Monday, January 22, 2018

Joseph in Egypt

The market has been on a hell of a run. The investment newsletters and the commercial media, focusing on the market's momentum, the promises of a better business climate from reduced regulation, a return to something approaching theoretical full employment, and the icing on the cake, the recent tax cut, can say nothing but, "Let the good times roll."

Perhaps, we should revisit the story of Joseph in Egypt.

Joseph, to be fair, something of a bratty little brother, his father's favorite, was sold into slavery by his siblings. They told dad a wild beast ate him. Down in Egypt Joseph was purchased by Potiphar, the captain of Pharaoh's guards. God blessed the captain and everything Joseph did until Potiphar's wife falsely accused him of rape. Joseph was thrown into prison. There he interpreted dreams for two of Pharaoh's servants who were not currently in their master's good graces. One of them lived to tell the tale to Pharaoh when the ruler had a bad dream about seven fat healthy cows and seven sick cows. Dragged out of prison to interpret the king's dream, Joseph prophesized seven prosperous years to be followed by seven years of drought and famine. He counseled Pharaoh to set aside as much surplus grain as possible to prepare for the bad years. As a result, Pharaoh was just about the only source of food to be had in the Middle East. By this time Joseph was the Chief Operating Officer of Egypt, Inc. He sold grain to other countries at exorbitant prices. Joseph also came up with the bright idea of supplying seed corn to Egyptian citizens in exchange for a 20% tax to be paid on everything they grew-forever. The tax was still in effect hundreds of years after the end of the famine. Listening to Joseph, made Pharaoh rich and Egypt rich. To be fair, it doesn't seem that Main Street benefitted quite as much as the palace in this story, but it does give one pause.

When the roller coaster is on the way up, put aside some of those profits for a rainy day or a dry year, depending on where you live. Maintain that age appropriate balance between stocks, bonds, and cash. Do not use an increase in your home equity as an opportunity to take out a second mortgage for a new SUV or a trip to the Bahamas. Every bull market will inevitably be followed by a bear. Unlike Joseph, I don't know when the crash is coming, but I know that it will come. Nobody has figured out how to keep the business cycle from turning. If you have liquidity, meaning cash available at the bottom of the bust, then you will be able to buy shares in profitable corporations and rental properties for pennies on the dollar. Those assets will then pay you income for the rest of your life, and hopefully, leave your family a legacy that could last for several generations.

There is another lesson to be learned from the story of Joseph in Egypt. Just as he dreamed when he was still a spoiled child, his starving brothers bowed down before him to beg for food when he was the master of Egypt. Joseph knew who they were, but they didn't recognize their supposedly deceased brother. After Joseph revealed who he was and forgave his brothers, he told them, "You intended to harm me, but God intended it all for good. He brought me to this position so I could save the lives of many people."

Twice in my life, after unfortunate and unfair setbacks, someone "spoke Joseph" into my life, "They meant evil against you, but God meant it for good." It wasn't obvious at the time, but in one case, it spurred me to earn an engineering degree, giving me an entirely new career. In the other instance, I was driven by circumstances to learn enough about investment basics that I was able to find both financial freedom and early retirement.

Never give up. Good luck? Bad luck? Sometimes, we just don't know.

Wednesday, January 10, 2018

Who is the Other?

A Zen master once asked his students the question, “Who is the other?”

As I have studied investment questions, I am beginning to come to the somewhat Buddhistic understanding that on at least on some level, criticism directed at our perceived enemy is often self criticism. To understand a problem or the actions of “the other,” I only need to look into a mirror.

This morning I read a politically charged column denouncing Pfizer for planning to use some of the additional profits excepted from the recent changes in the tax law for share buy-backs and an increase in the dividend, rather than using all of it to hire additional employees. The author also seemed annoyed the Pfizer was shifting its research budget away from Parkinson’s and Alzheimer’s to other areas. It was clear that the author was convinced that nothing but bad behavior could come from cutting the corporate tax rate, as leaving more money in corporate coffers simply gave bad people an additional opportunity to engage in wicked antisocial behavior.

Institutions own about 70% of Pfizer shares. That means if you are the beneficiary of a pension fund, or expect to become the beneficiary of a pension fund there is close to a 100% chance you own shares in Pfizer. If you own shares in a well-diversified, managed mutual fund there is close to a 100% chance you own Pfizer. If you own shares in an index fund that invests in large-cap American companies, there is a 100% chance you own shares in Pfizer.

As an individual share holder, the prudent manager of a pension fund, or a computer program that buys and sells shares of stock in order to maintain a desired model portfolio you are interested in having corporate managers who act with your interest in their hearts and minds. Currently Pfizer holds a AA credit rating while paying a 3.75% dividend. Compare this to a ten-year treasury note paying 2.5% with no possibility of capital gains, remembering that U.S. debt was downgraded to AA+ back in 2011. If you voted for Obama, or for that matter Bush in 2004, you share in responsibility for the creation of over $10 trillion in new money, out of thin air, by an increase in our national debt.

That money had to go somewhere.

In the current regulatory environment, financial engineering is often more profitable than actually producing real wealth in the material world, with products such as new drugs to combat Alzheimer’s or Parkinson’s. I suspect that Pfizer had no experimental Alzheimer’s or Parkinson’s drugs in its R&D pipeline that merited the further investment of either time or money, given that they are guaranteed a 3.75% return by simply buying shares in their own company. It also wouldn’t surprise me to hear one of Pfizer’s competitors proudly announce a major breakthrough in one of these areas sometime in the near future. Companies, as well as nation states, have been known to engage in espionage.

When it comes to the economy, we are all in this together. Every decision, every action, or reaction by everyone in the world contributes to the constantly changing ebb and flow of money. As we all try to pursue what we understand to be our rational self interest, buying, selling, working, contributing, or even engaging in criminal enterprises, the actions of everyone effect—everyone. Unless you are a hermit living in a treehouse somewhere completely off the grid, you are a part of that nonduality we call choose to call the economy.

As I believe that money is a spiritual commodity, I also believe that our individual actions, our use of our money and our time will have, if you will allow me to use the term, karmic consequences not only in this world, but in the world to come. I would like to suggest that the author of the article, look deeply into his own heart, before criticizing the actions of a company with a much better than average record of socially desirable behavior.

Sunday, January 7, 2018

Voodoo Child

"I tell you the truth, if you had faith even as small as a mustard seed, you could say to this mountain, 'Move from here to there,' and it would move. Nothing would be impossible."

Baker Mayfield, this year’s Heisman Trophy winner, is too small to play quarterback. He wasn’t offered a scholarship at any top tier school, so, as a freshman, he walked on to the campus of the University of Oklahoma, his first choice, and took the starting job away from students who had been given full athletic scholarships.

Lord knows, he’s a voodoo child.

In an interview, a sports announcer stated that he had heard Mayfield started keeping a list of things people told him he couldn’t when he was in grade school. Mayfield acknowledged that he has such a list. He uses it for motivation. Nobody has the right to tell you what you can’t do. Nobody has the right to tell you about your limitations and weaknesses. Often people are inclined to make statements of this sort, especially in financial matters, because of the limitations they have chosen for their lives.

“A man's heart plans his way, But the LORD directs his steps.”

If you hang around conservative Christians, you will hear this proverb presented in a way that focuses on the Sovereignty of God and the limitations of man. Recently, I heard Wayne Cordeiro, the founding pastor of New Hope Christian Fellowship in Honolulu, Hawaii put a different spin on this aphorism. He believes, that plans and stepping belong to man and directing the steps of a man in motion belongs to God. He emphasizes individual responsibility, telling a leadership training class not to wait for instructions or a job description from the senior pastor, but to make a plan, and then, just do it. He assures his audience that once in motion, God will be faithful to direct your steps and correct your plans.

“Then he answered and spake unto me, saying, This is the word of the Lord unto Zerubbabel, saying, Not by might, nor by power, but by my spirit, saith the Lord of hosts. Who art thou, O great mountain? before Zerubbabel thou shalt become a plain: and he shall bring forth the headstone thereof with shoutings, crying, Grace, grace unto it.”

Zerubbabel was the leader of the first Jews to return to Jerusalem from the Babylonian captivity. For two years, he started rebuilding the temple of God. After completing the foundation, local tribes, Samaritan immigrants returning from Babylon, and a lack of financial support for the Persian empire stopped construction for seventeen years, a great mountain indeed. Then the Lord sent the prophet, Zechariah, to encourage Zerubbabel and his construction crew. The Second Temple was completed, dedicated, and once again Israel celebrated the Passover in the presence of God in his temple.

If my Christian readers will offer me a little literary freedom and grace, let me say, “Lord knows, he was a voodoo child.”

What can you accomplish, not only in this new year, but in the rest of your life? I don’t know. That is between you, God, and the people who love, support, and encourage you. Today, right now, pick out something that you want to do, something you believe you can do, then put on your shoes, open the door, and start walking.

Who knows how far you can travel before it is time to move on to the world to come. Maybe, at your funeral, one of your friends will shake her head and say, “Lord knows, he was a voodoo child.”

Well, I stand up next to a mountain
And I chop it down with the edge of my hand
Well, I stand up next to a mountain
Chop it down with the edge of my hand
Well, I pick up all the pieces and make an island
Might even raise just a little sand
'Cause I'm a voodoo child
Lord knows I'm a voodoo child
Jimi Hendrix

Sunday, December 31, 2017

The Values Gap (Part III)

Thrift (noun) 1.the quality of using money and other resources carefully and not wastefully.

Thrift is a virtue, a value that can practiced by anyone. Not everyone has the ability to earn large sums of money. Even with a degree in engineering, I only managed to barely broach the top quintile late in my career. The Apostle Paul observed, “I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.” I don’t know if I ever will discover the secret of being content in any and every situation, but with the exception of buying our first home, I have managed to live on less than I earned. That is my definition of thrift. If you practice this virtue with patience and perseverance over the course of a lifetime, it is highly probable that you will find financial freedom.

But, freedom is never free. We live in an immediate gratification society that constantly tells us we can have everything our minds can possibly desire without effort. We are told, credit is easy, without the Biblical reminder that the borrower is slave to the lender. As long as you are spending your money, chances are, you are going to be OK. It is when you start spending other people’s money that you are likely to get yourself into trouble. What are you willing to give up? Your mind is full of screaming little demons demanding that you fulfill their every desire regardless of the cost. When do you say, “No!”

How can you tell if one of your desires is in keeping with your highest values?

If your spending patterns are truly aligning with your highest values, it is likely that you are on the path to financial freedom. If you are working to satisfy the agendas of all the two year old brats living in your subconscious mind, you are on the road to a lifetime of financial slavery. How does that work out in 21st century America? Let’s consider a hypothetical two income family. Both husband and wife earn $30,000 a year, putting them right at the current median household income of, $57,617. Remembering that rules of thumb are rules that work thumb of the time, let’s, let’s apply a few financial rules of thumb to this couple.

Rule of Thumb: Your house should not cost more than 3 times your annual income. The median selling price of a home is $225,262. Strike one! Unless they are lucky enough to be living in a low cost area of the country, it looks like our hypothetical couple is house poor.

Rule of Thumb: Your car should not cost more than 1/3 of your annual income. Since they both have jobs, it is likely that we are looking at a two income family, so we shouldn’t expect them to buy a car that costs over $10,000. The average price for new car is $34,968, so they can forget about buying a new car. Given that the average cost of a used car is running at $19,227, the chances are good that our family is spending too much on a depreciating asset that only generates costs.

Rule of Thumb: If you graduate with student debt that exceeds your projected first year salary, you have too much student debt. The average student loan debt burden for a 2016 graduate would be $37,172. Strike three! You’re out!

No one is asking you to wear a loin cloth and live in a cave, just spend less than you earn. If you value gourmet meals, go ahead, drop $250 on a steak and a bottle of wine. If you want to shoot targets in your spare time, a CZ-75 can be found for less than $1,000. If you want a BMW 540I, it will likely run you somewhere around $65,000. If you have the cash and it won’t damage your higher values, like feeding your family, providing for your retirement, or sending your kids to the college of their choice, go ahead, you’ve earned it.

This brings us back to the 80/10/10 rule, a simple rule of thumb for budgeting your income. Live on 80% of your income. Give 10% to the charities that line up with your highest values, the ones that you believe will follow you into eternity. Put 10% in savings. What that last number will mean is that, sooner or later, you will have enough in savings to buy assets that generate income. As those assets begin to pile up the income that they generate will buy more assets that generate income. You have now have the miracle of compound interest working for you instead of working for another person’s financial freedom.

Before you make that next purchase, that next financial decision that could possibly be at a crossroad in your life, stop, look at what you are about to do, and above all take the time to listen to your heart. If you do this on a regular basis, with patience and perseverance, over the course of a lifetime, I believe you will find your way to financial freedom.

Thursday, December 28, 2017

The Values Gap (Part II)

The Zen master, Thich Nhat Hanh once observed that anyone wanting to understand the Buddhist concept of the Hungry Ghost need only visit Las Vegas. The Hungry Ghosts are souls tortured in a specific hell realm for particularly evil deeds driven by desire, greed, anger, or ignorance. Hungry Ghosts are pictured as having gigantic bloated stomachs with necks that are too thin to swallow food. Attempting to eat is extremely painful, as is the insatiable desire to feed a hunger that can never be appeased.

Steve Wynn, the owner of several hotel casinos in Las Vegas and Macau, the new Chinese Las Vegas, revolutionized the business. Before Wynn started building large spectacularly luxurious casinos, most of the hotels in Vegas were little more than glorified motels attached to casinos, show rooms, and famously inexpensive restaurants. Everything was subsidized to bring players into the casino. Gambling paid for the hotel, restaurants, and the shows. Wynn changed the rules. He decided that every aspect of the business should generate a profit. He built hotels that were an order of magnitude more expensive than anything seen before. He charged an appropriate price for that kind of room. The occupancy rate for this new kind of hotel proved that Wynn’s business model was sound. No more free food! Wynn opened world class restaurants with world class prices. They made money. He once observed, “There are people who rather have a bottle of wine than $1,000 in their pocket. I want to be certain that I am the one who provides that special bottle of wine to my customer.” Steve Wynn correctly guessed that people are willing to pay—a lot—for the things they really value whether that would be the adrenalin rush of high stakes roulette or the gourmet who wants to eat a meal prepared by a celebrity chef in a five star restaurant.

The reality TV show, Pawn Stars is set in Las Vegas. The owners of the pawn shop are willing to buy anything that they can resell for a profit. The entertainment value comes from watching people try to sell their prize possessions, guessing the value (if any) of bizarre items like a WWII hand grenade signed by general George Patton (OK, I made that one up). An expert is consulted to authenticate the signature and the bomb. If it is the real deal, the owner and the pawn broker argue over the price until an agreement is reached, or the disappointed seller walks sadly away from the store. The visitors always tell the camera why they are willing to part with their treasure. The reason given tells a lot about the values of the seller. Since this is Las Vegas, many of the Pawn Stars customers are raising money for the slots, the opportunity to take their wife to an expensive restaurant, or upgrade their hotel room. Others are raising money for their wedding or their grandchildren’s college educations. Some are collectors, selling one antique firearm to get the money to buy the next antique firearm. They are making enough money to feed their habit without infuriating the wife. The owners of the pawn shop value money. Typically, they are looking for 100% profit before taxes and overhead. If it is something they know they can flip with a phone call to an existing customer, they will take less, as they understand the time value of money.

This morning, I listened to another video explaining that almost half of American families could not cover a $400 emergency without hitting the credit card or selling something of value. The author, who lives in one of the most expensive zip codes in America, admits that frequently he is one of those Americans, even though he has earned significant amounts of money. He values an address in the Hamptons and expensive private schools for his daughters more than he values $400 in the bank. I simply can’t understand people who can live without any contingency plans. When I was earning little more than minimum wage bagging cloth in a textile mill, I would volunteer to work overtime to make certain I had money in the bank. I was willing to scrimp on food, drive an aging rust bucket, and share a small apartment with a roommate, but if my bank balance dropped below $1,000 (which it did) I took immediate, radical action to rectify the situation.

It’s all a question of your values. If you value getting high, you will be willing to risk your freedom or even your life to satisfy that desire. If you value your child’s education, you will live in a small house, drive old cars, or take a part time job to cover the tuition to the best private school in town. If you show me your credit card records and your checkbook register, I will have a pretty clear picture of what you really value.

But America is Las Vegas.

I once heard Doyle Brunson, a superstar poker player, interviewed on the radio. He told the hosts of the show that while he had earned millions at the poker table he lost it all gambling on sporting events. In a voice that was both sad and wise, he assured the audience that no matter what your weakness, whether it was alcohol, drugs, gambling, or women, Las Vegas would take you down. Where else in the world would you find a luxury car dealership in or right next to a hotel?

Wednesday, December 27, 2017

The Values Gap

Recently, I have been listening to Ray Dalio, creator of the world’s largest hedge fund, opine about lessons he has learned from life, investment strategies, and our current economic situation. He believes that our economic stability faces two major threats the wealth gap and a values gap. The wealth gap has been discussed endlessly over the last ten years. Basically, the current economy works well for the top 20%, but not so well for the bottom 40%. In addition, the middle is being squeezed out of existence by the deindustrialization of America, free trade, and other macroeconomic forces that are beyond the control of any single individual. My ears perked up when I heard the term, “values gap.” How was he going to define that term? I couldn’t imagine a deeply analytical investment cyborg, like Ray Dalio, launching into a Dave Ramsey rant about debt, thrift, and hard work. He went on to explain that 50 years ago, almost all Americans basically shared the same Judeo-Christian understanding of morality. Today, as in the book of Judges when Israel had no king, all the people are doing what seems right in their own eyes. Dalio believes that a culture that is so deeply divided on a fundamental understanding of good and evil will be fundamentally—unstable.

While I understand and agree with Dalio’s “values gap,” there is another values gap at work in the economy that correlates strongly with individual outcome. Our personal financial values drive our behaviors. Our behaviors become habits. Our habits eventually define the outcome of our lives. Of course, there are exceptions. Winos win the lottery. Hardworking honest families can be wiped out by war, illness, or even by something like a factory closing. We live in what is basically, a cause and effect universe that has been corrupted by the fall. Given there are limits to free will, the question becomes, what kind of values based actions that are within the control of an individual can lead to financial freedom?

Family is most fundamental value that leads to financial freedom. The dice are loaded against a child born into a single parent home. A Stanford study discovered that children from single parent homes are 5 times more likely to grow up in poverty than children with intact families featuring both a father and a mother. The absence of a father also correlates with drug addiction, teenaged pregnancy, and criminal behavior. Beyond the nuclear family, our culture has forgotten about the importance of the extended family. Although grandparents are still sources of high quality, free day care, it is unusual for multiple generations to live in the same house or work in the same business. There are exceptions to this rule. Asian immigrant families frequently live in multi-generational households. One of the main reasons Asian unemployment tracks below that of other ethnic groups are family owned businesses. When junior losses his job that required a college degree, he can always come back to work at his parents’ convenience store until the economy turns. Strong family connections are one of the reasons I have seen first generation Asian immigrants move from poverty to the upper middle class in less than a generation. There are some groups that have a history of extending the definition of family to those who share their belief system. Mormons are well known for supporting church members who have fallen on hard times, not only by bringing over a casserole when the news hits the church email chain, but by providing them with employment in some business owned by a fellow member of the Church of Latter Day Saints. Jewish Americans refer their customers to other businessmen in their community. I guess that any group that has faced so much persecution understands the concept of, “We are all in this together.” Would that all churches understand the importance of supporting one another’s financial wellbeing as well as worrying about correcting our brother’s understanding of theological minutiae.

I am privileged to know a young man who is always hustling work, no matter what the current economic condition. If he cannot find work he invents it. As far as I know he has walked dogs, been a house sitter, worked, installed, and maintained sound boards for various organizations and events, installed car stereos, and even driven my wife’s car to our new home in SC. A killer work ethic is almost enough all by itself to raise someone out of poverty. I am frequently amazed at the number of ways excellence can find to generate wealth. Yesterday, I watched a reality TV show about a man who makes his living rebuilding and flipping cars. In this particular episode, he paid the best car detailer in his city $3,500 to clean a 1938 Aston Martin that had been sitting in a barn for over forty years. That was all it needed to net the car guy a handsome profit. Imagine paying someone $50.00 an hour to wash your car and believing that the price was a bargain.

Solomon observed, “Do you see someone skilled in their work? They will serve before kings; they will not serve before officials of low rank.” Traditionally, this trait has been called the Protestant Work Ethic. It includes the ability to defer gratification, a critical component in staying out of debt and finding your way to financial freedom. Now the name of this value is changing to the Confucian work ethic. Asian American have highest median household income of any racial group in our country. They are simply outworking other Americans.

Although I left the workforce for a few years to get an engineering degree, my work life has been limited because I never really learned how to take a calculated risk. There is a very famous story about the owner of the largest chain of truck junkyards in the Southern United States. After graduation with a MBA, he found employment in a fast track program for young executives with a major manufacturing company. His first assignment was at a dealership. There was a wrecked truck in the dealership’s lot. His boss told him to sell it to a local junkyard. He received $600 for the truck. Two weeks later his boss sent him to the same junkyard to buy a used part to repair a similar truck. The junkman went to the same truck sold to him two weeks earlier, removed the part, and sold it to the young man for (you guessed it) $600. The young man found the love of his life. After buying his first wrecked truck for $2,000 he quit his job and never looked back. I was raised and trained to be a cog in a great corporate or governmental machine. I never learned how to take the kind of risks that make a successful entrepreneur. I think in the future, this skill will become more and more valuable.

Education is no longer a guarantee of a good job, but the love of and respect for education and educators seems to be a common thread in the lives of people who are generally employed. I won’t waste your time with stories about overeducated failures I have met. I am sure you have seen plenty of these unfortunate stories in your life. However, communities that traditionally placed a high value on education (Jewish and Asian come to mind) have lower unemployment rates than the general population.

Keith Cameron Smith discovered one of the significant differences between the rich and the poor is their sense of time. We all plan, but our timescales are different. Smith makes the following observations concerning different groups.

“The very poor think day to day.” At the extreme end of the scale drug addicts have a time horizon limited to the distance to the next fix, but many of the world’s poor are forced by circumstance to think on a day to day basis. If they are unable to obtain food today, they will die. Making it to sundown is an accomplishment in this world.

“Poor people think week to week.” I have seen this in the factories of South Carolina during the 1970s, people literally living paycheck to paycheck. If they had money they spent it, sometimes irresponsibly and extravagantly. The idea of deferred gratification only appeared when Christmas was drawing near. Starting sometime around November 1 everyone, especially the moms, wanted overtime. Their time horizon jumped from a week to a couple of months.

“The middle class thinks month to month.” Smith believes the middle class focus is on comfort. What can they buy today to make their life comfortable? If they think they can make the monthly payments, “It’s all good, bruda.”

“The rich think year to year.” Smith believes one of the key strengths of the rich is an ability to defer gratification in order to achieve freedom. This long term thinking gives them an edge over time.

“The very rich (like Ray Dalio) think decade to decade.”

Sometimes, one wise decision is all that it takes to escape poverty. If you live in sinkhole of poverty in rural West Virginia, moving over the mountains to a city with jobs can change a life in a few hours. Sometimes, a single minded commitment to changing your family tree can move a man, like my grandfather, from extreme poverty to more than enough wealth to provide all his children with their own farms. He achieved this goal over the course of a couple of decades. The math, as well as numerous examples, demonstrate that a two income family can reasonably expect to achieve millionaire status over the course of a working lifetime. Holding the right financial values and acting upon them can change not only the destiny of an individual or a family, but an entire nation. Ray Dalio notes that in a single generation, Lee Kuan Yew turned Singapore from an impoverished city with serious drug and crime problems into one of the Asian Tigers, a center of global commerce, finance, and transportation, known as the most technologically ready country in the world. All of these considerable achievements required some combination of a stable family, a strong work ethic, the ability to take a calculated risk, a love of and respect for education, and a willingness to change your sense of time.

Look around, then ask yourself the questions, “What is working? What doesn’t work?” Sometimes, you might find the answers surprisingly obvious and simple.

Thursday, December 21, 2017

Cash, Cash, and Near Cash

Cash is trash. Cash is king. Which of these two common statements are correct? What do they mean? What is cash? How much do we really need?

Holding cash is a liability in the current environment. Government policy guarantees that the cash you hold today will lose its value over time. Economists are pleased to call this phenomenon, inflation. Politicians call it, monetizing the debt. I call it theft. Cash (money) is a spiritual commodity. Gold, paper, or bitcoin, it only has value because buyer, seller, and holder all believe it has worth both as a medium for exchange and a store of value. To intentionally debase a currency is at best theft. At worst, it is sin.

There is nothing more fungible than cash. It can be transformed into a mutually accepted amount of just about anything. If you want to buy from the corner drug dealer, you better bring cash. When the bottom falls out of the market, those who have cash reserves can buy the future profits of great corporations for pennies on the dollar. Those who do not have cash, sell to those who do have cash at the very time when they should be buying everything in sight. Closer to the life of the average American, cash means that a flat tire or a trip to the dentist won’t result in a credit card bill that will hang around for 36 months at a 12% to 20% interest rate.

The most basic form of cash—is—cash, greenbacks, federal reserve notes, pieces of paper featuring the portraits of dead noteworthy (a joke) Americans. I think just about everyone should have at least $20.00 or so in their wallet and some change in their purse or pocket. Using plastic for fast food, vending machines, and things like football pools and office charity drives seems silly or downright impossible. Beyond what is called, “walkin’ around money,” I think it wise to have a few hundred dollars hidden in a drawer or a closet somewhere in the house, both as a convenient in-home ATM and for contingencies, like pizza delivery or a neighborhood handyman who works on a cash only basis.

The next form of cash, is found in checking accounts, money market funds, and the old fashioned FDIC insured savings account. Conventional wisdom dictates that a family should have 3 to 6 months’ worth of expenses in an emergency fund that can be tapped more or less immediately, but isn’t too easy to grab when handling “emergencies” like the afore mentioned pizza delivery man. Sometime following the crash of 2006-2008, Suze Orman bumped her recommendation to 8 months reserve, due to the dramatic increase in the length of time required to find a new job during what has come to be known as the Great Recession. To me, three months seems like a high priority goal. Six months is desirable, but reaching that goal can be discouraging for a young family when there are so many competing needs for money.

The use of a little common sense can help. If you have ten years of seniority in a government job, you might focus more on paying down your student loans and less on building your reserves past the six month level. If they just eliminated all overtime and shut down the night shift at your factory, you might want to buckle down on building that emergency fund and start filling out some job applications.

Retirement is a little different. Hopefully, your Social Security, and an inflation adjusted four percent per year draw from a lifetime of savings is providing you with a comfortable lifestyle. How much of that nest egg should be in cash? While there doesn’t seem to be any general agreement among the “experts,” I have seen the number, two years’ expenses in cash, bandied about. I think that sounds about right. Two years’ in cash or maybe something like 10% of your net worth sounds good to me. Remember, you are no longer receiving a regular paycheck. You don’t want to “need the market,” meaning you don’t want to be forced to sell when the market crashes. In fact, you want to be able to buy at the bottom. If you are retired and have investments, even a 401(k) that only offers a handful of mutual funds, you want to be able to shift your holdings to undervalued assets when the opportunity presents itself.

Finally, a word about “near cash” assets. These are investment vehicles like Certificates of Deposit, Treasury Notes, and bond funds, such as my Ginnie Maes that are “full faith and credit” guaranteed by you, the American tax payer. These assets go up and down—a little bit—with changes in the prevailing interest rates, but they are highly liquid, meaning they can be converted to cash in your money market fund in a day or less with only the possibility of minimal loss. It is very handy to have a goodly percentage of your net worth in such boring assets when facing a major stock market crash, something that happens every twelve years or so.