The carpool lane

One of my early blog posts was a plea for California sponsored road safety infomercials. Simple things make a difference on the roads. We, in the Bay Area, can learn a thing or two about traffic efficiency from the South.

• Take for example the carpool lane, officially called High Occupancy Vehicle (HOV) lane. Typically one needs to have 2 or more people in the car to ride int he carpool lane. A lot of rubber necking starts when cars from the carpool lane need to cross over to take an exit. Building a HOV specific off-ramp overpass does pay off. Such changes to the high way 101-85 merge in Mountain View solved a lot problems. On the other hand, the 101 South commute through San Jose is hampered by two merges: 101-87 and 101-880. In both cases, car pool riders need to cross all lanes to take the exit.
  
• Weaving in and out of the carpool can be avoided by creating small separators between the lanes. Highway 5 near Rancho Bernardo is a great example of how traffic flow is encouraged by limiting when people can get in and out of the HOV lane.
  
• In the Bay Area, the HOV lane rules apply between 6-9am and 3-7pm. A look outside my office shows that the traffic continues well beyond 9am, and starts as early as 1-2pm. Reward commuters by making the HOV lanes 24/7. (LA Times: Car pool lane revolution)
  
• Traffic lights regulating the inflow to the freeway is a great idea. However, in the Bay Area, only one car is allowed to advance per green light. In San Diego, the traffic flow is smoother and stop and go traffic is reduced by allowing 2 or 3 cars to enter the high way per green light.

Common Sense Index Funds

The message of The Little Book of Common Sense Investing, by John Bogle is simple: Buy index funds and you'll do better than most investors. Yet the book counts 214 pages. Each chapter almost reads like a FAQ (frequently asked question). When it comes to investing, at the end, it all comes down to a single number: how much is left over.

"It may not be as exciting, but owning the classic stock market fund is the ultimate strategy. It holds the mathematical certainty that marks it as the gold standard in investing, for try as they might, the alchemists of active management cannot turn that own lead, copper or iron into gold. Just avoid complexity, rely on simplicity, take costs out of the equation, and trust the arithmetic."

"Remember, O stranger, arithmetic is the first of the sciences and the mother of safety." (Louis D. Brandeis, 1914)

"The two greatest enemies of the equity investor are expenses and emotions"

The lessons in the book are clear:

rule 1: Own businesses; don't speculate on emotions

• Total investment returns - the gains made by businesses - were remarkably steady: 8 - 13% each year and averaging 9.5%.
• The speculative return has added just 0.1% to the annual investment return.
  

rule 2: Own all businesses (best risk reducing strategy)
Don't look for the needle. Buy the hay stack.

• Only 3 out of 355 equity funds (since 1970), or 8/10 of 1%, have survived and mounted a record of sustained excellent.
• During the 39 year period (1968 to 2006) the S&P500 index fell into the bottom quartile of large cap core funds, in only 2 years and has not done so since 1979. The index has outpaced the average fund in 26 of the 35 years, including 11 of the past years.
  

rule 3: gross market return - costs = net return for the investor. Costs matter: compounding costs will eat your lunch and dinner
The "all-in" cost of equity fund ownership can come to as much as 3-3.5%/year. This includes the expense ratio, sale charges and initial sale charge. Compounding over 50 years, the investor who puts up 100% of the capital and assumes 100% of the risk, earned only 31% of the market return.
For 1980 - 2005:

• S&P returned 12.5%/yr; $10,000 will grow to $170,800 before inflation (3.3%/yr); after inflation: $76,200.
  
• Average Fund returned 10%/yr; $10,000 will grow to $98,200 before inflation (3.3%/yr); after inflation: $40,600
  
• The impact of compounding costs over 25 years is a difference of 53%!
  

rule 4: gross market - costs - market timing and selection penalties = net return earned by mutual fund investors
There is a investment time lag which costs investors dearly. When you calculate it out, the $10,000K investment will grow to:

• S&P invested: $76,200 (after inflation)
  
• Average Fund: $16,700 (after inflation)
• The impact of costs, counter productive market timing and selection penalties over 25 years is enormous: 22%! of what could have been if invested in an index fund.

rule 5: taxes are costs too. High turn over = taxes
Continuing the calculation:

• S&P invested: 12.3% return - 0.6% (tax cost) - 3.3% (inflation) = 8.4%; $10,000 grows to $65,000.
  
• Average fund: 10.0% return - 1.8% (tax cost) - 3.3% (inflation) = 4.9%; $10,000 grows to $23,100
• Again the impact is substantial when compounded over many years.
  

So, this brings us to a simple summary: Bogle recommendations

1. Serious money account = 95%
   Funny money account = 5%
2. Invest serious money account 100% in index funds
1. <>
2. 85% S&P index
3. 5% small cap index
4. 10% value index
5. short term bond fund
6. inflation linked bonds
3. Invest funny money (experiment)
   
1. some in stock
2. some in mutual funds
3. commodity funds
4. Avoid other funancial constructs
4. Asset allocation: bond % == your age or (age -10) %
   

Unclutter

Unclutterer.com is on my list of favorite blogs to read. For the last month we have been uncluttering our house and most importantly our garage. We had "inherited" numerous items from our friends who moved back to Belgium. Last weekend I took inventory of our regular drinking glasses. This does not include wine glasses or shot glasses. The picture on the left is exhibit A. No wonder our cupboards were full. We uncluttered to a simple set of glasses. We also kept the specialty beer glasses, such as a set of six Duvel beer glasses.

Buenos Aires, city of the thin

People in Buenos Aires always look in great shape. Women are obsessed by their looks (even more so than in many other places). But also men are in great shape (regardless of the amount of beef, beers, empanadas or media lunas consumed). I am impressed about the amount of sports done in this big city:

• Soccer is everything in Argentina. In the parks of Buenos Aires, or on any patch of green, you'll find many impromptu games of soccer. Soccer is everywhere. Day and night.
  
• Dogwalkers keep in shape by walking 10, 20 or 30 dogs at once.
  
• I have not heard of any famous cyclist from Argentina (except for Rebellin exchanging his Italian passport for a dark blue Argentinean one) in order to participate in the Olympic Games. However, on the route from the airport to down town, in the cold of mid winter, we encountered many cyclists on the freeway to the airport (Sunday 10am). They all were in great shiny outfits of the major European teams.
• Jogging along Avenida Libertador
  
• Rugby is very popular, although I did not see any game or people playing it.
  
• Tennis is gaining strong in popularity, thanks to a group of excellent male players, including Nalbandian.
  
• During the winter, I noticed a fair amount of people with squash rackets.
  
• Polo, although more a game for the rich and famous.