Bailout ...

Sept 2008...

We are in middle of a largest bailout in the history. Latest bill for US taxpayer is estimated to be $700B.

It seems that no one on either extreme of political spectrum like this bailout. Financial conservatives don't like as they think of potential tax increase that will most probably come with new administration. Some don't like government picking sides and some simply don't like government intervention.

Some of my friends on liberal side think of this as just another way wall street and rich getting help from government. I sense that some of them think there is some massive collusion going on between wall st. bankers and republican administration.

What no one is talking about is this: the real estate bubble of last few years has pumped up the US economy. All of this surely has resulted in huge taxes being paid to IRS. So what if US government uses some of the money for bailout.

What I don't like about government intervention is that they will surely won't think about everything. The voices being heard are the ones who have strong lobby in Washington. Some times voice of the main street gets lost in Washington.

Here is another problem that I have. Once an arrangement like resolution trust is in place, it eventually will lead to a scenario where government ends up selling the paper back in the market and some of the same banks getting bailed out will buy that paper back. And that is not right.

Let's see how this plays out.

Blog Fatigue

I started this Blog last year. My original intentions were to post regularly. But then the Blog fatigue set in.

What I mean is that I didn't get around to posting for a long period of time. Why does this happen ? I think, the novelty wears off. This experience has taught me an investing lesson. You see, I started looking into blogging as a way of exploring the Web 2.0 technologies and in part to understand why Google has been successful. How long can Google and other Web 2.0, especially the social networking companies like Facebook and Myspace, can thrive ? Will there be a social networking fatigue for lot of people ? This can curtail the growth for these technologies and eventually whole eco-system that relies on it (equipment makers and software vendors).

Investing in uncertain periods...

I get asked a lot about my investing strategy during recent credit crisis/housing meltdown/recession that started in fall of 2007. My answer is pretty simple. I have made no drastic changes to my overall investments. Stay the course. I have been sticking to dollar cost averaging into my 401K as well as my Vanguard accounts.



I have made minor additions to my portfolio. I have added 3 mutual funds with small positions in them. They are:

• Fidelity Canada (FICDX)


• Fairholm Funds (FAIRX)


• CGM Focus funds (CGMFX)

All 3 have done reasonably well for me. I picked Fidelity Canada for a small hedge against dollar and it's exposure to energy sector. Reason to pick Fairholm funds is because of it's huge position in Berkshire Hathaway and again exposure to energy. CGM focus fund is really a momentum fund but the manager Ken Heebner, has been picking momentum plays and rotating into different sectors , incredibly well in this decade. Picking of these funds aren't really because of the current crisis. I have been keeping a tab on them for a while.

I also picked up little bit of Wells Fargo (close to $29) and Wachovia Bank (around $25). I intend to hold them for a long time. As of the writing, I am loosing money on both of these :-(

My Merrill managed account did loose money on fixed income investments (primarily HFLAX). Rest of the account has outperformed market just by a tad. In loosing market, that's not saying much.

In the long term, I am convinced that diversified equity (stock market) investments is the way to go. Last decade hasn't been great, but my time horizon is really 20+ years. We will see :-)

Starting Out...

One of the questions that I get asked by folks staring their investment journey is...How do I start ?

My advice:

--Start by investing in a Balanced Mutual fund at one of the premier fund families like Fidelity, Vanguard or Trowe price. First time around you have to pony up enough to meet the minimum requirement. This is typically around $2500. More on balanced funds later in the post.

--When you open an account, choose Automatic Investment Plan, where fund withdraws $100 every other week from your bank account or whatever small amount that you can budget.
As time goes on, increase this minimum amount.

So why this advice ? First let's start with Balanced fund. What is a balanced fund ? A balanced fund is a fund that would invest certain portion of portfolio in equity (i.e. stock market) and certain portion of portfolio in bond market (fixed income). Balanced funds provide you with a decent upside potential with less volatility. It also fares well in bear market years.

Next let's talk about Automatic Investment Plans. This is great for many reasons.
--Forces you to save
--dollar cost averaging. It is very hard to time the market. If you could time the market then you should be running a hedge fund.

Most of the new investors look at only year to date performance data of a mutual fund. Don't !! Look at the performance data provided by sites like http://finance.yahoo.com. Look for 10 year performance. Look at how funds behaved in last bear market.

Some of the balanced funds that I have owned or still own are:

• Fidelity Balanced Fund
• Vanguard STAR fund
• Vanguard Wellington Income Fund
• American Century Equity Income Inv.

T Rowe Price also has T. Rowe Price Balanced.

I recently read an article on Yahoo Finance site that reflects this sentiment.

Speculative plays..

To make investing fun and expose myself to different financial instruments, I dabble in Options trading every now and then. I usually do this with few Ks at a time.

My current option plays are:
--Jan 45 call options of CROX
--Jan 220 Call option on GS

This year I have made some money with options in CVS, TMO. Last year I lost money in BBY and TRID. That's how it goes with options trading.

Given that rest of my portfolio is very conservative, this may be little puzzling. Even I don't get it :-)

Value investing

I am looking at increasing exposure to value plays as market may be getting little frothy. I have been holding Berkshire Hathaway Class B shares BRKB for 9 years. Return so far has been 64% over that time. Not great. But this is a long term investment that provides cushion in bear market years and still beats S&P over that time.

I recently added US Bank USB. I like their track record. It is going to be an investment taht I will hold for another decade. Financials are out of favor right now because of rising interest rate concerns and sub-prime fiasco. But that's ok. This will resolve over time.

Other names that I am watching are:
--Fairholme funds (FAIRX). They have same philosophy as Buffet. They hold a large chunk of BRKA and they also invest in companies that Buffet invests in like Wesco and USG.

--Brookfield Asset Managment (BAM).

I may sell some of my investments in CSCO and get into these names or use new money to get into this.

Mortgage Vs Stock Market

In 2003, mortgage rates as well as short term yields were at historically low. I also had enough cash to pay the mortgage resulting from my stock option sale in 2000.

When I bought my home, I had a 30 year loan at 5.8%. Six months later, I decided to go with a no cost 5/1 ARM with interest rate of 4.125%. My thinking back in 2003 was this:

• If you take into account mortgage interest payment deduction, real rate I would have to pay would be ~3%.
• I could make 3% or more in short term yield at that time.
• Over remaining 4 years, I would be able to generate more with the short term yield instruments.
• Once I approach end of 5 years when ARM reverts to higher rate, I would either pay it back or re finance.

Well in subsequent years, I have been able to use short term yield instruments like I-Bonds, treasury bills, Tax Free MUNIs, CDs, money market accounts, high yield accounts at ING, HSBC and most recently FNBOdirect and generate more return then cost of ARM.

July 2008 is when I will face the music. I am torn between three options:

• Pay off the mortgage
• re finance the mortgage and invest the money into equity market
  
• Pay off half the mortgage and re finance the other half. This means that half of the money will be invested in equity market.
  

There are many different opinions on this subject. Recently I came across an article by Ben Stein who suggests on investing rather then refinancing. Here is a link to the article.
http://finance.yahoo.com/expert/article/yourlife/37252

Many of my co workers and friends have been talking about peace of mind of not having the mortgage. I am not one of them. For me it is going to be strictly a financial decision involving things like risk/reward, asset allocation and rate of return. If mortgage interest rate hike up to 7%, decision will be a no brainer. I would pay off the mortgage as this would translate to risk free yield of 6%.

What are your thoughts ?

June 2007
tech-finance guy