Finance – 6 am pacific

Looking for Investment Management Tools

I have been looking for any personal finance software that can help keep track of my investments. So far, I have come up with zip. Maybe someone else has had a better experience.

Here is what I am looking for:

Syncs transactions with brokerage accounts.
Allows looking at performance on a consolidated basis across accounts. I own a few stocks across multiple accounts. I want to look at how on a consolidated basis.
Includes dividends and reinvested dividends intelligently into calculating performance.
Allows XIRR calculations by security. XIRR immediately shortens the list. Total gain/loss on a stock is not a very interesting number.
Ideally, I should be able to take any window of time to see how a stock has performed in that window. Also, of course, on a consolidated basis.

Schwab, of course, has nothing even close. They are so scared of making errors that they throw up a warning window every time I try to download a csv file. Can’t trust them to venture out this far.

I like mint.com for keeping track of expenses etc. but their investment management totally sucks. Pretty charts that are all horribly wrong, worthless or both.

A friend told me that Quicken takes care of all of these requirements. Unfortunately, Quicken gives the Mac platform short shrift. The last version for the Mac is from 2007 and the reviews are not good. No 30 day trial, so I passed. If someone has used this version and thinks it works, leave a comment.

iBank from iggsoft was supposed solve this very problem. The poor cousin treatment that Mac owners get on software for personal use. Tried it out. Couldn’t even set it up. No way to upload a csv! At least I couldn’t figure it out. For the transactions I could upload it seemed like it didn’t meet my criteria.

So my search continues. In the meanwhile, I put together a Google Spreadsheets solution, which meets all my criteria, except the windowing. Google allows you to call the price on a stock as a formula which is quite neat. The only problem with this is that transactions must be downloaded from the brokerage account and cut pasted into the worksheet every once in a while. I don’t trade much, so my solution works for me, kind of. At least until someone comes up with exactly what I want. But does that ever happen?

Indian Balance of Payments and Offshore Services

The RBI is concerned about India’s Balance of Payments. One of the reasons ascribed to the growing problem is the slow down in the Indian Offshore Services industry. From today’s FT

One reason, the central bank said, for the deterioration in the balance of payments was a decline in an “invisibles surplus”, caused in part by falling revenues to India’s prized outsourcing sector.

For my book I crunched some data from the RBI website. As you can see, on the Current Account, India depends a whole lot on the Offshore industry.

Without the Offshore industry being where it is today, the import regime could not have been as easy as it is today.

But I am a little confused on the timing of this. Given that last quarter was very good for most of the top companies, isn’t this now no longer a concern? Or is it that RBI data gathering and analysis lags public companies announcing their results by a quarter?

Real estate prices in India and California

Real estate in India looks really inflated to me. Two data points – one in Mumbai on very expensive flat in South Mumbai and another on a more modest flat in the Chennai. The annual rent on both is between 1.5 and 2% of the price of the flat. Yields on Indian government 10 year notes, is currently close to 8%.

One can draw two conclusions from this:

– It is far, far better to rent than to buy real estate in India. On a 2 cr. apartment the difference between buy vs rent is 12 lakhs per annum (and the peace of mind that GoI bonds give you)

– People who buy real estate at these prices are counting on capital appreciation and definitely not rental income. How much higher can it get?

On the other hand, in So Cal, a friend who thinks it is a good time to buy real estate in California, is making 8-10% just on rent (after costs).

Maybe those Mumbai fat cats should think about investing in California real estate. A much better long term bet, good rental yields and easy to manage long-distance.

I wonder if there is the makings of a business in channeling this investment from emerging markets with super high real estate prices to developed economies where post the financial crisis, real estate is quite depressed.

Markets Last Week

James Surowiecki sums up last week’s momentary free fall in the stock market:

But what does seem clear is that the plunge was exacerbated by the markets’ heavy reliance on computerized trades—both explicit “stop market” sell orders (that is, orders to sell a stock once it hit a certain price) and algorithmic trades that dictate buying and selling depending on different market factors.

and

I don’t think yesterday’s crash is evidence the market is irrational. It’s more that it’s a-rational: the computers aren’t panicking or herding. They’re just following simple rules. I think this is bad for the collective intelligence of the market, which really depends on diversity of thought and independence of action. But what happened yesterday isn’t, I think, quite the same as the crash of 1929 or the stock-market bubble of the late nineteen-nineties. It’s an example of the dangers of a-rationality (to coin a word) rather than irrationality.

Felix Salmon thinks this is an opportunity for a financial transaction tax

There’s a very sensible idea going around that a simple way to deal with nearly all of these problems, at a single stroke, would be to implement a tiny tax on financial transactions. Historically, people have complained that such a tax harms liquidity, which is true. But the fact is that it harms the bad kind of liquidity — the liquidity which dries up to zero just when you need it most. Liquidity, if it’s spread across multiple electronic exchanges and can disappear in a microsecond, does very little actual good, and in fact does harm during tail events like this. Let’s tax it, and raise some money for the public fisc at the same time as slowing down markets and making them think before doing a trade.

I think a financial transaction tax is a good idea. It is politically more doable at this time than any other time in the future. India already has one and it seems to do no harm to liquidity.

If you think about it, sales tax is a transaction tax. Why is it that there is no demur to a transaction tax on sales of goods (except on online commerce, which again is inexplicable), but financial transactions being taxed will bring about the end of capitalism?

The Politics of Financial Reform

Frank Rich writes a hard-hitting piece in the NYT. But he gets one piece wrong:

.. Those who shorted the housing market shorted the country.

There were many things that went wrong with the housing market – people were being given loans who had no chance of repaying it, homeowners were outright lying and the lenders were encouraging them or looking the other way, Wall Street was concocting securities that were several layers of complexity away from the real, underlying assets and the credit rating agencies were designing their models so that they could stamp their approval on these securities. And a bunch of other stuff related to Fannie and Freddie and the absence of any regulatory checks.

But the thing that was not going wrong, enough, was that there weren’t enough people shorting the heck out of these securities. An asset bubble is created when there are too many people in the market willing to buy at higher and higher prices and not enough people betting on the prices to go down.

Goldman Sachs and Paulson & Co. made money as the sub prime market was collapsing around it. Good for them. There’s nothing wrong with that. Goldman didn’t make much since they were late in the game. Paulson made out like a bandit because he was betting against subprime when no one else was. Unless these deals involved cheating or fraud, there is nothing wrong with making money in a collapsing market.

To the common voter, this won’t make sense. It isn’t fair, it isn’t right to be able to make money off of other folks’ misery. To get huge bonuses when people are losing their houses. You can almost see the special feature on CNN – an interview with an old couple who lost their home and their savings immediately followed by some charts on average bonuses at Goldman Sachs (assuming that nobody at Goldman will be stupid enough to give an interview to CNN on this subject).

Innovation and Complexity in Finance

This week the business news was dominated by Goldman Sachs. The SEC charged it with securities fraud. While Goldman denies any wrongdoing and will “vigorously defend its reputation”, it is actually its reputation that may be permanently damaged. The SEC may find it difficult to pin Goldman down in court, but in the court of public opinion, Goldman may find it hard to redeem itself. Felix Salmon does a great job of covering this. John Gapper has a nice piece in the FT that sums it all up rather well.

Here are a couple of observations about the Goldman Abacus deal. All parties involved – Goldman, ACA, IKB, ABN Amro and Paulson – are financial firms. While the assets being packaged into the CDO were mortgages, they were far removed from the houses that were bought using mortgages. There was no purpose that this deal served in the “real” economy.

George Soros in an op-ed in the FT today:

Whether or not Goldman is guilty, the transaction in question clearly had no social benefit. It involved a complex synthetic security derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals. This synthetic collateralised debt obligation did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst. The primary purpose of the transaction was to generate fees and commissions.

The deal was a complex deal. So complex that ACA and IKB didn’t understand it well enough to ask the right questions. Neither of them are bit players. ACA was happy to let Paulson pick the mortgages that went into the structured product since they thought he was long and on the same side of the deal as they were. IKB, similarly didn’t look at the underlying assets too closely because they thought Paulson was investing too.

There are many occasions in business when trust compensates for an incomplete understanding of the parameters of a deal. In such situations you prefer working with a specialist with a reputation, like say IBM for technology. But in this case, ACA and IKB, both financial firms, couldn’t deal with the complexity of the transaction and trusted (or at least ceded control to) Goldman. And they got taken to the cleaners. ACA is no more and IKB had to be bailed out by the German government. ABN Amro is now part of RBS which was bailed out by the British government.

And here’s my point. Maybe there is such a thing as too much financial innovation. Maybe too much of this innovation is to create complexity for its own sake, to keep changing stuff just to keep clients confused and uninformed. Low information clients are the most profitable clients.

In the consumer finance world complexity creates fine print. Fine print creates profits. Credit cards, banks – they don’t make money by being upfront and transparent. With financial institutions the game has to change, since they have lawyers who can read the fine print. So what do you do? You “innovate”. You create structured products that are mind-bogglingly complex. You avoid transparency. You avoid instruments that can be marked-to-market.

Besides clients and counter parties, constant financial “innovation” also keeps the regulatory bodies confused. They don’t understand these new financial instruments to effectively regulate or police them. In the meanwhile, the smart players on Wall Street are raking it in.

Which is why Wall Street doesn’t like exchange traded derivatives. Products would have to be simplified, standardized. Change would slow down. Spreads would come down and so would bonuses.

Innovation in services is hard to pin down – is it useful or is it smoke? Again, looking at credit cards business, developing a product that allows your teenage son to use your credit card at certain merchants to a certain limit – that’s useful innovation. But a product that has low APRs but gives you only 5 days to pay your bill before hitting you with late fees – that’s innovation that is designed to make more money off of customers who don’t read the fine print.

The problem is that it is very, very difficult to make rules such that the good kind of innovation is unimpeded while preventing the bad kind. That’s why we need ethical business leaders. Today, the credo in the corporate world and especially on Wall Street is – maximize your bonus without committing an unlawful act. In many cases this is stretched to “without getting caught”. Regulation can’t keep up with this. There has to be some self regulation.

We need more companies like Google. “Do no evil” might sound corny but it says that the company tries. That’s more than you can say about Goldman Sachs.

Lehman and Ernst & Young

The repo sleight of hand at Lehman was an atrocious piece of work. For those of you who haven’t been paying attention here’s how it works.

Lehman had a boatload of assets on its balance sheet supported by a thin slice of equity. To hide their huge leverage, they did deals with counterparties which were essentially short-term (like a week or two) loans against collateral (which they had plenty of). Except, that they didn’t show these as debt on the balance sheet against collateral. Instead they showed them as sale of assets so that the balance sheet at the end of the quarter wouldn’t look as leveraged as it was. Terrible, terrible stuff. The accounting magic may not have been at the scale of Enron, but the end result was the same – a once proud company, bankrupted, it’s shareholders left with nothing.

With all the noise around it, it is almost certain that Dick Fuld, the former CEO will be prosecuted. But what I am unable to fathom is why Ernst & Young gets away with it. Enron brought Arthur Andersen down. Of course they did a lot of other bad stuff like trying to shred the evidence. But does that make so much of a difference to E&Y’s culpability? If the shareholders of Lehman bring a class action lawsuit against Ernst & Young, that could be worth billions in damages.

But that doesn’t seem to be the case. If anyone has a better understanding of this, please leave a comment.

Update: I think I found the answer to my question. From the New York Observer:

Indeed, the problem when Lehman invented Repo 105 early last decade was that it couldn’t get an American law firm to sign off on it. It finally got the O.K. from Linklaters, a member of the small group of top British firms called the Magic Circle. So Lehman would send over its Repo 105 assets to England, where its European wing handled them. “These firms clearly shop jurisdictions all the time for the most favorable rule set, and there’s nothing wrong with that,” the second executive said.

Also read Felix Salmon’s post on Wall Street bankers still living on a different planet.

Wall Street’s Chickens Come Home to Roost

President Obama yesterday fired the first salvo in what is going to be a bruising battle to rein in Wall Street. More than a year after the financial crisis brought the economies of the developed world to its knees, its been business as usual, perhaps even a little better than usual, for the financial sector.

Well, no longer. The President in a hard hitting speech blamed Wall Street for financial crisis and the ongoing economic slump. He then laid out what he called the Volcker Rule, as a nod to Paul Volcker, former Fed chief, who has suddenly become very influential. While the details were scant, the thrust of the Volcker Rule was two-pronged.

Why is the Financial Industry this Big?

A few months back I wrote about why I thought salaries on Wall Street (and the city of London etc.) were not the big issue. The big one is about the humongous size and growth of the financial industry.

Matt Yglesias and Maxine Udall write about how talent, like capital, has been preferentially allocated to the financial sector in the last two decades during which the financial industry has grown from about 20% to above 40% in its share of corporate profits. It dropped sharply as Wall Street bled money in 2008 but if recent earnings results are any indication, they are headed back up there quickly.

The financial sector’s average pay has steadily increased where it is now close to 200% of the national average. This of course doesn’t sound too big because it also includes consumer finance and banking, not just wholesale capital markets.

Investing, My Way

This year saw a sea change in the way I invest. Umm…let me take that back. This year I finally decided to put in place an investment methodology. Something that will hopefully form the basis for the way I invest long into the future. I put some thought into it and so in case it might be useful to others, here it is. Needless to say, this is what works for me. Your context may be completely different and what works for you might be completely different (do leave a comment if you think it adds to the discussion).