders, and entrepreneurs at Marketpsych.  Free registration (giving them an email address and signing their agreement) is required, but the results appear right in your browser as well as in the emails they send, and your name is not requested.