A Solid Investment in a Shaky Financial World

As always, posts by readers are encouraged. We here at the blog believe in democracy and freedom of speech, so we promote all reasonable points of view. So if you would like to add something, please send it my way. Thanks.

Here is my friend Mike Yen:

Greetings Loyal Readers,

First of all, I must say that it's quite an honor to be the first guest writer on such an esteemed blog. However, I think he's asked me to step in for one of three reasons:

1) He's too lazy to write

2) Kristin's too lazy to write

3) I've been dubbed the Asian Pagano

How did I get such a moniker, you ask? Apparently, we both share the same anal-retentiveness and obsessive compulsiveness which we discovered while going to business school together. But I digress.

While I've could have posted random pictures from Hawaii or random USC - Texas ranking bets I have with my non-existent wife (Pagano, I sure hope that +8 spread cuts both way), he's asked me to write about this mess we call the financial markets.

To recap, this whole mortgage mess started when people with really crappy credit scores bought houses that they couldn't afford. These crappy mortgages were then bundled together by investment banks and sliced, diced and packaged into mortgage-backed securities that smelled like roses. How did they become less crappy? Through window dressing, wishful thinking, and financial engineering. And pension funds, universities, and other companies gobbled them up thinking, "sure, one or two of the loans might go bad, but they couldn't ALL go bad?" Things were fine and dandy as long as people paid their mortgages. But when housing prices started to go down, the people with the crappy credit scores stopped paying their mortgages ("how much lower can our credit score go anyways? Screw it.") which lead the mortgage-backed security holders to have to devalue their holdings. By a lot. Like 80% a lot. This devaluation in turn hits the company's earnings, which freaks the shareholders out creating a death spiral for the companies. In summary, we're screwed.

So, in a time when billions of dollars in shareholder value disappear literally overnight and so-called financial bedrocks crumble before our very eyes, where is an investor to turn? I'm not going to lie, the investment landscape looks pretty grim. While the traditional fund advisors would suggest purchasing shares while they're cheap (and historically the stock market has returned around 8%), the game has significantly changed from those quaint historical times. Investors today dream of a 10% return and would settle for not losing any capital.

Now, I've thought about it long and hard, did many hours of research, and consulted with the finest investing minds. After much discussion, I've found one asset class that should appreciate in value over time - handbags. Not just any handbags - Birkins, to be precise.

DEAD GATOR

Now before you poo-poo the idea, hear me out. For those of you unfamiliar with the Birkin, it is a piece of (most of the times) dead cow with some 17th century saddle maker logo on it. I don't really understand the appeal, but hey, girls have bags, boys have fantasy sports. Whatever. Regardless, pure economics are at play. There's a limited supply and a virtually limitless demand. This indicates a premium pricing opportunity and hence, high returns.

Now, how does one make money from such an asset? 1) through an outright sale or 2) by renting the asset. Based on the increase in retail price (so my friends tell me) and the fact that you’re buying a bag from the 1960s, it seems like the Birkin market is generally robust. So you could potentially flip the bag for a quick buck.

The second option, renting present a potentially more difficult valuation. Based on the market rental rate, the net present value (“NPV”) is significantly positive while the internal rate of return (“IRR”) is an astounding 92.5%! Aside from drug dealing, where else can you find a 90+% return? Both valuation indicators dictate that a purchase should be made.

NPV

IRR

With that, I'm announcing that opening of the Birkin Fund. The objective of the Birkin Fund is to (duh) purchase as many Birkins as possible with an eye towards the renting and eventual resale. Investment horizon is 3-5 years. Best case scenario - a compound annual growth return of 100% (based on the increase in Birkin retail value from 2002 through 2007 and the IRR). Worst case scenario - we liquidate inventory. Which would you rather have, a piece of Lehman Brothers shares or a Birkin?

Signing off,

Mike Yen