Forum Mailbag: Alumni VC Funds, Shorting Amazon, International Stock Allocation, And More!

There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.

1. White Coat Investor: Investing in Alumni Venture Capital Fund

Question: ERdude1982 is considering investing in a venture capital (VC) fund through a website called Alumni Ventures Group. These VC funds are only open to alumni of a certain university (e.g. the Blue Ivy fund is only open to Yale alumni), and each of the companies that the fund invests in has a connection to the school (e.g. a board member is an alumnus). The fee structure is the standard 2% assets under management and 20% of profits used by hedge funds, but they argue that venture capital is a high-risk, high-reward asset class that has outperformed the S&P 500 over time. He was wondering whether it was worth investing in this fund.

WSP’s Take: I would stay away. In my opinion, the best venture capital investors not only provide money to a startup, but also advice, connections, or other resources to help them succeed. If you’ve ever watched an episode of Shark Tank, that’s half the pitch of the sharks to the investors — I’ll not only give you money, but I’ll also give you the platform to help you market and build your business.

If the fund manager is simply “picking” startups just like picking stocks, then they are bound to have the same underperformance as actively-managed funds. In addition, because so much of a venture capital’s investment comes from a few home runs, the majority of venture capital funds who fail to invest in the next Facebook or Amazon underperform the market.

2. Bogleheads: Shorting Amazon Stock

Question: RandomFly has watched Amazon rise to all-time highs, and is thinking about shorting the stock. He argues that its valuations are based on wildly optimistic projections. He thinks their marketing has become too heavy-handed, and its primary business (retail) is cyclical. He was wondering what the Bogleheads community thought about shorting Amazon stock.

WSP’s Take: There is a bull case and a bear case for the stock market and for every individual stock, including Amazon. While I don’t fully agree with each of the poster’s reasons why Amazon’s stock could go down, there certainly is a bear case for Amazon. However, the bull case for Amazon is just as strong. The current price of Amazon is based on the “invisible hand” of buyers and sellers meeting at a trading price, and it’s impossible to say who is right.

3. Bogleheads: U.S. / International Ratio

Question: There is an interesting poll on the Bogleheads forum asking readers for their U.S. stock / international stock allocation.

WSP’s Take: Obviously, there’s a wide range of international stock allocation preferences among Bogleheads readers. A good case can be made for as little as 0% international allocation (the preferred allocation of Jack Bogle and Warren Buffett) to 50% international allocation (roughly half of the world’s market capitalization is in U.S. companies).

Most of the Bogleheads in this poll are somewhere in between, with 23% of respondents saying 70% U.S. / 30% international, and 34% of respondents saying 60% domestic / 40% international. My personal target U.S. / International ratio is 2/3 domestic, 1/3 international. There’s no perfect ratio, so long as you don’t use your U.S. / international allocation as a market timing mechanism to bet on global macroeconomic trends.

4. White Coat Investor: FSTVX vs. FSUPX

Question: Tomthumb22 currently invests in FSTMX, and now has made the requisite $10,000 to invest in the Premium shares version of the Fidelity Total Stock Market index fund (FSTVX). He noticed that the Fidelity Large Cap Growth fund (FSUPX), which is also an index fund and has a low expense ratio of 0.05%, has outperformed FSTVX by 5% for the past year. He wanted to get the input of the WCI community whether FSUPX could potentially be a better option than FSTVX.

WSP’s Take: The recent outperformance of large cap growth compared to the total stock market has not gone unnoticed. However, given that most of the academic literature on tilting favors small-cap value rather than large-cap growth, I attribute the recent overperformance to large-cap growth to short-term volatility and the outperformance of a handful of mega-cap tech stocks (e.g. Google, Amazon).

Wall Street Shares: 5 Articles To Read This Week

1. White Coat Investor: The Story of the White Coat Investor (part 1, part 2, and part 3) — Dr. Jim Dahle shares his origin story.
2. Big Law Investor: HSA: Pay for Expenses Now or Later? — A well-written discussion of the considerations when deciding whether to get HSA reimbursement for healthcare expenses now versus in the future.
3. Dads Making Cents: 4 Physician Bloggers Reveal Their Investment Portfolios — for the curious, check out the portfolios of bloggers Physician on FIRE, Dr. Scrilla, Dads Making Cents, and Hatton1.
4. Financial Samurai: Your Risk Tolerance Is An Illusion: Wait Until You Start Losing Big Money — Sam from FS has become quite bearish in recent posts, but I agree that investors overestimate their risk tolerance during bull markets.
5. Dads, Dollars, Debts via Think Save Retire: A hard reset after losing everything in the Tubbs fire — DDD shares how life has been since he lost his home in the Tubbs fire.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?