Value Line Fair Fund

This is kind of puzzling. Back in 2009 Value Line settled charges that from 1986 through 2004 it had been cheating investors in its mutual funds by having the funds pay inflated commissions which were then partially kicked back to Value Line. As part of settlement the Value Line Fair Fund was set up to reimburse damaged shareholders. Since I was a shareholder in two of the funds during the period in question (see here and here)  I was eventually sent a claim form which I duly filled out and returned in June of 2011.  My claim was initially denied (for bogus reasons) but I submitted an appeal and additional documentation in February of 2012 which was accepted.

Recently I became curious as to why I hadn't heard anything more about this.  I poked around a little on the internet and found that on April 26, 2013 the SEC had issued (34-69469) an "Order Directing Disbursement of Fair Fund",  This order says in part:

The Plan provides that a portion of the Fair Fund consisting of disgorgement,  prejudgment interest, and civil penalties, plus any accrued interest less a reserve for expenses and taxes, be transferred by the Commission to The Huntington National Bank for distribution by the Fund Administrator when a validated list of payees with the identification information required to make the distribution has been received and accepted by the staff. The validated list of payees, which is for a total disbursement amount of $21,053,635.14, has been received and accepted.

Accordingly, it is ORDERED that the Commission staff shall transfer $21,053,635.14 of the Fair Fund to The Huntington National Bank, and the Fund Administrator shall distribute such monies to investors, as provided for in the Plan.

This started me worrying that my check had been sent to my old address or lost in the mail or something.  But when I called the Fair Fund help number they told me that despite the above the SEC was still reviewing the claims list and they had no idea when the money would be distributed.

Hopefully it won't be too much longer.  The whole process has been more than a bit annoying.  It will be really aggravating if it turns out my claim is valued at less than $10 in which case I won't receive anything (the claims forms provided no useful advice as how to estimate your claim value and thus determine if it was worth expending the considerable effort and some expense involved in filing a claim).

Obstructed View

I recently got a ticket for obstructed view because my car's front side windows were tinted.  This was a bit annoying as the dealer in Colorado who sold me car had assured me the light tint was legal in all fifty states.  But it turns out  that any tint at all on the front side windows is illegal in New Jersey (as well as in Vermont and New Hampshire).  Something you might think the state inspector could have mentioned when I had the car inspected in order to register it in New Jersey.  Possibly I could have gotten the ticket dismissed by going to court and showing I had removed the tint.  But as a practical matter it was simpler just to pay the $54.

On the brighter side, as claimed on the internet, it wasn't difficult (with the aid of a fabric steamer and a tweezers) to remove the tint (which is actually a film applied to the inside of the window) myself.  The internet seems to be a good resource for simple do it yourself car repairs.  When I got something caught behind a cup holder in the center console so that the lid wouldn't open fully I found an internet video which showed how (for my car model) you can take apart the center console (without using tools).  This allowed me to get at and remove the obstruction.

Liquidity

Last week I criticized a Kevin Drum post complaining (in effect) that the government wasn't subsidizing home mortgages enough.  Drum quoted from a Felix Salmon post which is also wrongheaded in my view.  Salmon complains:

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

In the first place all cash buyers exist so even if no mortgages were available at all you could still sell.  So it appears this is really a complaint about the price obtainable.  Perhaps the value of units in Salmon's building has dropped significantly and the owners are in denial about this.  This would also explain the lack of refinancing, banks are justifiably reluctant to refinance a $600,000 mortgage on a property currently only worth $400,000 (for example).   Banks should not be lending money based on inflated valuations and public policy should discourage them from doing so even if current owners would prefer otherwise.

Salmon also appears to believe that there are both credit worthy potential buyers who are unable to obtain mortgages and banks with money with which they are unwilling to make mortgage loans because mortgage rates are too low.  But it is a bit hard to see why this wouldn't lead to rising mortgage rates (as potential buyers bid up the rates) attracting more lenders.

Salmon concludes:

Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.

It is hard for me to figure out what this even means.  Obviously the housing market is much less liquid than the stock market.  I recently bought a townhouse in New Jersey and sold a townhouse in New York and would estimate the transaction costs (shared between the buyer and seller) were at least 10% of the sales price.  In contrast buying and selling stock has much lower transaction costs, perhaps .1% of the sales price for a liquid stock like IBM, a hundred times less.  It is also much quicker and easier to buy or sell stock (to an extent that actually made me a bit uneasy considering the amount of money potentially at risk).   But this has little to do with availability of mortgages.  The very liquid stock market is largely cash based.  In fact mortgages make the housing market less liquid by adding layers of fees and required approvals to a typical transaction.   So it appears once again that Salmon's real issue isn't that the housing market isn't liquid (which has always been the case) but that prices are lower than he thinks they should be and that the government should be propping them up by offering subsidized mortgages.   I don't agree.

Spider Solitaire Update

I continue to waste time playing Spider Solitaire winning 45 out of 100 of the second hundred games I played.  This is up from 37 wins for my first hundred games and brings my overall win rate to 41%.  This is consistent with random fluctuation but I believe I am getting better and that my expected win rate is now at least 40%.  It would not surprise me if the expected win rate with perfect play is 50% or better. 

Noise Trader

As I noted in a previous post starting in late 2012 I bought some stocks (with less than stellar results).  In this post I will discuss my picks in more detail.  I should note I am not making recommendations, as will be seen my picks were based on personal idiosyncratic criteria.  But perhaps this post will provide some ideas.


I have a general preference for stocks with high earnings and/or dividend yields.  (The earnings yield is the inverse of the price earnings (PE) ratio.  So for example a PE ratio of 20 corresponds to an earnings yield of 5%).  These are sometimes called value stocks.  I also like investing in companies with which I am familiar especially through favorable (or at least neutral) experiences as a customer.  And I don't expect to be an active trader so I try to look at long term value.  I didn't evaluate the stocks I considered in any great depth (by for example carefully analyzing their financial statements or reading their annual reports).  This is mostly because I am lazy but I rationalize this with the belief that I am unlikely to find anything that isn't already reflected in the stock price.  I did look at the corporate governance scores (that can be found in company profiles in Yahoo finance) because I don't like being ripped off (even if the stock is cheap enough so that it is still a good investment).


In what follows I figure dividend yields for 2013 by just adding up the dividends for the year and dividing by the price at the beginning of 2013.  Adding this to the stock price change over the year gives the total return.  An alternative is to assume the dividends are reinvested but this is a lot more complicated, in most cases will make little difference and isn't what I do anyway (the dividends just pile up in my broker's money market account which is paying almost no interest).


As I noted in the earlier post I actually ended up buying a lot of an index ETF because it became apparent I wasn't going find 20+ stocks (I limited my investments in individual stocks to 5% or so of my account balance for reasons of diversification) which I was comfortable buying in a reasonable amount of time.  I chose the Vanguard ETF VOO which tracks the S&P 500 because it has the lowest expense ratio (.05% per year) of the S&P 500 ETFs.  The other two, SPY (expense ratio .09%) and  IVV (expense ratio .07%), are bigger and more liquid but as a long term investor I went with the low expense ratio.  VOO had a price return of 29.73% and a dividend yield of 2.38% for a total return of 32.11%.   Another alternative was VTI, a Vanguard index ETF which tracks the entire US stock market.  It had a slightly higher total return, 33.18%.   


My best individual stock pick was Aetna (AET), my health insurance company.  I see people claiming that everyone hates their health insurance company but I haven't had any negative experiences with them and the stock seemed cheap (low PE ratio).  It did well, up 48.11% while yielding 1.72% for a total return of 49.83%.


My other pick that did better than the market (for the full year) was JPMorgan (JPM), my bank.  Again a generally favorable impression as a customer (although they do tend to push some products of dubious value).  And I like that they are big, when I moved from New York to New Jersey they had a nearby location,  and when I unexpectedly needed money in Colorado I just had to walk into a local branch.  Again the stock was cheap and despite a seemingly endless stream of negative publicity it did a bit better than the market, up 33.00% while yielding 3.09% for a total return of 36.09%. 


During the year I bought another of the big banks, Wells Fargo (WFC).  It also did a bit better than the market (up 10.59% vrs 9.32%).


I believe oil prices are going to generally rise as we exhaust the earth's supply (peak oil) so I bought stock in a couple of large oil companies ConocoPhillips (COP) and ExxonMobil (XOM).  They did pretty well but lagged the market.  COP was up 21.83% and yielded 4.65% (total return 26.48%) and XOM was up 16.92% and yielded 2.84% (total return 19.76%).  During the year I also bought the Vanguard energy ETF, VDE, which was up 9.93% which again lagged the market (up 12.18%).


Another of my picks was Target (which I patronize more than Walmart).  It didn't do so well up 6.92% and yielding 2.67% (total return 9.59%).  (Walmart  did better with a total return of 18.08%).  I have kind of lost confidence in this pick, retail in general seems like a tough environment and Target doesn't seem like it has anything special going for it.


Looking for yield I bought a couple of electric utilities, Consolidated Edison (ED) and Public Service Energy Group (PEG), my gas and electric utilities in New York and New Jersey respectively.  I was familiar with them and thought they handled Sandy relatively well.  Due in part to concerns that interest rates might rise they didn't do too well (although better than a bank account).  PEG was up 4.70% and yielded 4.70% for a total return of 9.41% while ED lost .46% but yielded 4.42% for a total return of 3.96%.  I would have done better buying VPU (Vanguard's utility ETF) which was up 10.59% and yielded 4.15% for a total return of 14.75%.  I also considered Verizon, my phone and internet company but it seemed riskier, I was worried it would get stuck with investments in obsolete technology.  It did better up 13.56% and yielding 4.79% (total return 18.36), still seems risky though, it paid out more than it earned.    


Near the start of the year I bought VNQ, Vanguard's REIT index ETF.  This was attractive from a diversification point of view and it had a reasonable yield.  It did a bit worse than my utility picks, down 1.88% for the full year with a yield of 4.24% for a total return of 2.35%.  I doubled up on this position at the end of the year.


During the year I bought Intel (INTC) attracted by it's 4% yield.  The price was depressed because of worries about the future of the PC market but it seemed to me that Intel's chip design expertise should be transferable to other markets.  Perhaps this is optimistic.  Intel did a bit better than the market up 15.57% compared to 12.18% for the market over the same time period (actually almost the same time period for these partial year comparisons I am using the index (actually the VOO ETF) value at the close of the day I purchased the stock as opposed to the value at the actual time of purchase which I have no easy way to obtain). 


At this time I also bought Caterpillar (CAT) mostly for reasons of diversification (and IIRC a low PE ratio).  It has lagged the market a little up 8.81% as opposed to 12.18%.  And I bought the Vanguard high dividend yield ETF (VYM) which has also lagged the market a little (up 9.20%).


Later in the year I bought BHP Billiton PLC ADRs (BBL) attracted by the 4% yield and for purposes of diversification. This is a worldwide mining and natural resources company with a somewhat complicated corporate structure.  As Wikipedia explains it is a dual-listed company. You can also buy BHP Billiton Limited (BHP) shares.  BBL has a primary listing on the London stock exchange while BHP has a primary listing on the Australian stock exchange.  The shares are basically equivalent except that the BHP shares are franked (giving a tax advantage) for purposes of the Australian income tax.  As a result they trade at a premium (currently around 10%).  As best I can tell the BHP shares provide no tax advantage for typical Americans like me.  So we are better off buying the cheaper BBL shares.  The advantage is not enormous, if BBL trades at a 10% discount to BHP and yields 4% then BHP will yield 3.6%, for an edge of .4% per year.  In the short run BBL shares may do worse than BHP shares despite this advantage because the discount fluctuates but in the long run they should do better.  I was perhaps unduly attracted to the BBL shares because of the idea I was getting a bargain (I had been considering the BHP shares and then learned about the BBL shares).  They have lagged the market up 6.81% as opposed to 9.32%.

Mortgages

There is a powerful lobby in the US in favor of higher house prices.  Millions of Americans are homeowners and being generally richer and more politically active than renters they have disproportionate political influence.  In addition home builders and realtors also have an obvious interest in higher house prices which is expressed through lobbying by industry groups and trade associations.  The result is various government programs and policies which make houses more expensive.   These include various forms of government subsidized mortgages.  While such programs are sold as helping buyers in fact much of the benefit goes to existing home owners in the form of higher house prices (just as colleges capture much of the government aid to students by raising tuition).  In my view this bias in favor of high house values is not in the interest of the nation as a whole.  Trying to eliminate (or perhaps even substantially reduce) this high house price bias produced by government policy is probably unrealistic but I certainly think a substantial burden of proof should be imposed on people advocating biasing government policy even further towards high house prices.


Which brings us to this Kevin Drum post advocating fixing (which seems to mean even more government subsidies) the housing finance market without providing much in the way of evidence that it is broken.  He claims that even people with good credit (low 700s credit score) can't get mortgages which I highly doubt.  See for example according to this recent WSJ article reporting that the average credit score for approved mortgages declined in 2013 from 2012 and that plenty of mortgages are being approved for people with scores below 750 (or even 700).


Borrowers can still qualify for a mortgage with just a 3.5% down payment through the Federal Housing Administration, which has among the easiest qualification rules. The Ellie Mae report showed that the average credit score on an FHA-backed purchase mortgage stood at 690 in December, down slightly from 699 a year earlier. Average total debt-to-income ratios stood at 42% (lenders generally consider anything above 43% to be high).


Perhaps people with good but less than perfect credit scores can't get the very best rate on a mortgage but this is hardly surprising and isn't at all the same thing as being unable to get any mortgage.  Drum further claims (quoting Felix Salmon) that bank mortgage rules are designed to give the banks a reason to say no.  But this is a natural consequence of the fact that the loss on a bad mortgage is likely to be many times the profit on a good mortgage.  So it is much more costly for a bank to give out a bad mortgage than fail to give out a good one and bank rules and procedures will (or at least should be) designed accordingly. 


Considering recent history I think Drum should be embarrassed to be advocating lowering mortgage standards on such a flimsy basis.

Shipping Options

TurboTax (the tax program I have used for the last few years) was on sale at Amazon this week so I decided I might as well order a copy although I won't be ready to do my taxes for a while yet (still waiting for a lot of the tax documents I will need).  So naturally I chose the free but slow shipping option over the faster but more expensive choices that Amazon also offered.  Curiously when I was placing the order (late Monday night) this free option showed an expected delivery date of next week but when I received a confirmation of shipping the next day the expected delivery date was Thursday (when it duly arrived via the USPS).  Which leaves me wondering if Amazon is deliberately giving pessimistic arrival times for the free shipping option on the checkout screen to discourage use.  And if so about the legality of this. 


The program installed without any trouble which was a bit of a relief since if I recall correctly I had considerable difficulty getting it to install correctly last year (perhaps connected with a malware problem I had early last year).

Stock Picking Follies

While working at IBM I accumulated a fair amount of IBM stock through their employee stock purchase plan (ESSP).  Left to my own devices I would have probably held onto to it indefinitely despite the risk from lack of diversification.  However my new employer perceived a conflict of interest issue and I was required to sell most of my stock (I was allowed to and did retain a small amount).  In order to do this I opened an account with a discount broker and transferred my stock into it.  I was given 4 years to sell my stock but ended up selling about a quarter in late 2011 and then most of the rest in late 2012 (to avoid the federal tax increases effective in 2013).  

Since I was comfortable with this money in the stock market the sensible thing to do would have been to buy an index ETF as I sold the IBM.  Instead I decided to pick stocks myself.  This didn't work out too well.  Because I didn't get around to actually picking some stocks the money from the 2011 sales sat in my broker's money market account earning next to nothing through most of 2012 while the market (by which I mean the S&P 500) was up over 15%.  At the end of 2012 I finally managed to actually buy some stocks (and I did put a big amount into an index EFT as I realized at the slow rate I was picking stocks the money was otherwise likely to remain idle for some time).  Still I entered 2013 with over 30% of this money in cash.  I did buy more stocks (and some specialized index ETFs) throughout the year so by the end of the year my cash position was under 10%.  The result was in 2013 my brokerage account was only up 20.5% while the market was up 32%.  This shortfall was mostly due to not being fully invested but my individual stock picks generally lagged the market as well.  On the brighter side they did better than IBM which was one of the few stocks to be down (slightly) in 2013.  So being forced to sell IBM may turn out okay.  

The main lesson I draw here is that picking your own stocks in addition to the obvious drawbacks can have a somewhat hidden cost in the form of delays in getting your money into the market.  Of course this delay won't usually be as costly as it was in 2013 and in a down year would actually benefit you.  Still having made the correct decision to keep my money in the market it is too bad I didn't implement it better.