The Economist (magazine)

It’s been a while in the making, but yesterday, I broke down and subscribed to the weekly magazine The Economist. In a sense, this is a big step for me, because I’ve not ever subscribed to newspapers or news magazines before. Truthfully, I’ve not ever had to, because I’ve always digested news in a piecemeal manner, picking up whatever print material I happen to find wherever I go. Newspapers have been much more readily available, but I will also read magazines periodically. (By the way, I rarely watch television, except for occasional episodes of 60 Minutes or BBC World News.)

Whether I’m at the airport on my bimonthly trips to Boston, the coffee shop just a few doors away from my residence in San Francisco, the sandwich shop near work, on public transportation, or at the dentist’s office, I’m always reading whatever happens to be lying around near me: San Francisco Chronicle, The New York Times, Wall Street Journal, USA Today, Time, BusinessWeek, etc.

Throughout the current turmoil gripping the financial markets in September and October 2008, I’ve been more aggressive in my appetite for news. And the piecemeal approach hasn’t cut it. I’ve been hitting the online web sites of the previously-mentioned magazines and newspapers. In the process of all the reading I have done, both online and offline, I’ve come to realize something fundamentally lacking in the media I read. They have not satisfied my fundamental need for understanding the intricate details of why things are the way they are, in today’s economy. My undergraduate degree is in Business Administration, so I have a fairly good knack for understanding business, finance, and economics. However, these publications do not provide nearly enough detail to satisfy my needs. I have specific questions, and so, I want specific answers.

Being a Unix systems administrator, I’m naturally inclined to look inside of things to understand how they work. That is fairly easy in systems administration, because I can look at the source code of shell scripts and C programs. I can look at the state of memory, disk, network, and CPU on a heavily-loaded system. However, doing the same for understanding the economy’s intricacies seams less accessible to me. I’m not looking to become a professor of Economics at Harvard University, but I would like to understand things better. (Wouldn’t it be totally cool if there was such a thing as dtrace for the economy?)

With that in mind, I decided I wanted to subscribe to a magazine or newspaper that would help me in my quest for deeper understanding. My mind turned instantly to The Economist, a weekly news magazine that I had read a couple times in the past. And during the past several years, some of my Google searches have yielded really good articles I found on their website at http://www.economist.com/. However, I had some concerns about media bias, and specifically about which way The Economist leans.

Suffice to say, I’ve always identified myself as a liberal. I grew up in Massachusetts, and I’ve lived nearly a decade in the San Francisco Bay Area. However, in recent years, I’ve begun to notice that my beliefs and political leanings have shifted somewhat. I don’t exactly know how to characterize them today, but I recognize they are shifting. Though I still consider myself a liberal, I have started to take on more fiscally conservative ideas.

In spite of my political leanings, I have always considered myself a fair and balanced person, and as such, I would like the same of any newspaper or magazine I plan to subscribe to. I realize that human beings are biased by nature, but I still would like to seek out a publication that can be considered fair and balanced. Or at least, one that presents me with some divergent viewpoints, not just those from a predominantly liberal or conservative perspective.

I’ve previously read about liberal leanings and conservative leanings of various publications, but I never stopped to think much about them. I suppose I’ve digested my news from enough sources that I probably managed to achieve a balanced perspective on most topics anyway. But still, now that I was planning to start a subscription, I needed to do a little home work.

Online, I found some research articles regarding media bias, and I read numerous opinions people had about various publications. I was happy to read predominantly favorable and satisfactory reviews about The Economist from various sources. It seems that both conservatives and liberals will find issue with the magazine at times, but overall, it is very well-respected. And that is comforting to me. At a subscription cost of $119 (USD) annually, it isn’t cheap, but I believe it will be well worth it. The fact that it covers such a broad range of topics is also important. On the About page at economist.com, you can read more about the publication’s history and philosophy. What I read there was also encouraging. The paper describes itself as “classical liberalism,” and according to this Wikipedia page, it sounds like those ideas might be inline with my own. I look forward to my first issue.

The Demise of the Schwab Yield Plus Fund

In hind sight, it’s interesting to occasionally look back on some of my investment decisions.  Sometimes, I make good ones, sometimes bad ones.

Here’s an example of a bad one.

About 10 years ago, I left my then employer with about $1500 in company stock I had earned as part of some retirement benefit.  I considered selling it and buying a more diversified S&P 500 index fund.  But I ultimately decided to just keep the stock.  It would give me a reason to stay abreast of the company and of how my former coworkers were faring out.  Over the subsequent 2 years, I watched as the stock dropped from $20 per share, to $10, then $5.  Ultimately, the company went into Chapter 11 and the stock was declared worthless.  In hind sight, I should have diversified.  Oh well.

Here’s another example.  A somewhat good decision.

The Schwab YieldPlus Investor Fund (SWYPX) was touted as an ultra-short bond fund which offered slightly higher yields with minimal price fluctuation.  (As of today, it still claims the same.)  I felt it was a decent position for money that I would otherwise put into a money market fund.  We all know that risk is compensated with higher return.  The yield on SWYPX was indeed slightly better, and the risk must only have been minimally higher.  Right?  Wrong.

I had known that the housing market was a bubble for years in the making.  I’m not just saying that from a backward-looking perspective.  Trust me.  I was talking about a housing bubble in 2001, and probably as early as 1999.  Friends and some family members got tired of me talking about the “bubble,” to the point that I was asked to no longer speak of it.  To this day, I can still no longer talk about “housing” with at least one of these friends.  Well, we know how that housing thing all turned out.

July 2007.  That was the month when things really hit the fan.  The signs were there for months.  Noone should have been caught by surprise.  But as is often the case, many were blind-sided.  Little mini quakes had already been felt in the MBS/CDO/ABS markets for months before that.

I had heard about the “toxic waste” found in many bond portforlios, but I had not really stopped to consider what that really meant.  I just knew that I should avoid it.  For at least the prior 2 or 3 years, I had avoided any bond funds that carried mortgage-backed securities (MBS), except for one.  I had started investing in the Schwab Yield Plus fund one year earlier, in July 2006.  It was diversified across mortgage-backed securities (MBS), collateralized debt obligations (CDO), corporate bonds, commerical paper, and asset-backed securities (ABS).  Looking at the ratings of the underlying securities, I felt fairly confident that I was not exposed to any significant levels of toxic waste.  Many of the securities were highly-rated (AAA, AA, A).  And this was an ultra-short bond fund.  Ultra-short is supposed to be less risky, and I did not have to worry about the interest rate risk normally inherent in longer-term bond funds.

Anyway, from July 2007 to Novermber 2007, I had watched the slow and steady decline of the fund’s NAV from 9.67 to 9.17.  I was concerned.  That was a decline of just more than 5% in 4 months, for a fund that was supposed to be safe.  Something was not right, and at the end of Novermeber 2007, I sold a significant portion of my holdings in the fund.  I sold off the remainder in January 2008 at a price of 8.93.

So, why did I sell?  Two reasons.

  1. The collapse of the two Bear Stearns hedge funds that were heavily invested in subprime securities.
  2. The re-rating of debt obligations by the rating agencies (Moody’s, S&P, etc).

At some point in 2007, Bear Stearns ceased redemptions on two of its subprime hedge funds.  Investors of those funds were running for the exits with their money, and fast.  Those funds suffered major losses.  The problem with redemptions is that it forces the fund managers to sell securities they may not want to sell.  To keep the fund’s NAV stable, they may initially sell off their better assets.  But at some point, they are forced to sell the bad stuff.  And that is exactly what happened in March 2008 to the Schwab Yield Plus fund.  They had to sell off assets at fire-sale prices, because the market for those securities had dried up.  There were very few buyers willing to buy, so they sold at very deep discounts.

Toward the end of 2007, the rating agencies had begun to re-rate debt securities.  Apparently, obligations that had previously been considered safe/secure were now significantly more risky.  Despite Schwab’s re-assurances that the Yield Plus fund was not exposed to subprime by more than 5%, it was enough for me to sell.  With word of further re-rating to come from the agencies, it was anyone’s guess what the true quality of the SWYPX fund was, or of what the true percentage exposure to subprime was to the fund.

I don’t make rash decisions about investing.  I’ll stay the course, … to a point.  I had considered my position in the fund, the relatively small loss I had already incurred.  But ultimately, I decided to bail on the Schwab Yield Plus fund in January 2008.

It turns out that I picked a relatively good time to bail out of the fund.

Within the months that followed, other investors did the same.  An estimated $11 billion has left the fund in the past year, or about 80% of the fund’s assets.

Just in the month of March 2008 alone, the fund was down -17.96% for the month.  For the past year, it’s down -29.18%.  Ouch!  So much for a slightly better return with minimal price risk.  No wonder why Schwab is now facing dozens of law suits from unhappy investors in the fund.

The lyrics of Kenny Roger’s “The Gambler” come to mind:

You got to know when to hold em, know when to fold em,
Know when to walk away and know when to run.

I look foward to reading the fund’s annual report next month.  That should be interesting.

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