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  • Archive for March, 2009

    Ramit’s Book “I Will Teach You To Be Rich”

    Posted by Frugal on 31st March 2009

    Congratulation to Ramit first of all on his very successful book “I Will Teach You To Be Rich”. It’s amazing how he has made so far. Success never comes easy.

    I must first make a disclaimer, that I have not read his book. Therefore my following comments can be biased and inaccurate.

    Like most of the traditional advice for personal finances out there, it’s regular saving and investing. Yes, those are just the basics. However, when it comes to investing, I have been shying away from ETF. In fact, my 401K goes pretty much all cash since year 2000 January. And I have never regretted it. In fact, if they offer me a choice of buying ultra-short ETF, I would probably have chosen that. Unfortunately, most of the 401K investment choices are very limited.

    In the Yahoo’s interview on Ramit, he said,
    “The past doesn’t predict the future, but it gives us a fairly accurate view of what’s likely to happen. Whether it returns 6 percent or 8 percent — we can split hairs over that — the question is, do you fundamentally believe the stock market will go up. If you believe that, then invest. If you don’t, where do you put your money? If you only put it in a savings account, it’s not going to give you the returns you need to live on. You have to take risks to get potentially high returns.”

    My personal opinions have always been that it really depends on what timeframe you choose to base your opinions on. For example, many civilizations/currencies have collapsed in the past. Who is to say that USA is not on the same track? Once you expand your historical horizons, things are no longer as easy as “stock markets always fundamentally go up”. The primary reason that stock markets go up “in the long term” or rather in recent modern history is that human population increases exponentially. If human population stops growing at the same exponential rate, or heaven forbids, decreases, then stock markets will NOT go up.

    Why do I keep playing the devil here? Not because I want to earn advertising revenues of less than 0.01% of my net worth, with my pre-hypertension blood pressure going north of 130/90 partially due to excessive working hours. I only have one reason. For anyone who would care to listen, and in the case that I’m right, I hope that people can avoid financial catastrophes from stock markets. I believe that there will be another 40% to 50% collapse from the next intermediate peak in the general stock market going towards 2010 to 2012 timeframe. The credit excess is just not washed out yet.

    Anyone ever wonders why one of the best seller “Currency War” in China was never mentioned in most of the traditional media nor published in USA in English? There is a recent English book “Currency War” on but it’s an impostor. It’s simply inconceivable why any publishers wouldn’t want to publish this book based solely on business reasons. I think if people start to read “Currency War”, US Federal Reserve will go down for good. In the US, there is the freedom of speech unlike China, but then there is the “freedom of press coverage” based on money and power. No wonder Ron Paul only got 1 minute press coverage for his historical “money bombs” raising over 5 million dollars.

    Truth is out there, but you have to go out and find it out for yourself. The big money & power won’t tell you, and they will flood you with other AIG bonus news instead of reporting that Bernanke paid tens of billions of taxpayers’ dollars to Goldman Sach through AIG. Will the American public wake up before Wallstreet robs the future of the next two generations of USA blindly with their partners at Federal Reserve, Senate, and the Congress? This will be an infamy recorded in economic history, only to be expounded in details after maybe 50+ years from now.

    Posted in Book Review | 4 Comments »

    CGMFX: A former star falling on the hard time – A lesson on portfolio (mis-)management

    Posted by Frugal on 25th March 2009

    I’ve blogged about Heebner’s CGMFX & CGMRX fund before. Before 2007/2008, it had a terrific performance. I admired Heebner’s foresight on the builder’s good fortune from 2002 to 2005 (CGMRX), and taking advantage of commodity stocks out-performance from 2003 to 2007 (CGMFX), and the downfall in mortgage/financial companies(CGMFX). But the downfall since 2008 proved that it is very hard to beat the market consistently for anyone even if when they are very very smart.

    What went wrong? I remembered that Heebner was shorting Countrywide in CGMFX correctly. Why was his fund falling so hard? Looking at the top holdings of CGMFX at the end of 2008, I can think I can the reasons.

    (Stock symbol, Company name, holding percentage, YTD performance)
    NLY Annaly Capital Management, Inc. 12.84% -12.41%
    FRT Federal Realty Investment Trust 9.08% -33.75%
    PLD ProLogis Trust 7.82% -56.65%
    HME Home Properties, Inc. 7.11% -32.97%
    MAC Macerich Company 6.84% -32.45%
    SPG Simon Property Group, Inc. 6.77% -36.36%
    ARE Alexandria Real Estate Equities, Inc. 6.38% -33.78%
    DLR Digital Realty Trust, Inc. 6.02% -9.01%
    TCO Taubman Centers, Inc. 5.99% -38.53%
    DDR Developers Diversified Realty 4.84% -39.55%
    ESS Essex Property Trust 4.75% -29.12%
    EPR Entertainment Properties Trust 4.64% -49.97%
    VTR Ventas, Inc. 4.55% -35.75%
    CIM Chimera Investment Corporation 2.85% -13.33%
    UDR UDR, Inc. 2.68% -42.64%
    SLG SL Green Realty Corporation 1.89% -55.14%
    DEI Douglas Emmett, Inc. 1.40% -42.42%
    SKT Tanger Factory Outlet Centers 1.12% -25.79%
    BRE BRE Properties, Inc. 0.95% -32.38%

    Apparently, instead of shorting the real estate/financial companies, Heebner went 180 degree opposite and started buying beaten down real estate and insurance companies. Unfortunately, that didn’t turn out too well for the fund holder. Heebner literally caught the falling knife of the market.

    No one can exactly know where the bottom of the stock market or a particular stock is. That is especially true when the timeframe is broadened. There is some “truth” in buying ETF and not try to beat the market by market timing or stock selection. The key thing for smart people usually is NOT to out-smart yourself by thinking that if you do it once, you can do it again. Everytime (and anytime for that matter) is always different. Over time, stock markets tend to grind out all the “smart” people.

    So is it absolute useless for market timing and stock selection? Well, it’s not like that. Just by looking at the magnitude of 2008 fall, it is fair to question the Efficient Market Hypothesis. If the market is so efficient, why would there be such a big adjustment in such a short timeframe? The middle ground between ETF and market timing/stock selection lies at “sizing your bet” partially based on Kelly’s criterion which I’ve advocated to be much more important than anyone has paid attention to. The moment that you sizes your own bet, you have recognized the your own inability to forecast the market with 100% accuracy. When you believe that your stock market forecast is as good as throwing darts at random, you should go 100% in ETF. When you believe that your forecast has some validity, then you should step out of the ETF comfort zone, and bet accordingly.

    The problem with market efficiency is that it is only true in the short term, and very long term, but probably not in the intermediate timeframe. At the time of financial bubbles, you can almost always identify it. Bubble is an technical imbalance with the fundamental picture, which tends to last for some duration. Financial panic on the other hand can be felt and identified, but usually, it’s hard to take advantage of because of its much short duration relative to the bullish phase. Anything that you can identify is REAL information that you can take advantage via sizing your bets. Yes, you may not get the timing correct exactly, but you could get it partially correct. The thing to remember is that bullish phase tends to drag on longer (than any “smart” people expects), while the bearish phase tends to come very swiftly once it begins.

    So never bet the farm on anything. Give yourself some breathing room for mistakes. This is not to mention that you should try not to leverage (like those investment bankers who bet 20X to 40X of their AND OTHERS’ money). Understand that the stock markets can stay irrational longer than you can stay solvent (because the bullish phase tends to last longer). Stepping out of the market doesn’t mean that you should go short right away. Also understand that you should never try to catch the bottom of the stock market when it falls. And if you try, sizing is extremely important. Go very small with stop loss. Ideally, you should place majority of your bet AFTER it stops falling, not before. And forget about dreaming to catch the bottom and buy Citigroup at 0.97, and missing out the 200% gain in the rally to $3. You should be glad that you didn’t buy at $5, and suffer a horrendous 40% loss to $3, or buy at $4, and suffer 25% loss. Panic is usually short in duration. The chance of you catching the bottom is slim to none, even for professional traders. Doesn’t mean that you shouldn’t try, but if you try, you may want to bet very small. Do you spend $100K to buy lottery tickets? NO. So for an event of this tiny chance that you may actually catch the bottom, you should not bet big either. It means that you won’t get rich quickly from it, but it also means that you won’t get bust from it.

    In summary, size your bets. Give yourself some room for mistakes. And don’t go 180 degree opposite on your portfolio like Heebner did. Yes, you may get it right once or twice. But the mythical “swing trader” will remain forever a myth. In practice, you should ALWAYS go to cash first, before you swing to another direction. How long you wait depends on the market risk.

    Posted in Investing | 3 Comments »

    Stock market yo-yo

    Posted by Frugal on 20th March 2009

    From the last lower low till now, I believe the market participants were in the state of paralysis, refusing to throw in towel for a final panic. Sentiments were at bottom, and so we are getting a technical bounce. I repeat again that I believe that this is going to be the last chance for you to clean out stocks from your portfolio. The next wave may be free fall with sheer panic.

    My current guess is that this rally may last until about 15th of April at the minimum. Possibly it could last until mid to late May. Beyond that I have serious doubts on the strength of the rally. However, I probably wouldn’t go short until after July/August.

    I took the chance of a gold rally to “write down” a major chunk of my home equity shown on my own networth page, since the home prices have fallen quite a bit. I also accounted my past trading gains for this year. I am a bull in gold. Almost anytime I would tell anyone to load up. The recent rise is too sharp. If the gap is filled, I would add some more. The bullish train is probably going to leave the station really soon in my personal opinion. And I’m talking about months, or at least before the end of this year.

    Just some miscellaneous things. In my last post, I blasted AIG bonus and politicians for it. I’m surprised by the swift actions from Congress. I guess that they are FINALLY getting the message loud and clear. I don’t think what they did was the best method, since I’m never a supporter for higher taxes. But regardless, it’s a result that I can accept despite the method.

    After all, this is just common sense and justice. Paying bonus to people who lost hundreds of billions of dollars? Not on this planet please. By the way, let’s not forget that more billions are still flowing out of US treasury through AIG into pockets of Goldman Sachs and foreign banks. Why on Earth are we saving Mr.Paulson’s Goldman Sachs?? They are less like Lehman Brother who was a bond king. At the minimum, they should deserve 20 cents on a dollar, instead of a FULL dollar that AIG is paying. The IQs for these politicians really really need some improvements.

    Posted in Investing | 8 Comments »

    We need a Revolution!

    Posted by Frugal on 15th March 2009

    Taxpayers are going to “be forced” to pay out 450 million in bonuses to the guys who have essentially bankrupted AIG 10 times and counting, and dipped into treasury pots fourth time for 180 billions in less than a year.

    All these guys should be all fired, sued for paying back all past bonuses and compensation, and jailed for financial frauds. Why do US politicians continue to allow such ludicrous events to occur? If there is any plausible explanation, I can only think of two:
    1. Either the politicians are totally incompetent,
    2. or they are totally “in bed” with these financial executives.

    All these hundred of billions of dollars are paying out of our pockets of common people. If we don’t stand up and voice our concerns, one day all these financial executives will simply take all of the bonus money and flee away a bankrupt USA without getting any punishment.

    Who are these “daring” outside counsel that “advised the company that it must go through with” the bonus arrangement? Even if it’s somewhat “legally binding”, let these guys sue US government. I really want to see who are so daring and shameless to want to come forward and sue for these totally undeserved bonus.

    99 out of 100 workers don’t get ever any bonuses. But we are all working our butts off to pay some ridiculuous bonus to these executives.

    Something is seriously wrong at the top decision makers. We need a revolution!

    Posted in World Politics | 13 Comments »

    Is Gold In A Bubble?

    Posted by Frugal on 13th March 2009

    One of my colleagues have repeatedly asked me this question. I am quite clearly on the answer, “NO”.

    How many people do you know who actually hold GLD? How many people do you know actually buying gold? How many people do you know actually buy mining shares? The answer all too often is close to zero.

    A bubble is ALWAYS easily recognizable (unlike the shameful Greenspan who claims that it can only be seen hindsight). The participation rate will be quite high that you are bound to hear about it in news REPEATEDLY, and that it will be always the “topic of the party”. A bubble is a collective ignorance or rather frenzy, and there is always a disconnect to reality.

    In fact, gold is looking extremely good technically, forming the bottom of the cup in a cup & handle chart. The next rising up is usually pretty substantial.


    At $1000 just a month ago, the gold bull is faithfully shaking off the Indian and Arabic participants. However, the Asian will be piling in due to competitive devaluations of their own currency. Asians have always recognized both gold/silver as the money. They will never hesitate to protect their own wealth in the real money.

    So are you onboard?

    Unfortunately, for the smaller investors, physical gold is pretty much out of reach. With a minimum order of 20 ounces, that is about $20000. The only current buyers are from institutions and people who have money to put away. These are smart investors buying in, while the middle class is selling out their last portion of gold jewelry for cash. Who will be right?

    Posted in Gold/Silver | 7 Comments »

    Considering the Impossibility

    Posted by Frugal on 6th March 2009

    Everything is possible now with the unraveling speed of Wallstreet 700 trillion derivatives. Which of the following scenario may come true? Maybe all of them.

    1. Dow at 3500 in 2011.
    2. Gold at 5000 in 2016.
    3. S&P 500 bottoms at 400.
    4. The economic depression lasts more than 20 years until 2032/2033. This is not coming from me, but from the best economist that I know.
    5. All major banks nationalized at 80% of more, with stocks trading at penny levels by the end of 2009, continuing to extract hundred of billions every quarter from taxpayers to cover their derivative losses. Why is there no one outraged by benefits going to all the counter parties of the banks? The losses of the banks are the gains for the counter parties of the banks, which are being paid by all the US taxpayers, and eventually by the entire world through monetization and inflation.

    My “own crystal ball is showing” me that the stock markets will literally plummet another 50% to 60% in the second half of 2009, deflating everything until 2011, after which inflation gradually accelerates towards 2016, and wipes out all the cash holders. I predict in less than 15 years, there will be a hungry and unemployed mob rioting in the streets of Washington DC.

    The other day, I donated more to Ron Paul’s calling on fighting against mis-using of taxpayers’ money. American Republic is becoming a farce of preferential money distribution. Although intellectually I believe that US will not come out of this unstoppable economic mess until wrecking itself, emotionally I must “do my part” of trying to turn things around. Who else will turn USA around, if everyone of us don’t stand up and fight together? There will be no one saving this country from even dire economic except us.

    I understand that it sounds almost stupid to consider the impossibility of my little donation and my lonely voice will make any difference to the fate of this nation. But when I ask “who else” to myself, I think I might as well begin with myself, joining hands with Ron Paul’s campaign. I’m literally a “hopeless romantics”. But who says (my) love (for the nation) needs to be logical?

    Posted in Investing | 8 Comments »