Friday, January 13, 2017

Problems in Paradise

I left Maui on Monday October 16, 2006. It was easy for me to determine the date as we were scheduled to leave on Sunday, but the airport was shutdown by the 2006 earthquake that occurred under the ocean about 90 miles from our little rental house. We were fated not to return until December 5, 2016. Back then, I was entering the stretch drive to retirement. Most of our subsequent vacations were used to find a location that had a lower cost of living, less traffic, lower taxes, and better climate than suburban Washington D.C. Also, renting cabins in the mountains of North and South Carolina is a good bit cheaper than vacationing in paradise. This helps out during those stretch drives that seem to be necessary at various critical points in our financial lives.

We discovered that much had changed over the course of ten years. The big news during our recent visit was the end of the sugar industry in Hawaii. The pineapple business was dying as early as our first trip to the islands back in the late 90s. At the end of this season, the last sugar mill in the state will close. The Hawaiian economy is now a two legged stool. Large scale commercial agriculture is dead. Only tourism and the enormous military presence on Oahu will be left to provide employment for significant numbers of Hawaiians.

After the sugar cane harvest, random volunteer stalks of cane pop up in the empty fields. In the past this didn’t symbolize anything but the end of another growing season, but now these empty fields seem kind of disturbing as they indicate the end of an era. The county hopes that these lands will be divided up into small scale farms. Given the value of land on Maui, I find that this hope is unlikely to materialize, at least not for very long. I see more and more condo developments until a limit, probably water, becomes an issue.

Speaking of development, the last ten years have been good for that industry. It seems that there are significantly more buildings—everywhere. We stayed in Kihei, one of the fastest growing towns in the nation. When we last stayed there over twelve years ago it had the flavor of a family beach resort. Now it is more developed, more expensive, and a lot more crowded. Risking a car trip down the main drag is now something that requires a little thought and planning. It didn’t use to be that way.

Tourism seems to be bifurcating. There are a lot more upscale stores and restaurants that cater to the rich. Lahaina, the local tourist trap, once had a large variety of knick knack shops, stands, and kiosks selling a wide range of junk to middle class tourists as well as stores for the upper crust. Now about the only thing left along the waterfront are expensive restaurants, high end jewelry stores and art galleries. The demise of Hilo Hattie’s, the quintessential Hawaiian gift store for everyone, tells a sad story. They have gone into bankruptcy court twice. It doesn’t look like they are going to make it. The low end gift trade now belongs to the big name stores, like Walmart. The national chains are now just about everywhere and really there isn’t much difference between the Barnes and Noble located in Greenville, SC and its sister store near Lahaina. Wailea is a wealthy enclave just South of Hihei. Here you can buy a condo for a million dollars. Beach front houses seem to start somewhere above five million and go up and up and up. The local mall, The Shops at Wailea, charges $25 for parking! If you spend more than $25 in a single store, you get a voucher allowing you to park for free. Otherwise, be ready to fork over $25 for the privilege of visiting their mall. Obviously, they don’t want locals or people like me soiling their pavement with our presence.

Even though the traffic is much worse everywhere, there are still enclaves that are more or less as I remember. Up on the mountain, it is still peaceful, quiet, and cool. Makawao and Paia still have a counter culture, hippie, kind of flavor. Although, the aging hippies from the mainland had better have some limit left on their credit cards if they plan on spending much time in those gift shops or restaurants.

If you think a two week vacation in paradise is a financial stressor, imagine living on that island. Many residents of Maui County need two or more jobs to make ends meet. Good paying jobs for average people are in short supply. The cost of living is extremely high. Even renting a single room can push $1,000 a month. However, there are people who are beating the odds. A woman we met on our last visit was the store manager for a famous photographer by day and hotel concierge by night. Eventually, that store shut down. She began to sell her own artworks, first in the local weekly flea market while tending to two children still in diapers. Eventually, she saved enough money to rent a shop in a low cost section of the island. Her husband was able to quit his job at one of the famous hotels and join his wife in the family business. Now, she sells paintings, prints, photographs, and even wearable art she has created. Recently, she made her first step into a larger world, hotel d├ęcor. One of the hotels on the island is going to put her artwork in every room in the building. She insisted on doing this without using a professional hotel decoration company as a middleman. She gets to keep all the money generated by her talent.

How cool is that!

Thursday, January 12, 2017

Know Thyself

An article entitled “What is Your Biggest Investing Challenge?” appeared in a recent issue of Charles Schwab OnInvesting. I would like to comment and expand on some of the author’s worthwhile observations. Knowing yourself, your limitations, your weaknesses, your biases, is an essential component to self mastery as well as finding the road to financial freedom.

Not playing the game is the most frequent and the most serious mistake made by most Americans. There are really only two ways to build up significant net worth. The oldest is real estate. Unfortunately, playing that game requires a lot of money. For most of us that means borrowed money. As 2006 demonstrated nothing, including real estate, goes up forever. Leverage is a dangerous friend. When the market goes south it is pretty easy to lose more than your total investment. Losing 100% of all your money is bad. Losing more than 100% is totally unacceptable. When you are far enough along to pay cash for income generating rental properties, you probably don’t need to invest in real estate except for the purpose of diversification. That means the stock market for all but a few who really understand real estate and have the resources to play in that arena. The best place to start is your 401(k), 403(b), traditional or Roth IRA depending on your particular situation. Small automatic deposits taken directly from your pretax income won’t be missed, but when these funds are stashed away in a tax sheltered vehicle over the course of a working lifetime, the results can be astonishing. This kind of investing doesn’t even require more than the initial decision to start the journey. Life cycle funds sometimes called target date funds will maintain an age appropriate balance of foreign and domestic holdings in both stocks and bonds at a very low cost.

The flip side to staying out of the game due to under confidence is overconfidence. This investment sin can take many forms. The most obvious is gambling too much money in a single high risk/high reward investment—such as lottery tickets. Just joking, but I think you get the idea. Perhaps the most frequent manifestation of this mistake is holding more than 10% of your liquid net worth in shares of your company, the one who gives you a regular paycheck. Many employees have nearly all their holdings in shares of their company. If that stock tanks, not only will you lose a substantial portion of your nest egg, but you might even lose your job at the same time. However, overconfidence is something that can affect anyone, such as me, who has enjoyed some success in the market. It is easy for me to think, “I know what I am doing,” when I am riding a bull market or maybe just got a little lucky on a couple of investments. I have to remind myself from time to time that I will never outgrow the need for wise counsel and research even when investing in the most conservative funds. If I don’t remind myself, believe me, at some point the market will remind me of my limitations.

The article calls out “Status Quo” as a common investment mistake. Sometimes doing nothing is the best investment decision. Sometimes it isn’t. I am a buy and hold kind of guy. This is a very good strategy for most investors. When combined with DRIP (Dividend Reinvestment Plan) that plows dividends back into new shares of stock, doing nothing can put the power of compound interest to work in some remarkable ways. A stock that pays a good dividend, like AT&T can double its value in less than ten years even if the price per share doesn’t move very much. However, sometimes things change. The recent increase in the Fed rates caused a quick drop in the bond market. A complete reliance of bond funds would have hurt a portfolio that was out of balance. I should have been warned when I heard the words, “ability to borrow money at lower rates,” but Kinder Morgan Partners had been a star in my crown for quite a long time. When the parent corporation bought out the limited partnership, I let 90% of my position in the partnership roll into Kinder Morgan. Shortly after this decision, the news came out that Kinder Morgan was carrying too much debt. I lost half my money in a very short time. I comfort myself that I lost “the house’s money” rather than any of my initial investment, but that is just my feeble attempt at dealing with cognitive dissonance.

Regret aversion is the next mistake mentioned in the article. Simply put, “The burned child fears the fire.” Don’t worry. If you invest in the market you will lose money—some of the time—in something. However, Siegel’s constant tells us that over the last two hundred years, American equities have delivered a remarkably steady 7% return over any reasonably long period of time. Just hang on and scream. If you maintain that well diversified, age appropriate balance through good times and bad, you will be buying stocks when they are cheap and selling them when they grow expensive, unlike most of your neighbors who will be selling when the market tanks and chasing stars when they are at their most over valued. By the way, chasing hot returns is the last investment mistake mentioned in the article.

Now take a good look at the person in the mirror. What are you doing with your money? Do you have a plan? Are you following your plan or changing it on a daily basis? Do you know your own comfort level? I have tried “trading” using technical analysis on two occasions, one was pretty successful, but I realized I am simply not wired to be a trader. I have also discovered I should stay away from individual tech stocks. As an engineer, I tend to fall in love with technology rather than with the business underlying the technology. This is a big mistake. I limit my technology holdings to mutual funds or a managed account. Finally, I love fossil fuels. Chevron has been a consistent money machine since the beginning but I can talk myself in carrying too much in energy shares. I have been bitten a couple of times by this predilection, but I hope I am growing wiser in old age.

Now! For Heaven’s Sake! Let’s be careful out there!

Wednesday, January 4, 2017

No Answer

The question comes up again and again, starting when we first ask a child, “What do you want to be when you grow up?” Now, I find, as I am closing in on 66 and Social Security, I am still asking myself the same question. I think that can be healthy as long as I remember it is unlikely that God or the universe is going to give me the answer.

I hope that my Calvinist brethren extend me some grace on this subject, but I come down pretty hard on the free will side of that dichotomy. While I am open to the possibility of miracles, I don’t believe that God is generally in the business of telling people where to attend school, what major to choose, who to marry, where to find employment, or the best investments for retirement. Answering those questions? That is our job.

Unfortunately, we all want the “right” answer to those important questions because we know that we are not omniscient, either about the present or the future. The world is a fabulously complex interconnected system. In the present moment, we are an amalgam of everything in our past, our parents, our environment, our experiences, and our beliefs about the nature of the universe and our place in it. Given all those prejudices and short-comings that make me who I am, I have to make decisions to move forward in my life in a universe that I can not possibly understand.

Even if I had a perfect understanding of the present and natural law, I still have no guarantee of finding the “right” answer. Edward Lorenz coined the term, butterfly effect, in his study of chaos theory to describe how a minute change in initial conditions can produce an enormously nonlinear output in complex systems. As the poet says, the best laid plans of mice and men often go astray. Most outcomes in scientific as well as sociological experiments are not either/or, but probabilistic in nature requiring the use of statistical analysis to describe and understand the answer.

We make decisions based on our understanding, our metanarrative, the stories we tell ourselves. Then we take action based on those beliefs. Then we get results. Did I get the results I desired, the results I expected? Were my actions wise actions, unwise actions, or sin? I don’t always have enough information to answer those questions. A wise decision can produce undesirable results.

Even if the answer is no answer, there is hope. We can learn from our own experience and the experience of others. We can discern what kinds of actions are likely to produce what kind of results. We can seek out counsel from those who are more experienced, knowledgeable, and successful in some particular area of interest. We can plant and nourish a network of trustworthy friends and family members who will help us in time of need. Then after “talking through” all of the possible options from beginning to the desired outcome, I have to make a decision.

Relax. Don’t be so hard on yourself. Be courageous. If you couldn’t possibly know enough to make to make these kinds of life decisions, there wouldn’t be 7 billion of us humans running around on God’s green earth.

I also believe in a God who is there, who wants to bless me and be a part of my life, who will run toward me with open arms if I choose to move even a step in his direction. If this wasn’t so, why would my Savior freely choose to suffer death on a cross for my benefit?

Saturday, November 26, 2016

One More Time: Follow the Money

I have already used the title, “If You Want to Know The Truth, Follow the Money,” for a post analyzing the student debt problem. If you want to know the truth, just look at where the money comes from, where it goes, who gets to keep it, and who has to accept what level of risk in the transaction. In this case, the money comes from the banks or the Government. The bank or Government is guaranteed a return on their investment by a law that doesn’t allow the debtor to discharge this obligation in bankruptcy and the power of the state to tax its citizens. The university gets all of their money in cash, up front. Only the student bears any substantial risk in this transaction.

Sadly, this past election has demonstrated that the commercial media, all of it, doesn’t even pretend to have a shred of journalistic integrity. Even if someone (like me) is making a serious effort to find the truth, I am beset by my own biases, world view, and life experiences.

Think about it. If you read two articles about the same football game in two different newspapers, the only point of agreement is likely to be the final score. If something so unimportant as a silly game can generate such different reports from professional eye-witnesses, how likely do think it is going to be that you will hear the truth from someone who is not only biased but has a personal interest in the outcome of a particular event when power, money, and his paycheck are at stake?

You can’t find a news source that doesn’t spin the news to further its own ends. Sometimes even reputable organizations publish outright lies, because they want to believe that they are true. The good ones apologize when they make such a mistake, usually in really small print on a back page after the damage has been done. The bad sources just lie and never apologize. Headlines exist to get you to read the article. Look at how they are written to make you angry or cause you to gloat in your own sense of moral superiority. Look at two different publications on the same day. What subjects are featured on the front page? What subjects are consigned to back of the section? What subjects are omitted on one source, but featured on the other source? What does the layout of the page tell you about the publisher’s opinions?

Early on in my quest to understand how to invest my money, I learned the importance of the Biblical truth, “In a multitude of counselors there is wisdom.” Often different professional, respected, objective research sources will produce different recommendations on how to best invest your money in the same situation. However, if you look at four or five different sources, you can usually ferret out something reasonably close to the truth. The same logic can be applied to any analysis of the news. Read a conservative journal. Then read the same story in liberal publication. Sometimes foreign sources, like the BBC or Al Jazeera, will provide a more balanced report on American news than any domestic source. I have even learned that RT, a Russian news service can do a pretty good job reporting on American economic news.

But if you really want to know the truth, if you are ready to deal with the truth, follow the money.

Money is the only news reporting service that never lies. Look at an individual, a politician, a corporation, a nation. Where did they get their money? What did they do with it once they had it in hand? What kind of obligations, contractual or implied, came with the transfer of that cash?

Nobody rides for free.

If I could analyze your finances, your income, your monthly expenses, your gifts to church or charity, your rate of savings, your investment choices, everything you do with money, I could paint a very clear picture of who you are and what you value. For example, the rate at which I wear out and replace expensive walking shoes combined with a record of my purchases of fast food and convenience food would expose one of my major psychological conflicts.

Remember. Money Always Tells the Truth.

Monday, November 21, 2016

What if Churches...

One of the simplest models for a budget suggests that a family divides all the money that comes into the household into three pots. Before spending the first penny, 10% goes into savings and 10% goes into giving to charity. Then the theory goes that if you consistently live on 80% of your take home pay, chances are pretty good that you are going to be OK.

What if churches operated under this simple rule? Many churches teach the tithe, that their members donate 10% of their income to their home church, but how many churches skim 10% of the take right off the top and give it to the poor, to windows, or to orphans in their congregation, or to other ministries in need of cash? Most churches have an “emergency fund” or two, a benevolent fund for the poor, a building fund for unexpected or large expenses, and a checking account for ongoing bills, but if they were all added up, how many churches would have the money for 3 to 6 months operating expenses sitting in the bank?

I hear a lot of readers thinking, “This is unrealistic,” and you would be correct. Most churches as well as most families spend every penny they get, but wait, it gets worse. The median household income is running about $56,000. A quick Google search didn’t turn up a figure for median household debt, but average household debt is reported in the $130K to $150K range. Curiously, the annual average interest expense for an American family is $6,658. That would be 9% of the average household income.

As a nation, we almost give a tithe of our gross (not net) income to the bank, before budgeting for our living expenses. Things are not quite as bad for churches, since they are classified as non-profit organizations they don’t have to pay taxes before they can buy food. However, many churches, like their members are paying the bank before God.

As for the emergency fund, 62% of Americans report having less than $1,000 and 30% of Americans report a zero balance in their savings account. 21% don’t even have a savings account. How many churches would issue a similar report?

OK, let’s be realistic. What is possible for your family? What is possible for your church? Could you commit to giving 1% of your take home pay to charity or 1% more if you are giving less than 10%? Could you commit to saving 1% of your income or 1% more if you are saving less than 10%? If you or your church can’t answer yes to both those questions, you are in trouble. It is time to take a hard look at your life. Try to understand what got you into this condition and what it would take to break even. Generally, we know the answer, but honestly and courageously dealing with the consequences of our bad decisions, in any area of our lives, isn’t a pleasant experience.

Imagine a church with a budget of $10,000 a week with $1,000,000 in the bank. What could be done with that kind of money? A scholarship fund for poor students? Monthly checks for faithful members who are windows or single moms? What could a check for $100,000 do for medical missionary operating in a third world country?

What if churches in America and their members, actually believed our God when he stated in Deuteronomy Chapter 28 that debt was a part of the curse and that the ability to lend money was a blessing?

Tuesday, November 15, 2016


There is a problem with hunger. The more you feed it, the more you want. This true of hunger for food, your drug of choice, and the hunger for whatever it is that you like to buy. Giving into hunger on a regular basis has something to do with my waist measure. It also just might have something to do with the balance you carry on your credit card.

Consider: Since I have inherited a few old watches that have some collectors’ value, I have developed an appreciation for fine watches. I have researched my watches (and some watches that I covet) on the Internet. I even read a book on the art of watch making I found at the Furman University library. Some days I hear one of those little bad angels sitting on my shoulder telling me, “Go ahead. Take a step into this cool new world. You could find a used Rolex or Omega in the $5,000 to $10,000 range. Think of it as an investment.”

Then, just for good measure, the little voice adds the kicker, “You deserve it.” How often do your bad little angels come up with that line?

Recently, I went to see the new Doctor Strange movie. In one of the early scenes, the brilliant rich arrogant neurosurgeon opens a drawer containing nine watches that cost about $20,000 apiece. This scene set up the, “pride cometh before a fall,” sequence that would ultimately land the good doctor, now penniless and alone, in Katmandu on the doorstep of the Ancient One. I wonder if any other person in the audience, like me, couldn’t wait to find out what kind of watch Doctor Strange likes to wear.

And the answer is, a Jaeger-LeCoultre Master Ultra Thin Perpetual Calendar, at $31,500!

Until the 1970s, men tended to buy a quality dress watch sometime around age 30. They expected to wear this watch for the rest of their life. I really like the 1951 Hamilton Darrell that belonged to my father-in-law. Watchmakers consider it a fine example of a quality American watch, but it isn’t anything that collectors are willing to pay a premium to own. You can find one in pretty good shape for $200. I can only remember my father-in-law wearing one of two watches, the Hamilton he bought in 1951 and a fancy quartz watch he was given as a premium for attending a time-share presentation. After the quartz watch quit working, it was consigned to the garbage can. After my father-in-law died, I had the Hamilton cleaned and serviced. After I wore the watch for about seven years, the crystal was scratched up, so I had it serviced for a second time. After 65 years, it still keeps excellent time. I believe that its classic art-deco look is still in good taste for a men’s dress watch.

When my father-in-law bought his watch, he was a professor at Georgia Tech, but he hadn’t yet completed his Ph.D. The retail price for this watch was $65, not an easy decision for professor just beginning his career. That is $605 in today’s money. You can buy a really good watch for $605, one that with proper maintenance would last the rest of your life. But today, we upgrade. We buy something new every time something new is available. How long do you keep a cell phone? A car? A husband? How many pairs of shoes are sitting in your closet? In our new home, we have not one, but two walk in closets to hold all our stuff. In our old home, we didn’t have any walk in closets.

Maybe the good little angel, sitting on our other shoulder, might be suggesting that it is time to fast for a few days or months from whatever hunger is causing us a problem. Hungers, no matter how legitimate, always lead to problems if overindulged.

James Bond prefers the Omega Seamaster at a paltry $3,875. Maybe if I just bought one of those things, I would finally be content.

Wednesday, November 2, 2016

The Stories We Tell Ourselves

At almost any moment of life we can be forced to make a decision based on inadequate information. P.S. Choosing not to make a decision is also a decision that can have far reaching consequences. We deal with uncertainty and the possibility of highly improbable events by plugging the facts as we know them into our metanarrative, the overarching story we tell ourselves about the universe and our place in it.

What if our metanarrative is no good? What if it is a bad model of reality? Every one of us has a metanarrative and although none are perfect, some are much closer to reality than others. What happens when reality conflicts with our metanarrative?

Let’s start with a relatively harmless example. I love cars. I read about cars I have no intention of ever buying just because I find pleasure in fantasying about high performance luxury sports cars while viewing glossy photoshopped images of automotive perfection.

Yes, I indented that last sentence to sound vaguely pornographic.

I also read about cars I could realistically afford to buy when the time comes. My metanarrative tells me that Honda Motor Company makes a reliable automobile. My 1996 Honda Prelude Si was the best car I have ever owned. It was fabulously reliable, fast, comfortable, fun to drive, and delivered good gas mileage. After 14 years I traded it in for a 2010 Acura TSX, a high end Honda product. After 6 years it is well on its way to overtaking my beloved Honda in my pantheon of automotive excellence. Unfortunately my metanarrative no longer lines up with reality. Consumer Reports has put the hoodoo on the nine speed transmission found in every Honda product I would consider buying. They are not alone. Other respected sources have lowered Honda’s standing from the top three manufacturers to the middle of the pack. This actually makes me angry, even though I believe Consumer Reports is not motivated by any conflict of interest to tell me lies. To be honest, if I had to replace my Acura today, I would have to look at a Lexus or an Audi. It almost feels like treason to make such a statement.

This election is messin’ with a whole lot of metanarratives. I haven’t seen this much commotion, anger, and confusion since the elections of 1968 and 1972. First, admit that you don’t have all the facts. Then do your research. Don’t just listen to sources that will feed your assumptions and prejudices. Try to look deeply into the facts, while ignoring the stories woven around the facts by self interested parties seeking power and money at your expense. Realize that there are no objective balanced news sources in America when it comes to reporting on this election. Sometimes foreign reporting is less filled with histrionics and folly than even the best known American media outlets, but it isn’t perfect. Look at your own values. Do they really reflect what you want for yourself, your children, your nation? Once you are truly comfortable in your own skin, this may take more reflection than you think, then compare your values to what you know of a potential candidate. Try to look at the entirety of their lives. Then cast your vote remembering that fear, greed, anger, and hatred are the enemies of good decisions.

It won’t be easy. There is much to consider and most of it isn’t good.

Once this election is over you and your metanarrative will have a more important problem, the rest of your life. Are the stories you tell yourself about the world you inhabit useful and accurate? Will your assumptions about the universe help you to enjoy a more abundant life or will they guarantee that you will never find financial freedom? Will they hinder the outcome of the more important aspects of a balanced life, like our relationships with our family, our friends, and our God?

How does this work? Suppose your boss ignores a report you send up the chain for review; does this mean that he thinks you are stupid and he hates you? Does it mean that he is busy and that you are a lower priority than some of the other irons he has in the fire? Does it mean he just forgot he told you to prepare it? How about instead of telling yourself all sorts of stories that involve your place at the center of the universe, you just ask? After allowing a reasonable amount of time to pass, this question will give you a little leverage, especially if your boss just forgot about your report.

One of the things I really enjoy about the more reputable sources for financial research is that they are all engaged in a genuine search for the truth, even when they disagree. There is a blessed absence of overheated rhetoric and psychological tricks designed to activate the lizard brain. Take in a deep breath then exhale. Relax the muscles in shoulders. Say a short prayer.

Then LIVE!