Apple Town Prince

The Chicago Mercantile Exchange recently introduced housing futures and options. This is a long overdue idea and I look forward to the day when it is accessible to individual investors who don’t have membership on the exchange. The derivatives are based on the S&P Case Shiller Home Price Index, which tracks housing prices in ten major US cities. Interestingly enough, you can buy housing futures for 2007 at a considerable discount to today’s price.

If you don’t believe that high management fees represent a massive transfer of wealth from the public to the investment bankers who charge the fees then consider the following: You leave college at the age of 21 with a hard-earned engineering degree and your head full of Maxwell’s equations, the Church-Turing thesis and Graham’s Law of Diffusion. Your starting salary is $75,000 per year, grows with inflation, and you dutifully save 5% each year until you retire at the age of 65. By the age of 78 you will have $1,500,000 if you invest in mutual funds which return 7% (a conservative, long-term equity return) and charge you a fee of 2%.

If, instead, you bought a low-cost index fund which returned an identical 7% but only levied an annual fee of 0.2%, you would have $3,000,000 at the age of 78. And your mutual fund manager’s trust fund kid wouldn’t be driving past you in a Ferrari.

A scientist, Rupert Sheldrake, is claiming that he has proof of telephone telepathy. Maybe I’ve read too many fantasy books lately but the idea of telepathy has always resonated with me.

I wrote last week about the issues of fees in the investment industry. Now it appears that state governments are so enamored with the venture industry that they are investing on margin. According to VentureWire:

Deutsche Bank AG is emerging as a leading source of capital for private equity funds of funds sponsored by state governments.

In the latest instance, Michigan Gov. Jennifer Granholm announced this week that Deutsche Bank had ponied up $200 million to finance the state’s Venture Michigan Fund, which is a fund of funds earmarked for regional venture capital funds.

The Venture Michigan Fund is the second state-sponsored fund of funds that Deutsche Bank has financed. Deutsche also supplied Utah with $100 million for its Utah Fund of Funds in March. That vehicle invests more broadly in in-state venture capital and buyout funds.

Deutsche is said to be negotiating with other states that are also in the process of setting up funds of funds, a person close to the issue said. Deutsche declined to comment.

The Venture Michigan Fund is managed by Credit Suisse’s Customized Fund Investment Group, while the Utah Fund of Funds is overseen by Ft. Washington Capital Partners.

Rather than serve as a traditional investor, Deutsche acts more like a lender to the funds of funds. Both Michigan and Utah pay interest on the value of the bank’s commitment. In the case of the Venture Michigan Fund, the state pays Deutsche more than 6.5% interest on the $200 million it is supplying. And if the fund of funds’ investments fail to generate enough profits to cover the interest payments, Deutsche receives tax vouchers for the full amount as a backstop.

This is the kind of crass stupidity from politicians that bolsters the argument for limited government.

A large amount of the money flowing into private equity and venture capital comes from pension funds. Typical venture funds charge 2.5% fees annually. The pension fund managers also charge a fee (around 0.3%) to manage the entire pension fund. Often, there is an additional layer of fees if the pension fund manager decides to access the venture capital asset class through a fund-of-funds. Fund-of-fund managers typically charge 1% for their services (picking the underlying venture funds). The total fees that an 85-year old nurse is being charged on her pension is therefore close to 4%. And this does not even take into account the 20% of any profits which are allocated to the VC’s, the 5% of profits added to the fund-of-funds manager and the bonus allocated to the pension fund manager.

All this leads me to my broader point: why are people content to give up almost 5% of their life savings annually. The long term returns on stock investing is 8-9% depending on the time frame and those returns are easily accessible to anyone through low cost (<0.2%) exchange-traded index funds. It is unlikely that venture funds will return in excess of 15% annualized IRR over the next few decades. And even if they do, all the compensation for taking on the additional risk goes to the finance industry.

There is a similar phenomenon in the public markets. Mutual fund fees are often as high as 2%. Why are people willing to pay those fees when there is an abundance of evidence that the vast majority of fund managers underperform the indices they are attempting to track?

Last night I watched one of those movies (“In Her Shoes“) that is thoroughly enjoyable while you’re watching it but you know you won’t remember it in a few months time and it will have very little impact shaping your life. Afterwards I was inwardly cursing the waste of time when a thought occurred to me: How long am I going to defer gratification until some later time in my life when I will conclude that I have earned it? And do we sometimes delay gratification because we’re not even sure exactly what it is that we enjoy doing? Because we’ve never allowed ourselves to slow down enough to explore all the fun in the world? And then before we know it, we lose the ones we love.

One Art – Elizabeth Bishop

The art of losing isn’t hard to master;
so many things seem filled with the intent
to be lost that their loss is no disaster.

Lose something every day. Accept the fluster
of lost door keys, the hour badly spent.
The art of losing isn’t hard to master.

Then practice losing farther, losing faster:
places, and names, and where it was you meant
to travel. None of these will bring disaster.

I lost my mother’s watch. And look! my last, or
next-to-last, of three loved houses went.
The art of losing isn’t hard to master.

I lost two cities, lovely ones. And, vaster,
some realms I owned, two rivers, a continent.
I miss them, but it wasn’t a disaster.

–Even losing you (the joking voice, a gesture
I love) I shan’t have lied. It’s evident
the art of losing’s not too hard to master
though it may look like (Write it!) like disaster.

 

I love Skype and I’ve tracked the growth in online users since October 2003. I’ve noticed a disturbing trend the last few months. The number of concurrent online users peaked at around 6.5M users in May 2006. This peak usually occurs around 7am (Pacific Time). June and July had similar peaks but since then I have rarely seen numbers over 6.3M online users and never greater than the previous maximum. Is this caused by more people being on vacation during the summer? The next few months should answer that question.

Skype Users Online Concurrently

Increase/Decrease in Peak Skype Users Online

Prayer

by George Herbert

PRAYER the Churches banquet, Angels age,
Gods breath in man returning to his birth,
The soul in paraphrase, heart in pilgrimage,
The Christian plummet sounding heav’n and earth ;

Engine against th’ Almightie, sinner’s towre,
Reversed thunder, Christ-side-piercing spear,
The six daies world-transposing in an houre,
A kinde of tune, which all things heare and fear ;

Softnesse, and peace, and joy, and love, and blisse,
Exalted Manna, gladnesse of the best,
Heaven in ordinarie, man well drest,
The milkie way, the bird of Paradise,

Church-bels beyond the stars heard, the souls bloud,
The land of spices, something understood.

New Scientist has a video of a tree-climbing robot being developed at Carnegie Mellon. How long will it be until the post-industrial revolution?

“In the name of human vitality WHERE is the charm in that useless, dispiriting, discouraging fatalism which broke out so horribly in the eighteen-sixties at the word of Darwin, and persuaded people in spite of their own teeth and claws that Man is the will-less slave and victim of his environment? What is the use of writing plays?—what is the use of anything?—if there is not a Will that finally molds chaos itself into a race of gods with heaven for an environment, and if that Will is not incarnated in man.…”