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Investing in Toxic Assets - Am I out of my mind?
firewaterword
SatchitanandaPais Vasco to San FranciscoRegistered User regular
SatchitanandaPais Vasco to San FranciscoRegistered User regular
Probably. But that's another matter entirely. Anyway, financial wizards of H/A, I entreat you... While I realize this is a forum spawned from a comic involving robots that violate fruit, the level of discourse and intelligence here far surpasses many of the financial boards I've come upon.
I'm sure you're all aware of the state of things with regard to the insanity of the market(s) right now. Credit Default Swaps, Mark-to-Market, Mortgage Backed Securities, et cetera, et cetera. Things are nuts. And I feel that with a little luck, research, and time I might be in a position to profit greatly from this over the long term.
My specifics - I'm in my early 20's and make what I consider to be decent money for someone in my circumstances (low living expenses for my area, only loan is a manageable auto). For most of '07 and the first half of '08, I made max contributions to a Simple IRA. I ceased contributions for a while in the end of '08, and started back up a few months ago.
I've got about $6k I need to get out of "cash" and into securities. Some amount of that is going into an intermediate-term Bond fund, though I'm not sure what percentage. Obviously, we're talking long term investments here, with a target date that's over 30+ years from now, so please understand I am in no way trying to make a quick buck.
Now for the main question - assuming that Blackrock, PIMCO, or whatever others go ahead and open up investment in these assets to individual investors via mutual funds, would I be stark raving mad to get involved in this? I realize the risk is astronomical. But I also realize that I may very well be in a position to take this risk.
So... Your thoughts?
I'm sure you're all aware of the state of things with regard to the insanity of the market(s) right now. Credit Default Swaps, Mark-to-Market, Mortgage Backed Securities, et cetera, et cetera. Things are nuts. And I feel that with a little luck, research, and time I might be in a position to profit greatly from this over the long term.
My specifics - I'm in my early 20's and make what I consider to be decent money for someone in my circumstances (low living expenses for my area, only loan is a manageable auto). For most of '07 and the first half of '08, I made max contributions to a Simple IRA. I ceased contributions for a while in the end of '08, and started back up a few months ago.
I've got about $6k I need to get out of "cash" and into securities. Some amount of that is going into an intermediate-term Bond fund, though I'm not sure what percentage. Obviously, we're talking long term investments here, with a target date that's over 30+ years from now, so please understand I am in no way trying to make a quick buck.
Now for the main question - assuming that Blackrock, PIMCO, or whatever others go ahead and open up investment in these assets to individual investors via mutual funds, would I be stark raving mad to get involved in this? I realize the risk is astronomical. But I also realize that I may very well be in a position to take this risk.
So... Your thoughts?
Lokah Samastah Sukhino Bhavantu
firewaterword on
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Look into some funds you are interested in and read up on their investment strategy. How are they diversifying the portfolio? How dynamic are the underlying assets? What is their view (if any) on toxic assets?
Point is, if you are investing in a mutual fund, you are naturally exposing yourself to less risk for less headache simply because all the analysis and information gathering is being done for you by a team of professionals. You won't have personal control over how the fund performs, as that's up to the people running it, so you will have to make sure you are satisfied with their justifications and target returns.
As long as you're willing to go long, you should be all right.
Thanks for the feedback! This is pretty much all theoretical at the moment, given that these funds don't exist yet. Depending on what the actual amount per dollar these things end up going for (I would hope 50-60 cents on the dollar), it could have shocking returns if (and pretty much only if) things pick up in the next few years. The biggest incentive, however, has to be the gov't backing. From the NY Times:
"But the crucial incentive for investors — traditional fund managers, hedge funds, private equity funds, pension funds and possibly even banks — is that the government would lend as much as 85 percent of the purchase price for each portfolio of mortgages.
On top of that, the Treasury would invest one dollar of taxpayer money for every dollar of private equity capital to cover the remaining 15 percent of the portfolio’s purchase price."
So I would think I'm facing exposure as a taxpayer, may as well be an investor... Anyway, it really depends on how the big guys end up offering these things. If they slap a big fee and charge a high expense ratio, I would have to rethink it. Anyway, thanks again for the comments!
I've managed to "beat the market" with regard to the losses I've taken over the last few months; I've still taken a pretty substantial hit, but not as bad as some due to what I have to assume is limited exposure to financials. I have to admit I don't know very much at all about small-cap investing, but it's something I've meant to examine for awhile. Another goal of mine is to move a little deeper into metals and minerals (not gold!) and a small-cap may be the way to do it. I've got a few hundred shares in Alcoa which I'm happy with, and plan on buying RIO if it dips under $14.
Anyway, just some random ruminations. As usual, any comments or thoughts are always appreciated.
A bunch of people got huge loans for overpriced houses. Banks packaged lots of these loans together and got investors to essentially buy the dept off them (you invest 500k, the interest you make is the interest the people who bought the houses are paying minus the banks cut), but to safeguard your 200k investment you buy insurance against the mortgages going into default.
Now the house is worth way less than it was and people are defaulting left right and center. Not only that but the bank that you bought insurance from in case the mortgages go into default is on the verge of bankruptcy.
I would want a pretty insane deal to touch any of that, because the only thing of real value involved in these transactions, the house itself, is probably worth half what it says on the mortgage, which is the fake value your going to be getting a "discount" on when you buy into this.
With regard to diversification, my current allocations are as follows if anyone cares:
Small Cap Equity - %12.6
International Equity - %19.4
Cash - %13.8
Dman - yeah, it's a pretty insane risk, no doubt. But even if it's as you say (.50 cents on the dollar), the non-recourse loans which cover %85 of the financing and the %15 dollar matching make it attractive. Krugman does a much better job explaining than I ever could:
But suppose that I can buy this asset with a nonrecourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset?
The answer is, slightly over 130. Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me."
Then again, he's convinced the plan will fail miserably.
My understanding is that the lion's share of risk is being taken on by the US taxpayer, and the lion's share of rewards will go to investors.
I work in the foreclosure prevention field and while I'm close to the action, here, I'm in no way an expert.
What I do know is that it is possible to invest at low cost into many of the financial institutions that are currently "in danger" and see a high reward. Now banks not failing is a high priority of me retaining my job, so we tend to keep a close eye on those things. That said, I've been considering investing in some of the "sub-prime lenders" who are now stuck with a lot of toxic investments. Reasoning is this: the US government isn't going to let Bank of America or Citi fail, ergo while the price of stocks is low, the risk is nullified in that if the bank goes under, the entire effort to fix the economic crisis will have failed.
Now it's not so easy as all that, but my question is: What assets exactly are you looking at? Are they integral to the economy? I've been considering putting a chunk into Wells Fargo of late as I know they'll make it through, and returns should be significant once they do. I'm probably way off the mark, but I've been lurking this topic for a while now.
The Crowing One - For what it's worth I bought WF at 12.50, so I'm pretty happy about that right now. The market took a bit back after the rally, but it's still ahead and I think it's going to head higher, depending on how the Citi-WF brouhaha turns out.
Regardless of where you turn, there's so much opportunity (and risk) in undervalued financials. Imagine being the one savvy enough to buy Citi @$1, then watching it jump to $3. Obviously, that's a pretty absurd example, but it's happening.
The thing about these toxic assets is there's no realistic way to value them, whereas common sentiment says the guys like Citi, JPMChase, and BofA are obviously selling for less than "what they should be worth."
Another thought - I wish to god I had gone ahead and bought into solar tech. Depending on how things go over the next week it may not be too late, but man, the average gain was like %40 yesterday (!!!).
Edit - Another another thought - if the DOW's really going to head back down to ~6500, I'm going balls out. There has to be a floor somewhere...
Personally, I think you're better off avoiding this and looking elsewhere. While you are young and the money you have could easily be considered expendable at this point, there are much better "high risk" options available.
Zopa.com
Basically it takes your capital, lends it out at 6-7% depending on the class of borrower, takes 1% of that interest and passes the rest on to you.
In other words - a truly co-operative bank, rates higher than interest available mainstream, and reasonable security. Might be worth a look.
I've read this over 5 times and I can't see how an equal chance of losing 19.5 and gaining 20 is "a good deal". It's almost like saying betting red in roulette is a good deal because the most you can lose is 20 but you have an equal chance of gaining 20. I guess that .5 makes a difference, but you're talking only $4 on every hundred and only IF the initial assumption on the asset's value range was right. In these $100 million asset pools I think uncertainty abounds on what the true value range of the pool is. There might be only a 80% chance that the range is 50-150.
Ramius - You make a good point. I really don't claim to have a full understanding of the math behind this myself, but I'm trying
So instead of being on the hook for the entirety of that $0.10 drop, the investors are out $0.0075, and the government eats the rest. I'm not saying that this is an entirely insignificant amount, given we're talking a trillion plus dollars. Now, if these asset pools (mainly the houses and the land I would assume) actually end up "worth" more, the returns could be huge. If we go with $1.50, that's an %11.25 return.
Anyway, I could be totally wrong in my understanding, so don't hold anything against me if this is way off
Edit - And with regard to actually valuing any of this... O_o
Precious metals funds were some of the hardest hit when the market crashed in november, but ytd they are also some of the best performing across the board. Energy funds are also an interesting buy because of the new administration's push towards alternative energies. They haven't performed as well this year, but they haven't been hit as hard either.
Of course, there are drawbacks to this kind of fund as well, higher minimums and redemption fees.
Neither of these things, as you may well assume, work for me.
Anyway, I just want to thank you guys again for coming forward with all the great opinions and input. Given the range and thoughtfulness of replies here, I'm wondering if any of you would be interested in a D&D investment/retirement thread. I don't know when I'll have the time to put a proper OP together, but I'd love to get a quality discussion going.