Let me end an all too serious year on a lighter note. This is just one of those stories that is way too good to pass up. In “Authorities Crack Down on Flea Market Fakes” the Associated Press reports in shocked tones that counterfeit brand name goods are being sold in flea markets and swap meets, as well as by the traditional street vendors in major cities. I am reminded of the scene in the movie Casablanca where the thoroughly corrupt French police chief, Captain Renault finds an excuse to close down Rick’s American Café. He announces, “I’m shocked, shocked to find that gambling is going on in here!” Even as he is handed his share of the night’s take. Gee, you mean Rolex and Gucci do not extend franchises to New Orleans flea market dealers? I’m shocked, shocked, I tell you.
"If the price is too good, you have to think about it," said Lt. Mike McDonnell with the New Jersey State Police cargo theft unit. "If you see it at a flea market and it's half the price of normal, you have to think there's something wrong." Say it ain’t so. You mean that expensive watch I was once offered by an apparent drug addict on the streets of San Diego could have been a fake or stolen property?
The charges here are the possession of counterfeit trademark items. In one single raid, the police confiscated goods from flea market vendors “that included fake trademarks for Nike, Polo Ralph Lauren, Oakley, Ray-Ban, Coach, Louis Vuitton, Chanel, Gucci, Dolce & Gabbana, and UGG boots.” Did any of their customers seriously believe they were getting the same products sold in the best shops on Rodeo Drive, or were they just trying to make a low cost imitation of a fashion statement normally limited to the very wealthy?
The article estimates that 80% of such counterfeit goods come from China. I’ll bet most of the remaining 20% comes from our remaining Asian trading partners. The protection of foreign intellectual property is a relatively low priority in a country focused on building itself into a first class superpower. Not surprisingly, there was less of this nonsense when most of what was sold in this country was made in this country. Although, products like foreign manufactured counterfeit prescription drugs are extremely dangerous, most of the counterfeit products are probably made in the same city as the legitimate product. Comments by the readers indicate that at least in some isolated cases, such as that of a football jersey, the copycat goods are of similar quality to the authentic item.
Selling counterfeit trademark items should be a crime. I have a pair of Ray-Ban sunglasses that are over 20 years old. They were made in the good old U.S.A by Bausch and Lomb. They have proven themselves to be of the highest quality. That trademark means something and is worth something. If I owned the Italian company that bought the trademark and today manufactures Ray-Ban sunglasses, I would be quick to prosecute counterfeiters. The real problem is finding a way to return manufacturing jobs to this country. Then maybe more people would have enough money to buy an occasional luxury item even if it was what the article describes, “as the cheaper imitation versions found at major retailers, like Wal-Mart or Target,” that follow Consumer Safety Product Commission guidelines.
From the Movie Casablanca:
Rick: How can you close me up? On what grounds?
Captain Renault: I’m shocked, shocked to find that gambling is going on in here!
(a croupier hands Renault a pile of money)
Croupier: Your winnings, sir.
Captain Renault: (sotto voice) Oh, thank you very much.
Captain Renault: (aloud) Everybody out at once!
Friday, December 31, 2010
Saturday, December 18, 2010
From the Pen of A Grumpy Old Man
“The problem is that regulation is like medicine. If I give you the wrong medicine, I will make you sick. If I give you the right medicine, I will improve your health.”
"Black Swan" author Nassim Taleb
In a recent column by Robert Samuelson entitled “Our Allergy to Risk,” the author laments the new American aversion to risk. The major banks are unwilling to lend money to all but the most credit worthy customers, the ones who do not need any money. Individual Americans are reducing their household debt for the first time in a generation. American corporations do not want to borrow any money. Like the American family, they are paying down their debts, buying back stock, and hoarding cash.
Guess what? They finally get it. Excessive debt caused our problems. That is why U-6 unemployment is running around 17%. A record 42,000,000 Americans are receiving Food Stamps. In places like Spain it is worse. Their real estate bubble governmental regulations, expenditures, and borrowing have led to a situation where virtually no jobs are available for the generation that is just now graduating from school.
Excessive debt effectively killed some of the largest banks in the world including Bank of America and Citibank. They are now considered government owned “zombie banks” by many economic authors. Giant financial institutions like AIG and Bear Stearns suffered similar fates. General Motors, once the largest most profitable car company in the world is now the property of the American taxpayer.
Over 25 million Americans are unemployed or are working less than 40 hours a week. Their mortgages and credit cards are going unpaid. Many of them can not sell their house because they owe more than the house is worth. Easy credit to unqualified customers drove the price of residential real estate to unsustainable levels. Now there is hell to pay. As American families are heading for bankruptcy in record numbers, companies (particularly small companies) can not or will not hire new employees. There is simply not enough demand to justify the risk of new hires. Samuelson observes, “Americans are not merely reducing debts. They're erecting protections against unpredicted adversities. For a record 23rd straight month, more than half of U.S. households expect no income gains in the next year.” I know this is true in my case, President Obama announced no raises for Government employees and I am one of the lucky Americans blessed with a good job. Quoting the author of the University of Michigan Consumer Survey, Samuelson goes on to observe, “For many households, the recession's "primary lesson," notes survey director Richard Curtin, "was that the only sure source of financial security was their own savings.”
It’s about time. Nassim Taleb observes that the governments of Europe are beginning to get the message. "I'm not worried about Europe. I'm worried about here more. Europe is a patient who has been diagnosed with cancer and starting chemotherapy. That is the worst moment. Over here we have had a much larger tumor and we have not been diagnosed. When you are pumping more and more painkillers [qe2s], you stay in the same place and there are harmful side effects. Here, we are not yet at a consciousness. The problem we had was not a recession. It was simply a problem of too much debt."
How all this will work out remains to be seen.
"Black Swan" author Nassim Taleb
In a recent column by Robert Samuelson entitled “Our Allergy to Risk,” the author laments the new American aversion to risk. The major banks are unwilling to lend money to all but the most credit worthy customers, the ones who do not need any money. Individual Americans are reducing their household debt for the first time in a generation. American corporations do not want to borrow any money. Like the American family, they are paying down their debts, buying back stock, and hoarding cash.
Guess what? They finally get it. Excessive debt caused our problems. That is why U-6 unemployment is running around 17%. A record 42,000,000 Americans are receiving Food Stamps. In places like Spain it is worse. Their real estate bubble governmental regulations, expenditures, and borrowing have led to a situation where virtually no jobs are available for the generation that is just now graduating from school.
Excessive debt effectively killed some of the largest banks in the world including Bank of America and Citibank. They are now considered government owned “zombie banks” by many economic authors. Giant financial institutions like AIG and Bear Stearns suffered similar fates. General Motors, once the largest most profitable car company in the world is now the property of the American taxpayer.
Over 25 million Americans are unemployed or are working less than 40 hours a week. Their mortgages and credit cards are going unpaid. Many of them can not sell their house because they owe more than the house is worth. Easy credit to unqualified customers drove the price of residential real estate to unsustainable levels. Now there is hell to pay. As American families are heading for bankruptcy in record numbers, companies (particularly small companies) can not or will not hire new employees. There is simply not enough demand to justify the risk of new hires. Samuelson observes, “Americans are not merely reducing debts. They're erecting protections against unpredicted adversities. For a record 23rd straight month, more than half of U.S. households expect no income gains in the next year.” I know this is true in my case, President Obama announced no raises for Government employees and I am one of the lucky Americans blessed with a good job. Quoting the author of the University of Michigan Consumer Survey, Samuelson goes on to observe, “For many households, the recession's "primary lesson," notes survey director Richard Curtin, "was that the only sure source of financial security was their own savings.”
It’s about time. Nassim Taleb observes that the governments of Europe are beginning to get the message. "I'm not worried about Europe. I'm worried about here more. Europe is a patient who has been diagnosed with cancer and starting chemotherapy. That is the worst moment. Over here we have had a much larger tumor and we have not been diagnosed. When you are pumping more and more painkillers [qe2s], you stay in the same place and there are harmful side effects. Here, we are not yet at a consciousness. The problem we had was not a recession. It was simply a problem of too much debt."
How all this will work out remains to be seen.
Sunday, December 12, 2010
Debit Cards 2010
In 2009, for the first time, the volume of purchases made by debit cards exceeded that of purchases made by credit cards. Today, only 78% of consumers carry a credit card, while 80% have a debit card. Dave Ramsey should be happy. He does not believe in the use of credit cards. He considers the temptation to run up a balance too great to risk using a credit card; sort of like giving a two year old a loaded hand gun. There are two reasons for this change in American behavior. The first is the credit card reform act that took effect earlier this year. 15 Million Americans with questionable credit scores lost their credit cards as a result of this act. The second is a major change in consumer attitudes. After a 20 year credit binge, Americans have awakened with a nasty debt hangover. In the last two years the total debt carried on credit cards is dropping, “The lowest percentage of shoppers in the 27-year-history of a national survey said they used credit cards over the Thanksgiving weekend, while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion.” (New York Times). America is moving from credit to cash or debit cards. However, there are risks associated with the use of debit cards. I believe these risks are so serious that I would rather use a credit card. If the balance on a credit card is paid off every month without exception, it is a better tool than a debit card. If it is misused, it is truly a significant danger to your financial wellbeing.
In spite of what the banks would have you believe, credit cards offer more fraud and theft protection than debit cards. The latest numbers (2008) indicate losses from debit cards totaled $788 Million. Even if debit and credit cards are issued by the same bank, they are covered by different laws. Credit cards are covered by the Fair Credit Billing Act. This limits the card holder’s liability to $50.00 period the end. If the theft is reported before the card is used, the consumer pays nothing-nada. The same protection covers the illegal use of the credit card number by means of phone or Internet purchases.
Debit cards are covered by the Electronic Fund Transfer Act. If a card holder reports the loss of a card within two days, liability is limited to $50. After two days, the liability jumps to $500. A card holder who fails to report the loss within 60 days could be responsible for the entire amount. The EFTA also allows the bank to freeze your losses for up to 10 days while they conduct their investigation. Not having access to your money for 10 days could be a real problem if you needed to pay your rent or your car payment in that time frame.
Banks advertize zero liability debit cards, assuring customers that 100% of stolen funds will be restored, usually within 24 hours. However, PIN transactions (those transactions that do not require a signature) are not covered by zero liability policies, but are subject to the individual policies of the particular institution that issued the card. This would include fraudulent ATM withdrawals. Debit card holders can also be held responsible for losses due to “reckless behavior.” The definition of reckless behavior is pretty much left up to the bank. It can include card holders who report two or more unauthorized transactions in any 12 month period. If it is discovered that the cardholder wrote down his PIN or shared it with someone else, this can be considered reckless behavior.
In short, consider a debit card cash. If you are carrying a checking account balance of $5,000 that is how much cash you have in your wallet. Check that balance every day. Keep track of all your purchases and record them, again on a daily basis.
There are other dangers associated with debit cards. Last year I heard a discussion of debit card overdraft protection. Someone I have known for many years currently has a daughter in college. He was attempting to straighten out her checking account. It seems she has a debit card that she uses constantly for everything. She frequently forgets to enter these debits into her check register, spends more money than she has, and incurs overdraft protection fees. These fees typically run $30.00 per charge. In this particular case, the girl ran up over $150.00 in fees.
“If you overdraw your account with the typical fee and you pay it back in two weeks, you're paying over 500% interest," said consumer advocate Jeane Anne Fox. Tony Soprano would be ashamed to charge such interest rates but banks think it just fine. They generate $38,000,000,000 a year in pure profit by providing their customers with such a wonderful service.
Another person participating in this conversation told a story from his college days. Of course he didn’t have much money and like most of his generation he was quick to use a debit card instead of cash for small everyday purchases, like coffee, lunch, and miscellaneous school supplies. Then, every evening, he would check his checking account balance on line. On one particular day, he incurred 7 overdraft protection fees totaling $210! He called the bank and threw a screaming fit. He demanded they remove overdraft protection from his account and withdraw the fees. The bank withdrew the fees but encouraged him to keep the overdraft protection, telling him that it would protect him from the embarrassment of attempting to pay for something when his account was empty. This individual was having none of it and informed the bank he could tolerate a lot of embarrassment for $210.
It gets worse. If a series of checks or fees will throw your account into overdraft protection, the bank will process the largest charges first so they can hit you with more fees. If you use a debit card to rent a car or a hotel room, the vendor will put a hold on your account that is significantly larger than the expected charges. Sometimes the vendor will then forget to inform you of this little fact. Let’s say a total car rental bill is expected to be in the neighborhood of $135. The car rental company might put a $500 hold on your account as a form of self protection. If you don’t know this, you could easily rack up a lot of fees, thinking you had access to that $500 when the bank considers it already spent when calculating such fees.
Whether you choose to use a debit card and avoid the risk of reckless credit purchases or you choose to use a credit card, understanding the dangers associated with, fees and usurious interest rates;
Please, let’s be careful out there.
In spite of what the banks would have you believe, credit cards offer more fraud and theft protection than debit cards. The latest numbers (2008) indicate losses from debit cards totaled $788 Million. Even if debit and credit cards are issued by the same bank, they are covered by different laws. Credit cards are covered by the Fair Credit Billing Act. This limits the card holder’s liability to $50.00 period the end. If the theft is reported before the card is used, the consumer pays nothing-nada. The same protection covers the illegal use of the credit card number by means of phone or Internet purchases.
Debit cards are covered by the Electronic Fund Transfer Act. If a card holder reports the loss of a card within two days, liability is limited to $50. After two days, the liability jumps to $500. A card holder who fails to report the loss within 60 days could be responsible for the entire amount. The EFTA also allows the bank to freeze your losses for up to 10 days while they conduct their investigation. Not having access to your money for 10 days could be a real problem if you needed to pay your rent or your car payment in that time frame.
Banks advertize zero liability debit cards, assuring customers that 100% of stolen funds will be restored, usually within 24 hours. However, PIN transactions (those transactions that do not require a signature) are not covered by zero liability policies, but are subject to the individual policies of the particular institution that issued the card. This would include fraudulent ATM withdrawals. Debit card holders can also be held responsible for losses due to “reckless behavior.” The definition of reckless behavior is pretty much left up to the bank. It can include card holders who report two or more unauthorized transactions in any 12 month period. If it is discovered that the cardholder wrote down his PIN or shared it with someone else, this can be considered reckless behavior.
In short, consider a debit card cash. If you are carrying a checking account balance of $5,000 that is how much cash you have in your wallet. Check that balance every day. Keep track of all your purchases and record them, again on a daily basis.
There are other dangers associated with debit cards. Last year I heard a discussion of debit card overdraft protection. Someone I have known for many years currently has a daughter in college. He was attempting to straighten out her checking account. It seems she has a debit card that she uses constantly for everything. She frequently forgets to enter these debits into her check register, spends more money than she has, and incurs overdraft protection fees. These fees typically run $30.00 per charge. In this particular case, the girl ran up over $150.00 in fees.
“If you overdraw your account with the typical fee and you pay it back in two weeks, you're paying over 500% interest," said consumer advocate Jeane Anne Fox. Tony Soprano would be ashamed to charge such interest rates but banks think it just fine. They generate $38,000,000,000 a year in pure profit by providing their customers with such a wonderful service.
Another person participating in this conversation told a story from his college days. Of course he didn’t have much money and like most of his generation he was quick to use a debit card instead of cash for small everyday purchases, like coffee, lunch, and miscellaneous school supplies. Then, every evening, he would check his checking account balance on line. On one particular day, he incurred 7 overdraft protection fees totaling $210! He called the bank and threw a screaming fit. He demanded they remove overdraft protection from his account and withdraw the fees. The bank withdrew the fees but encouraged him to keep the overdraft protection, telling him that it would protect him from the embarrassment of attempting to pay for something when his account was empty. This individual was having none of it and informed the bank he could tolerate a lot of embarrassment for $210.
It gets worse. If a series of checks or fees will throw your account into overdraft protection, the bank will process the largest charges first so they can hit you with more fees. If you use a debit card to rent a car or a hotel room, the vendor will put a hold on your account that is significantly larger than the expected charges. Sometimes the vendor will then forget to inform you of this little fact. Let’s say a total car rental bill is expected to be in the neighborhood of $135. The car rental company might put a $500 hold on your account as a form of self protection. If you don’t know this, you could easily rack up a lot of fees, thinking you had access to that $500 when the bank considers it already spent when calculating such fees.
Whether you choose to use a debit card and avoid the risk of reckless credit purchases or you choose to use a credit card, understanding the dangers associated with, fees and usurious interest rates;
Please, let’s be careful out there.
Sunday, December 5, 2010
Where are You on the Net Worth Map?
Danko and Stanley, authors of The Millionaire Next Door, have proposed a simple formula to calculate a reasonable value for net worth at a particular age with a given income. This formula produces bizarre results for people in their twenties. However for ages over forty, the results are pretty realistic when compared with actual averages.
Net worth = Age X Pretax Income ÷ 10
Hence:
A couple about 50 years old earning a combined family income of $65,000 a year should have a net worth in the neighborhood of $325,000. If they have been paying on a mortgage for over 20 years and have been contributing to their 401K, this is fairly reasonable as an average number.
If you are near this target, you are considered by the authors as an average accumulator of wealth.
If your net worth is less than half your target, you are viewed as an under-accumulator of wealth.
If you have more than double this target, you are considered a prodigious accumulator of wealth and I tip my hat to you, sir.
The Millionaire Next Door is on my short list of financial "must read" books.
Net worth = Age X Pretax Income ÷ 10
Hence:
A couple about 50 years old earning a combined family income of $65,000 a year should have a net worth in the neighborhood of $325,000. If they have been paying on a mortgage for over 20 years and have been contributing to their 401K, this is fairly reasonable as an average number.
If you are near this target, you are considered by the authors as an average accumulator of wealth.
If your net worth is less than half your target, you are viewed as an under-accumulator of wealth.
If you have more than double this target, you are considered a prodigious accumulator of wealth and I tip my hat to you, sir.
The Millionaire Next Door is on my short list of financial "must read" books.
Saturday, December 4, 2010
If you don't know where you are, you're lost!
Once upon a time my wife became lost while driving home at night. She called me on her cell phone, demanding that I tell her how to get home. The first question I asked was, “Where are you?”
Her answer, “I don’t know. I’m lost.” I asked her to find a street sign. She was in an apartment parking lot and couldn’t see any street signs. I asked if there was anyone around. She saw a man parking his car. When she asked him where she was, we discovered that she was only one block away from the road home. A few minutes later she was safely on her way home in familiar territory.
Determining your present location is the first step in planning any journey. Take a minute to calculate your net worth. Add the value of all your assets. Subtract all your debts and consider the results. If your net worth is a negative number, don’t despair.
Consider this journey through this vale of tears we call life.
Fred graduates from college with $500 in his checking account, $20,000 in college debt, a car given to him by his parents valued at $4,000, and a $3,000 car stereo. I would ignore the car and the stereo equipment and calculate his net worth at -$19,500.
Time passes, now Fred is married. Fred and Ethyl have two children a mortgage, a late model minivan, and a beater Fred drives to work. They still owe $140,000 on the mortgage. They have $15,000 in principal payments and the initial down payment on the house. The wife’s minivan is worth about $16,000. The car Fred drives to work might be worth $1,000 on a good day. They have about $5,000 in the bank but they are also carrying about $5,000 in credit card debt. Fred also has about $10,000 in his 401K.
-$140,000 + $15,000 + $5,000 - $5,000 + $10,000 = -$135,000 net worth ignoring the cars
Fred and his wife are serious people. They do a good job raising their kids, paying off their debts, and saving for retirement. At age 55 they have paid off the mortgage (finally after 30 years!). They paid cash for their two current cars that are worth a total of about $25,000. Fred has about $500,000 in his 401K and another $50,000 in savings. He pays off his credit cards every month. The house is currently worth about $400,000.
$500,000 + $400,000 +$50,000 = $950,000 (Good grief! Fred is almost a millionaire.)
How did that happen? Of course the answer is one step at a time. I am afraid the increase in property value in this example might be a thing of the past, Fred should have more than $50,000 in savings by age 55, and he would be lucky to put away that much for retirement with two kids, but you get the idea.
On the first of every month, I do a quick calculation of my net worth. This might take 15 minutes. I then compare it to the total from the previous month. If it drops, I make certain I understand why. Each year, on New Year’s Day, I compare the old number with the new.
Just make certain you are heading in the right direction. Eventually, you will get where you want to go.
Her answer, “I don’t know. I’m lost.” I asked her to find a street sign. She was in an apartment parking lot and couldn’t see any street signs. I asked if there was anyone around. She saw a man parking his car. When she asked him where she was, we discovered that she was only one block away from the road home. A few minutes later she was safely on her way home in familiar territory.
Determining your present location is the first step in planning any journey. Take a minute to calculate your net worth. Add the value of all your assets. Subtract all your debts and consider the results. If your net worth is a negative number, don’t despair.
Consider this journey through this vale of tears we call life.
Fred graduates from college with $500 in his checking account, $20,000 in college debt, a car given to him by his parents valued at $4,000, and a $3,000 car stereo. I would ignore the car and the stereo equipment and calculate his net worth at -$19,500.
Time passes, now Fred is married. Fred and Ethyl have two children a mortgage, a late model minivan, and a beater Fred drives to work. They still owe $140,000 on the mortgage. They have $15,000 in principal payments and the initial down payment on the house. The wife’s minivan is worth about $16,000. The car Fred drives to work might be worth $1,000 on a good day. They have about $5,000 in the bank but they are also carrying about $5,000 in credit card debt. Fred also has about $10,000 in his 401K.
-$140,000 + $15,000 + $5,000 - $5,000 + $10,000 = -$135,000 net worth ignoring the cars
Fred and his wife are serious people. They do a good job raising their kids, paying off their debts, and saving for retirement. At age 55 they have paid off the mortgage (finally after 30 years!). They paid cash for their two current cars that are worth a total of about $25,000. Fred has about $500,000 in his 401K and another $50,000 in savings. He pays off his credit cards every month. The house is currently worth about $400,000.
$500,000 + $400,000 +$50,000 = $950,000 (Good grief! Fred is almost a millionaire.)
How did that happen? Of course the answer is one step at a time. I am afraid the increase in property value in this example might be a thing of the past, Fred should have more than $50,000 in savings by age 55, and he would be lucky to put away that much for retirement with two kids, but you get the idea.
On the first of every month, I do a quick calculation of my net worth. This might take 15 minutes. I then compare it to the total from the previous month. If it drops, I make certain I understand why. Each year, on New Year’s Day, I compare the old number with the new.
Just make certain you are heading in the right direction. Eventually, you will get where you want to go.
Saturday, November 27, 2010
I Am My Own Worst Enemy
When it comes to selecting investments or any financial decision, we are often our own worst enemy. Over 15 years ago I became interested in certain aspects of the consciousness and the human mind. There were at least 3 roots to this inquiry, one personal, certain observations made during my practice of Tai Chi as a martial art, and the discovery in the Wall Street Journal (of all places) the U.S. military and intelligence community were using psychics to spy on the Russians. This search culminated in taking the Certified Hypnotherapist training offered by the National Guild of Hypnotists. Among other things, I have concluded human senses and consciousness are, at best, treacherous and often inadequate tools for the study of truth. The mental maps we use in our perception of reality, no matter how detailed and accurate, are not and never can be the territory they represent.
Having worked in a research laboratory for 25 years, I know that the participants in an experiment affect the outcome of that experiment. They design the experiment itself, select the instrumentation, the method of recording the data, they are participants in the experiment as they execute the experiment, and they choose how to present the outcome of the experiment. All these factors affect the accuracy and repeatability of the results. I can not say an iron bar weighs 100 pounds. I can say that the bar weighs 100 pounds plus or minus 0.1 pounds with a statistical confidence of 99.6%. There are more subtle problems found in experimental methods. For example, using the same data to both postulate a theory and validate that theory is a trap I have seen all too often.
We are over optimistic concerning our own abilities. Studies have indicated that about 80% of students predict they will perform in the top half of their class. Roughly one half of all high school football players believe they have a legitimate chance for a NFL career. In fact only 1 out of 3,000 college football players ever make it to the pros. I don’t expect to consistently beat the market, but I do believe that my decision making ability is better than the norm. If I didn’t, I would just buy index funds. Many serious men, such as Warren Buffett, recommend this plan for those of us who are part time investors.
If you have watched Sleepless in Seattle, you know we men like to quote the Godfather. In a conversation with his son, Michael, the aging ill Don Vito Corleone observes, “I spent my whole life trying not to be careless. Women and children can afford to be careless, but not men.” I too have spent my life trying not to be careless. I know that psychologists have demonstrated that the quality of a man’s judgments peak at about age 55. Then they decline. Have I started down that hill? Would I know if this were the truth?
Crowd psychology is a part of stock market performance. Benjamin Graham’s, Mr. Market is a most erratic irrational fellow. One day, sometime for no reason whatsoever, Mr. Market will sell a stock for 15% less than he paid for it yesterday or he is just as likely to pay 15% more for no particular good reason. Mr. Market becomes wildly optimistic just as a market is about to reach its peak (think of the Internet bubble). He is just as likely to sell everything in a fit of pessimism, just when the market has reached a bottom. That is the time he should be buying everything is sight. Sometimes this is called Buffett’s Rearview Mirror, a tendency to become irrationally optimistic at the end of a long bull market and irrationally pessimistic when a bear market ends in a crash.
Another all too human folly is termed Conservatism Bias and Confirmatory Bias. Because of my opinions I am likely to undervalue or ignore stocks that do not pay a dividend, missing out on opportunities like Apple or Google (Conservatism Bias). Because I believe in value investing and the importance of a sustainable dividend, I tend to seek out information that supports my prejudice.
Because outcome tends to reinforce our decision making process, we can learn the wrong lessons. We tend to congratulate ourselves on bad decisions that turn out well, such as purchasing a winning lottery ticket. I hear this from time to time from unhappy souls who have spent $1,000 to win $20 from a scratch off lottery ticket. Of course wise decisions can turn out badly. If a doctor misdiagnoses an illness, does that indicate I should never again visit a doctor?
We all know about Monday morning quarterbacks. Every Monday morning, along with my coworkers, we discuss the mistakes made over the weekend by our favorite teams. We know what plays the coaches should have called. Why aren’t they as smart as we are? Everyone knows that an Internet stock with no cash flow, no profits, and no price earning ratio that is capitalized at a value that exceeds the Gross National Product of Germany is going to become a great crashing disaster, but only after the fact. While the music is playing, everyone wants to dance.
Finally, we come to language. In both undergraduate linguistics and in studying artificial intelligence in graduate school, I have run into philosophical discussions of the inherent limitations of language in creating a net of meaning. The very words I use in writing this article are inherently imperfect and limiting.
And please, let’s be careful out there today.
Having worked in a research laboratory for 25 years, I know that the participants in an experiment affect the outcome of that experiment. They design the experiment itself, select the instrumentation, the method of recording the data, they are participants in the experiment as they execute the experiment, and they choose how to present the outcome of the experiment. All these factors affect the accuracy and repeatability of the results. I can not say an iron bar weighs 100 pounds. I can say that the bar weighs 100 pounds plus or minus 0.1 pounds with a statistical confidence of 99.6%. There are more subtle problems found in experimental methods. For example, using the same data to both postulate a theory and validate that theory is a trap I have seen all too often.
We are over optimistic concerning our own abilities. Studies have indicated that about 80% of students predict they will perform in the top half of their class. Roughly one half of all high school football players believe they have a legitimate chance for a NFL career. In fact only 1 out of 3,000 college football players ever make it to the pros. I don’t expect to consistently beat the market, but I do believe that my decision making ability is better than the norm. If I didn’t, I would just buy index funds. Many serious men, such as Warren Buffett, recommend this plan for those of us who are part time investors.
If you have watched Sleepless in Seattle, you know we men like to quote the Godfather. In a conversation with his son, Michael, the aging ill Don Vito Corleone observes, “I spent my whole life trying not to be careless. Women and children can afford to be careless, but not men.” I too have spent my life trying not to be careless. I know that psychologists have demonstrated that the quality of a man’s judgments peak at about age 55. Then they decline. Have I started down that hill? Would I know if this were the truth?
Crowd psychology is a part of stock market performance. Benjamin Graham’s, Mr. Market is a most erratic irrational fellow. One day, sometime for no reason whatsoever, Mr. Market will sell a stock for 15% less than he paid for it yesterday or he is just as likely to pay 15% more for no particular good reason. Mr. Market becomes wildly optimistic just as a market is about to reach its peak (think of the Internet bubble). He is just as likely to sell everything in a fit of pessimism, just when the market has reached a bottom. That is the time he should be buying everything is sight. Sometimes this is called Buffett’s Rearview Mirror, a tendency to become irrationally optimistic at the end of a long bull market and irrationally pessimistic when a bear market ends in a crash.
Another all too human folly is termed Conservatism Bias and Confirmatory Bias. Because of my opinions I am likely to undervalue or ignore stocks that do not pay a dividend, missing out on opportunities like Apple or Google (Conservatism Bias). Because I believe in value investing and the importance of a sustainable dividend, I tend to seek out information that supports my prejudice.
Because outcome tends to reinforce our decision making process, we can learn the wrong lessons. We tend to congratulate ourselves on bad decisions that turn out well, such as purchasing a winning lottery ticket. I hear this from time to time from unhappy souls who have spent $1,000 to win $20 from a scratch off lottery ticket. Of course wise decisions can turn out badly. If a doctor misdiagnoses an illness, does that indicate I should never again visit a doctor?
We all know about Monday morning quarterbacks. Every Monday morning, along with my coworkers, we discuss the mistakes made over the weekend by our favorite teams. We know what plays the coaches should have called. Why aren’t they as smart as we are? Everyone knows that an Internet stock with no cash flow, no profits, and no price earning ratio that is capitalized at a value that exceeds the Gross National Product of Germany is going to become a great crashing disaster, but only after the fact. While the music is playing, everyone wants to dance.
Finally, we come to language. In both undergraduate linguistics and in studying artificial intelligence in graduate school, I have run into philosophical discussions of the inherent limitations of language in creating a net of meaning. The very words I use in writing this article are inherently imperfect and limiting.
And please, let’s be careful out there today.
Saturday, November 20, 2010
Just Do It!
Eighty percent of success is just showing up.
Woody Allen
Sometimes writing this blog is easy. A subject just pops up in my mind and the post is written long before I sit down at the keyboard. Sometimes I stumble across some information that is so important I just have to pass it on. Sometimes I have nothing to say or I just don’t feel like writing. On those days, because I believe what I am doing is useful, I keep on looking until I find something I hope is of value. Sometimes I am surprised to discover what I thought was not all that special gets me an email from a friend expressing their appreciation. Sometimes a piece I considered especially valuable elicits no response whatsoever. I am learning the truth of Woody Allen’s famous axiom. Sometimes the hardest part of this job is just sitting down and doing it. I think that this is probably true of just about any aspect of money management from escaping the great American debt trap to managing a substantial investment portfolio. It is also true in areas where I consistently fail, like weight loss.
Every job has a hard part, a part that requires us to “show up” even when we don’t feel like it. Perhaps, if you are extroverted schmoozing with your customers is the easy part of your job. Perhaps, actually doing the work is hard. For an introvert, her art is everything. This person would find customers an inconvenience and an interruption. I have a friend who loves his ministry, but loathes fundraising. If he doesn’t make those phone calls, write those letters, and visit churches, he can’t do what he does so well for the Lord. I wish there was an easier way, but there isn’t. When fundraising needs to be done, he just does it.
So no matter where you find yourself along the road to financial freedom. Just get up this morning and do what needs to be done.
Let me end with a quote from “The Invitation,” a poem attributed to Oriah Mountain Dreamer that quite often appears on inspirational or motivational websites.
It doesn't interest me to know where you live or how much money you have. I want to know if you can get up, after the night of grief and despair, weary and bruised to the bone, and do what needs to be done to feed the children.
It doesn't interest me who you know or how you came to be here. I want to know if you will stand in the center of the fire with me and not shrink back.
It doesn't interest me where or what or with whom you have studied. I want to know what sustains you, from the inside, when all else falls away.
I want to know if you can be alone with yourself and if you truly like the company you keep in the empty moments.
Woody Allen
Sometimes writing this blog is easy. A subject just pops up in my mind and the post is written long before I sit down at the keyboard. Sometimes I stumble across some information that is so important I just have to pass it on. Sometimes I have nothing to say or I just don’t feel like writing. On those days, because I believe what I am doing is useful, I keep on looking until I find something I hope is of value. Sometimes I am surprised to discover what I thought was not all that special gets me an email from a friend expressing their appreciation. Sometimes a piece I considered especially valuable elicits no response whatsoever. I am learning the truth of Woody Allen’s famous axiom. Sometimes the hardest part of this job is just sitting down and doing it. I think that this is probably true of just about any aspect of money management from escaping the great American debt trap to managing a substantial investment portfolio. It is also true in areas where I consistently fail, like weight loss.
Every job has a hard part, a part that requires us to “show up” even when we don’t feel like it. Perhaps, if you are extroverted schmoozing with your customers is the easy part of your job. Perhaps, actually doing the work is hard. For an introvert, her art is everything. This person would find customers an inconvenience and an interruption. I have a friend who loves his ministry, but loathes fundraising. If he doesn’t make those phone calls, write those letters, and visit churches, he can’t do what he does so well for the Lord. I wish there was an easier way, but there isn’t. When fundraising needs to be done, he just does it.
So no matter where you find yourself along the road to financial freedom. Just get up this morning and do what needs to be done.
Let me end with a quote from “The Invitation,” a poem attributed to Oriah Mountain Dreamer that quite often appears on inspirational or motivational websites.
It doesn't interest me to know where you live or how much money you have. I want to know if you can get up, after the night of grief and despair, weary and bruised to the bone, and do what needs to be done to feed the children.
It doesn't interest me who you know or how you came to be here. I want to know if you will stand in the center of the fire with me and not shrink back.
It doesn't interest me where or what or with whom you have studied. I want to know what sustains you, from the inside, when all else falls away.
I want to know if you can be alone with yourself and if you truly like the company you keep in the empty moments.
Sunday, November 14, 2010
Rebates! Humbug! Bah, Humbug!
After two sobering entries on an important subject, here is a post on one of life’s petty annoyances, rebates. As we head into the Christmas shopping season, one of the many ways we will be manipulated by marketers will be through the use of rebates. If you remember this is nothing more than another ploy to separate a fool from his money you will be OK.
Rebates are an attempt to psychologically manipulate the buyer. The company offering the rebate knows that only 50% of all rebates will actually be paid out. They know that the larger the percentage the more likely it is that the rebate will be cashed. Hence a $1.00 rebate on a $2.00 item is more likely to be cashed than a $1.00 rebate on a $10.00 item. One might question the efficacy of submitting such a rebate, given the value of time that could be spent doing something more useful than filling out a form that could, in a small way, compromise your privacy. The cost of a postage stamp is 44 cents. The cost of an envelope is around a nickel. So what am I really getting?
Of course, I am going to take the big rebates when and if they are offered. I was offered a $50.00 rebate on my printer. After months, I actually received the rebate. When a friend built me a new computer for my home, I submitted something like five rebate forms for some of the pieces parts that went into my new machine. I ultimately received one less rebate than I submitted. I didn’t bother trying to figure out who lost my form or what happened. It simply was not worth the aggravation. Another rebate I received came in the form of a $75.00 prepaid credit card that came from the purchase of a new refrigerator. That was Sears way of offering “free” installation. By the way, I had to pay sales tax on that money. If the installation was really free I would not have paid 6% tax on that $75.00.
By the way, rebates no longer come in the form of checks that can actually be cashed. They are likely to come in the form of stupid prepaid credit cards that can not be turned into cash at your local bank. The companies that issue these things know that it is unlikely that you will ever use all of the money on the card. They get to keep the $2.37 that you forget about. If you receive one of these annoying things, use it quickly and completely on purchases like gasoline or food. Zero it out in one or two purchases. These things are not covered by any of the recent credit card reforms. If it is lost or stolen you have 24 hours to report the theft. Typically, after one year they expire, even if unused. I have read about but not yet received a rebate card that can only be used at one store.
All things considered, rebates are extremely annoying. If possible try to find a comparable price at another store that is not offering a rebate. It is actually possible to find a better price without a rebate than the price with the rebate at a more expensive retailer. If the rebate is offered by the manufacture, a little shopping will give you the best price and the rebate. If you decide to buy an item with a rebate, take care of paperwork quickly, the option to apply for the rebate can expire in 90 days or less. Remember, the people who dream up these schemes are not your friends. Take what is offered when it is offered, only if it makes sense. Do not buy something you do not need just because it is on sale or it comes with a rebate.
Thanks to USA Today for inspiring this rant.
http://www.usatoday.com/money/perfi/tips/2010-11-07-rebate-offers_N.htm?csp=hf
Rebates are an attempt to psychologically manipulate the buyer. The company offering the rebate knows that only 50% of all rebates will actually be paid out. They know that the larger the percentage the more likely it is that the rebate will be cashed. Hence a $1.00 rebate on a $2.00 item is more likely to be cashed than a $1.00 rebate on a $10.00 item. One might question the efficacy of submitting such a rebate, given the value of time that could be spent doing something more useful than filling out a form that could, in a small way, compromise your privacy. The cost of a postage stamp is 44 cents. The cost of an envelope is around a nickel. So what am I really getting?
Of course, I am going to take the big rebates when and if they are offered. I was offered a $50.00 rebate on my printer. After months, I actually received the rebate. When a friend built me a new computer for my home, I submitted something like five rebate forms for some of the pieces parts that went into my new machine. I ultimately received one less rebate than I submitted. I didn’t bother trying to figure out who lost my form or what happened. It simply was not worth the aggravation. Another rebate I received came in the form of a $75.00 prepaid credit card that came from the purchase of a new refrigerator. That was Sears way of offering “free” installation. By the way, I had to pay sales tax on that money. If the installation was really free I would not have paid 6% tax on that $75.00.
By the way, rebates no longer come in the form of checks that can actually be cashed. They are likely to come in the form of stupid prepaid credit cards that can not be turned into cash at your local bank. The companies that issue these things know that it is unlikely that you will ever use all of the money on the card. They get to keep the $2.37 that you forget about. If you receive one of these annoying things, use it quickly and completely on purchases like gasoline or food. Zero it out in one or two purchases. These things are not covered by any of the recent credit card reforms. If it is lost or stolen you have 24 hours to report the theft. Typically, after one year they expire, even if unused. I have read about but not yet received a rebate card that can only be used at one store.
All things considered, rebates are extremely annoying. If possible try to find a comparable price at another store that is not offering a rebate. It is actually possible to find a better price without a rebate than the price with the rebate at a more expensive retailer. If the rebate is offered by the manufacture, a little shopping will give you the best price and the rebate. If you decide to buy an item with a rebate, take care of paperwork quickly, the option to apply for the rebate can expire in 90 days or less. Remember, the people who dream up these schemes are not your friends. Take what is offered when it is offered, only if it makes sense. Do not buy something you do not need just because it is on sale or it comes with a rebate.
Thanks to USA Today for inspiring this rant.
http://www.usatoday.com/money/perfi/tips/2010-11-07-rebate-offers_N.htm?csp=hf
Saturday, November 13, 2010
The Very Latest Retirement Data
The information in this post comes from an article entitled, “Retirement Drawdown: Tips to Make the 4%-Percent Rule Work” by Steve Vernon, detailing the results of a new study by Chris O’Flinn and Felix Schirripa.
It was a little annoying to find this the same day I posted “The 4% Retirement Solution Revisited” but such is life. For the first time I have discovered the origin of the 4% rule. It was first proposed in a 1994 paper published by William Bengen. His research determined that, “Based on his early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount subsequent every year for inflation, stand a great chance their money will outlive them. In the same article, his analysis showed that "Retirees who draw down 5 percent a year run a 30 percent chance their nest egg will run out of steam before they do." (Wikipedia)
Using the same methodology developed by Bengen, O’Flinn and Schirripa expanded the original data set to include all retirement periods beginning each month since 1926. The end date for this study, June 2009 includes the most recent stock market collapse.
For all 20 and 25 year retirement periods:
No examples of failure with these portfolio periods if invested in 75% stocks and 25% bonds
No examples of failure with a portfolio invested in 50% stocks and 50% bonds in a 20 year retirement
2% failure with a portfolio invested in 50% stocks and 50% bonds in a 25 year retirement
For all 30 year retirement periods:
4% failure with a portfolio invested in 75% stocks and 25% bonds
8% failure with a portfolio invested in 50% stocks and 50% bonds
For all 35 year retirement periods:
8% failure with a portfolio invested in 75% stocks and 25% bonds
15% failure with a portfolio invested in 50% stocks and 50% bonds
The author wryly observes that since O’Flinn and Schirripa note that since the 4% rule failed when there was high inflation or a stock market crash early in a retirement period, “Don’t retire before the market crashes or before there’s high inflation!” Hmm, I’ll try to keep that in mind.
I think there are some important take aways from this new data. First, the old conventional wisdom that recommends holding your age in bonds. For example at age 60 I should be holding 60% in bonds and 40% in stocks may be too conservative. Perhaps the new conventional wisdom that recommends 115 – your age in stocks is more appropriate. At age 60 that would be 45% in bonds and 55% in stocks. Maybe an even more aggressive portfolio is worth the risk. Unfortunately, psychological data indicates that the quality of the decisions we make tends to peak in our mid 50s and then, even if we do not suffer from any cognitive disability such as Alzheimer’s, our decision making ability begins to decline. Will I be able to pick stocks at 85?
Secondly, it would appear that the most important question is one of life expectancy. Data from the Boeing Company that was prominently posted on our bulletin board a work showed that each year worked beyond age 55 cut life expectancy by two years. Boeing, like my employer, is primarily a mix of skilled technicians, engineers, and administrative support personnel. Therefore, could we project that for each year you work past 55 there will be 3 fewer retirement years to fund? This, of course, is highly dependent on the nature of your work, genetic makeup, and lifestyle. There are only three careers that seem to provide a statistically high number of people who love their jobs. These are medical doctor, college professors, and religious professionals. Many of these people are highly energized by their work and never really completely retire. On the other hand, a 55 year old brick layer would almost certainly shorten his life if he continued to work. Also, the wear and tear on the body would undoubtedly produce serious disabilities requiring expensive medical treatments. I don’t have data to support this conclusion, but people who hate their jobs tend to live less healthy lifestyles. They tend to drown their sorrows in alcohol, tobacco, and unhealthy foods.
I used this one before and will probably use it again.
Proverbs 3
[5] Trust in the LORD with all thine heart; and lean not unto thine own understanding.
[6] In all thy ways acknowledge him, and he shall direct thy paths.
It was a little annoying to find this the same day I posted “The 4% Retirement Solution Revisited” but such is life. For the first time I have discovered the origin of the 4% rule. It was first proposed in a 1994 paper published by William Bengen. His research determined that, “Based on his early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount subsequent every year for inflation, stand a great chance their money will outlive them. In the same article, his analysis showed that "Retirees who draw down 5 percent a year run a 30 percent chance their nest egg will run out of steam before they do." (Wikipedia)
Using the same methodology developed by Bengen, O’Flinn and Schirripa expanded the original data set to include all retirement periods beginning each month since 1926. The end date for this study, June 2009 includes the most recent stock market collapse.
For all 20 and 25 year retirement periods:
No examples of failure with these portfolio periods if invested in 75% stocks and 25% bonds
No examples of failure with a portfolio invested in 50% stocks and 50% bonds in a 20 year retirement
2% failure with a portfolio invested in 50% stocks and 50% bonds in a 25 year retirement
For all 30 year retirement periods:
4% failure with a portfolio invested in 75% stocks and 25% bonds
8% failure with a portfolio invested in 50% stocks and 50% bonds
For all 35 year retirement periods:
8% failure with a portfolio invested in 75% stocks and 25% bonds
15% failure with a portfolio invested in 50% stocks and 50% bonds
The author wryly observes that since O’Flinn and Schirripa note that since the 4% rule failed when there was high inflation or a stock market crash early in a retirement period, “Don’t retire before the market crashes or before there’s high inflation!” Hmm, I’ll try to keep that in mind.
I think there are some important take aways from this new data. First, the old conventional wisdom that recommends holding your age in bonds. For example at age 60 I should be holding 60% in bonds and 40% in stocks may be too conservative. Perhaps the new conventional wisdom that recommends 115 – your age in stocks is more appropriate. At age 60 that would be 45% in bonds and 55% in stocks. Maybe an even more aggressive portfolio is worth the risk. Unfortunately, psychological data indicates that the quality of the decisions we make tends to peak in our mid 50s and then, even if we do not suffer from any cognitive disability such as Alzheimer’s, our decision making ability begins to decline. Will I be able to pick stocks at 85?
Secondly, it would appear that the most important question is one of life expectancy. Data from the Boeing Company that was prominently posted on our bulletin board a work showed that each year worked beyond age 55 cut life expectancy by two years. Boeing, like my employer, is primarily a mix of skilled technicians, engineers, and administrative support personnel. Therefore, could we project that for each year you work past 55 there will be 3 fewer retirement years to fund? This, of course, is highly dependent on the nature of your work, genetic makeup, and lifestyle. There are only three careers that seem to provide a statistically high number of people who love their jobs. These are medical doctor, college professors, and religious professionals. Many of these people are highly energized by their work and never really completely retire. On the other hand, a 55 year old brick layer would almost certainly shorten his life if he continued to work. Also, the wear and tear on the body would undoubtedly produce serious disabilities requiring expensive medical treatments. I don’t have data to support this conclusion, but people who hate their jobs tend to live less healthy lifestyles. They tend to drown their sorrows in alcohol, tobacco, and unhealthy foods.
I used this one before and will probably use it again.
Proverbs 3
[5] Trust in the LORD with all thine heart; and lean not unto thine own understanding.
[6] In all thy ways acknowledge him, and he shall direct thy paths.
Friday, November 12, 2010
The 4% Retirement Solution Revisited
I don’t like to be too repetitive. However, this question came up twice in a little over a week, so I thought it must be time to revisit the 4% solution. A hypothetical portfolio invested in 50% bonds and 50% stocks in 1946, subjected to a 4% withdrawal rate would have lasted for 53 years. The same portfolio subjected to a 5% withdrawal rate would last 34 years. Projecting an 8% withdrawal, mentioned in “I could be wrong now, but I don’t think so,” the portfolio lasted less than 16 years. This information comes from Richard C. Young’s Economic Analysis Report. Most of the usual sources including my Schwab account retirement calculator recommend the 4% solution. This calculator helpfully adds the probability of various balances at your projected death date. This calculator and others assume a 4% draw will give you something like a 90% probability of not outliving your money. Greater certainty would require more money.
Here, once again, is the basic calculation.
Start with your current total household income. Let’s say for the sake of this example, $100,000. Psychologists have discovered that in spite of protestations to the contrary, people spend more in retirement than they think they will. 80% is the current number favored by conventional wisdom. Only a few years ago this number was 75%.
So the amount of money you are likely to spend in retirement is:
$100,000 X 0.80 = $80,000
Some of us who live in high cost areas like suburban Washington, D.C. are in a position to move to a lower cost area, dropping our cost of living dramatically without lowering our quality of life. I plan to move to a state with low housing costs and low taxes like South Carolina. Almost everyone will spend less in retirement. There are no more daily commutes. This drops automobile expenses. Clothing costs drop now that white collars and suit jackets are only required for weddings and funerals.
So where is that money going to come from? $80,000 is the goal. First assume that you will be receiving Social Security. This number is provided by the Social Security Administration on an annual basis. I believe that any politician that attempts a bait and switch on Social Security will be burned alive by the Baby Boomers. There are too many of us and we vote. Gen X and Gen Y? Your Social Security may or may not be there when you need it. Plan accordingly.
For the sake of this example, let us assume Social Security in the amount of $25,000 a year for both husband and wife. Let us also assume that this hypothetical husband and wife also have a guaranteed pension of $30,000 a year. Unfortunately the folks with defined benefit pensions are becoming an endangered species.
So:
$80,000 - $25,000 - $30,000 = $25,000
This is the number you will have to generate every year (adjusted for inflation) for the rest of your life. To put things in perspective that is about the same as a job paying $12.50 an hour. To achieve this goal with a high probability of success, the economists and statisticians who study such things recommend the 4 percent solution.
Take the number not guaranteed by the Government or your employer and divide by 0.04.
Hence, in this example:
$25,000 ÷ 0.04 = $625,000
If you don’t like to divide, the same number can be calculated by multiplying your annual goal by 25.
In the past most of this money was expected to be generated by the increasing value of the single family home. It was assumed that real estate prices go up forever. 2008 proved this was a bad assumption. My generation was shocked by the sudden and dramatic drop in property values. Now savings and investments will be required to cover that shortfall. The basic calculation is pretty simple but achieving the goal is difficult. If you don’t plan on getting married, buying a house, or having children, it will be pretty easy to generate enough in your 401K to guarantee a comfortable retirement. However, if you want to have a life, things get harder. Don’t despair. Pick an investment strategy that is comfortable for you. There are several that are well proven. Then stick to the task with relentless determination. A disciplined approach, plus time, and the power of compound interest will take you where you want to go.
Here, once again, is the basic calculation.
Start with your current total household income. Let’s say for the sake of this example, $100,000. Psychologists have discovered that in spite of protestations to the contrary, people spend more in retirement than they think they will. 80% is the current number favored by conventional wisdom. Only a few years ago this number was 75%.
So the amount of money you are likely to spend in retirement is:
$100,000 X 0.80 = $80,000
Some of us who live in high cost areas like suburban Washington, D.C. are in a position to move to a lower cost area, dropping our cost of living dramatically without lowering our quality of life. I plan to move to a state with low housing costs and low taxes like South Carolina. Almost everyone will spend less in retirement. There are no more daily commutes. This drops automobile expenses. Clothing costs drop now that white collars and suit jackets are only required for weddings and funerals.
So where is that money going to come from? $80,000 is the goal. First assume that you will be receiving Social Security. This number is provided by the Social Security Administration on an annual basis. I believe that any politician that attempts a bait and switch on Social Security will be burned alive by the Baby Boomers. There are too many of us and we vote. Gen X and Gen Y? Your Social Security may or may not be there when you need it. Plan accordingly.
For the sake of this example, let us assume Social Security in the amount of $25,000 a year for both husband and wife. Let us also assume that this hypothetical husband and wife also have a guaranteed pension of $30,000 a year. Unfortunately the folks with defined benefit pensions are becoming an endangered species.
So:
$80,000 - $25,000 - $30,000 = $25,000
This is the number you will have to generate every year (adjusted for inflation) for the rest of your life. To put things in perspective that is about the same as a job paying $12.50 an hour. To achieve this goal with a high probability of success, the economists and statisticians who study such things recommend the 4 percent solution.
Take the number not guaranteed by the Government or your employer and divide by 0.04.
Hence, in this example:
$25,000 ÷ 0.04 = $625,000
If you don’t like to divide, the same number can be calculated by multiplying your annual goal by 25.
In the past most of this money was expected to be generated by the increasing value of the single family home. It was assumed that real estate prices go up forever. 2008 proved this was a bad assumption. My generation was shocked by the sudden and dramatic drop in property values. Now savings and investments will be required to cover that shortfall. The basic calculation is pretty simple but achieving the goal is difficult. If you don’t plan on getting married, buying a house, or having children, it will be pretty easy to generate enough in your 401K to guarantee a comfortable retirement. However, if you want to have a life, things get harder. Don’t despair. Pick an investment strategy that is comfortable for you. There are several that are well proven. Then stick to the task with relentless determination. A disciplined approach, plus time, and the power of compound interest will take you where you want to go.
Sunday, November 7, 2010
May Flights of Angels Sing Thee to thy Rest
On Thursday November 4, 2010 I lost a good friend. The world lost a good Christian and a good man. I want to take this moment to remember his life and his goodness.
MAN that is born of a woman hath but a short time to live, and is full of misery. He cometh up, and is cut down, like a flower; he fleeth as it were a shadow, and never continueth in one stay.
FORASMUCH as it hath pleased Almighty God of his great mercy to take unto himself the soul of our dear brother here departed, we therefore commit his body to the ground; earth to earth, ashes to ashes, dust to dust; in sure and certain hope of the resurrection to eternal life through our Lord Jesus Christ; who shall change the body of our low estate that it may be like unto his glorious body, according to the mighty working, whereby he is able to subdue all things to himself.
Domine Refugium Psalm 90
[1] LORD, thou hast been our dwelling place in all generations.
[2] Before the mountains were brought forth, or ever thou hadst formed the earth and the world, even from everlasting to everlasting, thou art God.
[3] Thou turnest man to destruction; and sayest, Return, ye children of men.
[4] For a thousand years in thy sight are but as yesterday when it is past, and as a watch in the night.
[5] Thou carriest them away as with a flood; they are as a sleep: in the morning they are like grass which groweth up.
[6] In the morning it flourisheth, and groweth up; in the evening it is cut down, and withereth.
[7] For we are consumed by thine anger, and by thy wrath are we troubled.
[8] Thou hast set our iniquities before thee, our secret sins in the light of thy countenance.
[9] For all our days are passed away in thy wrath: we spend our years as a tale that is told.
[10] The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away.
[11] Who knoweth the power of thine anger? even according to thy fear, so is thy wrath.
[12] So teach us to number our days, that we may apply our hearts unto wisdom.
[13] Return, O LORD, how long? and let it repent thee concerning thy servants.
[14] O satisfy us early with thy mercy; that we may rejoice and be glad all our days.
[15] Make us glad according to the days wherein thou hast afflicted us, and the years wherein we have seen evil.
[16] Let thy work appear unto thy servants, and thy glory unto their children.
[17] And let the beauty of the LORD our God be upon us: and establish thou the work of our hands upon us; yea, the work of our hands establish thou it.
Amen
MAN that is born of a woman hath but a short time to live, and is full of misery. He cometh up, and is cut down, like a flower; he fleeth as it were a shadow, and never continueth in one stay.
FORASMUCH as it hath pleased Almighty God of his great mercy to take unto himself the soul of our dear brother here departed, we therefore commit his body to the ground; earth to earth, ashes to ashes, dust to dust; in sure and certain hope of the resurrection to eternal life through our Lord Jesus Christ; who shall change the body of our low estate that it may be like unto his glorious body, according to the mighty working, whereby he is able to subdue all things to himself.
Domine Refugium Psalm 90
[1] LORD, thou hast been our dwelling place in all generations.
[2] Before the mountains were brought forth, or ever thou hadst formed the earth and the world, even from everlasting to everlasting, thou art God.
[3] Thou turnest man to destruction; and sayest, Return, ye children of men.
[4] For a thousand years in thy sight are but as yesterday when it is past, and as a watch in the night.
[5] Thou carriest them away as with a flood; they are as a sleep: in the morning they are like grass which groweth up.
[6] In the morning it flourisheth, and groweth up; in the evening it is cut down, and withereth.
[7] For we are consumed by thine anger, and by thy wrath are we troubled.
[8] Thou hast set our iniquities before thee, our secret sins in the light of thy countenance.
[9] For all our days are passed away in thy wrath: we spend our years as a tale that is told.
[10] The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away.
[11] Who knoweth the power of thine anger? even according to thy fear, so is thy wrath.
[12] So teach us to number our days, that we may apply our hearts unto wisdom.
[13] Return, O LORD, how long? and let it repent thee concerning thy servants.
[14] O satisfy us early with thy mercy; that we may rejoice and be glad all our days.
[15] Make us glad according to the days wherein thou hast afflicted us, and the years wherein we have seen evil.
[16] Let thy work appear unto thy servants, and thy glory unto their children.
[17] And let the beauty of the LORD our God be upon us: and establish thou the work of our hands upon us; yea, the work of our hands establish thou it.
Amen
Saturday, November 6, 2010
Cable TV
“Because prices move inexorably toward the free, the best move in the network economy is to anticipate this cheapness.”
Kevin Kelly
Finally, some good news for those promoting financial responsibility, USA Today is reporting that Americans are dropping cable TV subscriptions at record rates. More encouraging news is they are not replacing those services with satellite TV or telephone services such as FIOS.
As readers of this blog know by now, I consider ditching cable TV as a good way to free up money to pay off debts. It is a luxury not a necessity. Americans are finally discovering an endless cycle of work and spend does not bring happiness. As a nation and as individuals we are finally waking up from a two decade binge of spending to a really nasty debt hangover. We are still a long way from frugality becoming the new cool, as some authors claim, but we are finally heading in the right direction. People are buying into the idea of voluntary simplicity.
There are other economic forces arrayed against cable TV. First the wretched quality of their overpriced services always leaves these companies in a tight race to the bottom of the customer service rankings with airlines and AOL. Why should I want to pay for a bunch of shopping channels and worse to get the History Channel and ESPN? My wife would ask the same question, substituting Animal Planet and the Hallmark Movie channel. The American consumer has been demanding ala carte cable service for years. Because the cable TV companies are close to being natural monopolies, they have consistently ignored their customers’ desires.
Sadly, Americans, particularly unemployed Americans have much less in the way of discretionary income. Cable TV is a luxury not a necessity.
Much as I would like to believe this trend reflects a seismic shift in mentality of the American consumer, I expect the truth is that one of Kevin Kelly’s laws is taking effect. The cost of content delivered by a given technology will always tend to move asymptotically towards zero. In Rules for a New Economy, Kelly has traced the course of a number of technologies. When they are first introduced they tend to be affordable. I had cable when I lived in an apartment in Greenville, SC (1977-1978) that was located in a natural bowl surrounded by hills. We could only get one channel with the rabbit ears. From memory, basic cable gave us the three majors, PBS, a religious channel or two, and some trash for about $8.00 a month. Today the average cost of cable runs something like $70 a month, $120 a month for some of the premium services. At some point the customer is horrified by the rising cost or a new technology offers a better product at less cost. Then the price starts to drop, first fast and then really fast, heading towards but never reaching zero. In my lifetime I have seen the cost of long distance telephone service drop from something like $3.00 a minute to 3 cents a minute.
Affordable high speed Internet is becoming a “necessity” much as the telephone, which was first considered a luxury but in time came to be seen as a necessity. More and more shopping, bill paying, and financial services (such as banks and brokerage houses) are assuming their customers have access to high speed Internet. I have discovered that even in rural America, satellite Internet is the wave of the future. Free Internet services such as HULU are providing a huge range of television entertainment that is both free and available 24/7. Netflix provides downloadable movies at an extremely reasonable price. “Renting” the movies on line that you really want to see is far cheaper than paying for a bunch of junk you really do not want to watch. New technology is making it easy to integrate the Internet into a home entertainment center. People are cutting the cable.
From the article “More Customers Drop Cable TV; Is Internet or Cost to Blame?”
By Peter Sevenson
Thomas Clancy Jr., 35, in Lon g Beach, N.Y., canceled the family's Cablevision subscription this spring. He said he has been happy with Netflix and other Internet video services since then, even though there isn't a lot of live sports to be had online.
"The amount of sports that I watched certainly didn't justify a hundred-dollar-a-month expense for all this stuff. I mean, that's twelve hundred dollars a year," Clancy said. "Twelve hundred dollars is ... near a vacation."
Kevin Kelly
Finally, some good news for those promoting financial responsibility, USA Today is reporting that Americans are dropping cable TV subscriptions at record rates. More encouraging news is they are not replacing those services with satellite TV or telephone services such as FIOS.
As readers of this blog know by now, I consider ditching cable TV as a good way to free up money to pay off debts. It is a luxury not a necessity. Americans are finally discovering an endless cycle of work and spend does not bring happiness. As a nation and as individuals we are finally waking up from a two decade binge of spending to a really nasty debt hangover. We are still a long way from frugality becoming the new cool, as some authors claim, but we are finally heading in the right direction. People are buying into the idea of voluntary simplicity.
There are other economic forces arrayed against cable TV. First the wretched quality of their overpriced services always leaves these companies in a tight race to the bottom of the customer service rankings with airlines and AOL. Why should I want to pay for a bunch of shopping channels and worse to get the History Channel and ESPN? My wife would ask the same question, substituting Animal Planet and the Hallmark Movie channel. The American consumer has been demanding ala carte cable service for years. Because the cable TV companies are close to being natural monopolies, they have consistently ignored their customers’ desires.
Sadly, Americans, particularly unemployed Americans have much less in the way of discretionary income. Cable TV is a luxury not a necessity.
Much as I would like to believe this trend reflects a seismic shift in mentality of the American consumer, I expect the truth is that one of Kevin Kelly’s laws is taking effect. The cost of content delivered by a given technology will always tend to move asymptotically towards zero. In Rules for a New Economy, Kelly has traced the course of a number of technologies. When they are first introduced they tend to be affordable. I had cable when I lived in an apartment in Greenville, SC (1977-1978) that was located in a natural bowl surrounded by hills. We could only get one channel with the rabbit ears. From memory, basic cable gave us the three majors, PBS, a religious channel or two, and some trash for about $8.00 a month. Today the average cost of cable runs something like $70 a month, $120 a month for some of the premium services. At some point the customer is horrified by the rising cost or a new technology offers a better product at less cost. Then the price starts to drop, first fast and then really fast, heading towards but never reaching zero. In my lifetime I have seen the cost of long distance telephone service drop from something like $3.00 a minute to 3 cents a minute.
Affordable high speed Internet is becoming a “necessity” much as the telephone, which was first considered a luxury but in time came to be seen as a necessity. More and more shopping, bill paying, and financial services (such as banks and brokerage houses) are assuming their customers have access to high speed Internet. I have discovered that even in rural America, satellite Internet is the wave of the future. Free Internet services such as HULU are providing a huge range of television entertainment that is both free and available 24/7. Netflix provides downloadable movies at an extremely reasonable price. “Renting” the movies on line that you really want to see is far cheaper than paying for a bunch of junk you really do not want to watch. New technology is making it easy to integrate the Internet into a home entertainment center. People are cutting the cable.
From the article “More Customers Drop Cable TV; Is Internet or Cost to Blame?”
By Peter Sevenson
Thomas Clancy Jr., 35, in Lon g Beach, N.Y., canceled the family's Cablevision subscription this spring. He said he has been happy with Netflix and other Internet video services since then, even though there isn't a lot of live sports to be had online.
"The amount of sports that I watched certainly didn't justify a hundred-dollar-a-month expense for all this stuff. I mean, that's twelve hundred dollars a year," Clancy said. "Twelve hundred dollars is ... near a vacation."
Friday, November 5, 2010
The Intelligent Investor
Warren Buffet describes The Intelligent Investor by Benjamin Graham as, "by far the best book on investing ever written." It is the seminal description of the principles of value investing. The sage of Omaha is not alone in praising this book. On vacation I read the original 1948 edition of this classic. John C. Bogle, founder of the Vanguard Funds wrote the introduction. Other luminaries such as Irving Kahn, Walter Schloss, and Jason Zweig have praised this work.
The Intelligent Investor is the essence what I have been trying to learn over the last nine years. The value investor does not overly concern himself with the day to day fluctuations of the market. Instead, this investor attempts to identify companies with a promising income stream, sound management, and a sustainable dividend, buying them when their price dips, and then holding them, sometimes forever. Graham also recommends developing a defensive mix of fixed income securities and stocks to further protect the value of the investor’s portfolio against the slings and arrows of outrageous fortune.
In the sixty years that have passed since this book was written the particulars of all his examples have changed, but the principles taught are timeless. For example, I found it interesting he was aware of the inherent value found in unprofitable railroads. Thirty years later some of these unprofitable railroads went bankrupt. Those wise enough to understand what Graham was preaching made a killing buying these “worthless” securities. The real estate holdings of these railroads, proved to be worth many times the value of their cost.
This book is not an easy read. There is more to learn from his examples than can be absorbed in a single reading, no matter how slow and careful.
Graham is greatly amused by “Mr. Market,” an obliging fellow who comes to his door every day, offering to buy his stocks or sell him something else. Some days the price offered is ridiculously low and on other days the price is outrageously high, but over time the value of the intelligent investor’s holdings continues to grow and pay regular dividends.
The Intelligent Investor is the essence what I have been trying to learn over the last nine years. The value investor does not overly concern himself with the day to day fluctuations of the market. Instead, this investor attempts to identify companies with a promising income stream, sound management, and a sustainable dividend, buying them when their price dips, and then holding them, sometimes forever. Graham also recommends developing a defensive mix of fixed income securities and stocks to further protect the value of the investor’s portfolio against the slings and arrows of outrageous fortune.
In the sixty years that have passed since this book was written the particulars of all his examples have changed, but the principles taught are timeless. For example, I found it interesting he was aware of the inherent value found in unprofitable railroads. Thirty years later some of these unprofitable railroads went bankrupt. Those wise enough to understand what Graham was preaching made a killing buying these “worthless” securities. The real estate holdings of these railroads, proved to be worth many times the value of their cost.
This book is not an easy read. There is more to learn from his examples than can be absorbed in a single reading, no matter how slow and careful.
Graham is greatly amused by “Mr. Market,” an obliging fellow who comes to his door every day, offering to buy his stocks or sell him something else. Some days the price offered is ridiculously low and on other days the price is outrageously high, but over time the value of the intelligent investor’s holdings continues to grow and pay regular dividends.
Sunday, October 31, 2010
I could be wrong now, but I don't think so!
I really enjoy the television series, Monk. The hero is an insufferably neurotic police detective on extended disability due to his mental disorders. Monk is certain that something horrible is just about to happen, as he absolutely knows that the world is full of germs, poisons, and the like. The theme song, “It’s a Jungle Out There” written by Randy Newman is perfect for this show. It also seems to apply to retirement planning. On my vacation I bought a used copy of Dave Ramsey’s book, “The Total Money Makeover.” One of Dave’s principles is to only buy at a deep discount, so never pay retail for a Dave Ramsey Book? At any rate, I certainly agree with most of the book’s content and I certainly admire what he has accomplished. However, when I read his chapter on retirement planning I thought some of his assumptions were wildly optimistic. Because:
It's a jungle out there
Disorder and confusion everywhere
No one seems to care
Well I do
Hey, who’s in charge here?
Dave is assuming a 12% annual return on retail mutual funds, his preferred vehicle for individual investors. He is also assuming 4% inflation, giving a net return of 8%.
From a recent Wall Street Journal entitled, Retirement Disaster Ahead; John West and Rob Arnott of Research Affiliates observe that over the last half century, corporate earnings have grown at 1% per year in inflation adjusted terms. That would be 1.2% since 1900. The last century was the American Century. Can we expect a repeat with an aging population and a heavy public and private debt burden? Can we continue to grow our economy in real terms now that China is becoming the world’s industrial powerhouse?
West and Arnott are projecting a weighted return of 4.1% for a balanced portfolio of 60% stocks and 40% bonds. The return on a more aggressive portfolio might rise to 5.2%. Like Dave Ramsey, the major public pension funds are projecting an after inflation return of 8%. West and Arnott are projecting about 2.1%.
People think I'm crazy, 'cause I worry all the time
If you paid attention, you'd be worried too
Again, from the article, here is what those numbers actually mean.
Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000. Someone who only manages 2.5% ends up with $420,000, big difference.
Back in January I wrote another article on this subject entitled, “Counting our Chickens.” In this article I observed, “The author also asked some respected experts what guaranteed rate of return after taxes and inflation would be realistically acceptable. John C. Bogle, founder of the Vanguard Group of mutual funds replied, 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.”
Do you really want to bet your future on an 8% after inflation return on your investments? The title of the latest report by West and Arnott is “Hope is not a Strategy.”
As the song says,
I could be wrong now, but I don't think so!
'Cause there's a jungle out there.
It's a jungle out there.
It's a jungle out there
Disorder and confusion everywhere
No one seems to care
Well I do
Hey, who’s in charge here?
Dave is assuming a 12% annual return on retail mutual funds, his preferred vehicle for individual investors. He is also assuming 4% inflation, giving a net return of 8%.
From a recent Wall Street Journal entitled, Retirement Disaster Ahead; John West and Rob Arnott of Research Affiliates observe that over the last half century, corporate earnings have grown at 1% per year in inflation adjusted terms. That would be 1.2% since 1900. The last century was the American Century. Can we expect a repeat with an aging population and a heavy public and private debt burden? Can we continue to grow our economy in real terms now that China is becoming the world’s industrial powerhouse?
West and Arnott are projecting a weighted return of 4.1% for a balanced portfolio of 60% stocks and 40% bonds. The return on a more aggressive portfolio might rise to 5.2%. Like Dave Ramsey, the major public pension funds are projecting an after inflation return of 8%. West and Arnott are projecting about 2.1%.
People think I'm crazy, 'cause I worry all the time
If you paid attention, you'd be worried too
Again, from the article, here is what those numbers actually mean.
Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000. Someone who only manages 2.5% ends up with $420,000, big difference.
Back in January I wrote another article on this subject entitled, “Counting our Chickens.” In this article I observed, “The author also asked some respected experts what guaranteed rate of return after taxes and inflation would be realistically acceptable. John C. Bogle, founder of the Vanguard Group of mutual funds replied, 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.”
Do you really want to bet your future on an 8% after inflation return on your investments? The title of the latest report by West and Arnott is “Hope is not a Strategy.”
As the song says,
I could be wrong now, but I don't think so!
'Cause there's a jungle out there.
It's a jungle out there.
Saturday, October 30, 2010
Farms, Forests and Foothills
It was hard to return from vacation this year. We rented a cabin in the woods near Westminster, SC in Oconee County. At night there were no sounds but the barely audible passing of an occasional train or the distant complaints of a disturbed dog. The people of Westminster were polite, even kind. I have reached the age where the young women working at the grocery stores and the restaurants invariably address me as hun, honey, or darlin’ Everybody expects that you will be drinking sweet tea with your meal and the pace of life is just a lot slower than the Washington, DC area. I like the Northwest corner of South Carolina. We lived there for 9 years, leaving for Columbia in 1978. Somehow this area feels a lot like home.
Although the unemployment rate is a little above the national average in Greenville, Pickens, and Oconee County, it doesn’t have that bad feeling one gets from too many empty store fronts, battered cars, and that desperate depressed expression of too many bills and not enough month. The Dollar General Stores and Walmart are booming. Curiously, I saw a lot of expensive pickup trucks and not a few new cars in the parking lots of these establishments. It appears the locals are not interested in wasting their money on brand name consumables but are not going to give up their new F150 truck. There is a lot of light industry a few miles further North in Anderson and Greenville. There are even a few small plants near Westminster. I am not exactly sure why there is a discrepancy between the numbers (like average wage and unemployment rate) and a general feeling of well being. Perhaps, it is a combination of a low cost of living, low taxes, and a low crime rate. Perhaps, it is because much of the area is rural. People own farms and small independent logging operations seem to employ a lot of folks. I imagine that unemployment insurance plus an extended family with farms or an off the record part time job cutting trees makes for a better life during hard times.
Greenville, the largest city in the area is remarkable. When we left the area in 1978, Greenville was a dying textile center with a decaying downtown. The crime rate was climbing and property values were heading down. Thanks to Mayor Max Heller, something of a local hero, Greenville has been reborn. Main Street is now an attractive upscale food court. There are new office buildings in the downtown skyline that house regional banking centers and insurance companies. The city government built a new cultural center and a very nice river park with interesting walking paths, transforming one of the worst sections of the old city into a magnet for both locals and visitors. Some of the old textile mills have been reborn as condos, restaurants, or offices. BMW, Michelin, and small auto part factories have provided a new generation of factory jobs. It is a changed city. My wife, along with several groups of young girls spent a Saturday morning looking for 9 small bronze mice hidden along Main Street. By the way, she found them all.
One of the things that surprised me was the number of large Baptist and Pentecostal/Charismatic churches in the three Northern counties. It is hard to understand how the population could support so many large, fairly prosperous looking churches. It is not unusual to spot a large brick church complex with a sizable parking lot located in what appears to be the middle of nowhere. There is a Presbyterian church in Westminster and I spotted a number of Mennonites in the local grocery store but no evidence of Episcopalians or Catholics in Oconee County.
The poets tell us, “You can’t go home again.” To a degree that is true. My wife and I visited Furman University, our first college, after a 25 year absence. It was unrecognizable. There were so many new buildings on the same campus it felt claustrophobic. We still have friends and family in the area. Our relationships, the fields, and the forest are older, but they all still feel like home.
Although the unemployment rate is a little above the national average in Greenville, Pickens, and Oconee County, it doesn’t have that bad feeling one gets from too many empty store fronts, battered cars, and that desperate depressed expression of too many bills and not enough month. The Dollar General Stores and Walmart are booming. Curiously, I saw a lot of expensive pickup trucks and not a few new cars in the parking lots of these establishments. It appears the locals are not interested in wasting their money on brand name consumables but are not going to give up their new F150 truck. There is a lot of light industry a few miles further North in Anderson and Greenville. There are even a few small plants near Westminster. I am not exactly sure why there is a discrepancy between the numbers (like average wage and unemployment rate) and a general feeling of well being. Perhaps, it is a combination of a low cost of living, low taxes, and a low crime rate. Perhaps, it is because much of the area is rural. People own farms and small independent logging operations seem to employ a lot of folks. I imagine that unemployment insurance plus an extended family with farms or an off the record part time job cutting trees makes for a better life during hard times.
Greenville, the largest city in the area is remarkable. When we left the area in 1978, Greenville was a dying textile center with a decaying downtown. The crime rate was climbing and property values were heading down. Thanks to Mayor Max Heller, something of a local hero, Greenville has been reborn. Main Street is now an attractive upscale food court. There are new office buildings in the downtown skyline that house regional banking centers and insurance companies. The city government built a new cultural center and a very nice river park with interesting walking paths, transforming one of the worst sections of the old city into a magnet for both locals and visitors. Some of the old textile mills have been reborn as condos, restaurants, or offices. BMW, Michelin, and small auto part factories have provided a new generation of factory jobs. It is a changed city. My wife, along with several groups of young girls spent a Saturday morning looking for 9 small bronze mice hidden along Main Street. By the way, she found them all.
One of the things that surprised me was the number of large Baptist and Pentecostal/Charismatic churches in the three Northern counties. It is hard to understand how the population could support so many large, fairly prosperous looking churches. It is not unusual to spot a large brick church complex with a sizable parking lot located in what appears to be the middle of nowhere. There is a Presbyterian church in Westminster and I spotted a number of Mennonites in the local grocery store but no evidence of Episcopalians or Catholics in Oconee County.
The poets tell us, “You can’t go home again.” To a degree that is true. My wife and I visited Furman University, our first college, after a 25 year absence. It was unrecognizable. There were so many new buildings on the same campus it felt claustrophobic. We still have friends and family in the area. Our relationships, the fields, and the forest are older, but they all still feel like home.
Saturday, October 2, 2010
Artificial Intelligence?
As I was thinking about the list of problem solving tips presented last week in “Problem Solving III (10 Habits of Mind for Investor),” it began to sound very much like how an intelligent child interacts with the world, at least until he or she learns about doubt and fear. In fact it sounded somewhat like some of the definitions of intelligence I discovered while writing a research paper on Artificial Intelligence. I present one of those lists from my paper for your consideration. I think it can describe the actions of a toddler exploring a back yard or a 60 year old man tottering about the stock markets.
The best short list describing attributes that indicate intelligence that I found in my readings comes from Godel Escher Bach by Douglas R. Hofstadter.
1) To respond to situations very flexibly;
2) To take advantage of fortuitous circumstances;
3) To make sense out of ambiguous or contradictory messages;
4) To recognize the relative importance of different elements of a situations;
5) To find similarities between situations despite differences which may separate them;
6) To draw distinctions between situations despite similarities which may link them;
7) To synthesize new concepts by taking old concepts and putting them together in new ways;
8) To come up with ideas which are novel;
The best short list describing attributes that indicate intelligence that I found in my readings comes from Godel Escher Bach by Douglas R. Hofstadter.
1) To respond to situations very flexibly;
2) To take advantage of fortuitous circumstances;
3) To make sense out of ambiguous or contradictory messages;
4) To recognize the relative importance of different elements of a situations;
5) To find similarities between situations despite differences which may separate them;
6) To draw distinctions between situations despite similarities which may link them;
7) To synthesize new concepts by taking old concepts and putting them together in new ways;
8) To come up with ideas which are novel;
Stone Cold Facts II
Here are the facts. Your political persuasions make no difference. These are the problems that confront this nation.
Our nation is in debt to the tune of 13.9 Trillion Dollars.
We have underfunded liabilities (such as Social Security) that are calculated at 55 Trillion Dollars.
Many of our states and municipalities are on the verge of bankruptcy. If these entities were required to abide by normal rules of accounting they would already be considered insolvent.
The problem is rapidly getting worse as the Federal Government is currently borrowing roughly 40 cents for every dollar it spends.
The individual American consumer is possibly in worse shape than his Government. The last official number I could find was 13.7 Trillion Dollars, including mortgages. Current estimates run about 16.2 Trillion Dollars.
We are rapidly approaching several historically important tipping points. Any one of these may or may not prove significant, but they frequently mark the beginning of the end for a nation.
1)The national debt is roughly equal to the nation’s Gross Domestic Product.
2)The interest on the national debt approaches 15% of Government expenditures
3)More than 50% of the individuals in a country are net beneficiaries of Governmental expenditures.
By the way, number 3 on this list is almost unavoidable as the Baby Boom approaches retirement.
We are told by economists that our structural unemployment level is now approximately 9%. That means we can’t expect the unemployment level to get much better than 9% in the foreseeable future. What this means in human terms is there are 26 million Americans who are unemployed or working less than full time because no work is available. It means that 41 million Americans are on the current equivalent of food stamps. This is the highest number in history.
Over the last 20 years, our public policies have resulted in the exportation of approximately 20 million American jobs to countries like China and India. The stable wealth creating factory jobs with good benefits that made this country the envy of the world are gone, perhaps forever.
Debt that can not be repaid will not be repaid. It is repudiated or it is inflated out of existence by a devaluation of the underlying currency. When this occurs, the unintended second order effects are often rather unpleasant. They include the rise of dictators, military coupes, world wars, civil wars, and revolutions.
At this point, fixing blame is not the issue. These problems will not be solved in one year or in ten, but we must begin to head in a different direction, both as individuals and as a country, or we face extinction.
Our nation is in debt to the tune of 13.9 Trillion Dollars.
We have underfunded liabilities (such as Social Security) that are calculated at 55 Trillion Dollars.
Many of our states and municipalities are on the verge of bankruptcy. If these entities were required to abide by normal rules of accounting they would already be considered insolvent.
The problem is rapidly getting worse as the Federal Government is currently borrowing roughly 40 cents for every dollar it spends.
The individual American consumer is possibly in worse shape than his Government. The last official number I could find was 13.7 Trillion Dollars, including mortgages. Current estimates run about 16.2 Trillion Dollars.
We are rapidly approaching several historically important tipping points. Any one of these may or may not prove significant, but they frequently mark the beginning of the end for a nation.
1)The national debt is roughly equal to the nation’s Gross Domestic Product.
2)The interest on the national debt approaches 15% of Government expenditures
3)More than 50% of the individuals in a country are net beneficiaries of Governmental expenditures.
By the way, number 3 on this list is almost unavoidable as the Baby Boom approaches retirement.
We are told by economists that our structural unemployment level is now approximately 9%. That means we can’t expect the unemployment level to get much better than 9% in the foreseeable future. What this means in human terms is there are 26 million Americans who are unemployed or working less than full time because no work is available. It means that 41 million Americans are on the current equivalent of food stamps. This is the highest number in history.
Over the last 20 years, our public policies have resulted in the exportation of approximately 20 million American jobs to countries like China and India. The stable wealth creating factory jobs with good benefits that made this country the envy of the world are gone, perhaps forever.
Debt that can not be repaid will not be repaid. It is repudiated or it is inflated out of existence by a devaluation of the underlying currency. When this occurs, the unintended second order effects are often rather unpleasant. They include the rise of dictators, military coupes, world wars, civil wars, and revolutions.
At this point, fixing blame is not the issue. These problems will not be solved in one year or in ten, but we must begin to head in a different direction, both as individuals and as a country, or we face extinction.
Sunday, September 26, 2010
Problem Solving III (10 Habits of Mind for Investors)
This material was originally posted by a mathematics teacher.
http://mathteacherorstudent.blogspot.com/2010/09/habits-of-mind.html
Barry Ritholtz author of the Big Picture was so impressed with its potential application for investors he posted it on his blog without any changes.
http://www.ritholtz.com/blog/2010/09/10-habits-of-mind-for-investors/
I think it is the best list of problem solving tips I have seen.
1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts
2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)
3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases
4. Describe
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise
5. Tinker and Invent
. . .A. Creates variations
. . .B. Looks at simpler examples when necessary (change variables to numbers, change values, reduce or increase the number of conditions, etc)
. . .C. Looks at more complicated examples when necessary
. . .D. Creates extensions and generalizations
. . .E. Creates algorithms for doing things
. . .F. Looks at statements that are generally false to see when they are true
. . .G. Creates and alters rules of a game
. . .H. Creates axioms for a mathematical structure
. . .I. Invents new mathematical systems that are innovative, but not arbitrary
6. Visualize
. . .A. Uses pictures to describe and solve problems
. . .B. Uses manipulatives to describe and solve problems
. . .C. Reasons about shapes
. . .D. Visualizes data
. . .E. Looks for symmetry
. . .F. Visualizes relationships (using tools such as Venn diagrams and graphs)
. . .G. Vizualizes processes (using tools such as graphic organizers)
. . .H. Visualizes changes
. . .I. Visualizes calculations (such as doing arithmetic mentally)
7. Strategize, Reason and Prove
. . .A. Moves from data driven conjectures to theory based conjectures
. . .B. Tests conjectures using thoughtful cases
. . .C. Proves conjectures using reasoning
. . .E. Looks for mistakes or holes in proofs
. . .F. Uses indirect reasoning or a counter-example (Park School)
. . .E. Uses inductive proof
8. Connect
. . .A. Articulates how different skills and concepts are related
. . .B. Applies old skills and concepts to new material
. . .C. Describes problems and solutions using multiple representations
. . .D. Finds and exploits similarities between problems (invariants, isomorphisms)
9. Listen and Collaborate
. . .A. Respectful to others when they are talking
. . .B. Asks for clarification when necessary
. . .C. Challenges others in a respectful way when there is disagreement
. . .D. Participates
. . .E. Ensures that everyone else has the chance to participate
. . .F. Willing to ask questions when needed
. . .G. Willing to help others when needed
. . .H. Shares work in an equitable way
. . .I. Gives others the opportunity to have “aha” moments
10. Contextualize, Reflect and Persevere
. . .A. Determines givens
. . .B. Eliminates unimportant information
. . .C. Makes and articulates reasonable assumptions
. . .D. Determines if answer is reasonable by looking at units, magnitudes, shape, limiting cases, etc.
. . .E. Determines if there are additional or easier explanations
. . .F. Continuously reflects on process
. . .G. Works on one problem for greater and greater lengths of time
. . .H. Spends more and more time stuck without giving up
http://mathteacherorstudent.blogspot.com/2010/09/habits-of-mind.html
Barry Ritholtz author of the Big Picture was so impressed with its potential application for investors he posted it on his blog without any changes.
http://www.ritholtz.com/blog/2010/09/10-habits-of-mind-for-investors/
I think it is the best list of problem solving tips I have seen.
1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts
2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)
3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases
4. Describe
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise
5. Tinker and Invent
. . .A. Creates variations
. . .B. Looks at simpler examples when necessary (change variables to numbers, change values, reduce or increase the number of conditions, etc)
. . .C. Looks at more complicated examples when necessary
. . .D. Creates extensions and generalizations
. . .E. Creates algorithms for doing things
. . .F. Looks at statements that are generally false to see when they are true
. . .G. Creates and alters rules of a game
. . .H. Creates axioms for a mathematical structure
. . .I. Invents new mathematical systems that are innovative, but not arbitrary
6. Visualize
. . .A. Uses pictures to describe and solve problems
. . .B. Uses manipulatives to describe and solve problems
. . .C. Reasons about shapes
. . .D. Visualizes data
. . .E. Looks for symmetry
. . .F. Visualizes relationships (using tools such as Venn diagrams and graphs)
. . .G. Vizualizes processes (using tools such as graphic organizers)
. . .H. Visualizes changes
. . .I. Visualizes calculations (such as doing arithmetic mentally)
7. Strategize, Reason and Prove
. . .A. Moves from data driven conjectures to theory based conjectures
. . .B. Tests conjectures using thoughtful cases
. . .C. Proves conjectures using reasoning
. . .E. Looks for mistakes or holes in proofs
. . .F. Uses indirect reasoning or a counter-example (Park School)
. . .E. Uses inductive proof
8. Connect
. . .A. Articulates how different skills and concepts are related
. . .B. Applies old skills and concepts to new material
. . .C. Describes problems and solutions using multiple representations
. . .D. Finds and exploits similarities between problems (invariants, isomorphisms)
9. Listen and Collaborate
. . .A. Respectful to others when they are talking
. . .B. Asks for clarification when necessary
. . .C. Challenges others in a respectful way when there is disagreement
. . .D. Participates
. . .E. Ensures that everyone else has the chance to participate
. . .F. Willing to ask questions when needed
. . .G. Willing to help others when needed
. . .H. Shares work in an equitable way
. . .I. Gives others the opportunity to have “aha” moments
10. Contextualize, Reflect and Persevere
. . .A. Determines givens
. . .B. Eliminates unimportant information
. . .C. Makes and articulates reasonable assumptions
. . .D. Determines if answer is reasonable by looking at units, magnitudes, shape, limiting cases, etc.
. . .E. Determines if there are additional or easier explanations
. . .F. Continuously reflects on process
. . .G. Works on one problem for greater and greater lengths of time
. . .H. Spends more and more time stuck without giving up
Saturday, September 25, 2010
Problem Solving II (Vision Motivation Persistence)
This is a little bit of Tony Robbins, christianpf.com, a kung fu story, and a tip of the hat to Dave Ramsey.
I have never been completely comfortable with Dave Ramsey’s theory that financial security and peace is 20% knowledge and 80% behavior. This kind of assumes that people are stupid rather than ignorant. As the t-shirt says, ignorance can be fixed. Stupid is forever. I have always had good money management skills (thanks to my parents). As I grew older, I have tried to learn how to create wealth, as well as manage the money that comes my way. It is hard for me to realize anyone else would be any different. But then there is my problem with weight. I know I should eat celery sticks and drink water. Instead, I eat hot pastrami sandwiches and drink beer, so what should I expect?
This approach to problem solving begins with vision, a clear picture with the way things should be. It collapses step 1 and step 2 of the spiral method into a detailed mental image rather than spending a lot of time understanding the problem and developing something like a project management plan. Really this is probably OK. Most of us know where our goal lies and where we are currently located. I know that to get to Florida from Maryland, I need to head south. When I start out I may not know whether to take US-1 or I-95. I may not even have a map, but if I keep heading south and asking questions, I will get to Florida.
Christianpf.com (the pf stands for Personal Finance) calls the second step in this approach, “Getting Mad, Zealous, and Passionate.” There is nothing in the spiral method about emotional commitment, nothing to blast you from step 2 to step 3, implementing the solution. In my own personal experience, I needed that kind of energy to get me into a house. At that time my rent was already approaching the price of a house payment. One year, my rent jumped over 10% when my lease ended. That was it. Even though I didn’t quite have enough money to buy a house, I did it anyway. At the time 10% down was standard and there were about $7,000 in closing costs. We had saved the required $17,000 with a few hundred to spare, but there was not really enough left to be able to pay all our regular bills with certainty. I borrowed $3,000 from my father-in-law until I had the cash flow situation under control.
The last step is persistence. Losing weight, getting out of debt, or saving enough money to pay for a house is hard work. There will be setbacks along the way, weeks when your weight goes up even when you are staying on your diet, unexpected expenses that wipe out several months of effort. Continuing to do the right thing day after day, week after week, without much positive feedback is a wretched business.
A White Crane master, Dr. Yang, Jwing-Ming tells this story. “I felt so depressed after comparing myself with one of my most talented classmates. I always felt awkward compared to him. I told my master about this. He again looked at me and said, “Little Yang! The reason you want to train is because you want to train. It is the same as plowing a field. When you plow, you simply do it for your harvest. Why do you look around? If you are ahead of others, you will be proud of yourself, you will be satisfied, and you will become lazy. If you are behind, you will become depressed and despise yourself. Why don’t you just bow your head and keep plowing? Do not look around. Just keep plowing. Until one day…He pointed his finger towards my face…when you get tired and take a break, suddenly you realize that there is nobody around you. You have left all the others far far behind and you cannot even be seen.”
I have never been completely comfortable with Dave Ramsey’s theory that financial security and peace is 20% knowledge and 80% behavior. This kind of assumes that people are stupid rather than ignorant. As the t-shirt says, ignorance can be fixed. Stupid is forever. I have always had good money management skills (thanks to my parents). As I grew older, I have tried to learn how to create wealth, as well as manage the money that comes my way. It is hard for me to realize anyone else would be any different. But then there is my problem with weight. I know I should eat celery sticks and drink water. Instead, I eat hot pastrami sandwiches and drink beer, so what should I expect?
This approach to problem solving begins with vision, a clear picture with the way things should be. It collapses step 1 and step 2 of the spiral method into a detailed mental image rather than spending a lot of time understanding the problem and developing something like a project management plan. Really this is probably OK. Most of us know where our goal lies and where we are currently located. I know that to get to Florida from Maryland, I need to head south. When I start out I may not know whether to take US-1 or I-95. I may not even have a map, but if I keep heading south and asking questions, I will get to Florida.
Christianpf.com (the pf stands for Personal Finance) calls the second step in this approach, “Getting Mad, Zealous, and Passionate.” There is nothing in the spiral method about emotional commitment, nothing to blast you from step 2 to step 3, implementing the solution. In my own personal experience, I needed that kind of energy to get me into a house. At that time my rent was already approaching the price of a house payment. One year, my rent jumped over 10% when my lease ended. That was it. Even though I didn’t quite have enough money to buy a house, I did it anyway. At the time 10% down was standard and there were about $7,000 in closing costs. We had saved the required $17,000 with a few hundred to spare, but there was not really enough left to be able to pay all our regular bills with certainty. I borrowed $3,000 from my father-in-law until I had the cash flow situation under control.
The last step is persistence. Losing weight, getting out of debt, or saving enough money to pay for a house is hard work. There will be setbacks along the way, weeks when your weight goes up even when you are staying on your diet, unexpected expenses that wipe out several months of effort. Continuing to do the right thing day after day, week after week, without much positive feedback is a wretched business.
A White Crane master, Dr. Yang, Jwing-Ming tells this story. “I felt so depressed after comparing myself with one of my most talented classmates. I always felt awkward compared to him. I told my master about this. He again looked at me and said, “Little Yang! The reason you want to train is because you want to train. It is the same as plowing a field. When you plow, you simply do it for your harvest. Why do you look around? If you are ahead of others, you will be proud of yourself, you will be satisfied, and you will become lazy. If you are behind, you will become depressed and despise yourself. Why don’t you just bow your head and keep plowing? Do not look around. Just keep plowing. Until one day…He pointed his finger towards my face…when you get tired and take a break, suddenly you realize that there is nobody around you. You have left all the others far far behind and you cannot even be seen.”
Friday, September 24, 2010
A $1,000 Car
$1000 car's life was through,
'bought 50,000 miles 'fore it got to you.
Oh why did I ever buy,
A $1000 car.
Sometimes I come across something that is so good, I just can’t stand it. I heard a song on the radio, titled “A Thousand Dollar Car” by the Bottle Rockets. It made me think of some the more extreme advice I have read in “get out of debt” financial discussions. Authors have suggested selling your current vehicle to get out from under car payments and buying a thousand dollar car. The principle is sound but where to draw the line.
A $1000 car ain't even gonna roll,
til you throw at least another thousand in the hole.
Sink your money in it, and there you are
the owner of a 2,000 dollar 1,000 dollar car.
In 1973 I bought a 1967 Chevrolet for $600. It had about 90,000 miles on the odometer. In those days a car was lucky to make it to 100,000 miles. It seemed to be in pretty good shape and the owner promised me he had prayed frequently for that car (really). I wrote out the check and bought a $600 car. The window frames rusted out, allowing water to leak into the car and the trunk. The inside door handle broke, so I had to open the door for my wife when we took that car. That was funny. Women would sigh and give me romantic looks, as I chivalrously opened the door for my wife.
$1000 car is gonna let you down,
More than it's ever gonna get you around.
Replace your gaskets and paint over your rust,
You'll still end up with something that you'll never trust.
I named that Chevrolet Betty Lou. She continued to run for about 7 years. It certainly wasn’t reliable by modern standards, but it never left me stranded. At one point, I had 3 cars, so I lent her to a friend who needed a second car for his wife. Once I received a call from a wrecker. One of wheels broke off that car and it had been abandoned on one of the main streets in Columbia, SC. Of course I discovered my friend was in the process of taking care of the problem. Over the course of the next year or so he put over $500 into that car. At that point I told him to keep it. He insisted that he give me something, so I sold him the car for $50 dollars. Later, he sold it to a man who wanted to turn it into a hot rod. The new owner went to prison. After that, I don’t know what became of Betty Lou.
Just for grins, I went to value of a dollar by year calculator. One 1973 dollar had the buying power of $5.08 2010 dollars. That sounds a little low. I would have guessed $6.00, but let’s go with the lower number. My $600 dollar car would cost $3,048 today. That sounds just about right. I have seen $3,000 cars that would be fine for someone trying to get out of debt, but I have to agree with song’s composer.
If you've only got a $1000.
You ought to just buy a good guitar.
Learn how to play it it'll take you farther,
than any old $1000 car.
Listen to the song at
http://www.youtube.com/watch?v=nZdC5ggYbwc
'bought 50,000 miles 'fore it got to you.
Oh why did I ever buy,
A $1000 car.
Sometimes I come across something that is so good, I just can’t stand it. I heard a song on the radio, titled “A Thousand Dollar Car” by the Bottle Rockets. It made me think of some the more extreme advice I have read in “get out of debt” financial discussions. Authors have suggested selling your current vehicle to get out from under car payments and buying a thousand dollar car. The principle is sound but where to draw the line.
A $1000 car ain't even gonna roll,
til you throw at least another thousand in the hole.
Sink your money in it, and there you are
the owner of a 2,000 dollar 1,000 dollar car.
In 1973 I bought a 1967 Chevrolet for $600. It had about 90,000 miles on the odometer. In those days a car was lucky to make it to 100,000 miles. It seemed to be in pretty good shape and the owner promised me he had prayed frequently for that car (really). I wrote out the check and bought a $600 car. The window frames rusted out, allowing water to leak into the car and the trunk. The inside door handle broke, so I had to open the door for my wife when we took that car. That was funny. Women would sigh and give me romantic looks, as I chivalrously opened the door for my wife.
$1000 car is gonna let you down,
More than it's ever gonna get you around.
Replace your gaskets and paint over your rust,
You'll still end up with something that you'll never trust.
I named that Chevrolet Betty Lou. She continued to run for about 7 years. It certainly wasn’t reliable by modern standards, but it never left me stranded. At one point, I had 3 cars, so I lent her to a friend who needed a second car for his wife. Once I received a call from a wrecker. One of wheels broke off that car and it had been abandoned on one of the main streets in Columbia, SC. Of course I discovered my friend was in the process of taking care of the problem. Over the course of the next year or so he put over $500 into that car. At that point I told him to keep it. He insisted that he give me something, so I sold him the car for $50 dollars. Later, he sold it to a man who wanted to turn it into a hot rod. The new owner went to prison. After that, I don’t know what became of Betty Lou.
Just for grins, I went to value of a dollar by year calculator. One 1973 dollar had the buying power of $5.08 2010 dollars. That sounds a little low. I would have guessed $6.00, but let’s go with the lower number. My $600 dollar car would cost $3,048 today. That sounds just about right. I have seen $3,000 cars that would be fine for someone trying to get out of debt, but I have to agree with song’s composer.
If you've only got a $1000.
You ought to just buy a good guitar.
Learn how to play it it'll take you farther,
than any old $1000 car.
Listen to the song at
http://www.youtube.com/watch?v=nZdC5ggYbwc
Problem Solving I (The Spiral Method)
I would like to share at least three methods for problem solving. As is often the case in this blog, they will not contain material that you will find all that shocking or original, but maybe revisiting something you already know might prove of value in times of trouble.
The Basic Engineering Method – Sometimes Called the Spiral Development Model
Step 1- Understand the Problem
This is not nearly a simple as it sounds. Understanding a problem is a complex layered process. For example, “I don’t have enough money,” is not really the problem. If you don’t have any expenses, money is not a problem. Ask yourself why is not having enough money a problem. Perhaps the answer is, I have too many debts. Why do you have too many debts? Perhaps the answer is, “I bought things I didn’t need with money I didn’t have and then I got sick and lost my job.” There are at least four dimensions to this particular problem, spending habits, existing debt, health, and unemployment. Ask how have my spending habits contributed to this problem. Perhaps there is a psychological dimension to this problem called compulsive shopping. I think you get the idea.
Step 2- Propose a Solution
Once you have enough information, begin to construct a solution. It does not have to be perfect, complete, or address all the issues in step 1. In this particular example, visiting a free clinic, calling all creditors in an attempt to negotiate reduced payments, and contacting anyone you might know who could help you find a new job might be a proposed solution.
Step 3- Implement the Solution
Many people with problems spend a great deal of time on steps 1 and 2 (particularly Step 1), but never get to step 3. Talking to others about your problems is necessary but it is not an end in itself. At some point a proposed solution has to be implemented.
Step 4- Examine the Results
Once you are implementing your planned solution, examine the results you are getting. Generally, life is a pretty quick feedback mechanism. It usually does not take all that long to determine if your efforts are producing the results you desire. If your initial solution is working, great, keep on working that solution. If you are not getting everything you want as quickly as you want, return to step 1. Did I really understand the problem? Begin over again or continue to uncover layers in the Understand the Problem step. Perhaps you have not been able to find a job in your hometown, because there are no jobs in your hometown. That might lead to a proposal to expand your job search horizon.
I think you get the idea. Wikipedia observes, “The spiral model was defined by Barry Boehm in his 1980 article "A Spiral Model of Software Development and Enhancement." This model was not the first model to discuss iterative development, but it was the first model to explain why the iteration matters.”
The Basic Engineering Method – Sometimes Called the Spiral Development Model
Step 1- Understand the Problem
This is not nearly a simple as it sounds. Understanding a problem is a complex layered process. For example, “I don’t have enough money,” is not really the problem. If you don’t have any expenses, money is not a problem. Ask yourself why is not having enough money a problem. Perhaps the answer is, I have too many debts. Why do you have too many debts? Perhaps the answer is, “I bought things I didn’t need with money I didn’t have and then I got sick and lost my job.” There are at least four dimensions to this particular problem, spending habits, existing debt, health, and unemployment. Ask how have my spending habits contributed to this problem. Perhaps there is a psychological dimension to this problem called compulsive shopping. I think you get the idea.
Step 2- Propose a Solution
Once you have enough information, begin to construct a solution. It does not have to be perfect, complete, or address all the issues in step 1. In this particular example, visiting a free clinic, calling all creditors in an attempt to negotiate reduced payments, and contacting anyone you might know who could help you find a new job might be a proposed solution.
Step 3- Implement the Solution
Many people with problems spend a great deal of time on steps 1 and 2 (particularly Step 1), but never get to step 3. Talking to others about your problems is necessary but it is not an end in itself. At some point a proposed solution has to be implemented.
Step 4- Examine the Results
Once you are implementing your planned solution, examine the results you are getting. Generally, life is a pretty quick feedback mechanism. It usually does not take all that long to determine if your efforts are producing the results you desire. If your initial solution is working, great, keep on working that solution. If you are not getting everything you want as quickly as you want, return to step 1. Did I really understand the problem? Begin over again or continue to uncover layers in the Understand the Problem step. Perhaps you have not been able to find a job in your hometown, because there are no jobs in your hometown. That might lead to a proposal to expand your job search horizon.
I think you get the idea. Wikipedia observes, “The spiral model was defined by Barry Boehm in his 1980 article "A Spiral Model of Software Development and Enhancement." This model was not the first model to discuss iterative development, but it was the first model to explain why the iteration matters.”
Friday, September 10, 2010
When the Student is Ready, The Teacher Will Appear
A certain man caught a bird in a trap.
The bird says, “Sir you have eaten many cows and sheep in your life and you are still hungry. The little bit of meat on my bones won’t satisfy you either. If you let me go, I will give you three pieces of wisdom. One I’ll say standing on your hand. One on your roof. And one I’ll speak from the limb of that tree.
The man was interested. He freed the bird and let it stand on his hand.
“Number one: Do not believe in absurdity, no matter who says it.
The bird flew and lit on the man’s roof. “Number two: Do not grieve over what is past. It’s over. Never regret what has happened.
“By the way,” the bird continued, “In my body there is a huge pearl weighing as much as ten copper coins. It was meant to be an inheritance for you and your children. But now you have lost it. You could have owned the largest pearl in existence, but evidently it was not meant to be.”
The man started wailing like a woman in childbirth. The bird said, “Didn’t I just say, don’t grieve for what’s in the past, and also, don’t believe in absurdity. My entire body does not weigh as much as ten copper coins. How could I have a pearl that heavy inside me?”
The man came to his senses, “Alright. Tell me number three.”
“Yes, you’ve made such good use of the first two!”
“Don’t give advice to someone who is groggy and falling asleep. Don’t throw seeds on the sand.”
The story was written by Rumi, the 13th century Persian poet, jurist, theologian, and mystic.
Once again, I have been thinking about how difficult it can be to find teachers who are willing to actually educate others on how to use money and create wealth, without enriching themselves at their student’s expense. This would be OK if it represented a fair exchange of value, but often the slick self promoting scoundrels on the infomercials are just this side of what the law allows. Sometimes they are criminals and end up in prison where they belong.
My church is finally considering the possibility of offering one of the basic financial literacy courses to the congregation and the community, a no brainer I have been promoting for many years. In this particular case, I have been asked to look into Dave Ramsey’s Financial Peace University. Of course I am somewhat acquainted with Dave Ramsey and his ideas. They are pretty typical of most Christian financial teachers. These courses teach common sense ideas like avoiding debt, budgeting, thrift, deferring gratification, and long range financial planning. The box costs $93 per family unit. That would include husband, wife, and teenaged children. It contains 13 lessons on CD, a book, some budgeting paraphernalia, and some “bonus” material. The “university” itself consists of 13 weekly meetings featuring Dave lecturing on DVD followed by small group meetings (to be coordinated by yours truly if our church decides to offer this course) that explore what has just been taught in the lecture. I expect it will be well worth $93 especially if the students are willing to learn and to apply what they learn to their lives.
In financial matters as in all areas of life, be alert, always ready to learn something new from someone who knows something you do not know. Seek wisdom wherever she can be found. It is OK for a teacher to make a living, but beware of the coyotes who ask you to believe absurd nonsense like their $3,000 trading software will allow you to become an instant millionaire. Don’t spend too much time regretting missed opportunities, more will come along, and this time you will be ready to recognize it. If you are really lucky you might find a teacher who understands that wisdom is the only commodity he can give away without becoming any poorer. For in the end, it is what we can give to our community that makes us truly happy. Perhaps the day may come when you can help someone with their first step out of debt or their first fearful attempt to begin an investment program.
Proverbs 13:20
He who walks with the wise grows wise, but a companion of fools suffers harm.
The bird says, “Sir you have eaten many cows and sheep in your life and you are still hungry. The little bit of meat on my bones won’t satisfy you either. If you let me go, I will give you three pieces of wisdom. One I’ll say standing on your hand. One on your roof. And one I’ll speak from the limb of that tree.
The man was interested. He freed the bird and let it stand on his hand.
“Number one: Do not believe in absurdity, no matter who says it.
The bird flew and lit on the man’s roof. “Number two: Do not grieve over what is past. It’s over. Never regret what has happened.
“By the way,” the bird continued, “In my body there is a huge pearl weighing as much as ten copper coins. It was meant to be an inheritance for you and your children. But now you have lost it. You could have owned the largest pearl in existence, but evidently it was not meant to be.”
The man started wailing like a woman in childbirth. The bird said, “Didn’t I just say, don’t grieve for what’s in the past, and also, don’t believe in absurdity. My entire body does not weigh as much as ten copper coins. How could I have a pearl that heavy inside me?”
The man came to his senses, “Alright. Tell me number three.”
“Yes, you’ve made such good use of the first two!”
“Don’t give advice to someone who is groggy and falling asleep. Don’t throw seeds on the sand.”
The story was written by Rumi, the 13th century Persian poet, jurist, theologian, and mystic.
Once again, I have been thinking about how difficult it can be to find teachers who are willing to actually educate others on how to use money and create wealth, without enriching themselves at their student’s expense. This would be OK if it represented a fair exchange of value, but often the slick self promoting scoundrels on the infomercials are just this side of what the law allows. Sometimes they are criminals and end up in prison where they belong.
My church is finally considering the possibility of offering one of the basic financial literacy courses to the congregation and the community, a no brainer I have been promoting for many years. In this particular case, I have been asked to look into Dave Ramsey’s Financial Peace University. Of course I am somewhat acquainted with Dave Ramsey and his ideas. They are pretty typical of most Christian financial teachers. These courses teach common sense ideas like avoiding debt, budgeting, thrift, deferring gratification, and long range financial planning. The box costs $93 per family unit. That would include husband, wife, and teenaged children. It contains 13 lessons on CD, a book, some budgeting paraphernalia, and some “bonus” material. The “university” itself consists of 13 weekly meetings featuring Dave lecturing on DVD followed by small group meetings (to be coordinated by yours truly if our church decides to offer this course) that explore what has just been taught in the lecture. I expect it will be well worth $93 especially if the students are willing to learn and to apply what they learn to their lives.
In financial matters as in all areas of life, be alert, always ready to learn something new from someone who knows something you do not know. Seek wisdom wherever she can be found. It is OK for a teacher to make a living, but beware of the coyotes who ask you to believe absurd nonsense like their $3,000 trading software will allow you to become an instant millionaire. Don’t spend too much time regretting missed opportunities, more will come along, and this time you will be ready to recognize it. If you are really lucky you might find a teacher who understands that wisdom is the only commodity he can give away without becoming any poorer. For in the end, it is what we can give to our community that makes us truly happy. Perhaps the day may come when you can help someone with their first step out of debt or their first fearful attempt to begin an investment program.
Proverbs 13:20
He who walks with the wise grows wise, but a companion of fools suffers harm.
Monday, September 6, 2010
I Gotta' Win the Lottery and Move to Hawaii
From the news of the extremely weird:
The Italian towns of Ficara in Messina and Anguillara in Lazio, faced with growing budget shortfalls have decided to balance their budgets, fund public projects now brought to a standstill by the economy, and lower their tax rates with winnings from the lottery. Really! Governments have become so desperate; they are not only selling lottery tickets. They are buying lottery tickets. To be fair the city fathers of these two municipalities, the sums to be invested in lottery tickets are 5 and 15 Euros a week. These sums of money are not enough to really matter, but are things really that bad in Ficara and Anguillara?
One of my go to lines after a particularly bad day is, “I’ve gotta’ win the lottery and move to Hawaii.”
I used this line recently on the owner of the local wine and beer store. He replied, “You never buy any tickets. You can’t win, if you don’t play.” I laughed. It is pretty close to the truth. I buy about two tickets a year (maybe).
When the prize gets really big, I think, “Ah, Why not?” Sadly, at local stores I see regulars playing the lottery with money they can not afford to lose. It has been my observation that most lottery tickets are sold to desperate or discouraged individuals who believe that any efforts they can make to improve their situation are pointless. Instead of taking arms against a sea of troubles and, by opposing, end them, these unhappy souls buy lottery tickets, lots of lottery tickets.
Laura Rowley recently reported on some findings by researchers a several universities. Evidently, a surprisingly large number of lottery winners (5.5%) declare bankruptcy within five years of winning. Small winners tended to go bankrupt more quickly than big winners. In this particular sample $65,000 in cash was the median big prize. Laura observes, “That would be enough, on average, to pay off all unsecured debt or boost the equity in new or existing assets. Instead, the big jackpots simply evaporated.”
Apparently there are two reasons that explain this phenomenon. First, they winners are not use to handling large sums of money and make mistakes. They are not financially literate. Hence, they do not use the money wisely. The authors of the study believe the more important reason can be termed “mental accounting.” One of the authors, Mark Hoekstra observes, "We treat 'found money' differently than money we earn. So if you find $20 on the sidewalk, you may decide to blow it on a nice dinner, whereas if you earned it you wouldn't have done that."
The authors of this study believe that their findings have policy implications for governments dealing with heavily indebted consumers and homeowners with upside down mortgages. Mark Hoekstra says, “It appears the simplest solution-giving them cash-doesn’t enhance longer term financial stability and only postpones, rather than avoids bankruptcy.”
Laura Rowley adds, “The lottery findings are consistent with a 2007 research paper that showed consumers initially used their 2001 federal rebate checks to reduce debt, but eventually debt returned to its pre-rebate level.”
Hoekstra concludes, “Our research suggests that perhaps there is something more systematic about the types of people who get themselves into financial trouble -- and the appropriate policy prescription for helping them out is going to be considerably more complex than giving them additional resources.”
Even though I don’t think Solomon would have much good to say about lottery tickets, I will probably continue to buy one or two a year and dream of retirement in Hawaii.
Here is a sample of king’s thoughts on such matters.
Proverbs 13 11
Dishonest money dwindles away, but he who gathers money little by little makes it grow.
Proverbs 28 19-20
He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty.
A faithful man will be richly blessed, but one eager to get rich will not go unpunished.
The Italian towns of Ficara in Messina and Anguillara in Lazio, faced with growing budget shortfalls have decided to balance their budgets, fund public projects now brought to a standstill by the economy, and lower their tax rates with winnings from the lottery. Really! Governments have become so desperate; they are not only selling lottery tickets. They are buying lottery tickets. To be fair the city fathers of these two municipalities, the sums to be invested in lottery tickets are 5 and 15 Euros a week. These sums of money are not enough to really matter, but are things really that bad in Ficara and Anguillara?
One of my go to lines after a particularly bad day is, “I’ve gotta’ win the lottery and move to Hawaii.”
I used this line recently on the owner of the local wine and beer store. He replied, “You never buy any tickets. You can’t win, if you don’t play.” I laughed. It is pretty close to the truth. I buy about two tickets a year (maybe).
When the prize gets really big, I think, “Ah, Why not?” Sadly, at local stores I see regulars playing the lottery with money they can not afford to lose. It has been my observation that most lottery tickets are sold to desperate or discouraged individuals who believe that any efforts they can make to improve their situation are pointless. Instead of taking arms against a sea of troubles and, by opposing, end them, these unhappy souls buy lottery tickets, lots of lottery tickets.
Laura Rowley recently reported on some findings by researchers a several universities. Evidently, a surprisingly large number of lottery winners (5.5%) declare bankruptcy within five years of winning. Small winners tended to go bankrupt more quickly than big winners. In this particular sample $65,000 in cash was the median big prize. Laura observes, “That would be enough, on average, to pay off all unsecured debt or boost the equity in new or existing assets. Instead, the big jackpots simply evaporated.”
Apparently there are two reasons that explain this phenomenon. First, they winners are not use to handling large sums of money and make mistakes. They are not financially literate. Hence, they do not use the money wisely. The authors of the study believe the more important reason can be termed “mental accounting.” One of the authors, Mark Hoekstra observes, "We treat 'found money' differently than money we earn. So if you find $20 on the sidewalk, you may decide to blow it on a nice dinner, whereas if you earned it you wouldn't have done that."
The authors of this study believe that their findings have policy implications for governments dealing with heavily indebted consumers and homeowners with upside down mortgages. Mark Hoekstra says, “It appears the simplest solution-giving them cash-doesn’t enhance longer term financial stability and only postpones, rather than avoids bankruptcy.”
Laura Rowley adds, “The lottery findings are consistent with a 2007 research paper that showed consumers initially used their 2001 federal rebate checks to reduce debt, but eventually debt returned to its pre-rebate level.”
Hoekstra concludes, “Our research suggests that perhaps there is something more systematic about the types of people who get themselves into financial trouble -- and the appropriate policy prescription for helping them out is going to be considerably more complex than giving them additional resources.”
Even though I don’t think Solomon would have much good to say about lottery tickets, I will probably continue to buy one or two a year and dream of retirement in Hawaii.
Here is a sample of king’s thoughts on such matters.
Proverbs 13 11
Dishonest money dwindles away, but he who gathers money little by little makes it grow.
Proverbs 28 19-20
He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty.
A faithful man will be richly blessed, but one eager to get rich will not go unpunished.
Labor Day 2010
When I attended college the first time around (1969-1973) I learned about something called, theoretical full employment. At that time theoretical full employment allowed for a 3% unemployment rate. Academic economists noted that there is always some churn in the economy. People get fired or quit their jobs in disgust. Sometimes people just want to leave wherever they live and find someplace better to start over. I wondered what economists might consider theoretical full employment in 2010. I didn’t find much except a book titled, “Full Employment Abandoned: Shifting Sands and Policy Failures” published in 2008. Evidently the concept of theoretical full employment, once given at 2% I discovered, has been replaced by a new concept, structural unemployment. The definition of structural unemployment is given as, “Joblessness caused not by lack of demand, but by changes in demand patterns or obsolescence of technology, and requiring retraining of workers and large investment in new capital equipment,” (BusinessDictionary.com). In recent decades, structural unemployment was expected to run at about 5% as technology and regulation destroyed old jobs and created new jobs. In this model, a constant level of unemployment is primarily generated by a mismatch in workers who lack skills required for new jobs.
In “9% is Now Full Employment in America,” an extremely disturbing article written by Michael James McDonald, the author contends that 20,000,000 U.S. jobs have been exported to foreign countries. Most of these jobs were relatively stable, high paying, wealth producing jobs that provided men and women of average ability a middle class life style. They are gone.
In January of 2006 Warren Buffett said, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to ‘political turmoil.’ Pretty soon, I think there will be a big adjustment.”
One year ago on Labor Day, U-3 unemployment stood at 9.7%. Today that measure is 9.6%. The more realistic measure U-6 was 16.8% in 2009. Today it is 16.7%. Approximately 26.3 million Americans are unemployed, marginally attached to the work force, or working less than full time because no full time work is available. These numbers are low because they only include individuals actively seeking employment who are reporting their efforts to a government agency. It does not include many young people who have yet to find their first job, older workers who were forced into early retirement, or the plain discouraged who have just given up.
It isn’t that the government hasn’t tried. Trillions of dollars of borrowed money have been spent on corporate bailouts, stimulus programs, mortgage modifications, and ideas like cash for clunkers and an $8,000 tax credit for first time home buyers. It hasn’t worked. McDonald observes, “Global conditions and factors now control the American economy more than what is happening internally. It also puts in doubt the tried and true, standard solutions the government uses. Stimulation packages no longer work because there is now little to stimulate. They are using old internal solutions to fix an economy now controlled by external conditions. Until the government faces this and begins to solve the real issue – the long term detrimental effects of globalization on the American economy – nothing significant can occur.”
Today, over 26 million Americans are unemployed. 41,275,411 Americans are receiving food stamps, now called the Supplemental Nutrition Assistance Program. As a country, we are facing a very bad situation with no easy solutions. On this Labor Day, let us take at least a moment, look into our own hearts, confess our sins, and ask God to extend his hands in mercy to our Nation. Let us try and understand that when we stand with Christ we can not separate ourselves from our neighbors.
Psalm 70
[1] Make haste, O God, to deliver me; make haste to help me, O LORD.
[2] Let them be ashamed and confounded that seek after my soul: let them be turned backward, and put to confusion, that desire my hurt.
[3] Let them be turned back for a reward of their shame that say, Aha, aha.
[4] Let all those that seek thee rejoice and be glad in thee: and let such as love thy salvation say continually, Let God be magnified.
[5] But I am poor and needy: make haste unto me, O God: thou art my help and my deliverer; O LORD, make no tarrying.
In “9% is Now Full Employment in America,” an extremely disturbing article written by Michael James McDonald, the author contends that 20,000,000 U.S. jobs have been exported to foreign countries. Most of these jobs were relatively stable, high paying, wealth producing jobs that provided men and women of average ability a middle class life style. They are gone.
In January of 2006 Warren Buffett said, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to ‘political turmoil.’ Pretty soon, I think there will be a big adjustment.”
One year ago on Labor Day, U-3 unemployment stood at 9.7%. Today that measure is 9.6%. The more realistic measure U-6 was 16.8% in 2009. Today it is 16.7%. Approximately 26.3 million Americans are unemployed, marginally attached to the work force, or working less than full time because no full time work is available. These numbers are low because they only include individuals actively seeking employment who are reporting their efforts to a government agency. It does not include many young people who have yet to find their first job, older workers who were forced into early retirement, or the plain discouraged who have just given up.
It isn’t that the government hasn’t tried. Trillions of dollars of borrowed money have been spent on corporate bailouts, stimulus programs, mortgage modifications, and ideas like cash for clunkers and an $8,000 tax credit for first time home buyers. It hasn’t worked. McDonald observes, “Global conditions and factors now control the American economy more than what is happening internally. It also puts in doubt the tried and true, standard solutions the government uses. Stimulation packages no longer work because there is now little to stimulate. They are using old internal solutions to fix an economy now controlled by external conditions. Until the government faces this and begins to solve the real issue – the long term detrimental effects of globalization on the American economy – nothing significant can occur.”
Today, over 26 million Americans are unemployed. 41,275,411 Americans are receiving food stamps, now called the Supplemental Nutrition Assistance Program. As a country, we are facing a very bad situation with no easy solutions. On this Labor Day, let us take at least a moment, look into our own hearts, confess our sins, and ask God to extend his hands in mercy to our Nation. Let us try and understand that when we stand with Christ we can not separate ourselves from our neighbors.
Psalm 70
[1] Make haste, O God, to deliver me; make haste to help me, O LORD.
[2] Let them be ashamed and confounded that seek after my soul: let them be turned backward, and put to confusion, that desire my hurt.
[3] Let them be turned back for a reward of their shame that say, Aha, aha.
[4] Let all those that seek thee rejoice and be glad in thee: and let such as love thy salvation say continually, Let God be magnified.
[5] But I am poor and needy: make haste unto me, O God: thou art my help and my deliverer; O LORD, make no tarrying.
Sunday, September 5, 2010
You Got To Know When to Hold 'em
“You got to know when to hold ’em, know when to fold ’em,”
The Gambler
Recently, Calculated Risk, an excellent financial blog that often focuses on Real Estate told the story of an accidental landlord. In a market rapidly heading South, he couldn’t sell his house at the price he wanted, so he decided to rent the house until the market recovered. Earlier this year, he put the house back on the market, at a substantially lower price. It didn’t work. Nobody wanted to pay that price. Once again he rented the property and hoped for a better day. Currently, he dropped the price again and put his home back on the market. It isn’t selling. The owner believes he will pull it back off the market and hope for a better day. Real Estate investors call the phenomenon, “chasing the market down.” It doesn’t work.
People do this because they fall in love with their homes, believing that the market must value such a wonderful property as much as the owner. They get a price stuck in their head, and continue holding on to that price even as the market tanks. I have seen this happen a couple of times in my neighborhood. Once, after several years of frustration, the owners finally sold at $100,000 less they wanted. The second example ended in a successful short sale, if a short sale can ever be considered successful.
People who buy and sell stocks can fall into the same trap. I have a pretty good idea when to buy a stock but sometimes I exhibit the tendency to hold on, hoping for a better day, when I should just take a tax loss and walk away. Sometimes there is more than a little ego involved. Sometimes I just fall in love with a stock. Neither ego nor love should ever be a factor in an investment decision. With General Electric, I bought the stock after it had dropped, at $34.79. General Electric was a dividend aristocrat. Under Neutron Jack Welch, GE developed the most ruthlessly efficient management this side of the Waffen SS. Ah the technology, I just loved their turbines, locomotives, and big box medical equipment.
What I didn’t realize was I did not own an industrial/technological conglomerate. I owned a finance company with many dubious loans and questionable customers. As GE continued to head down, I bought a little more at $28.75 and then a little more at $24.25. I was certain that given their AAA credit rating, superior management, and impregnable dividend things would get better. Things didn’t get any better. In fact GE lost their coveted AAA credit rating and management was forced to cut the dividend. The price tanked. Finally, I bought a little more at $12.49. Today GE sells for $15.39 and pays a 3.12% dividend. Clearly, my handling of this investment is the worst performance of my career.
For the record, today GE is rated B by Schwab, Outperform by Credit Suisse, Buy by Ned Davis, Hold by Argus, Four Stars by Standard and Poor’s, Outperform by Reuters, and Neutral by Market Edge. I continue to hold. I am also comforted that Warren Buffet, the genius, bought $3 billion worth of GE preferred near the bottom. I also must admit he got a much better deal than is available to the average investor.
I bought more shares in a number of companies during the great debacle of 2008-2009. In the other instances, it paid off. But there was a difference, I wasn’t in love with any of those stocks and I didn’t feel as though my ego was tied up in owning them. Earlier, I made the same mistake with a small holding of Corning. After watching the stock go up and down for several years, I finally grew disgusted, gave up, and sold my shares at a loss. I held on to Corning for longer than I should, because I was in love with their technology. I should have learned something about myself from that inexpensive lesson. Hopefully, I have finally learned my lesson.
From an article by Harry Domash, entitled, Nobel winner unearths 5 common investing mistakes; the author reports, “Daniel Kahneman, a psychology professor at Princeton University, won the Nobel Prize in economics for his attempts to explain the quirkiness that governs our financial decisions…. The truth is that investors don’t like to recognize a loss. I know I don’t. One strategy they use is to wait for a stock or a mutual fund to get back to even, reasoning that they haven’t lost anything. This shortsighted approach ignores the opportunity cost, or what else they might have done with their money in the meantime. And the reluctance to recognize losses affects professional managers as well as amateur investors, Kahneman says. Accepting a loss and moving on is very difficult.”
“Now ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
’cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.”
The Gambler
Recently, Calculated Risk, an excellent financial blog that often focuses on Real Estate told the story of an accidental landlord. In a market rapidly heading South, he couldn’t sell his house at the price he wanted, so he decided to rent the house until the market recovered. Earlier this year, he put the house back on the market, at a substantially lower price. It didn’t work. Nobody wanted to pay that price. Once again he rented the property and hoped for a better day. Currently, he dropped the price again and put his home back on the market. It isn’t selling. The owner believes he will pull it back off the market and hope for a better day. Real Estate investors call the phenomenon, “chasing the market down.” It doesn’t work.
People do this because they fall in love with their homes, believing that the market must value such a wonderful property as much as the owner. They get a price stuck in their head, and continue holding on to that price even as the market tanks. I have seen this happen a couple of times in my neighborhood. Once, after several years of frustration, the owners finally sold at $100,000 less they wanted. The second example ended in a successful short sale, if a short sale can ever be considered successful.
People who buy and sell stocks can fall into the same trap. I have a pretty good idea when to buy a stock but sometimes I exhibit the tendency to hold on, hoping for a better day, when I should just take a tax loss and walk away. Sometimes there is more than a little ego involved. Sometimes I just fall in love with a stock. Neither ego nor love should ever be a factor in an investment decision. With General Electric, I bought the stock after it had dropped, at $34.79. General Electric was a dividend aristocrat. Under Neutron Jack Welch, GE developed the most ruthlessly efficient management this side of the Waffen SS. Ah the technology, I just loved their turbines, locomotives, and big box medical equipment.
What I didn’t realize was I did not own an industrial/technological conglomerate. I owned a finance company with many dubious loans and questionable customers. As GE continued to head down, I bought a little more at $28.75 and then a little more at $24.25. I was certain that given their AAA credit rating, superior management, and impregnable dividend things would get better. Things didn’t get any better. In fact GE lost their coveted AAA credit rating and management was forced to cut the dividend. The price tanked. Finally, I bought a little more at $12.49. Today GE sells for $15.39 and pays a 3.12% dividend. Clearly, my handling of this investment is the worst performance of my career.
For the record, today GE is rated B by Schwab, Outperform by Credit Suisse, Buy by Ned Davis, Hold by Argus, Four Stars by Standard and Poor’s, Outperform by Reuters, and Neutral by Market Edge. I continue to hold. I am also comforted that Warren Buffet, the genius, bought $3 billion worth of GE preferred near the bottom. I also must admit he got a much better deal than is available to the average investor.
I bought more shares in a number of companies during the great debacle of 2008-2009. In the other instances, it paid off. But there was a difference, I wasn’t in love with any of those stocks and I didn’t feel as though my ego was tied up in owning them. Earlier, I made the same mistake with a small holding of Corning. After watching the stock go up and down for several years, I finally grew disgusted, gave up, and sold my shares at a loss. I held on to Corning for longer than I should, because I was in love with their technology. I should have learned something about myself from that inexpensive lesson. Hopefully, I have finally learned my lesson.
From an article by Harry Domash, entitled, Nobel winner unearths 5 common investing mistakes; the author reports, “Daniel Kahneman, a psychology professor at Princeton University, won the Nobel Prize in economics for his attempts to explain the quirkiness that governs our financial decisions…. The truth is that investors don’t like to recognize a loss. I know I don’t. One strategy they use is to wait for a stock or a mutual fund to get back to even, reasoning that they haven’t lost anything. This shortsighted approach ignores the opportunity cost, or what else they might have done with their money in the meantime. And the reluctance to recognize losses affects professional managers as well as amateur investors, Kahneman says. Accepting a loss and moving on is very difficult.”
“Now ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
’cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.”
Saturday, August 28, 2010
American Debtor
In a recent article from the New York Times the author stated, “It’s one of the toughest lessons an investor has to learn: while the value of assets can plummet posthaste, it takes forever to shrink the debt that was used to buy them.” Even as housing prices continue to fall and U6 unemployment holds at around 16%, American consumer debt remains stubbornly high. It isn’t that we are not trying, the Federal Reserve reports that while consumer debt has only dropped 6.5% from its peak in 2008, the number of credit card accounts has dropped by 23.2%.
As a people we are beginning to get the message, but for some it is too late. More statistics from the Federal Reserve Bank from the aforementioned article: During the months of April, May, and June half a million people had a foreclosure added to their credit report. Also the number of bankruptcies reported in the second quarter jumped 34% to 621,000.
Per Capita Debt Balances for an Average Consumer with a Credit Report
California $78,000
Nevada $73,000
Nationwide $49,000
Really! These are the numbers reported by the Federal Reserve. How can you tell if you are part of the problem or part of the solution? I have posted lists of the warning signs of financial trouble from time to time. This one comes courtesy of my Employee Assistance Program at work.
You are borrowing to meet regular expenses, such as food and utility bills.
You are barely able to make the minimum required payment on bills, but continue to charge.
You are using one form of credit, such as a credit card or a debt consolidation loan, to make payments on other debt.
You are using 20% or more of your take home income to pay credit card bills and personal loans (excluding mortgage payments).
Your revolving credit cards are charge to the limit.
You are behind on credit card payments and receiving calls from creditors or collection agencies.
You are bouncing checks.
You have no cash reserve.
If any of these indicators apply to you, get help now. Perhaps something as simple as a budget will help. Perhaps more serious debt counseling will be required, but don’t wait for a miracle. Do something today.
As a people we are beginning to get the message, but for some it is too late. More statistics from the Federal Reserve Bank from the aforementioned article: During the months of April, May, and June half a million people had a foreclosure added to their credit report. Also the number of bankruptcies reported in the second quarter jumped 34% to 621,000.
Per Capita Debt Balances for an Average Consumer with a Credit Report
California $78,000
Nevada $73,000
Nationwide $49,000
Really! These are the numbers reported by the Federal Reserve. How can you tell if you are part of the problem or part of the solution? I have posted lists of the warning signs of financial trouble from time to time. This one comes courtesy of my Employee Assistance Program at work.
You are borrowing to meet regular expenses, such as food and utility bills.
You are barely able to make the minimum required payment on bills, but continue to charge.
You are using one form of credit, such as a credit card or a debt consolidation loan, to make payments on other debt.
You are using 20% or more of your take home income to pay credit card bills and personal loans (excluding mortgage payments).
Your revolving credit cards are charge to the limit.
You are behind on credit card payments and receiving calls from creditors or collection agencies.
You are bouncing checks.
You have no cash reserve.
If any of these indicators apply to you, get help now. Perhaps something as simple as a budget will help. Perhaps more serious debt counseling will be required, but don’t wait for a miracle. Do something today.
Friday, August 27, 2010
What is Truth?
“Crap being fed into our brains by people with an agenda.”
Dave Ramsey
Sometimes issues just kind of pop up all over the Internet. They can be discussed in totally different venues for totally different reasons, but the same subject is there, in each and every place. Lately, I have seen the question of the truth pop up on several of the blogs I follow. Barry Ritholtz, a somewhat liberal financial blogger, who normally avoids political rancor faced the issue head on. Stephen Freeman, a deeply committed Orthodox priest, tackled the question Pilate asked the Messiah in the Hall of Judgment, “What is truth?” Seth Godin, a marketing guru, challenged his readers to examine the truth of statements made to us by that little voice in our heads. Most recently, my pastor gave me some promotional material for Dave Ramsey’s Financial Peace University. Dave was talking about the truth, in this case financial truth.
Major media outlets in this country are biased, extremely biased. This is a world in which any two given media reports on something as simple and unimportant as a football game agree on very little but the score. Different networks have different biases, some liberal, some conservative. Expecting to see or hear the “truth” on American Television is a pretty hopeless task. Besides being politically biased, all the networks, including PBS, want your money. One of the things I love about the Internet is that I can read the same story from 3 or 4 different viewpoints. Sorting through that many different personalities and spins can give you a pretty good idea of the facts. Then, how you interpret the facts is your business.
In the movie, A Few Good Men, Colonel Jessep announces, “You can’t handle the truth.” He is correct. All of us have our own little mental maps of reality. We couldn’t operate without them. The world is too large and complex. Sometimes our mental map of reality and the world do not agree. When that happens, all too often, we conclude the world is in error and our precious beliefs and world view is correct. Psychologists call this phenomenon Cognitive Dissonance. It occurs when an individual is confronted with an uncomfortable truth that conflicts with their world view. The all too human response is to minimize the pain of realization with “justifying, blaming, and denying.” I have seen it happen over and over in churches, the columns of political commentators, and the publications of financial prognosticators.
Some time ago, I reached the point in my life where I came to believe that Pilate’s question was not an attempt at clever cynicism, but an honest reply from the tired cynical heart of a ruthless, intelligent, complex man. After too many years of service in the Imperial bureaucracy, a world where there is no truth, only an ever shifting balance of power, policy, and personality, Pontius Pilate, the fifth Prefect of Judea, had become incapable of recognizing the truth. Beyond an inability to recognize the truth, Pilate, a successful survivor in a world where self preservation was job one, had become incapable of the courage necessary to risk his own life and career for the sake of another. As a result of all he had become and the life that he had lived, Pilate washed his hands before the city of Jerusalem, and knowingly sent an innocent man to suffer a horrible death.
John 18
[37] Pilate therefore said unto him, Art thou a king then? Jesus answered, Thou sayest that I am a king. To this end was I born, and for this cause came I into the world, that I should bear witness unto the truth. Every one that is of the truth heareth my voice.
[38] Pilate saith unto him, What is truth? And when he had said this, he went out again unto the Jews, and saith unto them, I find in him no fault at all.
Dave Ramsey
Sometimes issues just kind of pop up all over the Internet. They can be discussed in totally different venues for totally different reasons, but the same subject is there, in each and every place. Lately, I have seen the question of the truth pop up on several of the blogs I follow. Barry Ritholtz, a somewhat liberal financial blogger, who normally avoids political rancor faced the issue head on. Stephen Freeman, a deeply committed Orthodox priest, tackled the question Pilate asked the Messiah in the Hall of Judgment, “What is truth?” Seth Godin, a marketing guru, challenged his readers to examine the truth of statements made to us by that little voice in our heads. Most recently, my pastor gave me some promotional material for Dave Ramsey’s Financial Peace University. Dave was talking about the truth, in this case financial truth.
Major media outlets in this country are biased, extremely biased. This is a world in which any two given media reports on something as simple and unimportant as a football game agree on very little but the score. Different networks have different biases, some liberal, some conservative. Expecting to see or hear the “truth” on American Television is a pretty hopeless task. Besides being politically biased, all the networks, including PBS, want your money. One of the things I love about the Internet is that I can read the same story from 3 or 4 different viewpoints. Sorting through that many different personalities and spins can give you a pretty good idea of the facts. Then, how you interpret the facts is your business.
In the movie, A Few Good Men, Colonel Jessep announces, “You can’t handle the truth.” He is correct. All of us have our own little mental maps of reality. We couldn’t operate without them. The world is too large and complex. Sometimes our mental map of reality and the world do not agree. When that happens, all too often, we conclude the world is in error and our precious beliefs and world view is correct. Psychologists call this phenomenon Cognitive Dissonance. It occurs when an individual is confronted with an uncomfortable truth that conflicts with their world view. The all too human response is to minimize the pain of realization with “justifying, blaming, and denying.” I have seen it happen over and over in churches, the columns of political commentators, and the publications of financial prognosticators.
Some time ago, I reached the point in my life where I came to believe that Pilate’s question was not an attempt at clever cynicism, but an honest reply from the tired cynical heart of a ruthless, intelligent, complex man. After too many years of service in the Imperial bureaucracy, a world where there is no truth, only an ever shifting balance of power, policy, and personality, Pontius Pilate, the fifth Prefect of Judea, had become incapable of recognizing the truth. Beyond an inability to recognize the truth, Pilate, a successful survivor in a world where self preservation was job one, had become incapable of the courage necessary to risk his own life and career for the sake of another. As a result of all he had become and the life that he had lived, Pilate washed his hands before the city of Jerusalem, and knowingly sent an innocent man to suffer a horrible death.
John 18
[37] Pilate therefore said unto him, Art thou a king then? Jesus answered, Thou sayest that I am a king. To this end was I born, and for this cause came I into the world, that I should bear witness unto the truth. Every one that is of the truth heareth my voice.
[38] Pilate saith unto him, What is truth? And when he had said this, he went out again unto the Jews, and saith unto them, I find in him no fault at all.
Saturday, August 21, 2010
What Makes You Happy?
What makes you happy? What makes you really happy?
This is not a question I explore very often. Perhaps that is a mistake. This blog is focused on doing the “right thing,” primarily in an attempt to avoid pain. Can money buy happiness? I suppose we all know the answer is, “Yes, but.”
I remember a moment on Hawaii (the Big Island). I was sitting on the porch of a Kona Coffee store, overlooking the Pacific Ocean. I heard the sound of rain from a passing shower, as I watched the small dark clouds blow past. It was a transcendental moment. I was at peace with the world. Hawaiian vacations don’t come cheap, but the moment and even the coffee sample were free. Whoops, sounds too much like those Mastercard commercials from a few years back.
Two recent surveys, one by Gallup and one by Nobel laureate Daniel Kahneman and Angus Deaton of Princeton University both found there is a strong correlation between money and happiness up to an income of about $75,000 a year. Beyond that number there is no correlation between money and happiness. Although, something called
“life satisfaction” continues to increase with wealth. This apparently, “reflects whether people are obtaining their values and goals in a long-term and big-picture sense,” it also seems to include the satisfaction derived from comparing one’s own condition with that of others.
It has also been observed, that people are happiest when there is a close correlation between their expectations and reality. If my expectations were a job at the mill and a wife from the trailer park down the road, I might be happier than if I believed I was going to be a star in the NFL and instead ended up in the aforementioned mill and trailer park. I think this also effects incremental satisfaction with some of our purchases. I expect to own a reasonably interesting car in good working order. At one time in my life, my definition of such a car would include a used Volkswagen without a radio or air conditioning.
It turns out that what really makes us happy is social capital and mastery. If our connections with friends and family are in good order and we view ourselves as competent in our chosen field of endeavor, we tend to be happier than if our relationships are in chaos and we face failure in our career.
This example comes from “But Will it make you Happy?” A New York Times article by Stephanie Rosenbloom. “For the last four years, Roko Belic, a Los Angeles filmmaker, has been traveling the world making a documentary called “Happy.” Since beginning work on the film, he has moved to a beach in Malibu from his house in the San Francisco suburbs.
San Francisco was nice, but he couldn’t surf there.
“I moved to a trailer park,” says Mr. Belic, “which is the first real community that I’v lived in in my life.” Now he surfs three to four times a week. “It definitely has made me happier,” he says. “The things we are trained to think make us happy, like have a new car every couple of years and buying the latest fashions, don’t make us happy.”
Mr. Belic says his documentary shows that "the one single trait that's common among every single person who is happy is strong relationships."
Romans 14
[17] For the kingdom of God is not meat and drink; but righteousness, and peace, and joy in the Holy Ghost.
[18] For he that in these things serveth Christ is acceptable to God, and approved of men.
[19] Let us therefore follow after the things which make for peace, and things wherewith one may edify another.
This is not a question I explore very often. Perhaps that is a mistake. This blog is focused on doing the “right thing,” primarily in an attempt to avoid pain. Can money buy happiness? I suppose we all know the answer is, “Yes, but.”
I remember a moment on Hawaii (the Big Island). I was sitting on the porch of a Kona Coffee store, overlooking the Pacific Ocean. I heard the sound of rain from a passing shower, as I watched the small dark clouds blow past. It was a transcendental moment. I was at peace with the world. Hawaiian vacations don’t come cheap, but the moment and even the coffee sample were free. Whoops, sounds too much like those Mastercard commercials from a few years back.
Two recent surveys, one by Gallup and one by Nobel laureate Daniel Kahneman and Angus Deaton of Princeton University both found there is a strong correlation between money and happiness up to an income of about $75,000 a year. Beyond that number there is no correlation between money and happiness. Although, something called
“life satisfaction” continues to increase with wealth. This apparently, “reflects whether people are obtaining their values and goals in a long-term and big-picture sense,” it also seems to include the satisfaction derived from comparing one’s own condition with that of others.
It has also been observed, that people are happiest when there is a close correlation between their expectations and reality. If my expectations were a job at the mill and a wife from the trailer park down the road, I might be happier than if I believed I was going to be a star in the NFL and instead ended up in the aforementioned mill and trailer park. I think this also effects incremental satisfaction with some of our purchases. I expect to own a reasonably interesting car in good working order. At one time in my life, my definition of such a car would include a used Volkswagen without a radio or air conditioning.
It turns out that what really makes us happy is social capital and mastery. If our connections with friends and family are in good order and we view ourselves as competent in our chosen field of endeavor, we tend to be happier than if our relationships are in chaos and we face failure in our career.
This example comes from “But Will it make you Happy?” A New York Times article by Stephanie Rosenbloom. “For the last four years, Roko Belic, a Los Angeles filmmaker, has been traveling the world making a documentary called “Happy.” Since beginning work on the film, he has moved to a beach in Malibu from his house in the San Francisco suburbs.
San Francisco was nice, but he couldn’t surf there.
“I moved to a trailer park,” says Mr. Belic, “which is the first real community that I’v lived in in my life.” Now he surfs three to four times a week. “It definitely has made me happier,” he says. “The things we are trained to think make us happy, like have a new car every couple of years and buying the latest fashions, don’t make us happy.”
Mr. Belic says his documentary shows that "the one single trait that's common among every single person who is happy is strong relationships."
Romans 14
[17] For the kingdom of God is not meat and drink; but righteousness, and peace, and joy in the Holy Ghost.
[18] For he that in these things serveth Christ is acceptable to God, and approved of men.
[19] Let us therefore follow after the things which make for peace, and things wherewith one may edify another.
Subscribe to:
Posts (Atom)