It’s Not Easy Being Less Rich

June 3, 2008

Rich people are having a hard time maintaining their lavish lifestyles in the face of the economic slowdown. The NYT article is both ridiculous and thought provoking. Excerpt:

NANCY CHEMTOB, a divorce lawyer in Manhattan, has found that her days have become crammed seeing clients, all worried about how an economic downturn will affect their marriages.

They seem to have nothing to fret about: their net worths range from $5 million to $1 billion. A blip in the markets shouldn’t send their chateau-size Park Avenue co-ops to foreclosure or exile them to Payless Shoes.

But Ms. Chemtob’s clients are concerned all the same, she said, because their incomes have shrunk, say, to $2 million a year from $8 million, and they know that their 2008 bonus checks are likely to be much less impressive.

One of her clients recently confessed that his net worth had decreased to $8 million from more than $20 million, and he thinks that his wife will leave him. He has hidden their fall in fortune by taking on debt to pay for her extravagant clothes and vacations.

The very wealthy can’t hide anything from their nutritionists and personal trainers, because they see the weight gain. Heather Bauer, a dietitian who works with many Wall Street executives who pay $600 to $800 a month for her services, says her clients have been eating and drinking more in the last six months. She sees results of this indulging each time they step on a scale, and in their journals that record what they’ve eaten.

ONE Wall Street executive, Ms. Bauer said, snacks on nuts in her office all day to manage the stress of potentially losing her position, while another confesses to inhaling four bowls of cereal at 10 p.m. Even their sex lives are suffering, Ms. Bauer said, because of the stress or because the weight gain makes them feel unattractive.


Revisiting “Buy vs. Rent”

May 31, 2008

Readers of my old blog (circa 2005-2006) know that one of my favorite topics was the “buy vs. rent” debate. One of the best writers on the subject has been David Leonhardt of the NYT – he has argued for years that it was cheaper to rent than to buy. But now, as home prices are coming down, the case for renting is less compelling: As Home Prices Drop Low Enough, a Committed Renter Decides to Buy.

Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.

The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.

Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.

And while home prices — and rent ratios — have always been higher on the coasts, they reached whole new levels recently. In the Washington area, the ratio went above 20. In Boston, New York, Los Angeles and south Florida, it topped 25. In Northern California, it approached 35, higher than it had been in any city, at any point on record.

In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting. At current mortgage rates, for example, a $500,000 house would typically bring monthly expenses of about $3,000 (taking into account taxes, repairs, a typical down payment and, yes, the mortgage deduction). When the rent ratio is 20, that same house could be rented for only about $2,000 a month.

There are two problems with buying a house in this situation. The first, plainly, is the extra $1,000 you’re paying each month for the privilege of owning, on top of the thousands of dollars you spent on closing costs. The second problem is that a rent ratio above 20 is a good indication of a bubble. When the prices of houses get out of line with the competition’s prices — that is, those in the rental market — a correction is coming.

The question facing my wife and me was whether we were entering the market before the correction had gone far enough. I really didn’t know what the answer would be. So as we looked at houses, I started calculating rent ratios.

In the neighborhoods where we were looking, two-bedroom condominiums were selling for $400,000 and being rented for about $2,100 a month, which makes for a rent ratio of 16. Four-bedroom houses were selling for $700,000 and being rented for almost $4,000, which makes for a rent ratio of 15. No matter the price range, pretty much every apples-to-apples comparison produced a similar ratio.

Historically, this is still a bit high. But it’s very different from where the market was just a couple of years ago. With house prices having fallen over the last two years and rents continuing to rise, the decision became a much closer call. We would now have to spend only a little more each month for the privilege of owning.

Federal and State Estimated Tax Payments – How to Pay Online

April 3, 2008

Your Federal and State taxes must be paid throughout the year on a “pay as you go” basis.  For employees – people who receive a W2 – taxes are withheld from each paycheck.  For self employed people, or people who have income in addition to earned income, quarterly estimated taxes are required.

How to Calculate Estimated Tax:
The best way to calculate your estimated tax payments – for both federal and state – is to prepare a projected 2008 tax return.  Each quarter you should estimate what your full-year 2008 income will be and calculate the tax you will owe based on this amount. 

For example, let’s say you received $100,000 of income in Q1 on which zero taxes were withheld.  Let’s also assume that you don’t know what you will receive in the next three quarters – could be more, could be less.  Project your 2008 income by annualizing the amount you earned in Q1.  In this example, you would project your 2008 earnings to be $400,000.  Calculate the federal and state tax you would owe based on this projection.   Pay ¼ of this amount by April 15, 2008.  Do this each quarter and “true-up” your payments so that you are on track to pay 100% of your tax liability by January 15th, 2009.


2008 Estimated Tax Payment Due Dates:

Q1: April 15, 2008

Q2: June 16, 2008

Q3: September 15, 2008

Q4: January 15, 2009


How to Make your Quarterly Estimated Payments Online: 

Enroll in the Electronic Federal Tax Payment System – EFTPS.  Each quarter when you determine your tax liability, login to the site to make a payment.  Alternatively, write a check and mail form 1040-ES each quarter.

New York State:
Go to the New York State Online Tax Center Website: and register.   Each quarter when you determine your tax liability, login to the site and make a payment.

The Scientists Speak: money and “stuff” do not make us happy

January 28, 2008

Check out this review of a new book: “The How of Happiness: A Scientific Approach to Getting the Life You Want” by Sonja Lyubomirsky. The message of the book seems to be similar to the popular “Stumbling on Happiness” by Daniel Gilbert, which I recommend.

The research and conclusions from these books is very compelling and more constructive, I think, than many of these self-help books that constantly make the bestseller lists. In this book, Lyubomirsky shows that a lot of our happiness is genetic — we are genetically predisposed to be happy or to be gloomy. But, there’s still hope for those predisposed to gloominess – we can affect at least 50% of our happiness through our own actions.

When it comes to money, beyond a certain level of income and material comfort, additional money does not make us happy. Many people actually become less happy as they climb the income ladder because they are more inclined to compare their success to that of other people. Have you ever found out that one of your colleagues, someone who does essentially the same work you do, makes more money than you? This happened to me shortly after I started my job at the bank about a year and a half ago. I found an offer letter sitting on the fax machine. The person was hired at the same level as I was and would be doing essentially the same thing – but her offer was 11% higher than mine. I was angry and depressed for the rest of the day; mad at myself for not negotiating better, resentful of my colleague, etc., etc. It’s ridiculous that seeing this letter would take me down from my good feelings about my new job but it did all the same.

As I see it, one great irony of our culture is that so many of the things we strive for actually make us unhappy. We run up lots of credit card debt buying stuff. The fancy new TV probably makes us less happy… we would be better off if we didn’t watch so much and instead spent the time doing activities with people we like. Many people work jobs they hate just so they can afford to consume a lot of junk they don’t need and doesn’t make them happy anyway. In my opinion, you shouldn’t spend the majority of your life doing something that isn’t fulfilling or working with people you can’t stand.

I think it actually takes conscientious effort to live by the lessons of these books. Living in NYC, it can be tough not to constantly compare your economic situation with everyone else’s. I have stayed sane – and actually prospered – in this environment by choosing to live below my means and save money. To accomplish this on a modest income in NYC is challenging. I know many people who make more money than I do but actually save less. These people often have huge credit card debt that they are unwilling to pay down. It might work for them, but that lifestyle would make me anxious and miserable.

Don’t Panic!

January 23, 2008

A friend of mine came to me today and said she was going to move her entire 401k into bonds and make all future contributions to a money market fund “until the bear market is over”. Without telling her specifically what to buy (because I have no idea), I was able to convince her out of this crazy notion.

Here are some quick thoughts on how I think you should allocate your 401k:
You should come up with an asset allocation (stocks, bonds, commodities, gold, real estate, etc.) based on the number of years until you can retire. Run the model once per year and reallocate accordingly. All 401k contributions out of your paycheck should go into equity mutual funds, regardless of your age.

Especially for Retirement Accounts, Take the Long Term View:
For those of us with a long time to go before retirement, we should take a very long-term perspective with our retirement accounts. That means continuous buying of “growth” stocks – emerging markets in particular. Ten years from now we won’t be able to see the difference between stock prices in December 2007 and January 2008 – in future real terms, the difference will be meaningless. But the return you get from incremental purchases at these discounted prices will be huge. Consider that you can buy shares of the same fund for 20% less than you could a month ago. If emerging markets continue to fall… even better! Over the long term, you can make a fortune by “dollar-cost-averaging” into emerging markets. You make money (by buying) when stocks are down, not when they are up.

** My 4Q 2007 Portfolio Review has been delayed because my broker won’t provide my December 2007 statement. Once I get it in the next couple of days I can crunch the numbers. Writing about the good returns I earned in 2007 will be bittersweet considering that I’ve given a big chunk of them back in the first two weeks of 2008!

The importance of writing clearly

November 13, 2007

I found a great speech by Mark Sellers on Greg Mankiew’s blog today. Sellers talks about what it takes to be a great investor, excerpt:

Sixth, it’s important to have both sides of your brain working, not just the left side (the side that.s good at math and organization.) In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn’t write worth a damn and had a hard time coming up with inventive ways to look at a problem. I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses. On the other hand, if the right side of your brain is dominant, you probably loath math and therefore you don’t often find these people in the world of finance to begin with. So finance people tend to be very left-brain oriented and I think that’s a problem. I believe a great investor needs to have both sides turned on. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer. Look at Buffett; he’s one of the best writers ever in the business world. It’s not a coincidence that he’s also one of the best investors of all time. If you can’t write clearly, it is my opinion that you don’t think very clearly. And if you don’t think clearly, you’re in trouble. There are a lot of people who have genius IQs who can’t think clearly, though they can figure out bond or option pricing in their heads.

The whole speech is worth reading. It hit a chord with me because the ultimate reason why I write this blog is to become a better investor. Writing helps me to clarify my thinking about thorny topics such as inflation, investing, asset allocation and tax planning. I know I would be thinking a lot less clearly about these things if I didn’t write about them from time to time.

3Q ’07 Portfolio Review

October 6, 2007


The third quarter of 2007 turned out great thanks to a strong September. On the year, my compounded monthly return is 14% compared to 9% for the S&P 500. The portfolio includes about 8% in cash (high yield munis) and 8% in GLD. The balance is made up of 24 stocks and is allocated as follows:


It should be obvious why the portfolio did so well in September: when the Fed cut rates on September 18, it was a huge boost to stocks having anything to do with inflation and the “global boom.” This includes anything to do with metals, mining, agriculture, infrastructure, gold and emerging markets. My best performing stock this quarter was Companhia Vale Do Rio Doce (RIO), which is the big Brazilian mining concern.

It was also helpful that I have very little exposure to financials. Going into the fourth quarter, I am thinking of adding some more exposure to tech because a) I am very “underweight” relative to the S&P; and b) tech stocks often do very well in the fourth quarter.


The third quarter is a good time to calculate all of your realized gains and losses in taxable brokerage accounts. Given that there are still three months left in the year, there’s plenty of time to shuffle things around so cap gains taxes are minimized.

So far this year, I have a net long term capital gain and a net short-term capital loss. They are roughly the same amount which means the short term loss will go to offset the long term capital gain. This really is not an ideal situation because of the higher rate at which short term gains are taxed; it does not make sense to use valuable ST losses to offset LT gains. I will try to realize some ST gains before the end of the year so that I don’t waste the ST losses.