Tuesday, September 27, 2016

A Different Way to Think

Recently I was listening to a Brian Tracy video on methods to increase your income through focusing your personal efforts on what is important to the bottom line and delegating or outsourcing those activities that don’t generate income. Along the way Tracy went off on a unrelated rabbit trail that I found quite interesting. Brian Tracy actually knows Thomas Stanley and William Danko, the authors of the landmark study, The Millionaire Next Door. While talking with one of them, I believe it was Danko, Tracy learned that Danko overheard a conversation between several millionaires involved in his study. They were saying things like, “I have two.” Or, “I have four.” Puzzled Danko asked them to explain what they were discussing. The answer, the number of years they could support their current lifestyle without any additional income or capital gains.

Believe it or not, there are personal finance authors that encourage their readers not to have an emergency fund. I noticed one of these dreadful recommendations came from a website supported by (you guessed it) the banking industry. “Go ahead little girl, put that surprise auto repair on your credit card. It will not harm you.”

It turns out that Stanley and Danko’s self made millionaires don’t think like that. Instead of having the usually recommended three to eight months in an emergency fund, these individuals are thinking in terms of years. Of course, the classic emergency fund is money held in an insured near cash instrument like a savings account or money market fund. I am not suggesting that you put years of expense money in something that pays nearly nothing, but consider that various model portfolios suggest that retired folk keep as much as 10%-15% of their net worth in safe, near cash accounts.

Danko and Stanley discovered that financial freedom is a high priority to the men and women who actually achieve financial freedom. Their decisions are frequently made with the goal of freeing up cash for investment opportunities. Even though they could easily pay cash for new cars, they tend to buy relatively high priced late model used cars, taking advantage of the fact that a car’s value tends to depreciate about 19% in the first two years of ownership. Then they keep them for an average of ten years. This practice, alone, has the potential of freeing up significant amounts of money over the course of a forty year career while the allowing those millionaires next door to drive around in some pretty nice automobiles.

I consider The Millionaire Next Door a must read for anyone who wants to become financially literate. The subjects of their study are not remarkable people with unusual skill sets. They are your neighbors. They just don’t think about money the same way the average American thinks about money. Because their thoughts are different, their actions are different. Because their actions are different, they get different results. Because they get different results they end up living a different kind of life, one that includes financial freedom.

Go thou and do likewise.

Friday, September 16, 2016

Never Believe a Fact

Never Believe a Fact.
“When making investment decisions, or when reading news reports on the economy, never believe the facts. Trust no one. Always dig into the numbers until you understand how they were created and what they actually mean. The truth is out there, but so are a lot of lies and balderdash.”

I threw this little teaser up on my Facebook page hoping to start a conversation. It only received one comment and a couple of likes, not one of my more successful posts. However, the solitary comment gave me something to think about, as the statement is simultaneously true and false.

“I doubt the average person has the time or the know-how to dig into it to the degree required.”

Financial “facts” are seldom what they seem on the surface. Take U-3 Unemployment, the statistic reported on the nightly news. It really isn’t a measure of anything but U-3 unemployment. This number excludes anyone who is counted “as not in the workforce.” “Discouraged workers,” who are not actively seeking employment according to the government’s definition are not counted in calculating U-3 unemployment. That excludes over 94,000,000 unemployed Americans out the 243,000,000 that fit the definition of working age adults from the denominator of the unemployment rate. U-3 also counts someone working 3 hours a month selling used furniture on Ebay as “employed,” same as someone working 50 hours a week in a factory. Also there is no mechanism in the calculation of U-3 to prevent accidental double counting of an individual with more than one part time job. To add injury to insult, this number is adjusted on a seasonal basis. This means the statistician making the calculation just changes the result to a number his intuition and experience believes to be a little closer to the truth.

If U-3 is heading down that is good thing unless the number of discouraged workers is increasing faster than the number of jobs. Likewise U-3 headed up is a bad thing unless an increase in the number of unfilled positions is causing more Americans to meet the criteria for actively seeking employment.

There is no accurate measure of unemployment. U-6 is more realistic than U-3, as it accounts for both discouraged workers and part time employees seeking full time positions, but is seldom reported outside of the financial press.

There is no malicious intent in the reporting of these numbers. No grand conspiracy is attempting to hide the truth. The number is even “corrected” months after it is first reported to include more data collected and tabulated after the fact. The Department of Labor statisticians are playing the game by the rules they have been given by our elected officials. As best as I can remember, the last time the definition of U-3 was changed was during the Clinton administration, so what you see in the news isn’t some kind of three shell con-game. However, it isn’t a number that is worth very much.

Trying to find your way in an investment world that includes commission salesmen, who are incentivized by their employer to sell their most profitable products to you, and out-right crooks like Ponzi scheme artist Bernie Madoff is even harder than dealing with an accurate reporting of useless information by government bureaucrats.

Although the average person will never have access to the same information as a billionaire full time investor, the Internet has certainly leveled the playing field. Just opening a brokerage account with a few hundred dollars will give you free access to professionally prepared reports written by experts who do not have a position in the market that would result in a conflict of interest. Websites containing a world of investment information such as the Motley Fool and Seeking Alpha are available to anyone with access to a computer, even if they don’t have a checking account. Visiting Macro-Economic websites, both liberal such as The Big Picture or Calculated Risk or conservative such as those run by David Stockman or Mish Shedlock will teach you what trends are important, how they are calculated, and what the graphs actually mean. It is amazing to me how much information can be obtained with an hour or two spent on line every day.

In the end, it doesn’t matter if you don’t have the time or inclination to dig into mysteries such as the reporting of the American unemployment rate. I have seen relatively uneducated, unsophisticated men and women achieve financial freedom by following a few simple rules.

1) Stay out of debt.
2) Spend less than you earn.
3) Invest what you save in something you understand.

If you can explain what you are doing with your money to a junior high school student, chances are you won’t get into a lot of trouble. If you don’t thoroughly understand an investment, follow my advice, run away.

Remember, you can’t predict the future. No one can. That doesn’t mean you can’t find a path to a better life.

And please, Let’s be careful out there!

Saturday, September 10, 2016

The Number 1 Secret of Money

There are times I don’t want to write a particular article that won’t let me alone until it is written. This is one of those times. I recently read a news article linked from Ramit Sethi’s I Will Teach You to be Rich blog site that packages the simple truth that as been annoying me for the last week or two for the Millennial Generation. A young couple retired at age 30 with more than a million dollars in investments. Their big secret?

If you want to be rich, If you want to find financial freedom, if you want to escape debt, if you just want more money than you currently have, there is only one way up and out of your current condition.

It is true for a twenty year old high school dropout earning $9.00 an hour.
It is true for a billionaire hedge fund manager.


They found financial freedom at a very early age and people hate them for doing it.

Wealthy Thirty Somethings Doling Out Financial Advice Breed Online Hate

No matter who you are, you can’t escape the money equation.

Money In = Money Stored + Money Spent

To make the Money Stored term of the equation large, this young couple worked their way through school rather than loading up on student loans. They earned degrees in a field that is actually hiring college graduates (generally speaking, that would be one of the STEM majors or something to do with computers). Then they lived like paupers on decent middle class salaries, putting every spare penny into their investment portfolio until they reached the level of financial freedom that allows them to live the life they want to live.

Important things are simple.
Simple things are hard.

The easiest way to start on the road to financial freedom is to make a promise to pay yourself first. Put a predetermined percentage of your take home pay in a specified account that is at least a little difficult to access. Do it with an automatic debit. Hey, chances are you pay at least some of your bills by auto-debit, why not provide the same service for yourself. Just about all the authors recommend placing 10% of any funds that cross your palm in a savings account or an investment portfolio depending on your particular situation. If you view 10% as an insurmountable mountain, start with 1% and increase it by 1% every time you get a raise or a change in your life, like paying off your credit cards, gives you a greater amount of free cash. In the last years before I retired, I was placing 14% of my pretax income into my version of a 401(k) and most months investing as much as 30% of my take home pay. Hey, it took me forty years to get there. It wasn’t easy. I made mistakes along the road of life, but I made it. You can too.

And while I am at it, let me remind you of the second big money secret, avoid debt like the plague.

From the Devil’s Dictionary by Ambrose Bierce

Debt, n. An ingenious substitute for the chain and whip of the slavedriver. Ambrose Bierce

Monday, September 5, 2016

Are Hallucinations Real?

Once an elderly woman asked me a serious question, “Are hallucinations real?” At that moment she was suffering from the earliest stages of dementia, electrolyte imbalances, and side effects from the numerous prescription drugs needed to keep her alive.

I told her, “I believe that your hallucinations are real to you.” Then to the best of my ability I explained how our perception of reality can be altered by chemical imbalances in our brains. I avoided the subject of dementia. I have learned that when people over 80 hear the word dementia, their imagination immediately transports them to a dirty unpleasant Medicaid lockdown ward where they are suffering the later stages of Alzheimer’s. It seems easier to start these conversations with the family doctor and the spouse than with the patient.

I have learned from my training in hypnotherapy that a perfectly healthy mind, unclouded by drugs or physical abnormalities can experience hallucinations that seem as real to the five senses or emotions as what we experience in the real world.

We can also suffer from self induced hallucinations or become deluded by believing the suggestions others. We all have our own metanarrative, the overarching story we tell ourselves about the world and our place in it. I have come to believe that most of this story exists in our subconscious, that part of our mind that allows us to make quick decisions without involving the time to engage the higher levels of our conscious mind in rational analysis. This is a survival mechanism. When our ancestor heard a noise in the bushes, she ran away instead of investigating to discover if it was a tiger or an antelope. She lived to pass her genes on to me. However, this rapid reaction mechanism can betray us, if we misapply it in a complex modern situation involving our interactions with the world.

When we are presented with facts, we don’t leave them alone. We have to create a story to fit these facts into our understanding of the universe, our metanarrative. If the facts don’t line up with our metanarative, we will typically ignore them or force fit them into our prejudices and preconceptions. We strive for internal consistency. Experiencing a disconnect between reality and our metanarrative results in a form of mental anguish termed cognitive dissonance. We tend to reduce our suffering by seeking explanations or excuses that will reinforce our existing belief system. This is why conservatives prefer FOX News and the Rush Limbaugh radio show, just as liberals prefer outlets like the Washington Post and NPR.

This tendency can be limiting or even self destructive. If an individual believes that he was unfairly fired because his employer didn’t like the way he looks, he may be correct if he is a corporate attorney who decided to get a purple Mohawk and a facial tattoo. However, if he worked for a carnival side show that plays at motorcycle rallies, he might have other problems beyond employer bias.

Because we like to feed our metanarrative, we typically find experiences and facts that reinforce our personal protective amour. One day, as I was out walking in the woods, I noticed a clump of large oddly shaped mushrooms growing by the side of the trail. I don’t know why, but for some reason this discovery excited me. I began to find different kinds of mushrooms growing all over the forest. The day before, I hadn’t noticed any mushrooms, but I am certain they were there. I just wasn’t looking for them. If you believe the world contains all sorts of opportunities, chances are you will find opportunities. If you believe the world contains all kinds of problems, chances are you will find problems. None of us have a metanarrative that is perfectly aligned with reality. Sometimes our metanarrative can help us survive and thrive, but on other occassions our metanarrative can limit our experience of life or even end it.

“In the abundance of water the fool is thirsty.”
Bob Marley

Sir John Templeton, considered one of the greatest investors in history, started on the road to becoming a billionaire during the depths of the Great Depression. With the little he had, augmented by some borrowed money, he bought 100 shares of every stock listed on the New York Stock Exchange that was selling for less than one dollar a share. When factory orders generated by World War II greatly increased the profitability of American industry, Templeton became one of the richest men in the world.

On occasion, as I interact with others in many different kinds of social settings, my mind returns to the old Indian story of the wish granting tree. I have learned wisdom literature that has been around for a couple of thousand years or more, generally has more than one level of application. This story is no exception.

Once upon a time, a man exhausted from a hard day on the road spotted a large tree in a nearby field. Thinking that this would be a good place to rest, he sat down under the tree. Speaking to himself, he said, “I am so thirsty, I wish I had something cool and refreshing to drink.”

Then a perfectly chilled goblet of his favorite white wine miraculously appeared at his feet.

Now, his appetite stimulated by the wine, the man then thought, “I am so hungry. I wish I had something good to eat.”

As before, a small table covered with covered dishes containing his favorite foods appeared out of nowhere.

After finishing his meal, the man sighed in contentment, “I am so tired. I wish I could take a nap on a comfortable bed.”

Suddenly he was lying on a large ornate bed covered with pillows that was fit for a king. In minutes he fell in to a deep restful sleep.

A few hours later, upon awaking, the man began to worry. He thought, “There is some kind of magic going on with this tree. Perhaps it contains a goblin that will jump out of the tree and eat me alive.”

Then a horrible goblin jumped out of the tree and ate him alive.

Saturday, August 27, 2016

Scarcity or Abundance?

If you truly believe that your source is infinite, how can you worry about taking more than your fair share?
Paraphrased from a motivational video, original source unknown.

This is one of those posts that might manage to annoy almost everyone. It has to do with your subconscious metanarrative, the overarching story you believe about reality and your place in the universe.

The prestigious Club of Rome using the most advanced statistical modeling predicted the world would run out of gold by 1981 and out of oil by 1992. Why they decided the world might run out of gold is beyond my comprehension. Gold isn’t consumed. Virtually all the gold ever mined since the beginning of time is still in circulation or storage—somewhere. Oil is a little easier to understand. Most of the byproducts of oil are gone once they are burned, but there are more known oil reserves in the world today than in 1972 when the Club of Rome published The Limits to Growth. I can’t buy a gallon of gas for $0.17 anymore, but there is plenty of 89 octane mid-grade available at my local station for $2.19 per gallon. At $4.00 per gallon the use of fracking technology in places like North Dakota becomes economically attractive. At somewhere over $10.00 per gallon, the technology exists to turn low grade bituminous coal into perfectly good unleaded gasoline. It has been estimated that the U.S. has enough coal to supply itself with gasoline for over 700 years.

That is only the beginning for one technology, the production of energy for the purpose of transportation. How about bio-diesel manufactured from recycled cooking oil? How about electric cars powered up by the energy from your local nuclear power station? How about natural gas; clean burning, all American prime rib energy at hamburger prices?

This line of reasoning brings up another abundant source of wealth beyond gold and oil, the human mind. When Steve Jobs and his design team developed the iPhone, did their efforts make the world poorer or did the creation of an entirely new undreamed of product make the world wealthier? Today, in village markets in Africa financial transactions are routinely handled using cell phone technology. These countries never even had a national land line system. They went from no phone lines, not even a telegraph system, to the 21st century in a single step.

Is the world’s wealth a finite fixed quantity? Then scarcity dictates that the world is a zero-sum game. Every dollar, house, car, or hamburger I own or consume is something that you can’t possess or consume. If on the other hand, the universe, by its very nature, contains abundance and alternatives that can be discovered or created by human ingenuity, then our self imposed limits are more a psychological problem than an actual physical boundary.

In the context of the motivation video, the producers were pitching their view of the abundance of the universe and the law of attraction. It is clear that I could misuse wealth. Money is power and power corrupts whether it is controlled by a 19th century robber baron or a 21st century governmental bureaucrat. But what if I could believe that my use of wealth could become a channel of blessing for myself and others? An Indian proverb notes that as the great river progresses from the mountains to sea, it never worries about running out of water as it blesses the plants, animals, and men that come to its banks to receive the gift of life.

Tuesday, August 23, 2016

What Can I Learn From Her?

“You hang out with nice people, you get nice friends, ya understand? You hang out with smart people, you get smart friends. You hang out with yo-yo's, you get yo-yo friends. You see, simple mathematics.”
Rocky Balboa

“Who you know is more important that what you know,” a principle that is sometimes reduced to this simple cynical statement is not only important in our everyday life, but at those crucial turning points that make us who we are. Sociologists, both liberal and conservative, studying the bifurcation of America have determined that the social connections of parents can be a crucial factor in the development of their children. The doctor, lawyer, or drug dealer serves not only as a role model or mentor, but can speak a word on behalf of a child that will result in acceptance at a prestigious university or membership in a criminal organization.

Let’s turn our focus from the systemic problems of our society to the mundane experiences of this retired engineer. Yesterday I walked 7.5 miles, a personal best. As a result, I am writing this blog article at a time that I would normally be hoofing it up and down the trail. One of the reasons I attempted this feat was an interchange with an older couple who walk farther than I can walk—Yet! Whenever we meet, they always encourage me to step up my game. In turn, I express my admiration for their accomplishments. If a woman who is training to walk a half marathon on her seventieth birthday can kick out 6 miles a day on a regular basis, what can I accomplish if I try? This is typical of interchanges on the Swamp Rabbit Trail, but it is more than words. When I walk with better athletes, I not only am inspired to walk farther, but I also walk faster. When I walk with people who haven’t reached my level, I walk the same distance, but I walk slower. I always try to be positive and encouraging in all these interactions. If I spent a similar amount of time with people who believe that life ends at 60, who are making no effort to improve their health, I would most likely return to my preferred natural state, a couch potato.

Competing with better players makes you a better player. When I practiced Tai Chi “push hands,” a form of controlled sparing, with my teacher or more advanced students, I had to get better or continue to get embarrassed. When I practiced with beginners, I had to lower my game to their level. After practicing with these people for an extended period of time, my teacher would point out that I had fallen into bad habits, as he gently took advantage of my carelessness.

One of the benefits I have in retirement is membership in Writeminds, a writers’ group that is an extension of our church into the community. I know I am pretty good, but some of our members are special. Really! Writeminds includes published authors who get money because real people buy their books. It even includes a member who has managed to sell the film rights to one of his novels. One of the younger members who hasn’t yet completed her first novel, sometimes just takes my breath away with her skill. Last week I shared one of my older blog posts in a private conversation. I remember at the time it was written I was pretty proud of the piece. When I read it again before sharing it, I instantaneously came up with about half-a-dozen different ways to improve it. I realized that I was a better writer because I was thinking in ways that I learned from hanging out with—better writers.

Now I am thinking about a woman I know who writes grant proposals that win. She writes these things for her clients, then they get money and she gets money.

What can I learn from her?

Thursday, August 11, 2016

Negative Net Worth

Bloomberg is reporting that 1 in 7 Americans have a negative net worth. The details are bad, but not as bad as the headline implies. Technically, I didn’t have a negative net worth at the time I bought our first house, since I made a 10% down payment. But it took $17,000 cash money to walk in the front door of that house and that was just about all I had. With less than a thousand dollars left in my checking account, I borrowed $3,000 from my father-in-law to have what I then called “working capital,” i.e. money to pay unexpected bills. Today I would call it money for the emergency fund. I paid my father-in-law $2,000 back within six months. When I gave him a second check for $1,000 the poor man looked totally flabbergasted. He told me to forget about the last $1,000. I don’t think he ever expected to see any of that money again. On two different occasions our net worth dropped below $1,000. That is as close to a negative net worth as I ever want to see.

Back during the slow motion train wreck that occurred between 2006 and the end of 2008, a lot of negative net worth was generated by folks who were upside down on their mortgages. During the subprime mortgage boom people borrowed money to buy homes they couldn’t afford. When the crash occurred, many of these unfortunates who lost their jobs were unable to sell their houses because the price had dropped below the amount they still owed. Since they couldn’t come up with the cash necessary to make up the difference, many of them ended up in foreclosure or personal bankruptcy. Even couples who held on to their jobs couldn’t sell their existing homes, leaving them unable to move to another city with better opportunities. Even the best debt, like the mortgage on your primary residence is dangerous.

Today the story is a lot better. Only 19% of the families with negative net worth own their own home. 75% of people who own their own home have a positive net worth. This is the way it ought to be. The equity in your home is a positive part of your net worth.

On credit cards the glass is half full. We are doing better. Fewer people are using credit cards than back in 2008 when 68% of Americans were carrying a credit card. Now that number is down to 61%. The total amount owed on credit cards is down 14% to $730 billion. Bloomberg also reports that delinquency rates are the best they have been since 1999. Still, the only acceptable balance to carry on your credit card is zero.

The really bad news is $1.2 trillion in student debt, a number that continues to grow at $2,726 a second. This is horrendous. Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, that made it nearly impossible to discharge student debt in bankruptcy many of our young people will be saddled with a negative net worth for a decade or more even if they dropped out of college. Of course, just because you managed to graduate from college doesn’t mean that you will be able to find a job that requires a college degree. However, the lender whether the Government or a private institution, doesn’t care if you ever find a job in your field.

The Bloomberg report notes that Americans with negative net worth can be divided into three equal groups. Those with debts of less than $12,500 are typically in credit card trouble. The third with a negative net worth who owe between $12,500 and $47,500 or the third that owe more than $47,500 have debt that is dominated by student loans.

I find it particularly disturbing that the average age of those with negative net worth is 43. After 20 or more years in the workforce, we should be doing better. Compare this with an average age of 51 for those with positive net worth.

It isn’t the end of the world if you are young and find yourself with a negative net worth. Conventional wisdom believes that you can safely carry an amount of student debt equal to your expected first year’s salary. That would be $33,574 for an English major or $93,500 for a petroleum engineer. Under no circumstances would I counsel a student to carry that kind of debt! If it takes longer than four years to get your degree without accruing any student loans you are better off than if you graduate on time with a boat load of debt. Look for scholarships, work study programs, and even consider taking a part time job. The power of compound interest can wreck your life if you don’t understand it.

If you can manage to avoid the student debt trap, pay cash for your cars (it can be done), and absolutely refuse to carry a balance on your credit cards, you are already well on the way to financial freedom. Just pay down your mortgage, keep on saving and investing for long term goals like retirement and your children’s education. Before you know it, I believe you with find that your net worth is a surprisingly large positive number.