Portfolio manager Cale Smith on investing, Spoke Funds®, and Islamorada in the Florida Keys.

From the front lines of the housing bubble, and direct from the father of Cale in the Keys, here is an update on the Key West real estate market. Dad doesn’t know I posted this, but he’s been putting these reports out every month for ten years and he’s got quite a following among the more analytical real estate folks down there. ROIs are starting to look attractive for some multi-unit properties in Key West.

On real estate in Key West:

The local real estate market has been active…lots of showings, and lots of properties on the market. Even with historically low interest rates, many buyers are using cash. There have even been lots of closings, mostly distressed properties and mostly lower-priced. But occasionally, there is the $2+ million transaction, too. I would have to say, in spite of much heartbreak out there, that properties are moving. Bittersweet…great for buyers, not so much for sellers.

In Old Town Key West:

1214 Catherine Street was reduced again! Combined with 1212 Catherine St, the 6-8 units generate about $120,000 annually, and you can buy the complex for under a million. Pay cash and that’s 12+% on your money to take over ownership, same tenants, no changes. Finance 75% and still clear $5,000 per month! What am I missing?

Spoken like a value investor. Must be something in our genes.

Kiplinger’s reports that expense ratios for stock mutual funds are rising, despite a horrific year of performance for most funds.

As described in the article, when assets in a fund fall below certain “breakpoints,” management fees as a percentage of assets increase.

So it could very well be the case that you, my dear mutual fund investor, not only saw your holdings decline in value by 50% last year, but you may have also paid taxes forced onto you by your fund…and now the fees you pay as a percentage of your assets could be going up, too.

You’d think that mutual fund companies might see an opportunity in that scenario to make it up to their investors by, for instance, lowering the breakpoint, or waiving the fee increase for their most loyal investors. At the very least you might think the fund companies would let their investors know that expense ratios will be increasing. Alas, neither will happen.

Mutual funds are broken.

Q. Can you help me win on that Deal or No Deal show?

A. Yes, if winning means maximizing the amount of money you take home, not picking the right suitcases.

Here is my advice: 

Forget about winning the million dollars. The odds say it just won’t happen. The object of the game should be to beat the mysterious Banker, not win the million dollars. To do that, you need to think in terms of expected value.

It makes no difference which suitcase you pick. Each has the same probability of having any one particular number in it. As a contestant, then, you should add up all the dollar amounts on the board at any time and divide by the number of choices left…or in other words, take the average.

The Banker is doing the same thing – figuring out the expected value (or in this case, the average) of all the choices left and then coming up with a number that is higher or lower than that value. If the number he offers to pay you is higher than the expected value (or average) of all the numbers you computed on the board, then you should take his offer. If not, keep playing.

Most people on the show are playing the wrong game – trying to win the million dollars. It’s not going to happen. Beating the Banker is the best you can do.

Try to figure out those expected values the next time you’re watching. You might be surprised how quickly you get the hang of it.

E-mail me if you have a question.