Wednesday, January 29, 2014

The Coffee Hypothesis

Loyal readers, there are tough times ahead for us. Very shortly there will be a posting about the tax consequences for Israeli Americans. This will not be fun unless you generally take pleasure in punishing yourself. Although, you did buy your house from an Israeli builder, so maybe this is something you enjoy.

What will get us through these tough times? The same thing that gets us through everything else. Caffeine, of course.

Dividends in Shekels

I have a developed a theory about the financial markets in Israel based on what I believe is a highly accurate observation about coffee. It goes like this: if an Israeli “large” coffee is really an American “small” coffee, shouldn’t Israeli “large” company stocks act just like stock in “small” American companies?

I’m a data-oriented sort of person, so to test my hypothesis, I graphed the performance of the Tel Aviv 100 against the Russell 2000 using “the internet”:

Coffee Hypothesis

The graph suggests that there is “similarity” in the way the stocks behave. This is important because it suggests that you not giving up much at all by investing in Israeli stocks over U.S. stocks, especially for money you otherwise were planning to invest in small companies.
                                                                                                                                   
In fact, alert readers will notice that the Tel Aviv 100 has been performing better than the Russell 2000, especially after 2002. Before you pull out the chocolate spread to celebrate, you should keep in mind that past performance is at best an indicator, it is not a guarantee.

The recent success of the Israeli stock market is probably related in part to the strengthening shekel which started around 2002. It also has come with significantly more dramatic up-and-downs (oy vey, 2008!), or what the experts would call “higher volatility” which is consistent with the way stocks in the “emerging markets” change in value. 

I am not suggesting that you should put all of your money in the Israeli stock market. However, whatever money you decide to bring to Israel and invest in the Israeli stock market should be a very nice overall addition to your investments.

Unfortunately, it won’t be as simple as just buying the Tel Aviv 100 index. As an American tax payer, buying an Israeli mutual fund will not be a viable option for you. I’ll explain why in a later post. In the meantime, just trust me.

(Important life note: if an Israeli ever says to you, “just trust me”, what he really means to say, “do not trust me.” Obviously, this does not apply to me. You can always trust me.)

But have no worries. You will be able to invest in Investing by Accident’s very own Israel Price Ratio Asset Yield index, or I-PRAY. I am almost ready to publish this index which will consistent entirely of stocks that I have chosen by accident. I can already guarantee you that the I-PRAY index will give you results that are either similar to the Tel Aviv 100, or that are different from it, depending on how the stocks perform.

I hope that the coffee hypothesis will you get through the tough times ahead. Whenever you think about giving up, just remember what it’s all for. When your money makes aliyah, it doesn’t only help protect the shekel-value of your money from a weakening dollar. It also gives your money the opportunity to benefit from the Israeli stock market.

You’ll still need to figure out exactly how much you want to invest in Israeli stocks as compared to the options that you have in the U.S., but let’s not get into that right now. For just this once, I’ll let you finish your latte.

Wednesday, January 22, 2014

Opening an Israeli Brokerage Account

Congratulations! Your money is ready to make aliyah. Let’s bring it over here, so that we can get back to reading through the pile of old magazines that we got the last time someone visited us from America. (Thanks, Rachel!)

Things you will need:
  • A pen and paper
  • Willingness to drive to Tel Aviv
  • A plan
Excuse me, “a pen and paper”? What is the pitom? This is 2014 and you are living in a hi-tech country. This entire process can be done electronically! Put that pen and paper away. Except, keep a fax machine handy. At some point, you will always need a fax machine.
                                
This part of investing in Israel – opening a brokerage account – is actually very easy to do. If you have a lot of money to invest (around 250,000 shekel or more), you can even find someone in Israel who will be willing to manage it for you. I never investigated fully how this would work, so please let me know what you find.

What I can tell you is how you can buy and sell Israeli stocks and bonds on your own.

At Your Bank

All of the banks in Israel offer trading services. They each have their own trading system and all you would need to do is ask your bank to turn it on. I’ve heard of some people being told by their banks that this is not allowed because they are American, but this is just a simple Israeli misunderstanding. The banks are not allowed to provide Americans with ability to trade U.S. stocks and bonds in an Israeli account, but there is no restriction to trade Israeli stocks and bonds. Fortunately, as a seasoned oleh, you already know how easy it is to convince Israelis that they have made a mistake. Make sure your fax machine is handy.

Trading with your bank is convenient because you have already memorized the 16 different special secret codes that change every month which you need to login. Also, the banks actually have fairly good trading systems. Of course, by “fairly good”, I just mean, “not necessarily as bad” as the alternative.

The only downside with the bank is that by the time you finish paying them fees, it’s not entirely clear whether you will have any money left. In fact, you are being assessed a fee right now just for reading about your bank on my blog. This is the “reading about a bank fee”. This one is totally my fault, so I’ll cover it for you.

Whoops! I just realized that you will need to pay the “friend is paying a fee for you fee”. This one is also my fault. I’ll cover it for you also.

Here is what the fees would look like for a basic brokerage account. They could even be lower as you invest larger sums of money:

Fee
Amount
Stock Trading Fee (of trade amount)
0.1%
Bond Trading Fee (of trade amount)
0.1%
Minimum Trading Fee per transaction
2.35
Monthly Service Fee
15.00
Minimum Trading Fees per month
9.00
Other Fees
None
Interest on the “Plus”
Prime “minus” 2.5%

If you have a brokerage account in the U.S., you may notice that these fees are very competitive with what you are used to paying in America. The major difference is the monthly service fee and required minimum transactions per month (totaling as much as 24 shekel). This is not a lot of money, but as Americans, we would have been more comfortable without these. Then again, we also would be more comfortable with wider parking spaces. That’s just what we get for living here.

By comparison, here is what the banks will want to charge you:

Fee
Amount
Stock Trading Fee (of trade amount)
0.650%
Bond Trading Fee (of trade amount)
0.650%
Minimum Trading Fee per transaction
27.00
Monthly Service Fee
None
Minimum Transactions per month
Possibly, none
Other Fees
1% and up
Interest on the “Plus”
Of course not, silly

In my negotiation with the bank, I only got as far as the “Other Fees” before I stopped. The banks charge דמי משמרת, or a “custodial fee,” which is assessed as a percentage of the money that you have in the account. The standard fee for this 1%. They will discount it for you, but they are unlikely to eliminate it altogether unless you can show that you will have significant trading volume.

To Bank or Not To Bank?

Trading with your bank is the quickest way to get started and having all of your money in one place is really very nice. However, you will want to make sure that the fee structure is reasonable compared to what you would pay with a brokerage account. As far as I have researched it, unless you have more than about $1 million that is planning to make aliyah, it is highly unlikely to be the case. Also, keep in mind that banks “expire” whatever discounts they give you on fees each year, which means that you will need to be prepared to re-negotiate the terms of your trading services every 12 months. 

Brokerage Accounts

The alternative to trading with your bank is to open an Israeli brokerage account. This option is a lot like eating in buffet style. It is not as convenient if you have to get up all the time to refill your plate, but it also means that you will eat less. Keeping your money further away from your bank account will make it easier to keep it off limits, which is a best practice for successful investing.

We already saw the price structure for a basic account (which is all you will need to trade just in Israel). The only requirement for the brokerage accounts is that you will need to meet their minimum opening balance, which will be about 50,000 shekel.

As it turns out, all of the brokerage firms in Israel use the same trading system. I consider myself somewhat an expert on “systems” because I work in software, so I can basically give you this fairly reliable assessment: it is not that good. But hey, it works.

Since all of the companies use the same trading system, it is really very simple to decide which one to use. I recommend evaluating them based on whoever calls you back first. In my case, it was IBI. They not only called me back within hours (are they Israeli?), they also paid for my parking in Tel Aviv when I came to visit them to an open account (really, are they Israeli?). 

You can find a convenient list of brokerage companies here. It is not quite up to date, but it will give you a good list to call if you want to do some comparison shopping. 

Or, I can save you the effort on the research: they are pretty much the same. If you want the cheapest, your best option is probably Migdal. They have a similar low-cost fee structure as IBI, but without requiring a minimum of 9 shekel in transactions. Unfortunately, Migdal told me that they are not willing to open accounts for Americans because the paper work is too complicated. I wonder if their fax machine is broken.

What Migdal clearly did not know is that I would write about this on my blog and encourage you to call them and ask them about opening an account so that they can see just how much they are missing. Please tell them that you have $1 million to invest. When they ask you why you just don’t keep it with your bank, tell them you like to eat at buffets.

הצלחנו!

There you have it. You can now invest in Israel! All you need now is a plan. That shouldn’t be hard at all. You simply need to figure out your life goals and work backwards to understand your investment objectives. At that point, it is simply a matter of understanding the tax consequences of dual citizenship and you are all set.

What’s that you say? You would rather get a driver’s license again? 

Wednesday, January 15, 2014

Kesef B'Kesef Alternatives: Part II

Well loyal readers, it’s just like when you have to go to a meeting with your kids’ teachers. Let’s just get this over with as quickly as possible so that we can get back to things we feel competent at doing, like online shopping. (Discussion topic: are fast talkers more likely to become teachers? Or, do teachers develop this skill in the wild because they only have 4 minutes to talk to each parent? Discuss.)

It’s time for the second basic alternative for how you can protect your money from a weakening dollar without making aliyah. Spoiler alert! It’s probably easier to just bring your money to Israel.

Second Basic Alternative #2: Currency Hedging

Slow down there, Mr. Fancy Pants. What’s hedging and why would I want to do it?
                                                                                     
In this very simple alternative, you would just open a forex trading account and short the shekel. This is a very good option for you if you (a) know what “forex” is, (b) you know what it means to “short” something, and (c) you agreed with my use of the word, “simple” in the previous sentence.

This option is good because it is highly versatile. It will work whether your money is invested in stocks or bonds, whether sitting in your bank account or trapped inside the house which you haven’t yet sold. It will work for money in whatever form it takes, liquid or solid.

To make this option work for you, you would take a “short position” in the amount of the dollars that you have against the shekel. You would make money or lose money in the opposite direction of the way the exchange rate goes. If the dollar goes up against the shekel, your position would lose money, and if it goes down, your position would make money. Happy example: 

You have $100,000 that is worth about 350,000 shekel today. Next year, the dollar gets weaker and your $100,000 is only worth 325,000 shekel. No problem! You simply cash in your “short position” which will be worth 25,000 shekel and you still have a total of 350,000 shekel. 

The only major “gotcha” with this happy example is that you will have to pay taxes on the 25,000 shekel gain. That dampers some of the happiness, but it is a small price to pay for not having to worry about your money losing shekel value.

One of my highly intelligent friends is doing this in advance of his aliyah. Had I been highly intelligent before I made aliyah, I probably would have done the same thing. But I wasn’t highly intelligent, so I didn’t do it.

By taking the “short” position, you are basically “freezing” the value of your dollars against the current price of the shekel at whatever point in time you take the short position. This is good because you won’t lose any more shekel value, but it also means that you want gain any shekel value if the dollar strengthens. Less happy example:

You have $100,000 that is worth about 350,000 shekel. Next year, the dollar gets stronger and now your $100,000 is worth 375,000 shekel. Nope – no happiness for you! You cash in your “short position” and pay 25,000 shekel. You still have just 350,000 shekel.

This is not a happy example, but that is the price you pay for wearing those fancy pants. Although, if you wanted to share in the happiness that comes from having dollars that get stronger, you could balance the risk differently by taking a short position at less than the amount of dollars you have. Or, you could take a position at greater than the dollars that you have if you want to bet even more that the dollar will get weaker. But at this point, you would be a currency trader. In that case, please tell your butler to stop reading this blog to you. His time would be better spent in fetching you more strawberries to dip into your halava fountain. I hope you enjoy them while thinking about the difficult problem of which of your villas you want to live in tomorrow.

So what’s the bottom line?

For regular people, this approach may be just a bit too complicated. However, if you haven’t made aliyah, and need a quick and easy way to “hedge” your risk, I could put you in touch with my highly intelligent friend who could help you do it.
                                                
I haven’t asked my friend if he will help you, but I’m pretty sure he would because he is Canadian, and Canadians are really nice people. Also, even though his hedge involves “CAD”s which is the currency code for “fake dollars”, he could still show you the path because it works the same way.

This may also be an option to consider if all of your money is stuck in dollars; for example, if all of your money comes from fixed monthly pension payments in dollars. Otherwise, it would be simpler and easier to just take some of your money and convert it into shekel.

So, how does one invest in Israel?

Why do people keep asking that question and answering it with a question? I don’t know, but keep reading this blog and I’ll tell you what I learned by accident. 

Wednesday, January 8, 2014

Kesef B’Kesef Alternatives: Part I

By now your money has been bitten by the aliyah bug and has begun to dream about a life in shekels. Ah, the shwarma it will buy! It probably has already started its aliyah list and is asking its friends for advice. (“My wallet is already a few years old. Should I bring it, or just buy a new one in Israel?”)

But does your money need to make aliyah in order to protect you against a weakening dollar? In the great capitalism of America, if you are willing to pay for it, someone will surely be there to sell it to you. Isn’t there a way that you could protect your money from a weakening dollar and still keep it in America?

You decided that aliyah was right for you by carefully weighing your alternatives, and your money should do the same. Maybe you wanted to live in Israel in order to be more deeply connected with a Jewish way of life. You evaluated the alternatives in America and decided they weren’t for you. You didn’t want to live in a beautiful home in Teaneck, in close proximity to the best Jewish day schools on earth and surrounded by an outstanding selection of kosher food establishments.

I don’t blame you. I couldn’t afford the tolls on the George Washington Bridge either. Or, you had your own reasons. Perhaps, all your friends started to write blogs for the Times of Israel and you wanted to also. Or maybe, you just couldn’t keep up with all the stress of collecting those Bed, Bath & Beyond coupons. Whatever your reasons, unless you made aliyah entirely by accident, your decision was based on weighing the alternatives.

For your money, there are two basic alternative approaches to aliyah which will allow you to keep your money in America while still protecting it against a weakening dollar. In today’s blog, we explore the first.

First Basic Alternative: Invest in Israel from America

Why not be like all real zionists in America and simply invest some of your dollars in Israel from the safety of your American brokerage account?

I found two mutual funds that you could use to do this. Both of them are alternatives for money that you are anyway planning to invest in the stock market:


Amidex

The fund from Amidex invests in 35 large Israeli companies. The folks at Amidex are clearly experts because they understand that the experts generally do not beat the index. That’s why their fund tracks an index of 35 companies that they invented. Their index hasn't performed as well as the Tel Aviv 25, but that may just be because of the 3.77% that they take in fees. Hey, it's expensive to passively follow your own actively managed indexed! Also, it's expensive to move money back and forth from dollars to shekel.

I like the idea of inventing your own index. In fact, I have decided that as soon as I get around to it, I will publish Investing by Accident’s very own index, which I will call the Israel Price Ratio Asset Yield index, or I-PRAY. It will consist of stocks that I will pick based on a quantitative-intensive process that involves randomly copying what other people are doing, and then selecting only those stocks that have either prices, ratios or yields, and which I believe could be considered as belonging to at least one asset class. You will be able to passively follow this index and thus be guaranteed returns that exactly match whatever it is that these stocks return.

But returning to the Amidex fund for a moment, doesn’t it just beg the question: why not just buy the individual stocks on your own? After all, there are only 35 of them. On their website, Amidex only shows a "selected list" of the 35 stocks. It is almost as if the experts at Amidex are worried that someone may just passively copy the index that they have worked so actively hard to create. This is very odd to me because someone could easily just look at their annual SEC filing from last May and copy and paste all of the holdings in the fund into their blog. Like this:


Exchange
Percentage
Israel Chemicals
Israel
9.2%
Bank Hapoalim
Israel
6.0%
Bank Leumi
Israel
5.0%
Israel Corporation
Israel
4.5%
Mizrahi Tefahot Bank
Israel
3.3%
Bezeq
Israel
3.3%
Delek Group
Israel
3.2%
Osem Investments
Israel
3.0%
Azrieli Group
Israel
2.4%
Migdal Insurance
Israel
2.3%
Strauss Group
Israel
2.3%
Israel Discount Bank
Israel
2.2%
Paz Oil
Israel
2.2%
Oil Refineries
Israel
2.0%
Harel Insurance
Israel
1.8%
Gazit-Globe
Israel
1.7%
First International Bank of Israel
Israel
1.2%
LivePerson
Israel
0.4%
Teva
US
9.4%
Check Point Software
US
9.0%
Amdocs
US
5.9%
Elbit Systems
US
3.0%
NICE Systems
US
2.9%
VeriFone Systems
US
2.6%
Taro Pharmaceutical
US
2.3%
Mellanox Technologies
US
2.1%
Verint Systems
US
1.8%
Ormat Technologies
US
1.6%
Partner Communications
US
1.4%
Cellcom Israel
US
1.3%
SodaStream International
US
1.0%
Electronics for Imaging
US
0.7%


Alert readers will have noticed that Amidex only has 32 companies in its index of 35. This is proof that they are real Israelis and that when they said “35” they really meant “until 35”. But no matter, as long as you hold at least 30 stocks in a given market segment, you will have the benefits of diversification.

You may have also noticed that about half (45%) of the fund’s holdings are traded in dollars in the United States. This is good for tracking the growth of Israeli businesses, but if your goal is to protect your money against the risk of a weakening dollar, this isn’t the best way to do it. You would protect yourself more (and save a considerable amount in fees) by buying all of these stocks directly in your very own Israeli brokerage account.

iShares EIS

The fund from iShares tracks a different made-up index that consists of way more than 35 companies (59 to be exact). It holds all of the stocks in Israel in shekel and has an expense ratio of just 0.61%. This would make for iShares EIS to be a fairly good option, if not for its one major downside: its top three holdings.


Percentage
Teva
23.80%
Bank Hapoalim
10.06%
Bank Leumi
8.65%
Total
42.51%

Loyal readers already know that I am not an expert. However, during my time on Wall Street, keeping 42% of your money in just three companies was not considered diversified. This is a very unfortunate weighting which makes this fund very hard to recommend to people.

Also, I’m not crazy about the banks. First of all, I don’t really like them. Second of all, there is no second of all. I just don’t like them. How can they have much room left to grow? It’s hard to imagine that there any types of fees that they can invent that they are not already charging you.

So what’s the bottom line?

Even with all their drawbacks, either of these fund will do a passable job of giving you exposure to Israeli stocks. However, the best way to think about them is as options for Americans in America who are looking to add a bit of zionist diversity to their stock holdings. If you are living here, you would be better off investing directly in Israeli stocks from an Israeli brokerage account. You’ll pay much less in fees and achieve better diversification.

Does anyone know of any other funds that that may change this bottom line?

In the meantime, the first basic alternative is only an alternative for money that you were planning to invest in stocks. It won’t help you for money that you want to keep in cash to buy a house next year, or the money that you want to keep in something safer like bonds. For that, you will need to consider the second basic alternative.