Blog News – Page 8 – The Aleph Blog

Heading to Chicago

Posted on 12 October 201112 October 2011 by David Merkel

Next Monday I head off to the Society of Actuaries Annual Meeting in Chicago.? I’m giving talks at two sessions: the first one on Monday afternoon is called Being Social?It’s a Game Changer.? It is meant to introduce and encourage actuaries in the use of social media.? My next blog post is going going to explain how I built my blog, and some broad concepts on how I use social media.? The slide deck I am not using because it is an interactive session and not a talk can be found here: My Sojourns in Social Media.

The next day, on Tuesday morning, I am giving a modified version of a talk I have given several times before for the session Systemic Risk: Early Warning Indicators.? Here’s my slide deck for the talk: Who Dares Oppose a Boom? And, Can you Predict a Bust?? It’s a variation on this blog post of mine, Who Dares Oppose a Boom?

Finally, I will end up doing a live video blog for the SOA that afternoon before returning home late Tuesday.? I did not know that the SOA would like me so much after ending being a dues-paying member. 😉

I will possibly have some time to meet with people around these sessions, so if you are in the area, let me know and maybe you can drop by.

How Do I Find a Job in Finance?

Posted on 27 September 2011 by David Merkel

I regularly get people asking me how they can get jobs in finance.? Many of them are young.? Some are older and have done other things, but have been bitten by the investing bug, and want to make a shift.

Now, before I start, let me say that if you are smart, driven, motivated, organized, and generally capable at all that you do, and you are working in another field, say chemical engineering, and you want to move to investing, you might be better off asking your supervisors to give you projects with dotted-line relationships to the investment function of the company.? That could propel you to later roles where you head a division, or run a smaller company.? The ability to invest wisely has all sorts of positive spillover effects in managing an enterprise.? So before you head off to work in investing in the public markets, take a step back, and see how you can combine your existing expertise, and try to invest in the private markets, where you may have Buffett’s “unfair advantage.”

The first thing I tell them about is my career.? In short, here it is:

Actuarial Trainee — Pacific Standard Life
Actuary for the Domestic Annuity Lines at AIG
Investment Actuary for the Pension Division at Provident Mutual
Investment Actuary for the Annuity Division at Provident Mutual
Mortgage bond manager and Risk Manager for Mount Washington Investment Group, which was managing the assets of Fidelity and Guaranty Life.
Manager of of the investments for Fidelity and Guaranty Life. (Still risk manager too)
Corporate bond manager for Dwight Investment Management (Still risk manager too)
Senior Investment Analyst for Hovde Capital Advisors, covering insurance companies, and managing the profit-sharing and charitable endowment funds.
Concurrently, writing for RealMoney.com.
Chief Economist and Director of Research for Finacorp Securities, which allowed me to work from home during a difficult personal time for my family.
Concurrently, writing the Aleph Blog.
Principal of Aleph Investments, offering stock and bond management strategies, and a strategy to switch between them.

That’s a lot for 25 years.? Do you notice something unusual here?? Most of the jobs I switched to I did not have the full complement of skills to handle.? I learned as I went, but there were two costs to that:

Only risk-taking businesses would hire me.? That meant more pressure, which in general, I did not mind.? I liked challenges.
I had to learn more as I took the jumps.? Not everyone likes to do that.? I love a challenge.

For those looking for jobs in investments, if you can’t find the opportunities you would like, I would encourage you to look for adjancencies. Look for jobs that are close to investing.? Here are examples:

Investment marketing
Investment accounting
Investment auditing
Investment management consulting
Working for the rating agencies (anyone can get a job there)
Working for the regulators
Working for government investors, pension plans, GSEs, Supranationals, etc.
Working for endowments
Working in the Treasury arm of a corporation.? Hedging, pension plan, short-term investments, etc.
Work in a bank, thrift or insurance company.? Look for projects where you can show off investment expertise.
And more.

And in all of these ideas, network.? Join your local CFA Society; get the credential if you can.? Talk with people in investing.? Volunteer and show your competence.? This will not return void.

Those with energy and a willingness to learn have a huge advantage over the rest.? If this article benefits you please e-mail me, and let me know how your career has benefited.

Post 1600

Posted on 24 September 201125 September 2011 by David Merkel

Every 100 posts or so, I take a step back to think about the broader issues I face in blogging, and describe what I am up to in my life, so that my readers can understand more about me.

Since my last post on this topic, I have had a difficult time.? Why?? I worry that my firm will not grow fast enough that it will support my family.? That said, I pick up 2-4 new clients per month, and my friends in the Baltimore CFA Society tell me that I am doing better than most.

So, I try to take heart amid the bear market, where it is more difficult to gain clients. Now, it would be nice if there were a database of dissatisfied investment management clients, but that doesn’t exist.? Thus I have to look to others for referrals of those who are dissatisfied with competitors in my business.

Over the last 100 posts, the economic/financial environment has turned from optimistic to pessimistic.? I haven’t changed much.? I still think there is more pain to come, where the big banks have to take losses.

I am more bullish now, but I am waiting for a turn in the momentum to get more aggressive.?? With momentum so negative, I commit small amounts of capital to my best ideas as they fall, like my RGA piece yesterday.

With all that, I thank my readers for reading me.? You have a lot of things you can do with your time, and if you decide to read me, I am flattered.?? I am grateful for any investing referrals.

Aside from that, I still enjoy blogging.? It is an opportunity to call out the powers that be and tell them they don’t know what they are doing.? Away from that, explain to people to avoid common scams.? I have a post coming on one of the scams soon.

I really enjoy writing for all of you.? I hope you enjoy my writing as much.

Post 1500, Post Launch

Posted on 25 May 2011 by David Merkel

Every 100 posts, I take a step back and try to think about where we have been over the last five months.? The investment world has been bullish, favoring stocks and commodities, and not bonds.? Money market rates have been driven to zero or so. (Have they tried to bill you yet for holding your money? 😉 )

I have a wide array of interests, which is what makes my blog a little different.? I’ve been doing more with stock and bond investing, which reflects the work that I do, but I still have time for commentary on Macroeconomics, banking regulation, and monetary policy.? I know that there are few who want to read everything I write, but there are many who want to read a few things I write.

The biggest things I have written recently have been:

Impossible Dream, Part 1 5,385 Views
Critical Analysis of Buffett?s Annual Letter 4,882 Views
Impossible Dream, Part 2 3,815 Views
Most People are not Better off Buying Common Stocks on their own 2,437 Views

That doesn’t count RSS and the many places where my blog is syndicated. I’m relatively free with my content.? But if you are reading me elsewhere, if you want to make a comment, please come to my site.? I do not interact with readers outside of my own site, and that includes Seeking Alpha.? I don’t have time for it, so if you want my attention, come to my site.

Away from blogging, my asset management business has launched.? let me quote from an e-mail to a more successful friend of mine:

I have had a lot of lessons over the past four months, and I don?t think they are over.

1) Unrealistic expectations: partly because there was quite a lag between my announcement and my start up, a lot of people that I think lost interest because of the lag.? But when I talked with other investment advisors later, they told me I had:

More prospects than I should reasonably expect for a new advisor, and

A better conversion percentage of prospects to clients than most, and

Chosen an underserved section of the market ($100-500K).

So, after four months, I am managing a little more money than my own assets at the firm, with about 12 clients, and 5 more on the way.

2) I did not realize that I would need to create fixed income management so early.? But for those that can?t hedge, I had to have another way of reducing equity market risk.? No track record there, but a lot of experience doing it, both with bonds and ETFs.

3) The most common objection of potential customers is that the market is too high, and so they don?t want to invest.? Still more asked for a Tactical Asset Allocation strategy, which I eventually created.? No telling whether it will work well, or build assets.

4) Custodial issues have not been absent.? Getting set up with Interactive Brokers is more difficult than with most because everything is automated; if one thing is wrong, it rejects and you have to try again.? Once Interactive Brokers is set up though, things work easily, the trading tools are great, and they are cheap, especially for clients in $100-500K range.? So I try to help clients as much as I can going in; so far, so good, with a little annoyance to me and clients.

Aside from that, I have been underperforming of late.? Not by much, but it feels bad to be missing the benchmark with the money of others.? I did not enter this business to lose.? After beating for so many years, it is a test to be missing now, largely because my posture is the most conservative it has been for the last eleven years.Anyway, that?s how I am doing.? I think I will reach viability by the end of 2012, but who can tell?

Indeed who can tell, but I got another new client today, equal to my largest external client, and there may be more if I do well.? I am grateful for their confidence.? Hey, perhaps one day I might get investors larger than me.? I hope so.? If I get to double my current size, I will try to hit up the emerging manager funds — there aren’t many emerging managers with 11 year track records.? And from there, who can tell?

I have an intern (child #7) and she is a very bright young woman who wants to learn investing.? She may have the “gene” that I got from my mom, but she sees this as the best way to be economically productive as a future wife and mother.? My Mom and Dad were equals economically, though Dad’s work made more difference early with his work — Mom earned more in the later years from the investing.? Give Mom credit for wisdom, and Dad credit for setting her free to do it (more or less).

I am enjoying this a lot, and am not worried about recent underperformance.? It has always corrected in the past, and then some.? If nothing else, it makes me work harder.? I like working hard.

Four Years at the Aleph Blog!

Posted on 5 March 2011 by David Merkel

My but the time passes rapidly.? When I was invited to write at RealMoney, because of compliance issues, it was several months before I wrote there.? And i wrote there for about four years, never thinking that I might write anywhere else.

But I had a guilty pleasure of very occasionally trolling Cramer’s blog comments, and occasionally commenting myself.? A few commenters encouraged me to start my own unvarnished commentary, and so I began what would become this blog.

Once I started blogging, the advantages of independence were apparent.? Lack of relevancy, editor, necessary business purpose could go out the window.? Though I think I was liked as a columnist for RealMoney, I don’t think that most of the stuff that I have blogged would have made it there.

The Aleph Blog is an expression of the character of David Merkel, no more, no less.

I get a lot of requests for offering guest content, but I turn them all down.? Maybe other bloggers do well with that, but I don’t.? My blog is an expression of me.? And that is why I blog — to give something back to the general public and media who do not get most things financial.

Don’t get me wrong, if someone asks me to come and speak, generally I will, and presently, at my own expense.? I will be in Chicago in 10 days, and in NYC in April.?? (Note: if you would like to meet with me, let me know.)

Two notes:? Abnormal Returns has had me on video two times.? Here’s the first time😕 And here is the second time.? Though I am not always rapid in my responses, I give very active responses to Tadas.

Apologies

Posted on 12 February 2011 by David Merkel

To my readers: I have not been feeling well over the last week.? Ordinarily, I feel quite healthy, and I am grateful to God for the general health I have had over the last 10 years.? But this sickness has made it difficult for me to concentrate, headaches, etc.? Haven’t had headaches in a long time — 5-10 years or so, can’t remember the last time.

So, hopefully I will be writing more soon.? During the downtime I have read a lot, and spent time monitoring and thinking about my business.? But I feel utterly unproductive, tired, and subdued.

Just letting you all know why I have been so quiet.? I have a lot of good stuff to trot out, but getting the focus is difficult when your head is pounding.

Roadblock

Posted on 31 December 20101 January 2011 by David Merkel

I’m sure I will make it past this snag, but it is certainly annoying.? I’m going to be delayed a few more days in setting up due to a takeover that happened over a decade ago, and snags in the Automated Customer Account Transfer [ACAT] system.

I’m glad that I have to transfer my accounts to Interactive Brokers ahead of my clients.? It is making me more aware of the troubles they may go through, that I can help them.? So, in mid-December, I submitted a full transfer, which Fidelity complied with, and Interactive Brokers rejected.

I contacted IB, and they said that they could not accept one security, a legacy security in my account entitled, “ESCROW RISCORP INC CONTINGENT VALUE RTS,” ticker RISOR.PK, CUSIP 767597982.? What, you ask, is this sorry excuse for a security?

Well, back eleven years ago, I was doing small deal arbitrage, at which I did poorly.? Riscorp was taken private by its controlling shareholder, but there was an outstanding lawsuit against Zenith Insurance Company and Arthur Andersen LLP.? From the SC 13E3:

Each share of Class A Common Stock issued and outstanding immediately prior to the Effective Date was converted, as of the Effective Date, into the right to receive $3.075 per share, less any required withholding taxes, plus a contingent right to receive an additional pro rata cash amount if RISCORP recovers any amounts in connection with the litigation currently pending against Zenith Insurance Company and Arthur Andersen LLP.

That’s how the rights got created.? But there was no one with a concentrated interest to follow the lawsuit, and over time, the “security” lost its transfer agent — I am not sure how.? There have been a lot of insolvencies and mergers in financial firms, and many things slip between the cracks.? As it is now, the securities are non-transferable.

So, I requested a partial transfer of assets — everything except the Riscorp Contingent Rights.? This time Fidelity rejected the ACAT, initially for reasons I could not fathom.

I had been researching the rights, and contacted Zenith Insurance, now a part of Fairfax Financial Holdings, to see if the case had been resolved.? Truth, there had been several cases, and it took two tries, but a lawyer at Zenith pointed me to a resolution of the case. (What a good guy.? Zenith did not have to help.? And Arthur Andersen was dead.)

He pointed me to this 10-K, page 26:

On April?1, 1998, pursuant to an Asset Purchase Agreement dated June?17, 1997 (the “Asset Purchase Agreement”) between Zenith Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP’s workers’ compensation business (the “RISCORP Acquisition”). On January?13, 2000, RISCORP filed a complaint against Zenith Insurance and another defendant in the Superior Court of Fulton County in the State of Georgia. RISCORP’s lawsuit sought a declaration that would have had the effect of requiring Zenith to pay either $18.1?million (and related charges) or $5.9?million. On September?4, 2002, by stipulation, the litigation filed by RISCORP was dismissed with prejudice and with no liability to Zenith.

Okay, so the rights are worthless, and should be canceled.? So I called Depository Trust & Clearing Corporation [DTC], and asked them to do so.? They told me that I could not ask that, but that I had to go through Fidelity.

Next call, Fidelity.? It took some wrangling (one hour), but with the help of their Private Client Group, they managed to get the attention of their group that dealt with DTC, and get them to submit what I had learned.? They said they would have an answer for me in 48 business hours.? That will be on the day the market opens in January.

But on a parallel track, I called Fidelity again to see why they had not processed my partial transfer.? They said that in one case, Interactive Brokers had not asked for the cash, ans in the other case, if I had asked for cash less the $50 termination fee, it would have processed.? So, today (try #3) I submitted another request for a partial transfer, minus $50/account.

So, I should be ready to go sometime next week, given the ridiculous 3-day settlement period.? Fascinating that one worthless piece of paper would delay my startup,? but it did.

When I started this, I expected that the roadblocks would be the Maryland Division of Securities, or my E&O insurer.? That a worthless security would hold me back is fascinating.

But I will use the time for good.? I want my initial investors to benefit from my current insights, so I will take the extra time to set up the trades for the current rebalancing, so that they can benefit from that.

I look forward to the challenges here in the coming year, and wish all a Happy New Year!

On the C4 Show Today

Posted on 30 December 201030 December 2010 by David Merkel

I’m going to be on the C4 Show today on WBAL, Baltimore’s main news-talk station, talking about business, investment, and economics.? I’ll be on with a guest host for the hour @ 1 PM Eastern Time.? If you want to listen live, you can click here, and then click on the “listen live” button on the middle top of the webpage.? A popup will emerge; I’m listening as I write.

I would like to mention that Aleph Blog Lunch went well.? I had seven guests:

A former boss, who is a bond manager
A former colleague, who works for an accounting firm
Ed Harrison, of the excellent blog Credit Writedowns
A well-regarded local hedge fund manager
Another fellow who works for an RIA.
And two more retail investors

I came? prepared to give a short talk, but when I saw the conversation was going so well, I abandoned it because it was an interesting gathering of people, of whom few knew each other.? So, after 90 minutes, we wished each other a Happy New Year, and disbanded.? The hedge fund manager and I tossed out a few investment ideas as we left.

I did give guests a handout, the opening of which stemmed from a question from a well-known finance writer: Seeing anything interesting out your way?? I reproduce my answer here:

The big six problems are still out there

1) China forcing exports / overbuilding capacity, along with much of the emerging markets

2) China, emerging markets, OPEC swallowing down a lot of developed country debt, especially that of? the US…

3) Eurozone is broken and will either centralize or fall apart

4) Demographic eclipse in the West, extending to some emerging markets as well… China, Turkey, Mexico… world population will likely peak sooner than many experts predict… with negative effects on systems that require younger people to take care of older people.? US will fare better than most.

5) State budgets are hopelessly broken, mainly due to underfunding of benefit plans because the pension accounting and funding rules gave lousy guidance on how much to contribute.? Cash costs only go up from here until 2040.

6) General overleverage leads to punk aggregate demand, and governments are still attempting “hair of the dog” and “beggar thy neighbor” strategies.

Aside from that, things are great.? ;)? If I had to pick out one anomaly here — it’s that implied option volatility is so low, which leaves debt spreads low as well, which is probably due to QE for now.

Attachments

And then I attached printed versions of the following old articles of mine to illustrate some of those points:

Anyway, it was a great time, and I look forward to having a great time on the C4 show today.? If you can listen in at 1 PM Eastern, please do.

Happy New Year to all readers!? May the Lord Jesus Christ bless you in the coming year.

Post 1400 — About to Launch

Posted on 25 December 201026 December 2010 by David Merkel

Every 100 posts, I take a step back, and think about where we have been.? My, I have been a busy bee.? And I have blogged more than usual over the last three months.

In the recent past, I have completed my “Flavors of Insurance” series.? I also wrote a series on investment modeling.? And I wrote a complete series on my eight portfolio rules.? I have created a book review database that I will continually update.? And in this time I have given two talks, one to the Society of Actuaries at their Annual Meeting, and one to the CFA Society of Denver, together with the Leeds School of Business at the University of Colorado.? Add to that my two award winning articles that I mentioned yesterday.? And this is in the midst of this, I have written more than ever.

Now as an aside, do you know who I am happy for?? Trader Mark.? I am glad that he has gotten enough subscriptions that he can start his mutual fund after the SEC okays it..? He seems to be a bright guy, and I wish him all the best.? He has more than $10 million of commitments.? Good for him, and I hope it grows from there.

As for me, by the end of January 2011, I have no idea how much I might be managing, it could be as small as $3 million, or over$10 million.? Many people have indicated interest, but the test is how many commit.? I won’t be disappointed if I hit the low end of the range, but I would not be surprised if I hit the top of the range, or exceed it.

What I am Doing

Because of many questions from readers, I want to give a brief description of what I am doing.? There is some confusion over what I do, because I have been a bond manager, and a lot of my investing is informed by conditions in the bond market.? I follow a lot of markets, because they are related, and knowledge of the whole sharpens understanding of particular markets.

But I invest in stocks.? Mostly stocks in the US, with a value orientation.? I rotate industries, as I have often written about.? I run a concentrated portfolio of 30-40 stocks.? I adapt to market environments.? Markets are very difficult to time, but if you are in stocks that have a margin of safety, a cheap valuation, and the industry is experiencing an increase in pricing power, it is hard not to earn good returns over time.? The rest is summarized in my eight rules.

The ideal here is to give investors a clone of my portfolio through separately managed accounts.? Each account has its own portfolio, which can then be be managed for tax purposes, unlike a mutual fund.

I am offering taxable accounts, IRAs, and other tax-deferred accounts.? I am not afraid of being called a fiduciary under ERISA standards, because I manage all money to those standards.

I am also offering market-neutral management of assets for taxable accounts, at no more cost than long only.? And, my fees are not high — 1% on assets between $100,000 (minimum size) and $1,000,000, 0.5% on assets over $1,000,000.

As it stands, next week I am going to start inviting those that have already contacted me to open an account at Interactive Brokers, and will send them a package of other materials via e-mail to complete the deal.? After that, I manage their money on a discretionary basis, mirroring my own trades.? I get the same execution levels as my clients.? We all trade together.? I will eat my own cooking, and at minimum 50% of my liquid assets will be invested in my strategies. At present, it is 80%+.

Aside from that, I have minimized the cost of trading by using Interactive Brokers.? Particularly for smaller accounts, it is the best solution.? Using Interactive Brokers means investors get cheap trades, while I pay fees to access market data.? Those costs get paid by investors through higher commissions in many other situations.? I bear those costs here, and I do not take soft dollars.

I start my investment management practice in early January.? I am really encouraged by this, and look forward to serving my clients.

What Remains

These are the few things I need to get done before I start:

Compliance Strategy, Including Web Compliance Strategy, CFA Document Retention
Procedures for suitability ? CFA notes on such to guide
Investment Policy Statement

I have the data together for most of these, though I have a question for those that manage equity money for clients through separate accounts.? What do you do on suitability?

What I need to get done will get done next week, and I will start taking client assets in 2011.? I thought of doing this in 1996 and 2003, but did not do it because I did not have enough assets of my own to buffer me if it did not work.? Now I can do it, and last for many years.

Those who inquire of me can see my 10-year track record.? I’ve done well, but that does not mean that I will do well in the future.? But I will do my best for clients.

The Blog

There are some that worry that I will stop blogging.? That is not my plan.? If I could write at RealMoney while working for a hedge fund, I can blog under the same rules with separate accounts.

But some things will change.? I will delete my portfolio at Stockpickr.? Only clients will know my full portfolio.

I don’t have any public stock positions other than what is in my portfolio.

Aside from the market-neutral accounts, there are no derivatives.? And I will let client know whether I am market neutral or long only, or a percentage thereof, before I do it.? Right now I am long only.

I will not write as much about portfolio management, at least on a detailed basis.? I will provide more detailed information on portfolio management issues to clients.

Thanks

One thing I have strongly believed since starting my blog — my readers have alternative uses of their time.? I thank them for taking time to read me.? I am humbled by the large reception I have received over the? years, and thank those that take their precious time to read me.

Soli Deo Gloria

Aleph Blog Lunch 12/29/2010

Posted on 18 December 201024 December 2010 by David Merkel

I know this is late notice, but I wanted to try to have a lunch with local readers last year.? This year, I will do it.? The date is 12/29/2010, and the restaurant is The Mongolian Grill of Columbia.? We will do it on 12/29 at 1:00 PM.

Please e-mail me if you intend on coming.? If I get a small number (<10), I will pay for the whole thing.? If a large number, I will subsidize.? I will have a presentation for those who come, and it will not be about my business, at least not in any direct sense.

I look forward to seeing those who will come.

UPDATE 12/24

Time change — we are meeting at Noon.? So far, ten attendees.