Tag Archives: investing

Real concerns about #robo-advisors and #Betterment

Quick summary from reading up on tons of links and discussions on Betterment, Wealthfront, WiseBanyan, etc.

TLDR: real concerns:

  1. You can actually do it better yourself if you put in enough time: both rebalancing and tax loss harvesting (the latter actually only kicks in when there are losses)
  2. Betterment just jacked up their fees, and there is no telling whether they will do it again at any point in the future, which leads us to the third point that is more general for all robo-advisors:
  3. An argument can be made that the whole robo-advisor business model is unsustainable, especially with low initially advertised fees that are the key competitive edge over an ocean of other funds, choice quotes:
    • Charles Schwab is already undercutting both companies with no fees (0.00%), and despite what Betterment will tell you, it’s a great deal.

    • 25 basis points is not a business model, it’s a temporary growth tactic.

Even shorter TLDR: it’s worth paying them if you really want to automatically rebalance and diversify across a range of funds and ETFs for a still-low fee, and hope they can make their model work out. If you are not particularly bent on having, e.g. a slice of bonds and overseas equities, then VTI/VOO/what have you is the way to go.

(Of course, in the context of present day, this assumes you are either not of the opinion that we are in an equities bubble, or it’s not a concern for your portfolio choice)

A healthy bit of #conspiracy theorizing for 2017

Why doesn’t anyone see the obvious? Many years of near-zero interest rate and dumping cheap money into the system produced mediocre economic growth combined with a huge debt and equity bubble (though surprisingly little inflation).

The rate will have to go up to realistic levels at some point, and with it will evaporate the equity bubble, mortgage affordability and the housing market – with debt servicing (consumer, corporate and government) draining all other parts of the economy.

Wouldn’t it be nice if we had a temporary figurehead with historic unfavorable rating to use as a scapegoat to do some bloodletting in this system?

Oh, wait…

The LendingClub debacle: what does it mean from a lender’s perspective

Short-term: it means nothing. The sky isn’t falling and my adjusted return rate over 3 years is still 13.77%. And MMM et al are still collecting a sweet chunk of referral change for sending the general interwebs population in that direction.

Long-term: will see. Short of catastrophic operational disruption (which I don’t think is the case here), I expect things to move along the same way in this established business (ok, so the startup tag on this post looks pretty ridiculous by now, of course). The threat I’m still concerned about is some economic event which may cause people to default much more. But what will take the biggest hit in that case – equities, funds, real estate or peer-to-peer lending – is anyone’s guess.

Market is ūĚėīūĚėĶūĚė™ūĚė≠ūĚė≠ ~2x 2010 – do you believe avg company 2x richer than 2010? Bar hyperinflation, it has to correct more

Screen Shot 2016-02-13 at 1.43.19 AM

So I painfully moved to cash, bonds, money market and other assets throughout 2015. It was a very lonely and depressing experience, missing out on all those FBIOX gains (I know, right?) But I kept asking myself, do I really believe that all those S&P 500 big old dudes, the General Electrics, the¬†General Motors, IBMs, and Exxons. Do they make twice more money than 5 years ago? Hardly. So why all the craze? We don’t have a noticeable inflation, at least not in the consumer, non-real-estate space. S&P 500 is still almost 2x over 2010, give or take, even after the ongoing correction early in the year. There are no fundamental reasons for these companies to jump 2x in their market cap. Meaning, there might have been some other, non-fundamental reasons – perhaps¬†more speculative in nature – and now we still have some way to go…

 

Stock #options exercise window – awesome!

A couple of years back, Sam Altman wrote¬†(paraphrase) that the 90-day stock option exercise window is complete bullshit which¬†adds to the nonsensical¬†ways startup employees get screwed over ¬†– as if¬†building a successful company wasn’t hard enough.

I’m really glad to see¬†the¬†sentiment is¬†getting heard, and yes, the startup employers need to be ¬†seriously reminded of this –¬†here on the webs, as well as during the employment and especially the offer negotiation. And companies that adopt sane options policies need to be praised. Zach Holman started a list of these¬†employee-friendly¬†outfits that I sure hope will grow over time. As of today, it is:

  • Amplitude
  • Asana
  • Clef
  • Coinbase
  • Expensify
  • GitLab
  • Persista
  • Pinterest
  • Quora

P.S. Bonus points Рwhen stock options suck and there is no way around that, here is a classic little post (not from me) on how to stop worrying and in 5 minutes maximize the deal you get for years to come.

How much did employees make on that Square IPO?

If you are a recent midlevel Square employee, you are likely to have gotten¬†10k-25k RSU’s vested over 2 years. That’s about $130k-$325k pre-tax over 2 years, assuming today’s stock price. (the throwaway-authored¬†reddit post could be completely made-up, but these numbers are not far from what I’ve seen at Uber and 3 other startups)

Folks who joined before Square¬†introduced RSU’s (which, looks like, were issued for¬†at least the last 2 years) likely¬†had to pay for their stock options, and it doesn’t look pretty:

21 million options have been awarded at a value above the $13.07 closing price of Square’s stock today

“Awarded at a value above the price today” means “currently worth less than toilet paper”. Of course, those 21 mil options could have been bonuses on top of RSU’s, which would make this a bit more palatable.

If you got in a bit earlier¬†with a strike price of $1 and an options grant of 25k, then we’re looking at¬†$300k before¬†tax. I have no idea what a typical options grant was in those days, again just going by what I’ve seen at¬†4 other startups. If you got¬†a royal grant of 100k, then it’s closer to real money – $1.2 million before tax, but clearly that has quickly dried up in value as the strike price went up and over the current ~$13 stock price, leaving the people who joined at the later stages of the stock options program with not much.

Also worth noting is that a decent engineer with a¬†$150k/year in salary at Square (according to Glassdoor, which unfortunately does not offer a time filter on those salaries, but let’s assume for a moment that it’s a relatively recent number) – the same engineer could probably pull $200k (or maybe even $250k) at the big 4, all things considered. That’s at least $100k extra for the 2 year period. That does not make one¬†filthy rich, but apparently neither did the Square IPO so far.

I do believe however that¬†it’s a viable business, and the stock price may (or may not) go up during the lock-up period¬†significantly.

#LendingClub investment vs. the market 2015

Just a data point –¬†started on Lending Club in October 2013. Now up to 258¬†notes, adjusted return rate is¬†down to 13.73% from twenties a year ago, but that was expected. I have an aggressive approach, only invest in E-F-G-grade minus some urban legends like never loan money to people in Nevada : )

From those notes, 13 are in default/charge off, 42 have been fully paid – assuming only pre-payment at this point (2 years), and I wonder if it hurts the APY? Since those people paid early, do I get the interest for 3 or 5 years? Guess not. But again, the biggest problem so far is the lack of liquidity – if I had a need for that money, it would not be easy to get it back before the 3/5 year term.

2 years into it, seems like a good way to make 10%+ on your investment. No idea how this will hold up in case of a downturn, people getting fired and defaulting on their loans. With SPX on track to return near a big fat 0% for the entire year 2015, LC looks like a good place to park some cash. However, a sales/support guy from LC called me once out of the blue, and started throwing some unexpected trivia and advice at me like not investing more than 10% of your portfolio in them. Yes, that was their sales person, and right at the time when I was considering moving more money into that account.

More updates will follow on this page.