about that vote

Citi's shareholders have spoken.

So-called "say on pay" votes, a requirement of the Dodd-Frank financial reforms give shareholders a vote on company executive compensation packages. These packages have long been disclosed in proxy materials each company sends to shareholders annually, but now everyone gets a say. The vote is a non-binding approval, disapproval or abstention on the whole package. Last year, most shareholders got to vote on how often they would hold this vote (a vote on a vote! how meta!) either one two or three years.

In Citi's annual meeting, shareholders voted 55% against the executive pay package - their CEO made $15 Million last year, while the owners didn't get an expected raise in the form of increased dividend.

This is the first example I can think of where such a prominent company's shareholders have clearly disagreed with executive compensation. It makes sense that you wouldn't often see rejection like this, people invest in a company partly because of faith in the management. It is still a good thing that people do exercise their vote, it is one of those reminders to the board that they are accountable to somebody else.

the carry trade

In case you haven't heard, short term interest rates are super low right now. In fact, they can't go too much lower. Since the end of 2008, the Fed Funds Rate has been between 0 and .25%. This is an overnight rate target, and supposedly can change any time. It has not changed at any time for the past few years though.

Banks borrow from the Fed at this rate. This has been great news for the banks, give them cheap money, and they can get to work making more money from it. The problem is, it hasn't been quite so easy for everyone else, people and businesses to get that cheap money (I've just gotten declined for a credit card, and that wasn't even the cheap money!) so that they too can make more money.

Former FDIC chair Sheila Blair has come up with a great solution: Let EVERYBODY borrow from the Fed! With cheap loans, we can start businesses, or just invest in bonds and make easy money just like banks are. The article is well worth a read, it explains how anyone with access to this incredibly cheap money has prospered over the past few years.

voting your shares

From http://jrtaff.wordpress.com/2012/04/12/voting-your-shares/

Its that time of year when shareholders are receiving ballots to vote on board members, compensation opinions and other matters in the companies they own. It may not seem that your individual votes really matter in the grand scheme of things, after all, you only own a few shares of millions, and the issues to vote on are pretty tame anyway (a pre-defined slate of board members, an auditor selection and maybe a few shareholder calls for more transparency in various areas). It is important, however, that you have and exercise that right.

A shareholder in a company is a shareholder in the economic interest of the company. When the company makes money, you have a share in that. Shareholders also have a share in the running of the company - this is where your vote comes in. Matching control of the company to economic benefit is very important. It would be silly to have a company where one person only cares about the money and not the operation and another person only cares about the operation but not the money. One has no way to carry out their desires, and the other has no profit motivation!

Google has a dual share srtucture. There are about 268M shares of their Class A stock and 67M shares of Class B stock. The Class A shares have one vote each, while the Class B shares have 10 votes each. According to their latest 10-k filing, Larry, Sergey and Eric held 92% of the Class B shares. This keeps control of the company effectively in their hands, with about two thirds of the total votes in those three hands.

As you can see, this puts the control of the company in the hands of a few people. This was done to insulate the founders from nefarious "short term demands" of those pesky, finicky shareholders.

Now Google is distributing a new share, Class C, for each share of Class A or B stock. For the moment, this keeps economic and control interests exactly the same. Class C, however, has no voting rights whatsoever. Google intends to use these for its equity compensation and possible acquisitions so that current voting power will not be diluted. Going forward then, control shares will not be diluted, but economic share will be. Hopefully, they will not be too reckless wielding this new paper even though it won't come back to bite in the form of less control. This makes Class C shares much less attractive for a company being acquired, however.

It is a good step that Google will stop diluting the voting rights of current share holders, but their structure is still not the most shareholder friendly.

One account that I manage is long GOOG.

not a good investment.

Even without considering the extremely low odds of winning, lottery tickets are a terrible investment. People continue to buy tickets though, hoping to score the now $640 Million dollar jackpot. While the prospect of spending $1 and receiving $640 Million is exciting, the expected value of each $1 ticket is only 63.2 cents! That means that, on average, every dollar spent on the lottery only turns into 63.2 cents of winnings.

Where does all that money go?

Fees. Besides taxes on winnings, there are taxes and sales costs of each ticket, and about 28 cents of each dollar goes to state education funds. Those are high fees!

High fees are a common feature of terrible investments. After all, if an investment was compelling, it would sell itself - you wouldn't need a high-commission salesperson pushing it on you. Management fees on actively managed funds are a drag on returns. Trading fees take a little out of each buy or sell you make, lowering returns more. Keeping costs down is the surest way to boost your returns.

If you do buy a lottery ticket - have fun with it! If you win, contact a Registered Investment Advisor for some advice on what to do with it.

the pain of a $100,000,000 IRA

This WSJ article gives a great look at how Mitt Romney and other Bain Capital partners were able to invest in private equity deals in their IRAs, making huge, tax deferred, profit.

So, Mitt Romney may have $100,000,000 in his IRA. Wow. This combines a two really awesome things - retirement savings, and absolute piles of money. Great, right?

Not quite.

There are two types of IRA accounts: Traditional and Roth. In the traditional kind (include SEP, SIMPLEs and rollovers) money goes in and reduces your income for tax purposes. You don't pay taxes on the money going in, just when it comes out - you pay taxes like it is income. In a Roth IRA, you pay taxes on the money when you pay it in, but you withdraw it completely tax free in retirement. In both accounts, all gains, interest and dividends are sheltered from taxes as long as they are in the account.

Mitt Romney has a SEP-IRA (like a traditional IRA). When he withdraws that money, it will taxed as ordinary income - not carried interest, dividends or long term capital gains. He will pay a higher rate on the in retirement than he would if he were selling in a taxable account today. Private equity investments pay the 15% long term capital gains tax thanks to the carried interest 'loophole'. The top income rate is 35%.

Of course, tax law was different when he opened his IRA. At the time, it may have been a good idea to defer the taxes on those gains. Also, it is fairly well known that Romney and his accountants are rather good about keeping his tax bill down.

But having $100,000,000 in an IRA is not all its cracked up to be.

Too bad he didn't have a Roth IRA.