AskDong

I decided to end the agony last week. I sold my holdings in AHM, American Home Mortgage, from my IRA accounts. On Thursday, July 19th, the stock took a beating as there were rumours that a bank was pulling it’s warehouse line of credit. The stock dropped like a rock, losing close to 18% of it’s value. It’s been steadily heading south for the greater part of the month, going from 22 to 12. I finally decided I had a enough. I sold, locking in a loss of 60% in one holding, and 40% in another. The next day AHM came out and denied the rumours, and stock proceeded to recoup everything it had lost the previous day. My timing was not the best, but I’m glad I sold.

As I stated earlier, my biggest problem as an investor is selling losers in my IRA accounts.  AHM was such a holding, I even added when I shouldn’t have. The other issue with AHM was that the holding itself wasn’t consistent with my overall view of the economy, especially the housing sector. I’m very bearish on housing for at least the next year to two years. Tightening lending requirements will both drive lower sales and lower sales prices. In my opinion the worst has yet to come. While I think fundamentally the economy will come out of this OK, in the near term the prospects for builders, and mortgage companies are not good. The warning by Countrywide is just another in what I believe will be continuing stream of bearish statements.

While it’s possible that I might even buy back into AHM, I’ve decided that it’s probably best for me to wait for the housing market to shake out a bit before I decide what I want to own. For example I’ve been interested in adding the builder, D.R. Horton (DHI), to my portfolio because I believe the company is well run and has solid future . However, I’m not interested in adding it to my portfolio right now. I rather wait till I’m confident that the turn around in housing has either started or is just around the corner. That is far from now. I will take the same approach to AHM, and sit out the potential volatility in my IRA accounts.

I wrote a few weeks ago about the debate on carried interest that has been waged in congress and is now being waged on the more erudite media outlets such as AskDong. Before we go any further, I just want to inform people what my stance on taxing carried interest is: Tax the general partners performance based “carried interest” as income and not capital gains. For people who are not familiar with carried interest, carried interest are the profits made by general partners from capital gains which in the case of private equity partnership would be part of the performance based 20% of profits in the 2-20 fee structure. 

What I find fascinating is how different individuals have come down on this issues. To me this really does separate the good conservatives from the potentially bad ones. Below are a list of institutions and or people who support the changes to make carried interest earned by general partners taxed as regular income.

• The Economist
• The Financial Times
• N. Greg Mankiw
• A VC In New York, Part Two
• AskDong

Below is the list the opposition

• Donald Luskin
• Bill Burnham

I’m not surprised by Donald Luskin’s take on the issue, though I’m particularly disspointed by how he tries to confuse the issue to his readers. His article is more a defense on lower capital gains rate than it is defense on why general partners should receive favorable capital gains taxation. But then again he’ll support anything that means lower taxes. He’s little more than a mouthpiece for the corporate right wing branch of the republican party.  I think corporate interests should be upheld, but only within reason and sensibility.

For anyone who is particularly interested in this topic, I would read the comments on the Mankiw and and VC blogs. Within the comments there are some lively debates. I’ve especially appreciated reading comments by those who do not agree because they raise legitimate issues. Bill Burnham both in his own blog, and on the A VC in New York blog makes some very reasonable arguments that shed light on the potential complexity of the issue. I don’t agree with those opinions, but his points are reasonable. The problem with taxes because they are in reality an artificial construct, they often have unintended consequences. The current situation with carried interest is a reflection of that. The main credible argument against taxing carried interest as ordinary income is that it could penalize entrepreneurs who have no capital of their own. Such entrepreneurs are analogous to general partners in a private equity fund. Supporters of lower taxation on carried interest want to protect “sweat equity.” While it’s unclear where distinction between labor and “sweat equity” is, I do think that entrepreneurs deserve favorable tax treatment to support the value they create for the economy. I just don’t see how properly implemented closure of the loopholes will affect start-ups. Most entrepreneurs can effectively grant themselves equity at a nominal cost from which they can they receive capital gains upon via “sweat equity.” However, it also seems that smart private equity, venture capital, and other partnerships would be able to easily circumvent the changes via tactics like loans and such. What I find patently laughable is Donald Luskin’s argument that there will be fewer people who want to be hedge fund managers because of these changes.

This weekend I attended a wedding in Newport RI, and right now am crossing the halfway point of wedding season. 3 down and 2 more to go. Having seen my friends get married in the last 5 years, it’s amazing how much things change between the ages of 25 and 30. The first wedding I attended when I was 25, most of my friends were single, few had graduate degrees, and none had children. Yesterday, more than half of the guests of the bride and groom were married. I was in the minority, with my lonely B.A. Given that the bride and groom are Dr. and Dr. “Smith”, there were a lot of young doctors in attendance. But even beyond that as I looked across at the table of my friends, there was an MBA, two Masters, and one PhD candidate.

The first wedding I attended as a guest of the bride and groom, 5 year past, seems like a distant memory. In the past 18 months, I’ve been in two, and attended an additional 5 weddings. I have friends who have averaged 10 a year for the past three years. Weddings are expensive for both those getting married and those attending. I won’t comment on the former since I have no experience with throwing a wedding, and on the latter my comments are only an observation on what a difference 5 years makes.

Five years ago, my friends and chipped in what we could in order to both give a present, and a small cash gift to the lucky bride and groom. I believe we each contributed about $50-$75 a person. At 25, most men and women are still at the cusp of their careers. At 31, they’ve usually entered into the meat of their career. Financial fortunes have usually turned. What I feel like is an appropriate gift has changed quite a bit in the past 5 years, reflecting my own improved financial situation. While my general belief on wedding gifts is that they are incidental rather than required, giving a gift to a couple as they enter a new stage of life is appropriate. A wedding is primarilty a celebration, not a gift bonanza. That said, there’s no question my friends who have married later rather than earlier have done better in the gift department.

I’ve tried to sign up for most reward programs to make sure I’m not leaving anything on the table. I’m good with the airlines and the credit card. Not so good with the hotels - I don’t travel for work and as result rarely stay at the same hotel chain. Hotels unlike airlines are much less of a commodity. Location, amenities, and price play much a greater determining factor on where I stay. Not only are there fewer airline options, but the options available are usually similarly priced and as result I have accumulated miles on a few airlines rather than scattering points across the board.

A few years ago, I signed up for an account at points.com with the intent of exchanging points between vendors. I’ve never ended up using the service mostly because the penalty you take on swapping between different programs is significant, and swapping options are limited. Most of the major vendors do not let you swap from other programs into their program. For example I cannot swap Delta miles into American Airline miles or vice versa. U.S. Airways is the only airline I have miles on that I can actually swap into and out of. Continental and United do not collaborate with points.com

Given that points.com does not offer an effective way to make reward programs a universal medium of exchange, how do you quantify the value of the points you have? Credit card programs are generally the easiest to value as they usually can be exchanged for credit on a bill, or even a check. Hotel and Airlines points are more difficult because of the restrictions they place on use of the programs. However, I’ve decided to estimate what my points are worth.

The estimate is somewhat on the high side given that partial points (i.e. points between reward levels) have no value. This is really only a issue with the Airline miles and Hotel points. My methodology for estimating a value of miles is that I basically value a domestic flight at $300, and then use the points required for a domestic flight. Example: 54,5000 United Points. 25,000 Points for a flight. 54,5000/25,000*300 = $654. In truth there are many different grades of flight rewards. I’ve used the lowest level with the most restrictions which in my opinion is equivalent to advance purchase cross country flight which would be a good deal at $300.   Using miles for a flight that costs less than that does not make sense.  In the case of Hyatt, I used the equivalent of an $120 hotel room for their lowest reward level which costs 5,000 points.

I know I’m a victim at times of my desire to hoard points  For that reason, I think it’s important to assess the monetary value of the points. The airlines, and credit card companies win when the customers don’t use their points.   By translating the value into dollar terms, it’s easier for me then use them instead of actual dollars.

Yesterday was one of those days when I ask myself why I bother owning a car. My car was parked on the street rather than the usual space in the back of my building. I was going to move the car on Tuesday, but I didn’t get around to it. As a result I experienced for the 3rd time in my life what is truly one of the worst feelings there is - the sinking feeling you get when you go to your car and it’s not there. I looked above at the sign. Street Cleaning, every 1st and 3rd Wednesday, and right below Tow Zone. It was Wednesday in the 3rd week in the month, and my car had been towed.

I walked home, not knowing where my car was. The 1st thing I did when I got home was to look up the Boston Police Tow Line, (617) 343-4629. I gave them a call. They told me my car was in Jamaica Plain, about and hour from my home by public transportation. Tow lots are never in convenient locations. While many areas in Jamaica Plain have been gentrified, the area in which the tow lot was situated was definitely not. Walking to my car, I appreciated my own neighborhood so much the more. I was finally in my car at 9:15 pm. I was also $110 poorer, and soon to be another $40 more poor. $110 for the towing fee, and $40 for the ticket. Not a good day. That morning I was already grumbling about the car, because I need to take it in for some routine maintenance. I’ve often felt that a car is more hassle than it’s worth in the city. I’ve often thought about giving up the car, and signing up for a service such as ZipCar. However, I’m still unconvinced that ZipCar would truly be convenient enough.

$150 is a significant amount of money. When I first realized I was towed, I was angry and frustrated. After 30 minutes, I calmed down. While that $150 will be missed, it’s not an event that will affect my life. Losing $150 will not prevent me from going on vacation. $150 will not prevent me from buying groceries. $150 is not worth being angry and upset for me personally. Yes, it was preventable and unfortunate, but one of the reasons to have your finances in order is to be able to deal with small unexpected setbacks. Why be angry when you don’t have to be? However, I’m also very fortunate that $150 is not an enourmous amount of money for me - I can afford it. There are however many people in Boston for whom I realize $150 would be a significant sum. Back in college, if I were hit with a $150 setback, I would probably have to cancel plans. One of the great difficulties in finding prosperity at lower income levels is not that it can’t be done, but rather that there is little room for error.