Sunday, February 15, 2015


The Nov/Dec 2014 issue of the MIT alumni magazine, Technology Review, had a long cover story on inequality, "Technology and Inequality", by editor David Rotman. While it isn't particularly surprisingly that MIT thinks more spending on education is the solution to all problems I nonetheless found it irritating in this instance. Misdiagnosing a real problem is harmful not just because it encourages spending on solutions that will not work but also because it discourages investigating solutions that might work.

The problem with the MIT article (and many similar ones) is that it correctly notes that people who have completed more levels of education tend to earn more money in their subsequent careers and then jumps to the almost certainly false conclusion that the additional years of schooling are why they are more valuable employees. It seems far more likely that some people have more natural academic ability than others and that the traits that make them good students also make them good employees. So the educational system is just identifying students who will make especially good employees. For the most part students who do poorly in school do so because they lack natural academic ability not because their schools are especially bad. There is confusion on this point because average academic ability varies widely between schools so some schools have lots of high ability students who do well and other schools have lots of low ability students who do poorly. It is natural to think that schools where most of the students are doing well must be far superior to schools where most of the students are doing poorly. But in the United States this is not the case, schools (within the range commonly found) make little difference. Move a poor student to a "good" school and they are likely to continue to do poorly, move a good student to a "poor" school and they are likely to continue to do well. Furthermore what differences do exist are predominantly due to peer effects, it is better to be surrounded by good students than by poor students. And of course it is not possible for everybody to have mostly high ability classmates.

One of the traits which helps you do well in schools is of course intelligence or IQ which the article doesn't mention at all. I do not find it surprising people with IQs of 115 do better in school and in their work careers than people with IQs of 85. But schools (in the US) have little effect on IQ and more spending on education cannot be expected to significantly reduce IQ differences and hence income inequality stemming from them.

Nor do I find it surprising that IQ is becoming more important in the job market. In 1920 there were over 25 million horses and mules in the US, by 1960 this number had fallen to slightly more than 3 million (see here). Pure muscle power used to be worth a lot in the economy, now not so much. There is a real issue here but more education isn't the solution.

Thursday, February 5, 2015

Super Bowl XLIX

I usually don't watch the Super Bowl but this year I did. It was quite entertaining. Especially if you were rooting for New England as I was.

Obviously Seattle's decision to pass on the critical play was debatable and it certainly didn't work out. But the level of criticism the Seattle coaches have received seems unreasonable. I doubt the claim that this was the worst play call in Super Bowl history. Instead it appears to me it was likely the unluckiest play call in Super Bowl history in terms of the actual effect of the play on Seattle's winning chances as compared to the expected effect. The level of vitriol does demonstrate why coaches are reluctant to go against the conventional wisdom. If they do and it doesn't work out they get crucified.

Tuesday, February 3, 2015

Portfolio Review

In 2014 my brokerage account increased in value by 12.17% (which breaks down to 9.69% from price increases and 2.48% from dividends).  This compares to a 13.44% return (11.38% price, 2.06% dividends) for VOO (Vanguard's S&P 500  ETF).  So my absolute performance was worse but my relative performance was better than in 2013.  I still lagged the market however.  As in 2013 this was primarily because I wasn't fully invested and secondarily because my stock and ETF picks underperformed.  Ironically while I bought 3 stocks during the year (dropping my cash position from 9.51% to 6.59%) they all lost money so I would have better off staying in cash.

Ensco PLC (ESV) which I bought early in the year was my worst performing stock with a total return of -33.92%.  I also bought two foreign banks near the end of the year,  Westpac Banking (WBK) a big Australian bank and Bank of Nova Scotia (BNS) a big Canadian bank.  They were both down at year's end, -3.45% and -1.38% respectively. 

I didn't make any other changes.  My existing positions tended to either significantly underperform or outperform.  In the underperforming group were my other energy picks, VDE, XOM and COP which had total returns of -9.97%, -5.98%  and 1.77% respectively.  Also underperforming were BBL (-26.88%), IBM (-12.20%), CAT (3.58%) and JPM (9.68%).  IBM continues to struggle so being forced to sell most of my position has worked out well so far.

VYM (13.38%) basically matched the market.

On the positive side my utilities outperformed in 2014.  ED was up 23.97% and PSEG was up 33.86%.  Similarly VNQ (another interest rate sensitive pick) was up 29.99%.  These positions had underperformed badly in 2013.  Two more solid outperformers were TGT (22.98%) and my other US bank WFC (23.72%).  Aetna (AET) my best position in 2013 continued to do well (up 30.82%).  My best performing stock in 2014 was Intel (INTC) with a total return of 43.29%.

Stock prices of course fluctuate however the dividend stream a diversified portfolio provides should be more stable and hopefully will increase over time.  In this regard my dividends (weighted by my initial 2014 positions) increased by 8.29% for 2014 versus 2013.

Thursday, January 29, 2015


I recently made several purchases from Amazon.  I didn't have a very positive customer experience.  On one purchase they offered me a $10 credit to sign up for their 'pay with points' program in which you can use credit card reward points to pay for Amazon products.  This isn't actually a bad idea as I have lots of reward points which I should do something with.  But when I signed up I didn't get the credit.  Amazon customer service did give me the credit when I complained but by that point I was so annoyed I had unsigned up.  So Amazon ended up paying me $10 not to sign up.  I also bought a TV.  Amazon claims to offer price protection on TVs, if they drop their price within 14 days you can get a credit for the difference.  But again I had to email customer service to actually get the credit although according to their help pages this should not be necessary.   On another item I was ready to buy but there was no buy button on the product page.  It showed up some time later but only after I had wasted considerable time.

A general complaint I have with Amazon is that if you get to the final page before buying and notice something wrong there doesn't seem to be an easy way to fix it.  At least I didn't see anything to do but abort and start over which is quite annoying if you had several items in your cart.  Another general complaint I have is about their numerous significant price changes (both up and down).  Perhaps these are somehow revenue maximizing (although I find that difficult to believe in some cases) but I wonder if they are properly accounting for how annoying this is.

My most recent purchase was TurboTax Deluxe 2014.  I ordered it Friday night (during a brief period when it was selling for under $40) and surprisingly it was delivered around noon on Sunday by the USPS much earlier the estimated arrival time.  This was kind of impressive but also seems sort of pointlessly expensive, why not just deliver it with the regular mail.

As for TurboTax, Intuit has annoyed a lot of people by removing a bunch of long standing features from the Deluxe version (in order to force upgrades to the much more expensive Premier version) but fortunately it appears I don't need any of them for my 2014 taxes.  I did have some trouble installing it and was worried when it first came up with the Basic version logo but this eventually changed to Deluxe and it seems to be working ok.

Wednesday, January 28, 2015

Snow Day

It appears that perhaps 6 inches of snow fell from Monday through Tuesday morning at my residence near Princeton, New Jersey. This is not nothing but is not at all unusual for a winter storm in this area and was nowhere near the alarming prior predictions. These predictions were bad enough to induce my employer to announce Monday evening that my work location was closed Tuesday. Perhaps this decision was a little premature but it is nice to get notice as early as possible.

It is not too surprising that the predictions of potentially record breaking snowfall totals did not materialize (at least not in New York City and areas south and west). For a record snowfall everything has to go just right (or wrong depending on your point of view) which means most potential record breakers will fall short.

Monday, January 12, 2015

Two Dollar Gas

On April 24, 2004 (when I was living in Ossining, New York) I bought gas and paid $1.939 per gallon.  A couple of weeks later I bought gas again and the price had risen to $2.039 per gallon.  This appears to have been the first time I had ever paid over $2 per gallon and I vaguely recall noting that at the time and wondering if I would ever pay less than $2 again.  For a while this seemed doubtful as the price bounced around but stayed above $2 and trended higher.  On July 26, 2008 I paid $4.499 per gallon.  But then the financial crisis hit and demand plummeted driving the price ever lower.  Five months later on December 26, 2008 I paid $1.979 per gallon.  This was more or less the low and the price had moved back above $2 at my next fill up (although I did pay less the $2 per gallon a couple of times in April 2009 in New Jersey where the gas tax is about $.35 less per gallon than in New York).  On July 2, 2014 (having moved to New Jersey) I paid $3.399 per gallon.  But then with growing over supply of crude oil prices began to drop, slowly at first and then more rapidly.  When I bought gas on Friday (January 9, 2015) I once again paid less than $2 ($1.959 per gallon to be exact).  It remains to be seen how low the price will go and how long it will remain below $2.

The lower price is nice in isolation but probably isn't really in my overall best interest at this point.  I purchased about 425 gallons of gas in 2014 paying an average price of about $3.20 per gallon.  So if I buy the same amount in 2015 and pay an average price of $2 per gallon I will save about $510 or just less than $10 per week.  This isn't too impressive and is much less than what I am likely to lose on my oil price sensitive investments if crude oil prices remain depressed.

See here for a graph of national gas average prices over the last 11 years.  When I was living in Ossining I seem to have been paying about $.40 per gallon more than the national average whereas now in New Jersey I am paying about $.10 per gallon less.

Sunday, December 28, 2014

Crude Oil Prices

Six months ago the Brent crude oil price was about $110/barrel and the WTI (West Texas Intermediate) price was about $100/barrel.  The current prices are about $60 and $55 respectively.  So the price has fallen dramatically and unexpectedly.  As I have mentioned before I believe oil prices are likely to generally rise over time as the earth's supply is exhausted (peak oil).  The recent price action doesn't totally contradict this as there was no reason to believe the rise would be smooth and monotonic.  Because both oil supply and demand react slowly to price changes small mismatches between production and consumption can cause wild price swings.  Still the recent price action is at least a reminder that in investing being right in the long run doesn't mean you can't lose a lot in the short run.  

Given that one still expects rising crude oil prices in the long run what is an appropriate investment strategy at this point?  It is tempting to look for bargains among the oil stocks which have fallen the most.  But this is in effect a bet that crude oil prices will recover before the highly leveraged companies in question go bankrupt (as a stock which is going to zero is never cheap along the way). So this is not an appropriate way of investing based on a long run view.  It is better to look at those companies that are most likely to be around for the long run.  However such companies are currently only cheap relative to the market as a whole.  I bought some ExxonMobil (XOM)  and some ConocoPhillips (COP) a couple of years ago and while their stock prices have fallen substantially in recent months they are still above my basis (while the market as a whole is up about 50%).  So I don't see a compelling reason to add to my positions.  Perhaps this will change over time if the crude oil price remains depressed.