What they should do

Last night I got a call from a client in New Zealand. He told me he was transferring his assets back home. The reason? Soon citizens of Australia and New Zealand will pay no capital gains taxes on any domestic investments. Then I thought, what if they did the same in the US? That would create significant incentive for domestic investment which will also help reduce the deficit, not to mention create more wealth for US citizens who invest in their country.

Why hasn't any politician proposed such a bill? I speculate that the politician who proposes such a bill will generate much goodwill.

The Present Value of a College Education

They say a person who goes to college earns an average of $1 million more in their lifetime then a person who doesn't.

With a good college education costing $40,000 a yr, thats $160,000 for a degree. If the average person graduates at 21 and works untill 65, thats a working lifetime of 44 years. Well if you could invest every year at the rate of 4.5%, then the present value of that $1 million is $144,172.76, or put another way, $144,172.76 invested at 4.5% a yr would become $1 million. So it could be said that a college education costing $160,000 is fairly valued.

But what if you can invest at a rate greater then 4.5%?

At 6% the present value is $77,000 which is the returns of the average bond investor
At 9% the present value is $22,554 which is the returns of the average buy & hold stock investor
At 12% the present value is $6,829 which is the returns of a good mutual fund
At 15% the present value is $2,134 which is the returns of a good investor
At 20% the present value is $328 which is the returns of a great investor
At 30% the present value is $9.69 which is the returns of legends like Buffet & Gates (maybe this is why he dropped out of college)

Suddenly $160,000 for a degree is not looking so hot.

Growth vs Value

Today I happened to get into a debate with someone from the value persuasion. After reading about some of his beliefs on value investing I felt compelled to opine on some of the spurious relationships he mentioned such as buying low p/e or below book value stocks will outperform the market.

His response was:

"In the short run the market is a voting machine (Google is sexy)

In the long run the market is a weighing machine (which has more weight? Berkshire or Google?)"

And then offered to make a value vs growth bet.

Well it just so happened that today the stars are aligned, because Google and Berkshire both closed with a market cap around $138 billion. So to answer his question, as of today they are equal weight.

For the sake of knowledge what better way to entertain the bet then to track the performance of Google (growth) vs Berkshire (value).

As of 01/13/2006:

Google closed at $466.25
BRK.A closed at $89,600.00

I will be tracking the performance of these two side by side, and will make updates as we observe new developments in both.

The Smartest Generation

Common belief by older generations is that the current generation and generations to come are stupid, ignorant and lazy. I think there is a trend in effect right now that as it matures will nuture one of smartest generations in history.
Over the past 50 years people's main information source was the TV, before that it was radio, newspapers, books, spoken word. What all these share in common is that one source influenced the masses.
Along comes the internet. A source where the masses influence the masses. Unlike the previous mediums, this source interacts with it users. Maybe its true the average persons attention span has shrunk, but is that a bad thing? Whats the point spending hours searching through papers & books when you can get the same information in seconds via the information superhighway. One can interact with others, and when in doubt no longer has to stayed glued to the tube waiting to be spoon fed information. Its also the information arbitrator between the able and the not so able. Anyone with a link to the internet is on much nearer level playing field with someone with more extensive reasources more today then ever. I havent't quantified how much more productive the internet makes someone, but if I had to guess based on my own experiance I would say at least 3 fold.
To give an example of how disruptive the internet is, I continue to refer to google. They continue take ad revenue while the old men of the by gone days stand and scratch their heads, wondering how it makes that money. Its simple; google lets advertisers see the return on their ad dollars they are getting, while TV, radio and print doesn't. Advertising used to be alot of guesswork + trial and error, Google & overture (now owned by yahoo) turned it into a science.

Does Technical Analysis Work?

This chart was taken from the most popular technical analysts website on a popular TA website.

If we break out to the upside he will just revise his chart to now show a bullish pattern instead of a bearish wedge.

We are now in a period of historically low volatility. I wonder if the low volatility will cause technical traders to take one position then be forced to take it in the other direction only to be stopped out again, when if they just held the original trade they would be profitable?

I think it would work better in a period of high volatility, but in the mean time I think mean revision trades can make a trader feel like he's coining money.

Negitive Sentiment

6am est - Alarm goes off - "There have been explosions around London" said the voice on the radio. I thought I was still dreaming.

7am - Check the quotes and everything is inverted, dow & nasdaq futures down 140 & 22. Mood was somber, but I did not feel uneasy.

Sometime later - jobless claims not good.

4pm - Dow up 31, Nasdaq up 7

When you have a day where there is very bad news, so bad that no one would doubt the direction as to which the market will go, and just the opposite happens. Capitulation. When the sentiment is so negitive that everyone who wanted to sell has sold, there is no place for the market to go but up. That is what we witnessed today.

What is Google?

What makes Google so special? Most can't believe advertising revenues alone justify it's current price. Advertising is a $600 Billion market, given that Google shows a better return on advertising dollars then any other model, why shouldn't adveristing dollars keep flowing to Google? If someone does happen to build a better wheel, here are some other things Google is working on:

• algorithms • artificial intelligence • compiler optimization • computer architecture • computer graphics • data compression • data mining • file system design • genetic algorithms • information retrieval • machine learning • natural language processing • operating systems • profiling • robotics • text processing • user interface design • web information retrieval

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