June, 2009


Most banks are now paying a fraction of 1% a year interest on savings accounts. While it is easy to find a much higher yield elsewhere, 'high yield' usually means 'high risk.' For example, the dividend yield on Bank of America preferred stock (BAC-L) is now 14% a year, but if Bank of America declared bankruptcy, this stock would likely become worthless. So, where can you get a high yield on your savings minimum risk?

Ginnie Mae. I like the Vanguard GNMA "Ginnie Mae" Bond Fund. Like Fannie Mae and Freddie Mac, Ginnie Mae (Government National Mortgage Association) is in the business of issuing mortgage backed securities; but unlike Fannie Mae and Freddie Mac, which are investor owned companies; Ginnie Mae is owned by the U.S. government. Ginnie Mae bonds are as safe as U.S. Treasury bonds. Right now, the Vanguard Treasury Money Market Fund (VMPXX) yields a pathetic 0.16%, but the Vanguard GNMA Bond Fund (VFIIX) yields 4.25%. Why does Ginnie Mae yield so much more? Mainly, it because most people don't understand what Ginnie Mae is. The debts of Fannie Mae and Freddie Mac are not guaranteed by the U.S. government, but Ginnie Mae bonds are guaranteed by the U.S. government.

Bonds Beat Stocks. Although stock brokers often claim that stocks outperform bonds in the long run, that just isn't true. Bonds have been outperforming stocks for a long, long time. Over the past 10 years, U.S. Treasury bonds, the safest of all bonds, produced an average annual return of 7.7%, but stocks (the S&P 500 index) yielded a dismal -3.0%. Going even longer term, stocks still didn't beat bonds. Over the past 30 years, Treasury bonds had an average return of 9.4% a year, but stocks only made 7.7%.

Mutual funds. Stock mutual funds did even worse than stocks. 75% of all managed stock mutual funds consistently underperform their index. (Standard & Poor's Index Versus Active Fund Scorecard (SPIVA). What that means is this - the great majority of professionally managed mutual funds performed worse than a randomly selected portfolio, that is, a portfolio selected by throwing darts at a copy of the Wall Street Journal. 80% of all managed common stock mutual funds have lost money over the past 10 years.

Why do so many people invest in the stock market? The simple truth is this - most people invest in stocks and stock mutual funds simply because everyone else they know is doing it, but that's a lousy reason to invest in anything. That was the reason why a lot of very smart people gave their money to Bernie Madoff and thought that their money was safe. I used to be a Registered Financial Investor. After reviewing a new client's portfolio, I would sit down with the client, look him in the eye, and ask: "Why do you own stocks?" or "Why do you own mutual funds?" Usually, clients would go silent and try to think of some answer to that question besides: "Everybody I know owns them." Most of the time, they couldn't come up with any other reason. If you can't think of a good reason why you own stocks or mutual funds, then you shouldn't own them. (This may be the best single piece of financial advice that anyone is ever going to give you.) Remember, a stock certificate has no intrinsic value. It is just a piece of paper. You can't live in it, you can't eat it, you can't wear it; and unlike bonds, which pay interest; most stocks and stock mutual funds do not pay dividends. (As you can probably tell, I don't own stocks or stock mutual funds myself. Why do you?)


In my April newsletter, I wrote a story about King Ludwig II of Bavaria and his insane relatives. Several people have asked me if I thought that King George III of England was even crazier than Ludwig. The answer is: Yes. At the beginning of his reign, King George III was very popular, mainly because he spoke English. His grandfather, King George I of England spoke no English at all, only German. King George II spoke a little broken English, but like his father, George II needed a German-English translator by his side in order to conduct business. In his youth, King George III seemed like the perfect monarch. He was handsome, witty, intelligent, well educated, a talented musician, and very popular with the ladies. His dementia came on gradually and got worse with time. George III was king of England for a long, long time too. He was king of England in 1775 at the start of the American Revolution, and he was still king of England 40 years later when the War of 1812 ended in 1815. By that time, King George III was so crazy that he was kept in a straight jacket most of the time, and he lived in a locked room with barred windows. Prince Charles has often stated that the king of England whom he most admires and most wants to be like when he becomes king of England is George III. I don't understand why Prince Charles feels that way. The only reason I can think of is this - when King George III was a young man, many people said that he was the handsomest man in England. I don't believe that anyone has ever said that about Prince Charles.


You can drop off hazardous waste products at the Alameda County Household Hazardous Waste Facility at no charge. Their facility is located at 2100 East 7th Street, Oakland. For hours of operation, go to their web site at Hazardous Waste. You must bring a driver's license or other photo I.D. with you showing that you live in Alameda County. They will accept automotive products (motor oil, transmission fluid, oil filters, additives, auto batteries), garden products (pesticides, fertilizers, sprays), paint products (liquid and spray paint, stains, varnish, paint remover), household chemicals (bleach, cleaners, solvents, sprays, acid and caustic oven cleaners), florescent light bulbs, batteries, mercury thermometers, etc. Remember, you can receive a substantial fine, up to $750, for putting hazardous waste in your garbage can.

CHOCOLATE 101. Another chocolate misnomer.

White Chocolate. There is really no such thing as white chocolate. What we call "white chocolate" is just a confection that is designed to resemble chocolate in appearance and texture. Real chocolate is made with cocoa solids and cocoa butter. Since no one has ever figured out a practical way to get the brown color out of cocoa solids, there are no cocoa solids in any brand of white chocolate, regardless of the price or where it was made. About 10 years ago, Hershey petitioned the FDA for a legal definition of the term "white chocolate," and in 2004, the FDA complied. In order to call a product "white chocolate" in the U.S., it must contain at least 20% cocoa butter, plus specific amounts of milk, milk fat, and sugar. The European Union has recently adopted the F.D.A. definition. My White Chocolate with English Toffee and Toasted Almonds is one of my most popular items. It's an original recipe of mine, and I don't know of anyone else who makes it.


My Name is Mary. I once received an application from a woman named Mary. After I looked at her application form, I said: "Mary, you forgot to write down your last name. You also forgot to fill in a lot of the rest of the form as well." She said: "I didn't forget. I don't like to give out personal information about myself." I said: "Well Mary, if I decided to rent this apartment to you, what name would I put on the lease?" She said: "Mary." I said: "Mary, but I can't rent an apartment to someone who I can't identify." She said: "You have to." I said: "Why?" She said: "Because I'm protected by the ADA (Americans with Disabilities Act.) I'm mentally ill, which is why I didn't put down my last name on your application form. I have a letter here from my psychiatrist." She showed me her letter. She had cut out her last name and the name of the psychiatrist. The letter said that Mary suffered from "chronic paranoia."

My Goons. During the showing, Mary had a private chat with the current tenant living in this apartment. After Mary left, my tenant told me that Mary told him that she took a bus to see the apartment because if she had come in her car, "your landlord could have seen my license plate number and then his people would be able to track me down." I had run into this kind of thinking before. Berkeley is a very left-wing town, and I have met people here who believe that landlords have hired goons to spy on and terrorize their tenants. Although this may sound self-serving, I can assure you that Berkeley landlords do not actually have goon squads. Honest!

Paranoia and Pot. I didn't rent my apartment to Mary, but I did call my lawyer to make sure I couldn't get sued. It is sometimes impossible for a landlord to know for sure if a prospective tenant is legally disabled under the ADA. My lawyer told me that this woman probably is protected by the ADA, but that I was on sound legal footing in my decision to reject her application. No rational landlord is going to rent an apartment to someone who he cannot identify. I have known a lot of paranoids in my life. That's because there are a lot of marijuana addicts in Berkeley, people who are stoned every day. Long term marijuana abuse can cause extreme paranoia, and sadly, I have lost a number of friends and tenants over the years due to marijuana induced paranoia. Most of my Berkeley tenants are students at the University of California, and when one of them tells me that he is dropping out of college, it's always because of marijuana. Unfortunately, that has happened many times.

Mark Tarses

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