Invest To Hedge For Inflation

According to the Efficient Market Hypothesis, the stocks are always fairly priced. Whatever information and news will be reflected by the stock price almost immediately. The current market capitalization of a given stock to the entire market is the best allocation percentage using all available news and information. This is the philosophy of the passive index investing.

Using the spirit of efficient market hypothesis, a person can invest to hedge inflation of his or her expenses by studying his or her expense budget. Using my budget as an example, my total expenses including property tax, but excluding income taxes and charity contribution is $3805 per month. I categorize expenses roughly into the followings (please refer to the table of my budget):

  1. Food: $360
  2. Car: $45 insurance + $40 maintanence = $85
  3. Housing: $1270 mortgage + $165 HOA + $225 property tax = $1660
  4. Communications: $16 local + $7 mobile + $20 long distance = $43
  5. Energy: $45 electricity+ $55 gas + $135 gasoline = $235
  6. Utilities: $25 water + $13 trash + $17 cable = $55
  7. Medicals: $127
  8. Travel: $220
  9. Consumer Staples/Clothing: $100 (baby) + $300 wife’s + $80 cash + $100 misc = $580
  10. Education: $440 preschool

Here is the summary table:

Expense

Amount

Percentage

Food

360

9.5%

Car

85

2.2%

Housing

1660

43.6%

Communication

43

1.1%

Energy

235

6.2%

Utilities

55

1.4%

Medicals

127

3.3%

Travels

220

5.8%

Consumer Staples

580

15.2%

Education

440

11.6%

So if I want to hedge against the inflation of my expenses, I would invest in accordingly the related industries. Of course, you may also want to consider the input factors into a particular industry along with that industry. For example, to hedge against your costs of airline tickets, you definitely want to consider the cost of gasoline energy that goes into airplanes. And for calculating your investment for housing costs, you should take out the mortgage, but do include the rent. Mortgage itself is already your investment into your own housing.At last, you don’t need to over-hedge your expenses. If you assume an operating margin of 10% (or stock return of 10%), you only need to invest $43 * 12 months / 10% = $5160 in the communication industry. If the overall revenue of communication industry grows, most likely so will your expenses and your investment profits.

How I Pay Just $3.21 A Month For A Cellphone

FYI: I posted another article for $2.54 per month for prepaid cell phone.

I’m not a heavy cell phone user at all. From Monday to Friday, most of the time, I am too busy to pick up any personal phone calls at work. During weekend, since I spend most of my time together physically with my family, there is not much of need for phone communication either. I guess my lack of need for cell phone is due primarily that

  1. I don’t have a business that I need to be responding to 24/7, or at least during regular work hours at any locations.
  2. Any other calls from friends or non-immediate family, I can always take care at night, or at my leisure time.

So what can a person like me do something about cell phone plans so that I can have and use a cell phone without paying monthly charges of $20 or more? Initially, I signed up a plan of $19.99 for only 60 minutes a month with AT&T wireless. But my usage is kind of sporadic. Sometimes, I go over 60 minutes; at other times, I use less than 5 minutes for the entire month, in which case, I’m paying $4 per minute.

So when I found out about the Free2go plan, I made my switch. Under this pre-paid plan, I can always roll over unused minutes as long as I refill my account before th credit in my account expired. Every minute is 25 cents. I can save up my minutes, or I can use a lot of them if I need to.

AT&T has been bought out by Cingular wireless since. From the Cingular online account now, you can only add $25 for 90 days of expiration, or $10 for 30 days of expiration, or $100 for a year of expiration, which is about $8.33 per month. It’s not too bad, but still more than what I need to use per month. My trick comes in here. I buy those refill phone cards by AT&T at the rotary stands from the grocery store (usually at Ralph store in CA). Because these cards were issued long time ago, they still have AT&T printed on them, and still have $10 refill cards for 90 days expiration. Since there won’t be anymore of these coming out, I keep 4 unused refill cards all the time because the cards will expire in 1 year if not used for refill.

The extra added bonus of buying these refill cards is that I don’t need to pay any sales tax or any telecom-related taxes. I also get 5% off when I use my Citibank dividend credit card. So that’s roughly extra 13% (5%+7.75% sale tax) savings. So I end up paying $10 * 4 cards * (1-5%) / 360 days * 365 days / 12 months = $3.21 per month.

Of course, the downside of using this plan is that these cell phones in this plan are TDMA-based, and have worse signal reception compared to GSM or CDMA-based phones. In fact, if I have very good and reliable cell phone reception at my home, I may have opted just using cell phone, and get rid of the land line phone which at least cost about $18 a month. Using cell phone only has the downside of not being able to access 911 emergency calls when you really need it, but I think it’s worthwhile considering it. After all, land line phone can also get a circuit-busy signal at those disaster time. And it’s not like every one of your neighbors will be as frugal as you.

By the way, last time I checked, Cingular is not making this kind of Free2go plan available anymore. They still have their own prepaid GSM-based plan Pay As You Go but it’s $10 refill per 30 days, or $100 refill per 365 days. For $8.33 a month, it is still not a bad deal. By the way, you can get a great deal on these GSM phones too at HSN. They have camera phones for the prepaid plan for about $100, with $40 + $10 rebate or phone minute credits.

I guess at this point you may think that there is no way to beat $3.21 per month for maintaining a cell phone. One friend of mine who probably has 2 or 3 million networth actually beat me on this. Because he uses his cell phone even less often than I do, he simply lets his prepaid cell phone minutes expire at the end of 90 days. And the next time around when he needs to use his cell phone, he will call up the customer service for immediate refill of $10 using his zero-minute cell phone. This is feasible if you don’t need to receive calls, but just need to make calls. If you let it expire for too long, you will even lose to the right to your original cell phone number. Your cell phone in this case becomes a mobile paid phone.

The Silver ETF Is Here!

Finally SLV, the first silver ETF is here on April 28, 2006. No more needs of paying premium over CEF which at one point was trading more than 10% premium over its underlying asset. Despite its convenience and attractiveness as an easy way in investing in silver, it is after all a paper asset. Not only that, like gold ETFs (IAU and GLD), they will be taxed at the very high federal tax bracket of 28%, falling into the category of collectibles. I wonder where this collectible tax came from. It must have come from an inflationary era when people held goods and collectibles instead of cash. Our beloved government never forgets to extract taxes out of its own making of inflation, taxing collectibles at even higher rate. As an investor myself, I think it’s so unfair to tax beyond inflation. I have no problems with taxing real gain. But when government inflates by printing more paper money, and then comes in and tells you that you have an absolute paper gain while you barely beats inflation, the government is simply stealing from you for her own sin of inflation. The capital gain tax makes the job of being an investor doubly difficult. Not only you need to beat inflation, but you need to beat inflation on an after-tax basis.

Okay, enough about tax & inflation. What are the other ways that you can invest in silver? Here is my list:

  1. SLV, as just mentioned. An annual percentage cost of 0.5% will cover all the storage costs and inconveniences. However, as a matter of fact, I’m not too thrilled about another paper vehicle for the hard asset.
  2. Silver perth mint certificate in Australia. Minimum investment is close to $10000 US. Last time I checked, uncle Sam has got its tentacles into the books of most dealers, requiring tax reporting upon sale.
  3. American Silver Eagle coins or silver bars. This is an easy way for small investor to get into physical silver market. Storage cost is nil, at your own space. But you pay for minting, dealer premium, and bigger bid/ask spread over the spot price of silver.
  4. CEF, Canadian Central Fund: A gold/silver holding company with small management cost. It holds roughly 50% of gold and 50% of silver bullions. It was trading at a 9.2% premium over it’s precious metal holdings on April 27 2006, the day before SLV is launched.
  5. Silver stocks: PAAS, SSRI, and many other ones. For disclosure purpose, I personally hold both stocks that I mentioned.
  6. Silver futures or call options: Commodity market is less regulated, and subjected to manipulation by various agency, especially close to delivery/expiration dates of futures/options. This may not be a bad way, but I don’t have sufficient knowledge in this area. Investment in volatile commodity market can reduce an overall volatility of the portfolio through its uncorrelation to majority of other investment choices. More detailed information can be found in the theory of Efficient Frontier.

How I Earn Extra Return Without Risking My 401K Account

The annual 401k contribution limit is $15K in 2006 now. Every year I always contribute to the max allowed by the law. My company allows the worker to contribute up to 60% of the salary. 60% of my salary at about $100K is $60K, far exceeding over the $15K annual limit. At the first thought, one would think that 60% is probably for the people whose salary is around $25K, but choose to crazily contribute 60% of the income into 401k account. Obviously, I don’t know of anyone who can live on a $25K – $15K = $10K pre-tax income. But after a little contemplation, I foud out this trick of earning extra 1.45% return without any risk in my 401k account.

Here is how I do it. I simply contribute at the maximum possible rate of 60% at the beginning of every year. My investment choice is usually cash/bond at Fidelity which is yielding about 3.8% APR. Now if you look at the following comparison table, using 26 bi-weekly contributions:

pay#

balance of regular contrib.

upfront contrib.

balance of upfront contrib.

1

576.93

2,307.69

2,307.69

2

1,154.70

2,307.69

4,618.76

3

1,733.32

2,307.69

6,933.20

4

2,312.78

2,307.69

9,251.03

5

2,893.09

2,307.69

11,572.24

6

3,474.25

2,307.69

13,896.85

7

4,056.26

1,153.85

15,071.01

8

4,639.12

15,093.04

9

5,222.83

15,115.10

10

5,807.39

15,137.19

11

6,392.81

15,159.31

12

6,979.08

15,181.47

13

7,566.21

15,203.66

14

8,154.20

15,225.88

15

8,743.05

15,248.13

16

9,332.76

15,270.42

17

9,923.33

15,292.74

18

10,514.76

15,315.09

19

11,107.06

15,337.47

20

11,700.22

15,359.89

21

12,294.25

15,382.34

22

12,889.15

15,404.82

23

13,484.92

15,427.33

24

14,081.56

15,449.88

25

14,679.07

15,472.46

26

15,277.45

15,495.07

Do you see how I end up extra (15495.07 – 15277.45) / 15000 = 1.45% at the end of the year? After the year is over, all the money in both cases will be earning at the 3.8% APR. However, by simply paying myself first before IRS every year, I end up getting extra $217.62 or 1.45% yield every year. I have been doing this for several years now, and IRS has never complained (since my 401k account gets to the money first). Certainly this strategy is not for everyone. There are three problems with this:

  1. You need to have a sufficient cash reserve in the beginning of the year to cushion the lack of after-tax money coming in.
  2. Your contribution now is not at the even rate, and therefore, if you choose to contribute to other investment choices, you have extra risks of getting into market at the wrong time (or right time for that matter). Or you can phase in your contribution dollars evenly back into the market yourself.
  3. If your company has 401k match, it is possible that you may lose some match dollars with this uneven contribution rate.

In any case, this shows clearly the advantage of paying yourself first over the tax man (especially if you are a business owner). You can also appy the same principle outside of the 401k account. On the W4-form, you can reduce the paycheck withholding amount in the beginning of the year, but then pay extra at the end of the year to avoid underpayment tax penalty. I use my tax calculator near the end of every year to underwithhold a little bit throughout the year, but catch up with extra tax payment at the end of year. But of course, in that case, your extra dollars may or may not go as far because although the total amount is not limited to $15K, whatever extra money that is earning returns needs to be taxed (at some 20 to 40% marginal tax bracket) unless you put the extra money into your Roth IRA or (spousal) IRA accounts. So don’t delay your contribution to Roth or regular IRA accounts until the April 15 of the next year. You pay yourself extra one-time return by contributing on Jan 1st of that tax year which is 1 year and 3.5 months earlier than contributing at the last minute. And if you do this every year, those extra one-time returns are not a one-time event, but a consistent annual extra return dollars that you pay yourself.

An Investment Platform For Independent Money Managers

So, you have decided to become a financial advisor for an average earning of $122,500? Wow, that’s actually higher than my salary, despite the fact that I think I know more or at least as much about investing than all of the advisors that I have met so far from various big banks and brokerage houses (read my experiences here).

How about going even one step further and become an investment advisor to officially manage other people’s money for fee? Well, look no further, I have got it all planned out, except I don’t have any potential clients. Here is a direct route plan to become a small independent money manager in the fastest timeframe:

  1. Get your NASD series 65 license & register as an investment advisor in your state. This will probably cost you one to two thousand dollars, and some annual renewal fees of several hundred dollars.
  2. Now you are qualified to open a master account at ScottradeAdvisor. With this platform from Scottrade, you can essentially open up a money management firm of your own, with very little back-office support. The master account allows you to have unlimited client accounts. You can set up various rules for distribution of bought shares into your client accounts, and in a single master trade order, you can buy or sell from all of your client accounts. Every client accounts are subjected to the same Scottrade commission and fee structure. You can set up your management fee automatic deduction with Scottrade, with your client permission. Your clients will own their accounts directly, while giving you the trading authorization and fee deduction authorization. Since they are the direct Scottrade account holders, this will solve the biggest client trust problem when they give you money for management. Their accounts will receive the full SIPC insurance coverage up to $500,000. Plus that you and your clients will enjoy one of the lowest trading commission of $7 offered by Scottrade. I have personally contacted Ameritrade, ETrade, and TDWaterhouse, and none of them has similiar platform like Scottrade’s. I know that Charles Schwab has similar service to Scottrade’s, but the trade commission is higher, and they only seem to offer the platform to very big money management firms.
  3. Well, that’s it. You just need to have some marketing plan, and find your clients now. After that, it’s all about your money management performance, and you will have a very scalable business that can potentially bring you millions of income every year.

Want to be my first clients? My base fee is only 1%, and I don’t have a minimum opening amount (which is usually north of $100K). I’m also doing very well, returning about 37% since April 1st of 2005, and returning about 16% since Jan 1st of 2006. And I didn’t get this performance from a single stock portfolio, but rather diversified among some 60 stocks, most of which has a total return from 35% to 110%. I will be posting the “brochure” on my website for my own investment firm pretty soon….

California Housing Boom or Bubble?

For the people who don’t live in California, you may be thinking that I got to be joking to have a gain of $260K on a small condominium, which can be more than the price of a single family house in some other states. But for the people in California who are not home owners of a single family house, this is a harsh reality that they need to face everyday. Most people can’t ever make up the wealth gap of $300K to even $600K comparing to the lucky homeowners.

For the people who argue for the continuing of the housing boom, their list of upside reasons is endless: California has very good weather, plentiful jobs and diversified economic growth, increasing population & immigration, etc. But none of them can tell me why the housing price was half or even a quarter of the current price eight years ago, when everything that they claim was also true six years ago. It’s almost like saying that group A (in 2000) took a placebo pill (which is the good weather & economy), and that group B (in 2006) also takes a placebo pill, but group B recovered from the disease, mainly because of the effectiveness of the placebo.

To me, I believe that the single most influential factor was the interest rate cuts by US Federal Reserve. The list of why California is better may help the boom compared to mid-west, but is definitely not the direct reason. Without holding the short-term interest rate at 1% for more than 1 year, real estate wouldn’t never go as high as it did without any doubt.

I’m personally in the bubble camp for 6 years and counting. The entire process of watching the house that I really want to buy for my family, to keep going up without an end in sight, has been simply tormenting. I wish 6 years ago I was either wealthier or had my current salary. Everytime when my networth finally increased by another $100K, the housing price simply has gone up by more than that amount.

So when will the housing stop going up, or will it? According to Didier Sornette, the author of “Why stock markets crash”, his prediction is this year in mid-2006: http://arxiv.org/PS_cache/physics/pdf/0506/0506027.pdf

Or click on “Is There a Real-Estate Bubble in the US?” at his web page: http://www.ess.ucla.edu/faculty/sornette/books.asp

I don’t know if it’s true, but his theory on the mathematical behavior of an unsustainable bubble is the one of the most interesting readings so far that I’ve come across.

Markets can be temporarily (or for a long time) out-of-synced with the fundamentals. The market price is always the fair price at the current moment between buyers and sellers, but that does not preclude one to come up with a valuation measure on its price. I’ve constructed a comprehensive housing valuation calculator to objectively assess the price against the owner’s equivalent rent (which is used in CPI or Consumer Price Index calculation). I don’t know how much fudging the bureau of labor statistics has done in the housing component of CPI. But certainly housing price has out-paced the owner’s equivalent rent used in CPI, when almost 70% of the people are home owners, and only 30% are renters. Talk about fudging CPI. If they start to switch over to use housing price while it’s in decline, they can certainly produce even lower CPI both at going-up and going-down of the housing market.