Ken Skarbeck

Since the mid-1980s, a lucrative activity on Wall Street has been to pool financial assets and then issue securities representing an interest in these pools-a process called securitization. All sorts of assets are securitized, including auto loans, mortgages, leases, credit card receivables and corporate debt. Investors purchase the “asset-backed” securities and receive the cash flows generated by the underlying loans in the pool. Securitization was a tremendous financial innovation. Before securitization took off, financial institutions often would keep loans on…

The upheaval in the credit markets has cast doubt on whether the long list of the acquisitions announced months ago will be completed. Some of these deals will blow up, but there also is opportunity for investors who are able to weigh the probabilities a deal will be completed. The spread between the current market price and takeover price on many of the deals in the works offers potential arbitrage profits. An example of a deal that has a low…

Investors who purchase individual securities in taxable accounts have a great deal of control over their tax situation-taxes are due only when the investment is sold and gains are realized. Those who wish to monitor their potential tax liability could maintain an “unrealized tax liability account” on their investment ledger that tracks the tax due if the investment were sold. Anyone who has held securities for decades is aware of the power of delaying the tax man. A single investment,…

Previously, we were discussing Jeremy Grantham’s brash newsletter about global bubbles (found at www.gmo.com). His frank talk is a bit stunning to me. Grantham’s expertise is in analyzing the relative values of various asset classes and arriving at estimates of their future returns. And he has reached an unprecedented conclusion: Over the next years, higher-risk investments will earn poorer returns for investors than lower-risk investments. Historically, investors have been compensated with higher returns for taking on more risk. In the…

In the second episode of the excellent trilogy “Back to the Future,” Biff Tannen obtains a magazine that gives the final scores of yet-to-beplayed sporting events. He uses that information to “gamble” his way to wealth. Similarly, haven’t we all wistfully wondered what we would do if we only had a copy of tomorrow’s Wall Street Journal today? Well, occasionally some people do obtain that kind of advantage in the securities markets. One former Securities and Exchange Commission attorney noted…

Students at Indiana University’s Kelley School of Business have been busy lately. A group of students recently spent a day in Omaha with Warren Buffett. Then on April 4, the school hosted a cable program called “Mad Money.” Between the two, they heard what must be the most opposite investment philosophies on the planet. In Omaha, the students would have learned about “looking through” the price of a stock to the underlying business, to focus on the long term and…

“It slices! It dices!” That was the claim of late-night pitchman Ron Popeil of his invention, the Veg-OMatic. He could very well have said the same about Wall Street and its penchant to carve up the stock market and repackage it for sale to investors. The most visible evidence of this pursuit is the development of exchange-traded funds, or ETFs. An ETF is essentially an index mutual fund-an unmanaged pool of investor money that is invested in a select group…

Risk. Webster’s defines it as “the chance of loss; also the degree of probability of such loss.” Specific to the act of investing, one might add: any investment activity that may lead to a permanent loss of capital. Investors can’t eliminate risk. However, by following Webster’s definition and attempting to determine the “degree of probability” of a potential loss, the investor can then decide the wisdom of proceeding with an investment. In cases where he judges the probability of loss…

The gyms are full, Slim-Fast is flying off the shelves, and the closets are scheduled for cleaning. Human beings regularly view the turn of the calendar as an opportunity to take stock of their affairs, and to vow to change things that need adjustment. So, add to your agenda a review of your investment program. This annual checkup will include an assessment of the performance of your portfolio for 2006. But it is wise to reserve your harshest judgments for…

Readers of this column know I’ve been critical of the institutional-feeding frenzy that is pouring fiduciary money into alternative investments. My premise isn’t that institutions all will end up losing a lot of money by investing in private equity, hedge funds and venture capital. But I am suggesting that aggregate returns from alternative investing merely will be mediocre. Indeed, 2006 will mark the third year in a row that the average hedge fund has failed to keep pace with the…

Alternative investing is all the rage, as I noted in my last column. As an individual investor, you might feel that the dealings of hedge funds, private equity and venture capital don’t apply to your portfolio. Yet, when there is such a sea change taking place in the investment landscape, it is important to try to understand why it is happening and whether it makes sense, because the ripple effects can reach you. Hedge fund is an all-encompassing term that…