Category: Investing

Art as a bad investment (1970s lithographs)

by philg

My mom had a first-rate art history education, was an accomplished artist herself, and had a fine eye for talented work by others. How did the art that she collected do as an investment? One example is “Elijah Ascending to Heaven” by “Shalom of Safed” (Shalom Moskovitz) in 1973. The index card in her file says that she paid $315 for it in 1980 (maybe that was even the wholesale price). Adjusted to post-Biden dollars, that’s $1,280 today. The current retail price of this work seems to be 650 Bidies (RoGallery). I.e., the return on investment over 45 years was worse than -50 percent (perhaps closer to -80 percent because the owner would have to sell it to a retailer).

(This is not to say that the rich didn’t get richer. The lithographs of the most famous and expensive 1970s artists, such as Andy Warhol, have appreciated, I think. The art that was accessible to middle class Americans in the 1970s has taken a dive, though, I’m pretty sure.)

Full post, including comments

Rudy Giuliani would still be rich if he’d moved to Florida, bought a house and universal life insurance, and created a Nevada trust

by philg

Happy National Florida Day, celebrated every year on January 25 to commemorate the founding of Florida becoming a state on… March 3, 1845. (CBS makes no attempt to explain the apparent discrepancy.) Let’s check in with someone who should have paid more attention to National Florida Day…

“Giuliani, Slow to Give Up His Belongings, Tests Patience of Court” (New York Times, January 3, 2025):

After several missed deadlines and extensions, Rudolph W. Giuliani, the former mayor of New York, could be found in contempt of court on Friday for failing to deliver assets worth $11 million to two poll workers he defamed after the 2020 presidential election.

If he is held in contempt, he could face steep penalties, including jail time.

Mr. Giuliani, 80, was set to appear in federal court in Lower Manhattan to justify the stalled handover of some of his most prized possessions, including a penthouse apartment in Manhattan, a collection of Yankees memorabilia, luxury watches and a vintage Mercedes-Benz convertible. (It is unclear whether Mr. Giuliani will appear in person; his lawyers have indicated that he might attend the hearing remotely, citing health problems.)

The transfer was originally scheduled to take place in October, as a down payment on a $148 million judgment that he was ordered to pay to two Georgia election workers, Ruby Freeman and her daughter, Shaye Moss. Mr. Giuliani had claimed, without evidence, that the women had helped steal the presidential election from Donald J. Trump more than four years ago.

After a lifetime of work, the guy was on track to be destitute, with all of the money that he earned going to a couple of election workers in Georgia whom nobody had ever heard of and who nobody today has apparently heard of (the NYT didn’t think it worth mentioning their names). His two children (Wikipedia) were on track to inherit nothing (though maybe indirectly they would because their mom was divorced from their father in 2001).

Giuliani tried to salvage about $3 million in home equity via a foxhole conversion to Floridianism on July 15, 2024 (a primary residence in Florida cannot be acquired by a creditor). Perhaps this was a factor in a settlement (NYT, Jan 16) where he managed to cling to at least some portion of his former wealth.

What could Giuliani have done as soon as he got sued? Or, indeed, at any time during the trial that wiped him out?

  • sold all real estate outside of Florida
  • consolidated all real estate equity into a single no-mortgage primary residence (“homestead”) in Florida (he likes Palm Beach and his maximum estimated net worth was $50 million so he could have easily found a single house to absorb all of his real estate wealth)
  • sold all financial assets and personal property and split the proceeds into a life insurance policy for himself and a Nevada trust for his heirs

(A universal life policy can be tapped into while the insured is still alive and it can function essentially like a high-fee mutual fund account that has the advantage of no taxation of dividends and no taxation of capital gains when it finally pays out (the capital gains exemption is of more value when the insurance policy is held by an irrevocable trust; any investment positions held personally and not sold during a person’s lifetime will “step up” in basis on death anyway).

Florida State Constitution (which also prevents a state personal income tax from being dreamed up by a righteous legislature), Article X, Section 4:

(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:

A relevant statute:

222.14 Exemption of cash surrender value of life insurance policies and annuity contracts from legal process.—The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

(222.21, “Exemption of pension money and certain tax-exempt funds or accounts from legal processes”, may also be relevant)

Why a Nevada trust? Steve Oshins explains it better than I can in a lot of scenarios. Florida appears to offer many of the advantages of Nevada for a conventional trust (not a “domestic asset protection trust” that is “self-settled” (the grantor is also the beneficiary)), but it favors beneficiaries to the point that litigation becomes much more likely than with a Nevada, New Hampshire, or South Dakota trust. A beneficiary can sue because he/she/ze/they is unhappy about a trustee’s decision, e.g., to pay some other more virtuous beneficiary more, and not run afoul of a “no contest” clause. Nevada, as well as some other states, are more likely to consider the grantor’s intent as primary. All of that said, a Florida trust for his kids should have been protected from his plaintiffs.

It is kind of surprising to see such poor planning from a person who is a lawyer and who has been surrounded by lawyers. If the jury verdict had gone the other way, Giuliani wouldn’t have given up anything other than some commissions and the right to continue paying New York State and New York City income taxes. The cobbler’s children have no shoes?

So… let’s remember on National Florida Day that Florida is a place where a person can keep much or most of what he/she/ze/they has earned even if positioned for insolvency in the typical state. (One type of predator against whom Florida law is useless: a divorce, alimony, or child support plaintiff! In those situations, having a Nevada DAPT and actually living in Nevada is the solution.)

Background, from state-sponsored NPR:

From state-sponsored PBS, Giuliani can’t use the bankruptcy process to retain enough for a meager personal lifestyle:

When Giuliani filed for bankruptcy, he listed nearly $153 million in existing or potential debts. That included nearly $1 million in state and federal tax liabilities, money he owes lawyers and millions more in potential judgements in lawsuits against him. He estimated at the time he had assets worth $1 million to $10 million.

In his most recent financial filing in the bankruptcy case, he said he had about $94,000 in cash at the end of May and his company, Guiliani Communications, had about $237,000 in the bank. He has been drawing down on a retirement account, worth nearly $2.5 million in 2022. It had just over $1 million in May.

Full post, including comments

New Year’s Resolution: Sell the index funds?

by philg

Happy New Year to everyone! Let’s consider a New Year’s resolution to look at our investments…

“Wave Goodbye To the Stock Market’s Historic Run, Goldman Sachs Says” (Investopedia):

Analysts at Goldman Sachs on Monday forecast the S&P 500’s average annual return over the last decade of 13% will shrink to just 3% in the next 10 years.

Goldman analysts forecast the S&P 500 will return an average of just 3% a year in the next decade, a far cry from the 13% average annual return of the last 10 years. That would rank in the bottom decile of comparable periods in the last century. It also puts the odds that stocks fail to outpace inflation at about 33%.

So why the pessimism? One of the primary causes for Goldman’s concern is the market’s extreme concentration, which by their measure is near its highest level in 100 years. Concentration of this magnitude, the analysts say, makes the performance of the S&P 500 overly reliant on the earnings growth of the index’s largest constituents.

The 10 largest stocks in the S&P 500 currently account for about 36% of the index, far higher than at any other time in the last 40 years. These stocks have swelled in size in large part because of their exceptional earnings growth over the last two years. The Magnificent Seven—Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG; GOOGL), Amazon (AMZN), Meta Platforms (META), and Tesla (TSLA)—more than doubled their earnings on a year-over-year basis in the first quarter of 2024.
2

History shows, however, that it’s extremely difficult to sustain earnings growth at that clip. Just 11% of S&P 500 companies since 1980 have maintained double-digit sales growth for 10+ years, according to a Goldman analysis. A microscopic share (0.1%) has sustained 50%+ margins for a decade.

What’s the alternative if you don’t have a direct phone connection to God to tell you what individual stocks to buy?

However, growth is expected to pick up for the “Other 493,” which are forecast to post double-digit earnings growth over the next five quarters, significantly narrowing the gap between those companies and the Mag Seven.

The market’s extreme concentration and the difficulty of sustaining earnings growth are two key reasons Goldman expects the equal-weight S&P 500 index to outperform the more widely tracked capitalization-weight, or aggregate, version over the next decade.

Historically, the equal-weight index tends to outperform the aggregate index, but the last 10 years have been a different story. The aggregate index has outperformed the equal-weight by 3 percentage points a year since 2014.

Goldman expects the pendulum to swing back in favor of the equal-weight index, which their model suggests will outperform by 8 percentage points annually through 2034, its most dramatic outperformance since at least 1980. The size of the outperformance may seem extreme, the analysts note. “However, the equity market has also rarely been as concentrated as it is now.”

The current record outperformance for the equal-weight index is 7%, which it achieved in the decades ending in 1983 and 2010. These two 10-year stretches, Goldman points out, each began when the market was at peak concentration, as it may be today.

How would it work to put together an equal-weight portfolio? Just find a zero-commission broker and buy $1000 of each of 500 stocks (total value: enough to buy a meal at Five Guys a few years from now). It would require a lot more trading for rebalance, though, than the market-weight S&P 500 because the market-weight index adjusts automatically when one component stock rises or falls. The trading could lead to tax inefficiency that would wipe out the theoretical superiority of equal weight.

One could also let someone else do the trading, and somehow this Invesco ETF (RSP) seems to have figured out how to eliminate what you’d expect to be capital gains from all of the trading.

Past medium-term performance doesn’t seem to be great for equal weight:

Perhaps from letting the Mag 7 stocks run wild, the straight S&P (light/bright blue bar) seems to have outperformed, but if we go back 21 years to the fund’s inception (2003), the equal weight index has done a little better than the S&P 500 index (on the third hand, the ETF’s relatively high expense ratio of 0.2% will wipe out quite a bit of that small superiority).

Do we feel confident enough in the market power and dominance of the biggest companies in the S&P 500 that we think they can keep growing?

What about other indices? The NASDAQ-100 is now partly Bitcoin because they brought in MicroStrategy, a Bitcoin account selling at a bit premium to the value of the underlying Bitcoins (WSJ). And there is a lot of overlap by market cap with the S&P 500 (e.g., Apple, NVIDIA, Microsoft, Amazon, Alphabet). Maybe a simpler way to avoid the concentration risk in the S&P 500 would be to buy a midcap or smallcap fund.

And how about a little humility/honesty as an early New Year’s resolution? “He Lost 35% Ignoring 2024’s Biggest Trades: ‘I Am Not Good at What I Am Doing’” (WSJ):

In early December, Richard Toh, the chief executive and investment officer for the Singapore-based hedge-fund firm Kenrich Partners, sent a four-page letter to investors.

“I have come to the realization that I am not good at what I am doing but I guess some of you may have sensed that already,” he wrote. “I am sorry I have let you down.”

“I pretty much missed all the major themes in the last two years,” Toh wrote. “I was hopelessly out of sync with the market, buying when I should be selling and selling when I should be buying. We got whipsawed several times this year even as we got some facts correct.”

“I learned from that episode that sometimes the best investments are precisely the ones you cannot explain and probably made no sense. It also told me I am getting too old,” he wrote.

(There are so many people to whom I could legitimately write “I am not good at what I am doing” that I don’t know where to start…)

Separately, soon we will need to say goodbye here in Jupiter to our mayor’s personal Christmas light display (no keffiyeh as part of the crèche, as the Pope had):

Happy New Year’s Eve, everyone!

Full post, including comments

How is Zoom stock worth less today than before coronapanic?

by philg

Some folks are using Zoom stock as an example of the pain that some Americans would suffer if the Democrats’ plan to tax unrealized capital gains were implemented. They posit a prescient investor who paid $100 for the stock just as coronapanic was unfolding, then got taxed based on the $337/share price at the end of 2020, and just held onto the stock for the ride back down below $100 (remember that the loss in real dollars is even more severe; adjusted for purchasing power, the $100 paid in 2020 had a purchasing power of closer to $200 today, e.g., for a house):

Today’s topic is not the wisdom of forcing successful Americans to pay their fair share, but on how the Zoom price today can be lower than the Zoom price before coronapanic. Zoom was worth $92 per share in August 2019, for example, before SARS-CoV-2 had infected even a single human, with or without a cloth mask to protect him/her/zir/theirself.

Given that Zoom was a curiosity in 2019 and is something that hundreds of millions of people today still use regularly, how can the company be worth less?

Let’s also consider the purportedly efficient market and the purported wisdom of crowds of investors. Zoom had potential, so it was worth a lot in 2019. What would have been an impossible dream for Zoom investors? How about governors all around the U.S. making it illegal for people to meet in person (except at liquor and marijuana stores in California, Massachusetts, etc.)? U.S. state and local governments did more for Zoom than investors could ever have hoped for and yet the company still hasn’t lived up to the expectations of 2019.

How did the investors of 2019 get it so wrong?

Full post, including comments

How will NVIDIA avoid a Google-style Vesting in Peace syndrome?

by philg

NVIDIA is the world’s most valuable company (P/E ratio of 75; compare to less than 40 for Microsoft), which also means that nearly every NVIDIA employee is rich. A lot of people slack off when they become rich. Google ended up with quite a few “vesting in peace” workers who didn’t contribute much. It didn’t matter because it was too challenging for anyone else to break into the search and advertising businesses. But suppose that another tech company assembles a group of not-yet-rich hardware and software people. Hungry for success, these people build some competitive GPUs and the biggest NVIDIA customers merely have to recompile their software in order to use the alternative GPUs that are marketed at a much lower price.

How can NVIDIA’s spectacular success not lead to marketplace slippage due to an excessively rich and complacent workforce? Is the secret that NVIDIA can get money at such a low cost compared to competitors that it can afford to spend 2-3X as much on the next GPU and still make crazy profits? I find it tough to understand how Intel, which for years has made GPUs inside its CPUs, can’t develop something that AI companies want to buy. Intel has a nice web page explaining how great their data center GPUs are for AI:

Why can’t Intel sell these? Are the designs so bad that they couldn’t compete with NVIDIA even if sold at Intel’s cost?

Full post, including comments

Hedge funds take 64 percent of their investors’ returns

by philg

“When Wall Street Rolls Out the Red Carpet for You, Who Pays?” (Wall Street Journal, March 8):

Edward McQuarrie, an emeritus business professor at Santa Clara University who studies long-run asset returns, recently analyzed how mutual-fund investors have fared since the 1920s. His goal was to measure their returns not in theory, but in real life.

He found that a $10,000 investment in 1926 in the index that became the S&P 500 would have grown to just under $198,000, 30 years later, with all dividends reinvested. But you couldn’t have invested directly in that index; it was only a hypothetical measure, without commissions or other costs.

In the real world, where mutual funds charged sales loads of up to 8.5% plus annual expenses, a $10,000 investment in 1926 would have grown to less than $99,000 over three decades. In the real world, costs ate up half the wealth you could have achieved in theory.

Over the next 30-year period, through 1986, fund investors captured only 71% of the cumulative wealth that the S&P 500 hypothetically generated.

(None of these results account for the toll of taxes and inflation.)

That last sentence is brutal. Unless you live in a tax-free environment, e.g., as an EU citizen resident in Italy, It might be better to follow Hunter Biden’s example and enjoy whatever money falls to hand rather than trying to invest!

How about the alternative investments that savvy college endowments buy into?

A recent study found that, on average, for every dollar of return they generated from 1995 through 2016, hedge funds harvested 64 cents in management and performance fees. Lately, at some leading hedge funds, expenses have even risen—to as much as 5% to 7% annually.

Of course, this analysis is presented by the same newspaper that reported on the high effectiveness of lockdowns, mask orders, and school closures as means of preventing COVID-19…

Full post, including comments

The death of Europe: a challenge to the Efficient-Market Hypothesis religion

by philg

It is perhaps an exaggeration to say that Europe is “dying” when “stagnating” might be a fairer description. The chart below isn’t adjusted for inflation, so the European market is more or less flat in purchasing power while the investor in the U.S. market has done nicely.

All of Europe’s challenges and advantages were known to investors in 2008. Ditto for the U.S. The Efficient-Market Hypothesis, therefore, would suggest that the above situation shouldn’t have happened. Returns to the European stock market should have been about the same as returns in the U.S. market unless something dramatic occurred. Perhaps we could say that Russia’s attack on Ukraine in 2022 was an unforeseen dramatic event, but it looks as though the divergence between the markets happened well before that.

Full post, including comments

How is Rivian doing?

by philg

Back in November 2021, I asked “What edge does Rivian have in the truck or EV market?” and questioned the company’s stratospheric market cap. It has been two years. How is the company doing and how is the stock doing?

Given the calculation that working class subsidies to elite owners of EVs are $50,000 per vehicle (direct tax credits, higher costs for gas-powered cars due to EV percentage sales requirements, subsidized electricity), the company itself should be profitable. MotorTrend says otherwise: “Rivian Loses a Huge Amount on Every Vehicle It Sells” (October 5, 2023).

From May 2023, in the lower Manhattan neighborhood favored by elites (Chelsea):

Full post, including comments

Profiting from the permanently temporarily settled Venezuelans

by philg

“Nothing is as permanent as a temporary government program” has been proven conclusively over the past couple of decades with migrants granted “temporary protected status” (aside from the 500,000-ish Venezuelans on whom this was bestowed by Joe Biden, there are the Haitians who won this in 2010 and are still entitled to “temporary” status).

“Yes, Immigration Hurts American Workers” (Politico 2016, by a Harvard professor) concludes that elite Americans get a $500 billion/year (pre-Biden dollars) boost in wealth from low-skill immigration. This can be due to ownership of real estate, such as apartment buildings, and stocks in companies that have a larger market due to a larger population. Elites also profit by paying lower wages, since the larger supply of workers results in a lower market-clearing wage under Econ 101.

Maybe a non-elite can profit by investing in a health care enterprise in a low-income neighborhood? Migrants who are granted temporary protected status immediately qualify for unlimited taxpayer-funded health care spending (Medicaid). Here are the Florida rules:

In Maskachusetts, a noncitizen can get taxpayer-funded health care, taxpayer-funded housing, and taxpayer-funded food (i.e., a 100-percent taxpayer-funded lifestyle) and he/she/ze/they does not run afoul of the “public charge” rule:

How about California? “For Medi-Cal [Medicaid] eligibility purposes, immigrants granted TPS are lawfully present.”

Readers: How else could a non-elite American invest so as to position him/her/zir/themself to profit from the open border?

Full post, including comments

Why have US stocks outperformed international stocks so dramatically?

by philg

One of the mantras of an index fund investor is that you can’t predict which companies or which economies will do best. (Or at least you can’t predict better than other investors, so obviously promising stocks are already priced high to reflect that promise.) Therefore, you should try to invest in a way that mirrors the domestic economy or, if you expect to spend time in other countries, the world economy.

Let’s have a look at the Vanguard all-US fund (“Total Stock Market”) “total returns” (reflects reinvestment of dividends, but not taxes).

12.17 percent return over 10 years. After federal taxes, this is 10.1 percent, says Vanguard. They don’t estimate the effect of state income taxes, but with California at at 13.3 percent on the successful, this could fall to less than 9 percent for a Californian.

How about the Vanguard all-foreign fund (“Total International”)?

In an efficient market, the returns should have been about the same. But the investor enthusiastic about broadening his/her/zir/their investment base got destroyed. The 10-year total return on non-US stocks, in U.S. dollars, has been 4.68 percent. After federal taxes? 3.88 percent. After California state taxes? Perhaps around 3.5 percent. Foreign bonds would have paid better than foreign stocks, I think.

Full post, including comments