Category Archives: Investing

I Did No Better Than the Market

The years 2014 and 2015 were quite a time in the stock market. I cranked some numbers recently to review my market performance over the past two years and came to a certain realization about it, upon which I based the title of this post.

Prior to 2014 my portfolio mainly consisted of 401k mutual funds and I didn’t pay much attention. It would have been a good idea to do so as the market has had a great run beginning circa 2009, and I was a little more than fashionably late to the market as an active investor.

Appreciation vs. Total Return

To be clear, there are multiple ways that market numbers are often bandied about. Sometimes it’s the value of the stocks (or more accurately the price of the stocks). Other times it’s the value of stocks plus dividends received, and which are then reinvested. This is known as total return.

Those figures are theoretically possible to emulate if one is running a large portfolio such that transaction costs are so small a proportion of each trade as to be negligible. Certainly the latter case of total return sets a higher bar. It also reflects a more complete picture. Continue reading “I Did No Better Than the Market” »

Betting On A Red Horse

Ferrari 458 Speciale

Courtesy Ferrari N.A.

I’m not one to bet on horses. I never play the lotto (even with the record 10 figure jackpot currently in the headlines), and I have never even made it to a blackjack table in Vegas despite a few attempts. I didn’t even pay much attention to Williams Grand Prix, another stalwart of the Formula One (F1) circuit, when the company went public. But this time, it’s a little different. Ferrari is now a public company following a spin off from Fiat Chrysler (FCAU), and I have some shares of stock in the Prancing Horse.

The Legend

You might say I’m long on the legend of the Prancing Horse, which began with Enzo Ferrari (1898-1988) as a racing driver for Alfa Romeo in the early days of the automobile. Upon the birth of his son Alfredino (“Dino”), he retired from driving to concentrate on running Alfa’s F1 team, and then eventually setting up shop on his own.

In that bygone era of racing cars painted in national racing colors rather than adorned with sponsorship livery, road going Ferraris were sold to fund operations of the racing team. Ferrari has always been a company that sold cars to go racing, which is quite the opposite of most every manufacturer that has been involved with the sport before or since. It is also the one with the most wins and championships in F1, and the only one that has been part of the sport all through the post-WWII era, starting with the 1950 season.

Unsurprisingly in such a competitive business, the company’s fortunes ebbed and flowed over the years. Dino Ferrari, whom Enzo had likely been grooming to eventually takeover, tragically died of muscular dystrophy in 1956 at the age of 24. Then in the 1960s Ferrari almost sold the business to Ford but backed out. “The Deuce” (aka Henry Ford II) was incensed and commissioned the creation of the Ford GT40, which eventually ended Ferrari’s dominance of the famed 24 Hours of Le Mans endurance race, by winning four times straight beginning in 1966.

Fiat, under the leadership of Gianni Agnelli, bought a stake in the company in 1969 and later became the controlling shareholder. The company went on to some of its greatest successes after Enzo’s death in 1988, launching a slew of critically acclaimed and commercially successful models beginning in the 1990s and returning to its winning ways on the F1 circuit with a combined 14 driver and constructor titles between 1999 and 2008.

Green Pastures

Ferrari is a solid, if expensive investment. It is a trophy property after all. In the short term the share price is subject to fall due to the initial hype surrounding its IPO and the high Price/Earnings (P/E) ratio. However, over the long term I can’t think of many more solid investments in the “automotive” sector. Here’s why.
Continue reading “Betting On A Red Horse” »

A Piece of Ferrari

Ferrari California T convertible

Ferrari California T

A few weeks ago Fiat Chrysler Automobiles (FCA), majority owner of Ferrari, announced it would spin-off the fabled Italian marque next year by floating 10% of the shares on a stock exchange and distributing another 80% to its shareholders.

While details explaining exactly how FCA will go about doing so have yet to be announced, reports indicate that one would have to buy them on the market or be an existing shareholder. How I understood it is if you want to get your mitts on a piece of Ferrari you will probably do better to buy Fiat Chrysler shares than wait to buy Ferrari shares next year, even if it means having to buy convertible debt.

Why Is Fiat Chrysler Floating Ferrari?

Basically they are borrowing on Ferrari’s good name because FCA needs to raise some $60 billion to fund product development through 2018. Various estimates have pegged Ferrari’s value at around $7 billion while FCA’s entire market cap (including Ferrari) is only about $18 billion. No wonder FCA wants to spin off the Prancing Horse.

Ferrari is worth more standing on its own than under the Fiat Chrysler umbrella. So separating Ferrari will more accurately reflect the value of the brand, increasing the amount against which FCA can borrow for product development.

So early last week I bought some FCA shares (stock ticker FCAU) not only because I’m a Ferrari fan – which is a terrible reason to buy stock – but also because I think it’s a good long term investment (even if I don’t view FCA in the same light). Here’s why.

Continue reading “A Piece of Ferrari” »

When the Ceiling Caves In

Ceiling collapses after drywall nails fail.

When the ceiling caves in…

It was a late summer evening, a Friday night at around 8 o’clock. The phone rang. It was Lorraine. There was a hesitation in her voice, like she was going to deliver bad news and she didn’t want to make it sound like bad news.

But I already knew. After all, as far as I could remember she had never called before. Ever. All of our exchanges had been via email. She worked for a property management company. I was one of their clients. Until that point all of our exchanges were rather mundane. Taxes needed to be paid, the additional parties added to the insurance policies and the property inspections conducted. All routine activities.

To receive a call at that hour, it couldn’t have been good. This time it was about a ceiling in a rental property. Specifically, the ceiling had come crashing down for no obvious reason.

“Was anyone hurt?”, I asked.

“No one was home”, came the reply.

A sigh of relief. It was in a little girl’s bedroom. As one can see from the photo above, the entire ceiling of the room ended up on the floor, exposing the rafters in the attic. As many people can attest, owning rental property isn’t always a bed of roses.

Lorraine wanted to know what I wanted them to do. I asked if they had ever had this happen with other properties under management. Somewhat surprisingly, it had happened a couple of times among their 650 homes. So what did they do about it?

Stuff Happens

The ceiling caving in is a problem. But it’s not the only problem. Things fail all the time, some times catastrophically. Cars breakdown. Buildings fail. People of off the deep end. Entire societies can breakdown. I’m not apocalyptic but the reality is it takes vigilance to prevent or at least counter the chaotic nature of the world.
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Do Shantytowns Have Condo Fees?

Shantytown

Of shantytowns and homeowners associations.

There’s usually a sizable difference in the purchase price of single family homes and condominiums of similar grade. Adjusting for differences in square footage and certain amenities, the required condo fees are usually higher than single family homeowner association (HOA) fees.

Could that difference in fees make up for the difference in purchase prices? How much more property could you buy if, instead of acquiring a property with a condo fee, you bought one without? Here’s one way to look at it.

I have a condo where the fee is over $300 per month. That includes trash service, water and electricity, as well as maintenance of common areas and all that good stuff. But let’s suppose I had instead bought a home nearby that didn’t have a homeowner association. How much more home would that $300 condo fee buy?

First, realistically it would be more like a $200 difference since I would have to pay for utilities and such any way. Assuming a 30 year mortgage and 5% annual interest, that extra $200 per month works out to a little more than $37,000 – an amount that will, unlike fee increases, appreciate in the owner’s favor.

In other words, if I had put that extra $200 per month toward buying a bigger property, I could have bought a home that cost about $37,000 more. Would that have been likely in that area? No. But that doesn’t mean that’s always the case.
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Keeping Up With Your Cash Calendar

One thing I do is keep a simple calendar that shows me at a glance my anticipated cash flows, when to expect upcoming dividend and rent payments, as well as key expenses. You may want to do so as well.

Stock Dividends

When earnings announcements occur, companies usually also announce the ex-dividend date (the date before which one must own shares in order to receive the next dividend payment), the payment date and the date of the next earnings call.

For stocks I already own, using a calendar lets me plan when I’ll need to take action with these payments, whether to reinvest them and, if so to start thinking about where to place them.

If I’m considering buying stock then I want to know the ex-dividend date. I’ll mark it on the calendar with an “x” followed by the day of the month (“x14” for the ex-dividend date falling on the 14th day of the month).

These dates are also useful to know when unloading shares. Sell on the ex-dividend date or after and you’ll have received the dividend payout, locking in the dividend as cash. However, when trading opens on the ex-dividend date, the share price will already have been adjusted down by the amount of the cash payout. So in theory your sales proceeds will be a wash – though share prices constantly fluctuate.

It’s also good to know when to expect the annual report, and keep an eye on analysts’ earnings “guidance”.

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After the Great Credit Hangover, the Party Is Slowly Starting Anew

More lending documentation requested

“What do you mean I have to fill out another form???”

A pair of articles in the Wall Street Journal this week signaled that credit scoring models and strict lending standards and are beginning to loosen. Signs of the Great Credit Hangover seem to be fading as the pendulum swings back the other way ever so slightly.

Credit Score Revamp

This year’s introduction of FICO 9, the latest iteration of the widely used credit scoring model from Fair Isaac Corp., is expected to help widen credit access. The goal of this latest version, of course, is to increase lending without increasing risk. Lenders want to expand the pool of eligible borrowers while avoiding likely deadbeats. The eternally open ended question, of course, is how?

The new model will not penalize those who do not have an outstanding balance, omit bills that have been settled with collections, and give less weight to unpaid medical debt.

That first point especially makes a lot of sense. Absent the influence of government handouts that distort the free market regulations, I would say borrowers without debt are more likely to pay back loans than those who have already demonstrated an inability to do so.

The WSJ cites Federal Reserve findings that “More than half of all debt-collections activity on consumers’ credit reports comes from medical bills…”. This encompasses an astounding 41 percent of the U.S. adult population. That’s apparently 75 million people.
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Are Municipal Bonds A (Good) Hedge For You?

Bond rates and yields

Bonds, rates and yields – municipal and otherwise.

With the stocks trading with price/earnings multiples as lofty as they are, it would be prudent to consider other investments that may provide solid returns while weathering potential market corrections.

It seems everyone is on the edge of their seats wondering about when the Fed will raise interest rates. It’s almost inevitable because, well, they’ve said so and because it’s not like rates can really go any  lower. Unless you’re Europe. Then you can, apparently, go below zero.

Anyway, it appears that municipal bonds (“munis”) are one area that may (and I caution may) provide a hedge against stocks. Priced as they are, the market currently seems to regard the act of buying them with only slight preference to placing one’s hand on a loaded mousetrap.

What They Are

Bonds generally have terms of more than one year, often decades in duration (debt instruments for periods of less than a year are referred to as notes).

Municipal bonds are issued by state, county and city governments or other local government entities to fund general operating obligations or specific public projects such as airports, public utilities, toll roads and schools.
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You Have A Spare House, Now What?

If you find yourself with a condo, townhouse or house you will no longer live in, what should you do with it?

Rental townhouse

If you find yourself in a situation where you’ll have an extra home you won’t be living in, and assuming it’s safe to inhabit and can be spruced up without too much investment, what should you do? I’ve been there a couple of times due to job changes. Here’s how I dealt with it.

Two main factors, of course, are usually financial: How long and secure is the financing (if any), and what’s the expected cash flow?

When Would You Need the Money?

Do you have a lot of equity tied up in the home, and how soon will you need the money? My time line has so far been indefinite so there has not been a need to sell.

Most residential mortgages are backed by Freddie Mac or Fannie Mae with decent interest rates fixed for 15 or 30 years (who else could or would give such a sweet deal?) so that’s as straightforward as it gets.

If you have a floating or adjustable rate mortgage you might want to consider getting out of that loan whether by selling or refinancing, especially if it’s due for an adjustment soon.
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Rents Rising Faster Than Income

Rents have continued to rise while household income stagnates.

Apartment building

The Wall Street Journal reports that average rents rose in all 79 metro markets tracked by research firm Reis. Nationwide the average monthly rent for an apartment is now $1,099. Led by cities on the West Coast, cities where rents have risen fastest saw increases of about 4% to 6% during the past year.

Meanwhile median household income, adjusted for inflation, is the same as it was in 1990. However, inflation adjusted rents are up nearly 15% during the same period. Ouch.

One reason attributed to this trend is the more stringent mortgage lending standards now in place compared with before the recession began. As fewer people have been able to obtain mortgages and become homeowners, and some have lost their homes to foreclosure, the demand for apartments has increased markedly.

However, rent increases are expected to be tempered somewhat by the availability of more rental units due to new construction. This is reflected by the vacancy rate which has remained steady at about 4%.
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