patrick.net

OO,

I hope that the actual inflation is higher than I am expecting. I would make more money in an environment of greater inflation.

But, I am expecting the effects of globalization to continue to mitigate the inflation pressures, even if it is by a diminishing factor.

Zephyr Says:
In response to your earlier question: Yes, my personal investment returns are without any IPO windfalls or one-time big deals.

With the exception of the windfall of the housing boom? That's how my folks have made their biggest gains...

DS,

if you must enquire, I expect a crash landing of China in 2 years. What you said about China is correct - on surface, I am aware of all that but I also know the stories behind each headline that you've quoted. I am ethnically Chinese, and I still have lots of friends doing businesses there. They basically share the similar view.

I won't go into an elaborate analysis of why we arrive at this conclusion. Let's just keep it at that and check back in 2 years. The next China to take up the void may be Vietnam, which shares the same work ethics, or India, but we will see.

China will close the gap over time. But even if they have no problems along the way, it will be decades before their GDP is comparable to the US. Right now they are about equal to California.

They cannot sustain their recent growth rate forever. If they sustain a 5% faster growth rate it will take them 40 years to catch up with the US.

DS,

I expected the housing booms and busts to occur. I do not consider expected events to be windfalls.

But, clearly my returns do include the “windfalls” and the crashes of several housing booms and busts. The cycle continues, and I continue to ride it.

I must sleep now. I will come back another day.

Yeah, I gueeessss it is possible, especially if you have been buying and selling housing at the right moment. I realized that I have returns greater than that since I really started investing in 1999, mostly due to buying a two unit home in San Francisco at the right lucky time.

euro just broke 1.4

I am waiting for the Loonie to pass the Greenback. It will happen any minute now.

OO, I understand there are differing arguments about China. I don't think it will necessarily throw its weight around in global politics in the same way as the West, for instance, and I don't think it has huge imperial ambitions, although you never know. It has some impressive stats already tho, and the definitions of middle, great and superpowers are really about relative size, output, and military capability. China is spending a lot on modernising its armed forces, for instance, funded by its manufacturing windfall. The rest is open to debate, really, e.g. it is a huge exporter, but is currently only the world's 4th largest economy by GDP according to the World Bank (but 2nd according to the CIA world factbook??). California's GDP considered as a 'country' is placed somewhere between 6th and 10th by various sources, for the record.

Uncle Buck on Life Support:

http://www.stockmania.com/2007_09_20_archive.html

very pithy, kahunabear... i like your style...

Zephyr,

I've noticed that too. It doesn't seem to be any particular feat to take say a 50k account and turn it into a 250k account. But then something happens... and I'm not sure what? Retail a/c over 1 mil. it seems like investors become much less brazen and opt instead for "preservation of capital" style of management? Institutional a/c? Forget it.

I'd be curious to get your take on why that is?

"The dollar is down… And some think this is bad… now our goods will be more competitive overseas, and foreign goods will be less competitive here. So our trade deficit will decline and our employment will rise."

I disagree; this is good only for the foreigners or foreign stocks. Our cost of living will soon be skyrocketing.

Peter Schiff said it best:

http://europac.net/Schiff-CNBC-9-18-07_lg.asp

DS,

In my opinion, a Chinese recession/depression around 2010 is already overdue and healthy (IF managed properly). A visit to the country will reveal vast gulfs of wealth between the very conspicuously rich and the poor. Corruption continues to be endemic. The mainstream culture is wasteful and quite decadent. There are tons of pointless projects that are generating short term GDP growth at the expense of sustainable long term growth.

Politically, China has major challenges ahead and it is not nearly centralized/modernized enough to face it in a very coherent manner. The CCCP core is actually quite enlightened and technocratic, but once you move outside of the booming coastal cities, things still suck.

DinOR,

Perhaps, but it seems an even more common feat to turn a $50,000 account into a $10,000 account...

astrid,

LOL! Yeah, I've seen that a few times. Especially when the words "inheritance" and "ETrade" are mentioned in the same sentence. Typically though a retail broker will get fired long before those kinds of losses are sustained. Believe it or not though this really is a problem.

By the fiduciary nature of most ERISA a/c there's the need for regular liquidity to meet the obligation of serving current retirees. Depending on allocations and the ages of participants this can really paint the finance group into a corner. Older members are all about preserving capital and just carving out conservative returns. Younger board members are saying, hey! What about me!?

I trust everyone is enjoying the "Subprime and Solutions Hearing"?

It doesn’t seem to be any particular feat to take say a 50k account and turn it into a 250k account.

DinOR,

I agree with Astrid. I think what you're seeing is a quirk of statistics. You have enough investors throwing their $50k around that some of them are statistically bound to hit some huge returns. Sort of like those monkeys typing out Shakespeare.

At higher levels of investment you have fewer institutions, and they can't afford to lose 100% of the investment (well, unless they're a Bear Stearns hedge fund) so the nature of risk management being what it is, you don't see as many 1000% returns on $1B as on $50k...

I am waiting for the Loonie to pass the Greenback. It will happen any minute now.

On that day, we will all meet and sing O Canada.

This is an interesting little aside that I just received. Very few of these places are actually in cities.

http://higley1000.com/archives/44

And an interesting on-topic article:

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=BYRFMD0QYRQTVQFIQMFSFF4AVCBQ0IV0?xml=/money/2007/09/19/bcnsaudi119.xml

Boston Transplant,

"Unless they're a Bear Sterns hedge fund" LOL!

Well, it was that "quirk" that I was referring to in the first place. I was one of those truly sick people that stayed hours after everyone was long gone pouring over the account history of blow'd up and defunct accounts trying to glean something from their mistakes. They are (in order)

1. "Trading" the ENTIRE account (no "core" positions)

2. Junk stock (yes, even without leverage this can spell doom)

3. Excessive use of leverage

4. Excessive account activity

5. Zero dividend paying stocks (or pfd's etc. to off-set margin expense)

6. Over concentrated positions (usually tech)

7. Trading on margin w/issues TOO CLOSE to becoming non-marginable/partially marginable

Notice though, I hadn't been able to determine poor "market timing" as a leading cause of the 50 to 10K account. Excessive use of leverage is actually the 3rd. leading cause of "post margin disorder". This was a pretty large sample of about 18,000 accounts. PgDn, PgDn, PgDn. FWIW.

Zepher said:

"Their interest costs are passed on to you in their prices and in taxes.
So, lower interest rates can lower your costs even if you have no debt. In addition, lower interest rates are favorable to employment."

This seems counterintuitive to the Fed. They lower rates to stop prices from falling and raise rates to stop prices from rising.

The Fed did not lower rates so that business could save interest costs that would be passed on to the consumer. In fact, house prices rose despite the builders lower interest cost and "guest worker" labor cost. It wasn't costs, but the market (fueled by easy credit) that determined the prices.

The point of the lower rates/easy credit was to generate liquidity. That is, get the consumers to forgo future earnings for today's consumption. That way, employment and other economic indicators will look good for now.

HeadSet Says:

Because, Zepher, not everyone is a goddamm debtor. Lowering the cost of that “fundamental element” only allows Joe Howmuchamonth to run up asset prices and actually increase costs to savers. It also lowers the rate of return savers can get.

Mighty well said.

Oh, and Jimbo was right to call Zephyr on that 26%/yr average rate of return over 20+ years. Unless he's the World's Greatest Investor with Hari Seldon-like powers of prediction (not to mention balls of steel and a gargantuan appetite for risk), such returns are rarely seen in the short run, much less consistently over a 20+ year period.

Zephyr frequently likes to mix half-truths and truthy-sounding opinions with some outright bragging ("I manage $1 billion in assets", "I average 26%/yr," "spotting market tops/bottoms is easy", blah-blah-blah), but his overall bias is familiar to anyone who has been posting here for any length of time: he's pro-Fed, pro-bankster, pro-debt and pro-inflation.

I have also benefited significantly from timing my purchases at low points in the market, and selling near the tops. For someone who spends many hours each day studying the markets, and has done so for more than 30 years, this is not as hard as it sounds.

If market timing and consistently beating market averages is so easy, why aren't all daytraders millionaires? And why aren't we all daytraders?
A: It's not.

DinOR, nice analysis, thanks for the insight.

I see some posters are claiming high rates of returns. I also see "highly leveraged" and "real estate" sprinkled about.

When I see "highly leveraged" rates of returns, I have often found it means someone is comparing a cap gain to a down payment.

For example, Joe put $5,000 down on a residence he bought for $100,000 and sold for $110,000 net a year later. Joe then claims he turned $5,000 into $10,000 in a year, for a 100% annual return. Joe feels he is genius compared to a fool who paid cash for a $100,000 house, since that guy would only get a 10% rate of return.

Apply this tortured logic to a house bought long ago and quite few can claim a 26% annual return for the first 20 years of their mortgage.

@HeadSet,

I think you've nailed the source of Z's "26%/year" claim. Ignore the cost of servicing your "leveraged investments" (mortgages), ignore the cost of prop. tax, insurance, maintenance, prop. management, etc.), assume you bought near the last cycle bottom and sold near the top, and sure, you're a RE tycoon.

"his overall bias is familiar to anyone who has been posting here for any length of time: he’s pro-Fed, pro-bankster, pro-debt and pro-inflation."

In other words, in debt up to his eyeballs.....

Boston Transplant,

Your welcome, but in truth it was more of an "informal survey". Without question though, patterns emerged. It's further skewed by the dominance of PNW issues, Nike, Starbucks, Portland General Electric along with scores of local OTC companies. The reason I can say leverage isn't necessary to "blow up" an account is b/c many accounts existed for the sole purpose of custody for PGE shares. As you'll recall PGE was bought out by Enron and these (1) holding accounts were absolutely wiped out.

The branch I worked at held 225 mil. in client assets during the 4th qtr. of 1999. By Fall of 2002 it was barely above 100 mil. I HAD to know where so many investors had gone so wrong!

While in the past I have used the equity in my primary residence toward my personal balance sheet (for loans etc.) I've NEVER calculated it into my overall investment performance! That's not cricket!

I haven't heard anyone singing "O Canada" yet....it would be nice to hear it in French if you don't mind. The loonie passed the US dollar this morning.

It is given that loonie will pass the dollar.

I am expecting AUD to pass the dollar, give it another 12 months.

I do fit the description of being “pro-Fed, pro-bankster, pro-debt and pro-inflation.” Those elements are all favorable to making money.

However, I am not in debt up to my eyeballs. My total debt is less than 13% of my investment assets. In addition, I own my home debt-free.

It is true that some people fail to count some of their expenses when calculating their profits. This is not the case with me. I am very experienced in financial accounting matters. My investment returns are properly inclusive of all income and expenses in accordance with the proper GAAP and tax accounting rules. Nothing is left out.

Returns such as mine are very common among successful private investors. I am not the best investor in the world. In fact, in many investor circles my returns would not be considered unusual. For example, there are many hedgies who would be disappointed with my returns. And venture capitalists generally expect to do better than I have done.

As for timing, picking cycle turning points a few times per decade is nothing like being a day trader. I find it interesting that anyone who believes that they successfully predicted the housing bubble and crash would refuse to believe that I (as a lifelong and trained investor) could not make money from using similar market insight.

You may not understand it, but that does not make it only half true.

An interesting point:
http://www.thestreet.com/s/kass-bernanke-made-a-big-mistake/markets/activetraderupdate/10380295.html?puc=googlefi

The thing is: Lower Fed Rate ==> Falling $US ==> Falling Bond Prices ==> Higher real Long Interest rates ==> worse housing crush

Yes. We have changed direction. The previous higher fed funds rate was choking the economy, which in turn reduces inflation, which in turn lowers long-term interest rates, which makes housing payments lower. Reversing this effect is what we will now see.

Zephyr Says:
As for timing, picking cycle turning points a few times per decade is nothing like being a day trader. I find it interesting that anyone who believes that they successfully predicted the housing bubble and crash would refuse to believe that I (as a lifelong and trained investor) could not make money from using similar market insight.

That would involve anticipating 9/11, then watching interest rates get set low and knowing they would stay low for years, then picking up masses of property, all within a few weeks... did you also have any puts on the airlines at that time, by any chance?

Most of the bears and bubbleheads here did *not* 'predict' the bubble, as it was partly precipitated by 9/11. It has been a retrospective realisation about the various factors -- easy credit, subprime expansion, low interest rates, shaky stocks post dot bomb. Unless you factored in an early sub-prime surge prior to 9/11 (was there one?), and you just *knew* that would create a price boom. All a bit unlikely. A few people in the property/MB business *may* have got set when they saw some of the confluence of factors... The Zeph is starting to sound like the Kiyosaki, infinitely wise in arrears, knew it all along, of course, and got insanely rich at the time (by selling nylon wallets and get-rich-quick books to MLMers...)

I do fit the description of being “pro-Fed, pro-bankster, pro-debt and pro-inflation.”

Thanks. Always nice to see someone honestly own up to his/her personal bias.

Since turn-about's fair play, I should own up to mine too (which should be pretty obvious to all by now): I am horribly biased in favor of honest, productive, working-class Americans and against paper-shuffling crooks, fraudsters, and Wall Street greedbags who demand that the financial system be rigged for "heads, I win, tails, you lose".

Those elements are all favorable to making money.

If you happen to be a paper-shuffling crook, fraudster or Wall Street greedbag. Those elements are not-so-favorable for ~98% of the working American public.

Returns such as mine are very common among successful private investors. I am not the best investor in the world. In fact, in many investor circles my returns would not be considered unusual. For example, there are many hedgies who would be disappointed with my returns. And venture capitalists generally expect to do better than I have done.

As I don't have your Schedule D's for the last 20 years at my disposal, I guess I'll have to take your word for those returns. And, as I haven't the foggiest as to what represents "average" long-run returns for your typical hedge fund or Thurston Howell III-type investor, I must again defer to your expert opinion. Unless of course someone else who works in the 'biz would like to post some corroborating or contradictory stats. (On a related note, Randy was not banned from this site, he just chose to stop posting primarily thanks to you-know-who.)

Different Sean said:
infinitely wise in arrears

Heh, heh. Nice.

SP

You guys are really stretching it to trump up some kind of argument to make my performance sound unrealistic. Posting sophomoric innuendo must be a fun diversion for you. However, if you spent that energy trying to learn how to make money from these things you could be so much better off. Perhaps others who read this blog will be interested in learning something about making money.

All that I have posted is true. And no, I did not anticipate 9/11 in making my investments. Nor did I rush to invest because of it. In fact, I made no significant investments at all during 2001 (before or after 9/11).

I do study market cycles. And in the late 1990s I did anticipate a normal cyclical recovery in real estate after the long and severe downturn of the early 1990s. After seeing prices start to rise in 1997, I started carefully buying rental properties in 1998 for what I expected would be a typical and long recovery. I also thought stocks were overvalued, so I sold nearly all of my stock in mid 1998 (the Dow was at about 9300).

In 2000, after the tech stock bubble finally burst, the Fed started rapidly cutting interest rates. They had already cut the Fed Funds rate in half (to 3.0%) before 9/11. After 9/11 they cut the rate a lot more, and by 2003 it was only 1%. I knew that all this should eventually stimulate the markets.

In 2002 I also saw that the fear of the coming war with Iraq was weighing down on both the real estate market and the stock market. I was confident that the markets would regain strength after the war started. So I bought as much real estate as I could leverage myself into during 2002 and 2003. With lots of debt!

I also thought stocks were cheap (Dow about 7300), and I bought as much stock as I could (also with debt) in early March of 2003 just before the war started in Iraq. (It is an old cliché to buy on sound of cannons, because war is usually good for stocks).

Then I just waited for the prices to peak and start to decline a little. Real estate was clearly in the exuberance phase, so when the market started to look glutted and prices stopped rising, I sold some, and paid off some of my debt in early 2006.

When the Fed Funds rate rose rapidly past 4.0% in late 2005, I figured that the party would probably end in about two years (typical historic lag – not a prediction).

Stocks continued to look good to me until late 2006 when I worried that the peak was near. So, I started selling on rallies - until last month. I have now sold about 70% of the stock that I once held, using the funds to pay off nearly all of my debt and to establish cash pool for new investments.

Now I am watching and waiting to see what to do next in stocks. And I continue to just wait for the real estate market to hit bottom so I can aggressively buy real estate again.

Predicting the future is not required. I wait for the trends to emerge. It’s a cycle that repeats itself over and over again. It is not hard to play the cycle if you pay attention.