WSJ has a great article about Myths of Hedge Funds.

Myth #1: Hedge Funds are all the same. There are up to 25 different hedge-fund strategies which include funds invested in equity (both long and short), bankruptcies, mergers and acquisitions, high yield debt, bank debt, currencies, commodities, convertible debt, mortgage backed securities, trade claims, options, derivatives, volatility, etc. Each strategy has its own risk factors, return history, etc. Smart investors should heed the Socratic maxim of hedge funds — Know Thy Strategy.

Myth #2: Hedge Funds are too risky. This is perhaps the biggest myth of all. For the first five years of this decade, hedge funds have returned a 7% (approximate) compound annual rate of return while the S&P has returned -2.2% per year. These positive returns in a bear market demonstrate that the funds are able to produce higher returns with less-than-market risk.

Myth #3: Hedge Funds are too expensive. No doubt about it. Index funds and mutual funds can be purchased at much lower fee structures. But to savvy investors that’s not the issue. The key question is, net of fees, where do I want my capital invested? Hedge-fund fees are high as they are meant to compensate the top investment talent available. The question isn’t, are hedge funds expensive? But rather, are the fees worth it? The market is saying yes.

Myth #4. Hedge Funds are secretive. Not so. Hedge funds are sold through privately distributed prospectuses which carefully describe, among other things, the fund’s investment parameters, terms of investment, redemption rules, conflicts of interest, as well as the backgrounds and track records of key personnel. In addition, the funds provide annual GAAP audits detailing their assets. Many, although not all, funds disclose their portfolio holdings upon request. A fund that failed to provide this information would have a minimal chance of raising meaningful capital.

It is true that this information is not publicly available. This is not because managers are secretive, but rather because the funds are privately offered and SEC rules prohibit managers from making the information available.

Myth #5: Recent Hedge Fund regulations will prevent fraud. There is no reason to believe that recent SEC regulations will prevent fraud. Funds can avoid regulation by imposing a two-year lock-up on capital raised on or after February 2006. It is safe to assume fraudsters will avail themselves of that loophole. What the new regulations have done is to reduce the liquidity normally provided to investors. Funds of funds now have to choose between allocating to funds which impose two-year lock-ups (as many of the top funds are now doing) thereby reducing investor liquidity rights, or selecting funds that are not their “first choice” but will register and provide annual liquidity. That means that in the name of “protecting the public” the SEC just reduced the liquidity available to funds of funds and hedge-fund investors. While fraud will never be entirely eliminated, continually evolving due diligence and other best-practice standards should reduce the scope and frequency of fraud.

Myth #6: Funds-of-funds investors need more regulatory protection than hedge-fund investors. Of the $1 trillion in hedge funds, approximately $335 billion comes from funds of funds. Most funds of funds require individual investors to be qualified purchasers (those with $5 million or more in investable assets), so they don’t prey on widows and orphans. Less than 3% ($8 billion) of all capital invested in funds of funds is estimated to be in publicly registered “fof” vehicles where investors who are not qualified purchasers can invest. Hardly worth a new regulatory scheme. In fact, like hedge funds, funds of funds provide monthly track records, annual audited reports and detailed prospectuses which disclose conflicts of interest, investment terms, etc. Fund-of-fund annual reports are required to disclose any investment that exceeds 5% of total assets. Many funds of funds are fully transparent.

Myth #7: Hedge Funds destabilize markets. While the collapse of Long Term Capital Management in 1998 was immensely destabilizing for the markets, it is really the exception that proves the rule. Most funds run modestly leveraged, since they do not want to incur a loss large enough to jeopardize the franchise. Today hedge funds are a key source of liquidity for the markets. They make markets more efficient, and can create value, since they often actively unlock corporate value by pressuring managements to make necessary changes. Would you rather buy a stock owned by a passive mutual fund or one owned by hedge-fund managers insistent upon corporate responsibility?

Japan Land Prices Rise for First Time Since Early ’90s

TOKYO — Japan’s tax agency said the average price of land rose around the country for the first time in 14 years, lifted by gains in Japan’s three major metropolitan areas.

The report signals that Japanese property values are slowly rebounding from a slide that began in the early 1990s.

The National Tax Agency’s survey found the average price of land along selected major streets across the country rose to 114,000 yen ($994) per square meter as of Jan. 1, up 1,000 yen, or 0.9%, from a year earlier. The agency assessed land prices at about 410,000 locations.

Higher average land prices in five of Japan’s 47 prefectures combined to push up the national average. Those five are home to the country’s three major urban areas, which center on Tokyo, Nagoya and the western metropolitan region that includes both Osaka and Kyoto.

Average land prices rose in Tokyo for a second straight year, climbing 5.4% to 484,000 yen per square meter. While the average land price continued to fall in the remaining 42 prefectures, the rate of decline slowed in 33 of those districts.

As most of you know I like reading about the economy and finacial policies and how they affect my investments. I just finished reading The Conservative Nanny State by economist Dean Baker.

Its a great book and a very easy read. Not as fun to read as Freakonomics : A Rogue Economist Explores the Hidden Side of Everything, but still extremely fascinating nonetheless.

Dean Baker explains how the wealthy are influencing government policy to make sure that money flows upstream from the poor to the rich. Not only that, but even policies that seem like they’re designed to help protect the poor and middle class are actually designed to help rich corporations instead. He touches a variety of topics from illegal immigration to patents and tort reform, and even how CEOs are grossly overpaid. I finished it in 2 hrs and I couldn’t put it down. He even has solutions, not that I believe anything will change but I strongly recommend it.

And its even FREE!! Just download it in PDF format.

I read a ton of books[atleast 2 every month, sometimes 4 and occasionally as many as 7]. So whenever I can I try to make good use of the public library. Quite often, it doesn’t have a specific book that I’m looking for inwhich case I end up buying the book from Amazon.com.

I just found a really good website. http://www.worldcatlibraries.org/ will let you enter a zip code and will tell you which library has a book.

I was looking for “Dying of Money” by Jen O Parsson. Neither the local public library nor Amazon had this book but I according to the website its available at USCD’s library!

The only good book every written by Robert Allen is Multiple Streams of Internet Income. The rest are all bogus.

I’ve been trying to set up my own different revenue streams. My job, my real estate, my oil investments[potential], my private investment fund in oil and gas[again potential] and my minority stake in an internet telephony company[miniscule so far] have all been attempts to diversify my income and make it recession proof. I was laid off for 4 months after 9/11 and it sucked! If I had some money coming in from other sources life would’ve been so much better.

I just started another revenue source. Blog content creation. I’m creating content for a marketing company’s real estate blog and I’m outsourcing the content to some terrific writers in India. Now if I could only find some decent way to monetize this blog!!!!

I’m also trying my hand at outsourcing web-application projects too. I already have a few leads lined up. Lets see how this works out.

Check out my bookstore.
[All content is copyright of Living Off Dividends]

I contacted a fellow investor today after several months of silence. Found out he quit his stable engineering job in San Diego and moved to Florida. He’s writing investment reports and sending them to mutal fund companies and trying to get a job as an Investment Analyst. He could have done this while still working, but he realized that he had to make this “do or die” situation to get out of his routine job and pursue something he enjoys. It really does show his commitment!

Somehow, most of the people I’ve been meeting or talking to lately fit this mindset. They’re all trying to get out of the 9 to 5 rut and do something that is profitable, enjoyable and definitely not mainstream.

One of my friends quit his engineering job to become a trader quite recently. Another investor I know has an auto body shop and he’s started flipping foreclosures. Practically all the people I talk to are trying to improve themselves through investing or starting some sort of business.

They’re already well set in life with stable and well-paying jobs, but they all feel that something is lacking. Maybe its the desire to achieve fame and fortune. Maybe its the goal of wanting to be their own boss or maybe its the goal of being financial free.

Whatever is the driving force, they all work hard long hours to make their dreams a reality. They all hang out with strong minded and strong willed people who have positive attitudes and lofty goals. They spend a lot of time researching their particular market to give them an edge over everyone edge. And they don’t whine and complain about their place in life.

Finally having finished rounding up nearly $200,000 for the 17 oil well project yesterday we sent off the check to the operator. Together with 28 other investors, we managed to snag a 12.5% ownership in the entire project. Now I can get some rest!!! [Although now I have to sign all the paperwork and mail it back to the individual investors]

One of the advantages of owning a large chunk of a project is that you get to bug the operator a lot more than if you owned say 1%. [The same is true for real estate. Do you think your property manager is more likely to take your calls if he manges 12 of your homes instead of just 1??] People will tolerate a lot more crap if you provide them with a substantial amount of business.

So rather than me owning 0.72% of the project and having absolutely no leverage, I control 12.5% of the project thus making myself cozy with the operator. I’m also the manager of the LLC and will be getting a performance fee if we make more than a 20% return in any given year.

Ahh…leverage! It works in all aspects of life, especially the financial arena!

One of the lessons of history is that nothing is often a good thing to
do and always a clever thing to say.

Will Durant

Warren Buffett has been touted as the world’s foremost ‘Buy and Hold’ Investor. He’s been quoted as saying he likes to hold stocks “forever”.

He’s also a value investor. So most people could draw the conclusion that value investing means buying for the long term. I disagree strongly. Buying when something is undervalued and selling when its overvalued is essentially market timing. You time your entry and exit points based on the fundamental underlying value of the asset. So Buffett really is a market timer!

Warren Buffett recently sold his Laguna Hills house because “it was overvalued”. Its not like he needed any extra money or couldn’t make his mortgage payments!!!

I feel sorry for all those people who are still buying real estate in Southern California because “its a lifestyle choice and people always want to live here”, or “in the long run, it will always go up”, or “its currently a buyers market so now is the time to buy” or some stupid excuse that ignores the underlying value of the property.

When a property rents out for $1450/mo and your mortgage is $2300 on an interst-only loan 3 year ARM, its way overpriced!!! Which is why I sold my condo and pocketed the cash!

You may have heard today that Warren Buffett is giving away his billions to Bill Gates’s Foundation to give away. It amounts to about 3 billion a year at the current stock price which is pretty impressive. It looks like charitable giving is now back in style!

What I thought was truly impressive is that Buffett only draws a salary of $100,000 which is probably amongst the least of all publicly traded companies in the US. His wealth comes from his 38% ownership in Berkshire Hathaway and the money he’s been investing on his own which has probably done better than the approx 30% return that Berkshire has seen. So essentially he gets a performance incentive for managing the companies money!