Saturday, October 10, 2015


I recently read Boomerang, a 2011 book by Michael Lewis based on magazine articles he wrote in 2009, 2010 and 2011. These articles looked at Iceland, Ireland, Greece, Germany and the United States in the aftermath of the financial crisis. I generally like Lewis as a writer and I found the book entertaining and a useful reminder that the excesses that led to the financial crisis were not confined to the United States.

In Iceland the problem was the banks. They grew extremely large (compared to the economy of Iceland) by making lots of bad loans around the world. The rapid growth should have been a red flag as credit worthy borrowers are a scarce resource that other banks will compete strongly for. This makes it hard for a bank to grow rapidly while maintaining high loan standards. Obviously there is less competition for bad credits so it is easier for a bank to grow rapidly if it makes a lot of low quality loans. But this generally doesn't work out too well in the long run.

In Ireland the problem was an amazing property and construction boom which Irish banks fueled with easy credit. When the bubble inevitably popped the banks became insolvent and would have failed had not the Irish government made a dubious and extremely costly decision to guarantee all their debt. In the US there is a lot of loose talk about taxpayer dollars bailing out the banks but in fact the government profited overall by supporting the banks (since as it turned out they were fundamentally sound). This was not the case in Ireland.

In Greece the problem (as least as related by Lewis) is that the Greek people individually and collectively are not credit worthy. So it was a big mistake to admit Greece to the Euro as this gave the false impression that Greece was credit worthy. So a lot of bad loans were made to Greece.

The German problem was a little different. Germany was saving more money than could be productively invested in Germany. So the German banks looked to invest abroad. Foreign investing can work out but you have to be careful you don't get stuck with a bunch of garbage the locals have sensibly passed on. The German banks failed to be adequately cautious thereby acquiring a lot of bad loans and a worldwide reputation for stupidity.

I thought the final chapter on the United States was the weakest in the book. Lewis discusses the financial problems of some state and local governments but in a big country like the United States there will always be some problems. Lewis doesn't really make the case that these problems threaten the country as a whole.

So in summary I can recommend the book as a good example of its genre.

Monday, June 8, 2015

Realizing Losses

Some people claim that if you own a stock whose market price falls below your purchase price you haven't actually lost money unless you sell the stock.  This is nonsense of course but what is true is that you can't write the loss off on your taxes unless you sell the stock.  So from a tax point of view it makes sense to periodically eliminate losing positions even if this requires you to acknowledge error. 

In this light last Friday I sold out my position in Ensco (ESV) a company which owns and leases out offshore oil drilling rigs.  I had bought this stock in March 2014 (at a price of about $48 per share).  In hindsight I was unduly influenced by the 6% yield (at the time) which should have been a warning sign.  I also was operating on the assumption that oil prices should be expected to rise over time and underestimated the risk of a price drop.  When the oil price did drop so did Ensco's dividend (cut by 80%) and stock price. 

I received about $24 per share when I sold.  So I lost about $24 per share or 50% of my original investment.  But by selling I will be able to write the loss off on my taxes (perhaps over several years).  I estimate this will result in a tax saving (federal and state together) of about 25% of the loss or $6 per share.  Which is better than nothing.

I have some more underwater (i.e. currently losing) stock positions but I let them be.  They weren't down as much and I have more faith in their future prospects.  The problem I see with Ensco is that new US shale oil may now (in large part) be cheaper to produce than new offshore oil.  In which case the demand for offshore drilling rigs will remain severely depressed indefinitely.  With predictably bad consequences for Ensco's profits and stock price.

Sunday, April 19, 2015

2014 Taxes

I got my income taxes done a little early this year.  I submitted the federal return electronically late on April 6 and mailed the state returns the next day.  My federal refund has already arrived, it showed up in my bank account April 15.  I was pleased of course but on reflection it could have been faster.  It should be immediately clear to the IRS that the return is legitimate (because it matches the 1099s and W2s reported to the IRS and is similar to my return for 2013 including having the same address and bank information) so in principle my refund could have arrived in just a couple of days.  However given the actual IRS system (which among other things appears to only issue refunds once a week) this was close to best case.  And I guess cutting this time down shouldn't really be a top priority for the IRS.

The IRS is much quicker than New York and New Jersey.  New York estimates 6 weeks and New Jersey 12 weeks which is consistent with my experience (except for New York in 2013 when I didn't get my refund until the end of August).  We will see how it goes this year.

Incidentally I intended to drop off my state returns at the post office on my way to work but drove right by and was a couple of miles past before remembering and turning around.  Not a big deal but it did leave me with a bit more understanding of how a parent could forget to drop a infant off at day care (as sometimes happens with tragic results).

Added May 1:  Both of my state refunds arrived quicker than usual this year.  My New Jersey refund check arrived in Wednesday's (4/29) mail and my New York refund check arrived in today's mail.  I can only speculate as to why things were faster than usual this year.  I have now filed several New Jersey returns maybe that reduces fraud concerns.  Also perhaps the fact that both refunds were on the small side.  Maybe filing a week early helped.  And I suppose it is theoretically possible the states have become more efficient.

Sunday, April 12, 2015

Blog Roll Switch

I have replaced educationrealist in my blog roll with West Hunter.  Educationrealist is a blog about teaching by a high school math teacher.  While I generally agree about the importance of innate cognitive ability (compared to other factors) in student achievement the fact is I am just not that interested in the details of teaching medium ability high school math classes.  West Hunter is a blog about human genetics (and other things) by two scientists (one of whom writes most of the posts) working in the field which I find more interesting.

Monday, March 23, 2015

TurboTax vrs H&R Block

It is tax season again and as in prior years I have been using TurboTax (published by Intuit) to do my taxes. A friend was visiting with a similar H&R Block tax program so I decided to compare the two programs. This proved somewhat painful as although the H&R Block program is able to import TurboTax data from 2013 easily as best as I can tell there is no way to import the TurboTax data from 2014. So I had to enter all my 2014 data again. When I had done so the H&R Block program produced similar but not identical results. Some differences were due to the way the programs round to whole dollars. For example TurboTax sums up all my dividends received and then rounds while H&R Block rounds each entry before summing. This sort of thing makes a difference of a dollar or two here and there.

The biggest difference was in their handling of a state tax refund. These are taxable if they are for a year in which you had previously deducted state income taxes and received a tax benefit for doing so. I normally deduct my state income taxes and receive a benefit on my ordinary income tax for doing so. However since I am also subject to the alternative minimum tax (AMT) which does not allow deductions for state income taxes my tax benefit disappears once the AMT is added in. So my state income tax refunds are not taxable. It seems to me that given your prior year's return a tax program should be able to figure this out for you. But neither program handles does. As I have complained before TurboTax makes it quite complicated to exclude such tax refunds from income. H&R Block is better in that it is simpler to tell it that the refund is not taxable but you still have know that it isn't. Fortunately I know this from doing my tax returns by hand but many people won't and will end up paying extra taxes. Recently the Obamacare tax on investment income has added a new complication. Because this tax is on net investment income you are allowed to allocate and deduct a portion of your state income taxes paid from your gross investment income. But this means if you later receive a state tax refund you deducted too much and are required to adjust your investment income in the current year appropriately to compensate. TurboTax (given your prior year's return) helpfully figures all this out for you and automatically computes the appropriate value. H&R Block just gives you an opportunity to enter an adjustment but provides no useful help in determining when such an adjustment is needed or how to compute it. Given that the Obamacare tax started last year so that this is the first year that this adjustment may be needed I expect most H&R Block users will have no idea about what to do and will just assume this doesn't apply to them (which is what I did). Even if a user did realize an adjustment is needed they would have to compute it by hand which is the sort of thing people buy tax software to avoid. So TurboTax definitely wins here. In fairness to H&R Block both companies have a range of programs of varying cost and capacities and possibly a more expensive version of the H&R Block program would have handled this.

Overall this H&R Block program seemed similar but a bit inferior to TurboTax. So given my familiarity with TurboTax I see no compelling reason to switch.

Sunday, March 1, 2015

Book Review

I recently read "The 5 Mistakes Every Investor Makes and how to Avoid Them" a 2014 book by Peter Mallouk. The book makes the case for a mostly buy and hold investment strategy using stock and bond index funds. This is reasonable but the arguments for it are familiar to me so I didn't find the book too exciting. The book assumes a certain basic familiarity with the financial markets, if the investing world is completely foreign to you this book would not be a good introduction.

Mallouk is an investment advisor and the book reads like an extended client pitch. It is good about ways to identify and avoid bad advisors, perhaps less good about how to decide whether you need an advisor at all and what constitutes a reasonable fee. The new robo-advisers (which offer automated advice from computer programs) are not discussed at all.

I would sum up Mallouk's advice about mistakes to avoid as 1) Don't try to time the market, 2) Don't try to pick individual securities, 3) Take the long view, 4) Be wary of biased advice and 5) Don't ignore taxes. (This merges two mistakes in Mallouk's list and adds another). This seems generally sound (although I personally don't follow it 100%).

I think Mallouk slightly overstates the case for stocks, although probably a good bet they aren't really a sure thing even in the long run. People pitching stocks generally reference the historical performance of the US stock market. As the US market has always recovered from setbacks to reach new highs this gives an optimistic outlook. But looking at foreign markets gives a more mixed picture. The Japanese market for example is currently at about 1/2 the level of its 1989 high (I don't think this counts dividends but even so its performance has been dreadful). In particular I believe (contrary to Mallouk) that there is something to be said for cash as an asset class. Mallouk concedes that although bonds have a lower expected return than stocks they have a place in a portfolio to moderate volatility. But the same argument applies to cash which in turn has a lower return and is less volatile than bonds. Or to put it another way if going from 10% cash to 0% is a no-brainer (as Mallouk suggests) why not go further to -10% (buy on margin)? Clearly at some point (which will vary with the individual) the added expected return is not worth the added volatility. That said many individuals probably do have too much cash. Me for example although more because of laziness (I am paid in cash and it piles up in my bank account out of inertia) than because of any considered decision to hold cash. Perhaps a sixth mistake to avoid is laziness.

To sum up while I think the advice in this book is largely sound I am doubtful there is enough of it to make the book worth reading particularly if you are already familiar with it from other sources. Of course some people (possibly including myself) may need to hear the same advice repeatedly to get up enough motivation to actually act on it so perhaps this book will be helpful in that regard.

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.