Monthly Archives: October 2011

My risk profile…

Few days ago I received an email from my bank back in Spain, ING, suggesting me to take a small test in their website to see what my risk profile as an investor was. I was curious about what the result could be so I took it.

The test consisted of 7 questions regarding what kind of financial products you have, how much you save, whether you would take or not some products, etc. The result:

My risk profile: Bold, daring....

Contrary to that statement I consider myself quite conservative in relation with my financial behaviour and that is why I save and invest the way I do. Nevertheless, it seems that the mainstream definition or perception of risk is quite different to the one I have.

Together with the result of the test, ING showed a graphic showing the proportion of different financial products that people with “my” risk profile had… well, at least they got it right regarding the amounts I put in short-term fixed-income deposits, investment mutual funds and current account… the rest of them is quite different.

Bold, daring…

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One free trip to space or free international travel for life?

Some weeks ago, I got an email from a source-of-ideas-for-blogs service called Plinky, from which I have already picked some good ideas to write about in posts in the past (on my dream job, charities…).

The question I liked very much this time from the email was:

“Would you rather have one free trip to space or free international travel for life?”

Having already confessed that my dream job as a child was to be an astronaut and knowing how much I enjoy travelling, this question really posed a dilemma.

But after some seconds, I rationalized it and I started making some numbers (how couldn’t I?).

During the past years I have made about 2 long trips per year with Luca abroad, plus some shorter trips apart from commuting back-and-forth to the Netherlands. I have perfectly recorded how much each of the international trips is costing us, since I already made a budget some months beforehand and played with Luca to see how much my initial budget deviates from reality in the end (from 22% to as low as 7€ on a 2-week trip to Japan). Let’s say we spend about 6,000€ per person a year on international travels.

If now I am 30, and I could expect to continue travelling abroad till let’s say 70, this makes 40 years of international trips. As we grow older our trips will most probably become more expensive. This is a trend we have already experienced in the past 4 years and I expect it to continue to hold true, even more so during the some 25-30 years in the future when we will have to include offspring in the travelling expenses tally (by then I expect we won’t have to commute so much but we will have to do so from time to time to visit grandparents)… Let’s use 8,000€ per person per year to play on the safe side with this calculation… so in 40 years that would make ~320,000€.

On the other hand, how much does it cost space travel? Rich individuals who have travelled in the Russian Soyuz have reportedly spent between 20-35M$, or about 25M€. Taking this figure the conclusion is clear: I would rather receive a free trip to space and I’ll gladly continue to pay for my yearly holidays for the rest of my life.

But then again, Virgin Galactic comes offering suborbital flights at a rate of 200k$, or about 150k€, if that is the case, I would rather receive a free lunch in down-to-earth international travel for a lifetime and pay for my stunt with the SpaceShipTwo.

Finally, given the choice, I’d go for the first and highest value option: an orbital free flight in the Soyuz.

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Filed under Aerospace & Defence, Travelling

Long-term commodity prices

On previous posts I have written about the long-term prices of housing and why I didn’t considered a house a sound investment, about why it is better to invest in any asset than having cash, why pencils would be as safe as an asset can be (even if not productive) and why gold is not more worthy than pencils. I, then, included some interesting graphics showing quite long-term views on the issue.

Weeks ago The Economist showed another interesting long-term graphic that I wanted to share and also to leave it here as a note to self as a reminder of the long-term worth of commodities.

Commodity-price index, adjusted by US GDP deflator.

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What is the price of an A380?

Yesterday, it appeared in Flight International website, an article in which the price of an A380 was unveiled. Generally, aircraft real prices are never disclosed, that is why that was news. What it is normally published is the list prices for the different aircraft (here you may see Boeing’s list).

The article disclosed the price for an A380 acquired by Nimrod Capital LLC, which is to lease it to Emirates. The price: 234m$. Since the list price for the A380 is 375m$, that means it was purchased with a 38% discount, as the article says.

For obvious reasons, I will not comment on Airbus prices (*). Here, I just wanted to mention that, using a quite detailed approach, some time ago, I calculated which were Boeing’s discounts. I explained everything in a post.

I used the number of aircraft delivered per year, the net orders per year, all for a period of three consecutive years, and matched the list prices versus the revenues recognised in the yearly income statement published by the company in each of those years… I figured out which was the discount that minimized errors for the period of three years. Guess what was the result I came up with: 38% for the period 2007-2009 and 39% for the period 2008-2010.

(*) Disclaimer: I have never worked in anything related to aircraft pricing, sales or marketing in Airbus. Thus, I have no insider clue about its prices.

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Gold as an invesment?

If in a previous post, pencils were treated as a supposedly safe haven in case of a recession. In this post I just wanted to mention that I don’t see anything more value in gold or silver than I see in pencils.

That may sound shocking, as we are used to have gold items in great praise. Well, as a commodity, as an asset, I don’t see much difference between gold and other materials. What it is valuable is the company that continues to produce goods out of those commodities, with ever greater productivity and value added to its products.

Gold by itself is just like a pencil, assuming that you continue to find someone in the future willing to pay something for both commodities (certainly not more than it is worth at any given moment).

It is easy to say this now that both silver and gold have seen its prices plummet after the summer, but more than using the recent fall as basis for the argument, I have in mind these other long-term (as in centuries’ trend) graphics below:

Gold price fluctuations since 1800. Source: The Economist.

From the previous graphic, gold went up to 1,900 in the summer of 2011 and then fell again to around 1,600$ per ounce, in September. Well, I see no reason why it shouldn’t be around 300-600$ again, as it has always been.

Gold as an "investment"... Source: Jeremy Siegel

In this other graphic you may see how much gold is worth as an investment… well, it is more valuable than cash, but we already discredited cash in a previous post.

And still, you’ll find people running towards gold when there is a crisis… I never understood that. What are the gold price fluctuations based on?

Personally, I prefer to go to the Casino in Torrelodones once a year, lose at most some 50€, if that is the case, and kill altogether the speculative behaviours until the next year.

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Hyperinflation and defaults in Europe

In my previous post, I purposefully selected Germany as the case of country that would need to be kicked out of the Europe due to its fiscal irresponsibility. Surely, most of you think the situation today is just the reverse and thus it was just a bit of irony…

… well, I wanted to come to it at a later point, in this post, to share the following graphic from the Wikipedia in which you can see the hyperinflation lived in Germany’s Weimar Republic between 1921 and 1923:

Weimar Republic hyperinflation. Source: Wolfgang Chr. Fischer

The explanation in the Wikipedia is astonishing, I recommend that reading.

The situation only stabilized when the Retenmark indexed to gold bonds was introduced at the end of 1923, by then there were notes of 1,000,000,000,000 marks (and even so there were two other cases of higher hyperinflations in History, in Hungary and Zimbabwe!).

Even though during those hyperinflationary years the Weimar Republic Germany did not default, Germany did so in 1932 and 1939, being those of the latest defaults in Western Europe… later than the latest from Greece or Portugal, as can be seen in the following table.

Sovereign Defaults in Europe. Source: Reinhart and Rogoff, “This time is different”, via Credit Suisse.

Finally, you may also see in the table that now, after 72 years since the end of the Spanish Civil War, we are living the longest period since 1800 (and second longest since 1500) that Spain has not defaulted on its debt! I am not sure whether this should be a source of calmness or worry.

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Invest in real assets (pencils if need be)

My previous post discussed why it is better to be invested in real assets vs. cash or bonds in order to protect your savings in case of a recession.

Even though all the references were to stocks, I kept the word “assets” instead of “stocks” in the title and conclusion of the previous post in order to come back to it a later time, in this post.

Bestinver fund managers, in their conferences, have often given examples of assets to be invested in to protect your wealth such as pencils, chairs, and, this year, books.

If by the time a recession came and inflation started to build up, you had all your fortune invested in pencils, the same discussion that was made in the previous post with stocks would hold true for pencils.

For example, say that Southern Europe (Greece, Portugal, Italy…) in a near future needs to kick Germany out of the Euro due to its fiscal irresponsibility. Germany would then have to use another currency, e.g. the Deutsche Mark. Say that at day one the mark would be worth 2DM = 1 Euro, as it was more or less 10 years ago.

Due to the inevitable capital runaway from Germany, Germany would most probably undergo a period of hyperinflation and mark devaluation that could very well end with 1 Euro being worth ~ 2.000 DM. Obviously, the prudent Bavarian who had all her savings in cash would have nearly lost all of them.

However, if this Bavarian had instead purchased pencils in order to protect her wealth, she would have seen a different outcome. Say a pencil cost 0.5€ at the beginning, or 1DM. After all the hyperinflationary period, and if German students still needed pencils for their classes a pencil would sell for ~1,000DM. Thus, as the theory goes, the Bavarian investor would have protected her wealth just by being invested in real assets, i.e. pencils.

Of course, if you wanted to see your wealth grow pencils wouldn’t be the best assets to be invested in, as they do not reproduce, or any other assets are taken out of them, but to protect your savings they would work just fine.

 

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