Sunday, August 28, 2011

Death and Life

Proverbs 18:21 states “Death and life are in the power of the tongue: and they that love it shall eat the fruit thereof.” I want to thank a friend of this blog for inspiring this post.

Giving is typically viewed as a toxic subject. Somebody, usually in a position of authority, is attempting to guilt manipulate his followers into funding his dreams at their expense. We have it all wrong. True generosity with money or words puts the giver into a position of power.

Once I decided to make some enlargements of some of my favorite photographs. I decided to try Walmart. Enlargements made by the mall camera store are a bit pricy. Instead of handing your negatives to a store employee and giving him instructions, Walmart has a customer operated scanner connected to a computer that takes the order. Of course I had never seen one of these things. I was not sure how to operate it and I didn’t want to make any mistakes. I asked the young woman behind the counter for some help. She walked me through the process. At that time, I didn’t know that different sized prints are not necessarily proportional to the negative. She taught me how to selectively crop the negative in order to get the best results and gave me some tips when I was making a bad decision. In an hour I came back to the counter to pick up the prints. When I examined them it was obvious the young woman spent some time tweaking the color and contrast because the prints were more vibrant and “deeper” than the originals. When I paid my bill, I received three dollars and some coins in change. I handed the three dollars back to the young woman and opened my mouth. I am not sure why I was inspired to speak these words, but I said, “You are much better than the kind of people that usually work at one of these stores. You should think about opening your own business someday.” The young woman burst into tears. When she stopped crying she told me she was studying accounting in night school. Someday she wanted to open her own office. With three dollars and a few kind words I had validated a life.

Truly, death and life are in the power of the tongue. I don’t know how far to push this idea, but I believe the words and the money we give in this world are more powerful than we understand, both in the world that can be seen and world that can not be seen. Do you want to be a blessing or a curse? Every day we are given the choice. We can speak words of blessings in the world or we can engage in cursing our brothers and engaging in malicious hurtful gossip. Dear Lord, let my words be full of compassion, peace, mercy, and honesty. So often they are not what they could be.

Oh, the second part of that verse? “And they that love it shall eat the fruit thereof.” I would interpret that to mean if we love to wag our tongues, and who doesn’t, we will eat the fruit of our words. Would you prefer to eat the fruit of curses or the fruit of blessings? Your choice.

Let me end with the quote that inspired this post.

“If you have a favorite waitress or waiter at a restaurant think about this. . . .Have you ever told them how much they mean to you and that Jesus really loves them. Tell them about Jesus...then leave them a big tip. WWJD? (What Would Jesus Do) He'd hug them, bless them, meet their need and leave a big tip. Go for it! intentionally!!”

Saturday, August 20, 2011

Get Up And Finish The Race

“Wherefore seeing we also are compassed about with so great a cloud of witnesses, let us lay aside every weight, and the sin which doth so easily beset us, and let us run with patience the race that is set before us, Looking unto Jesus the author and finisher of our faith; who for the joy that was set before him endured the cross, despising the shame, and is set down at the right hand of the throne of God.”

Chariots of Fire is one of my favorite movies. It tells the story of two British athletes Harold Abrahams, an English Jew who ultimately goes on to great success and recognition in this world and Eric Liddell, an intensely devout Christian who eventually goes to the mission field in China and martyrdom.

In one scene Liddell is intentionally tripped during a race. He falls, gets back up, and with superhuman effort runs down the cheater who tripped him, and wins the race. Liddell immediately collapses in a state of hyper-exhaustion gasping for air. Sam Mussabini, the hardened old trainer who would take Abrahams to a gold medal in Paris, runs to the aid of the stricken Liddell. Helping Liddell’s trainer, Mussabini observes, “You take good care of this lad of yours, Mr. McGraff because if you drop him, you’ll never find another one like this.” Then looking at the fallen runner he adds, “It’s not the prettiest quarter I ever seen Mr. Liddell, but it is certainly the bravest.”

In the last few years a lot of us have been tripped up by life. Sometimes it was done, as in this scene, with malice and forethought. Sometimes it was our own fault. Sometimes we have just been victims of forces far beyond our control. Whatever the cause, we are exhorted by scripture to get up and finish the race. I am not a very optimistic person. Typically, I plan expecting things will go wrong. I am the kind of guy whose contingency plans have contingency plans. It is hard for me to write motivational prose, but it is something I need to hear even more than I need to share. If you, if I, want to be the kind of person others will remember we must get up and finish the race. Then perhaps, at your funeral people will say, “There will never be another one like _____.” Even more importantly, we may hear Someone rather more important than our friends say, “Well done, good and faithful servant.”

2nd Timothy Chapter 4

[6] For I am now ready to be offered, and the time of my departure is at hand.
[7] I have fought a good fight, I have finished my course, I have kept the faith:
[8] Henceforth there is laid up for me a crown of righteousness, which the Lord, the righteous judge, shall give me at that day: and not to me only, but unto all them also that love his appearing.

Friday, August 19, 2011

Yes, It Is Hard Work

An article by Laura Rowley reports on a new paper written by Annamaria Lusardi of the George Washington School of Business. Lusardi states, “We shouldn’t underestimate how difficult it is for some people to make financial decisions.”

10% of the people she surveyed didn’t know the interest rate on their mortage.

20% of the people she surveyed didn’t know the interest rate on their car loans.

Of the 46% who carry a balance on their credit cards 12% didn’t know the interest rate on their highest rate card.

She found just 10% could ace a quiz on basic economics and finance. I saw a sample of the types of questions she was asking. They were almost moronically simple.

Even if you are half conscious you are still in trouble. Our financial system is designed to separate a fool from their money. Even after the recent credit card reform act, contracts are designed to confuse the card holder. The stuff American Express sends my 85 year old mother in law would confuse the proverbial Philadelphia lawyer. That is why I recommend, “Pay off your card every month or lock it away in a box.”

Phone companies and cable television providers desperately want you to set up automatic debits to pay your monthly bill. If you don’t pay attention, like most people, they will pull the old boil a frog trick by slowly raising your bill, hoping you don’t notice the increase and hop out of their pot.

T. Harv Eker, author of Secrets of the Millionaire Mind observes, “Rich people buy assets, things that will likely go up in value. Poor people buy expenses, things that will definitely go down in value.” Are you buying shares in Verizon or are you signing cell phone contracts that you do not understand? Just asking.

More from Annamaria Lusardi:

Americans fail to plan ahead: only 42% have even attempted to understand what they will need to save for retirement. Only 41% with financially dependent children have set aside money for college. She further observes those who do save don’t know what is being done with their money. 20% of those with investment portfolios had no idea what they had purchased. Only 33% were using a tax advantaged account to save for their children’s education. This is really sad.

From T. Harv Eker, “Again the idea is to have your money work as hard for you as you do for it, and that means you have to save and invest rather than make it your mission in life to spend it all. It’s almost funny: rich people have a lot of money and spend a little, while poor people have a little money and spend a lot.”

Rick Mayhew teaches a financial planning course for adults at Washington University in St. Louis. He observes, “Most of my students even though they have been to college didn’t get a lot of basic information along the way that we cover in my class.”

"It is amazing how many people want to talk about investments rather than budgeting," Mayhew notes. "It's not the fun or sexy part of planning. People think they are going to hit a wonderful investment that's going to help them live a great life, when they will do better by managing their controllables: making sure they get the best value on purchases and keep a little money in reserve."

Are you supervising your money? Do you know where it is going and when it is leaving? Do you know where it is coming from? Are you satisfied with the results? Maybe your money does not require as much supervision as your children, but it certainly requires more supervision than a housecat.

A final observation from T. Harv Eker, “Long-term versus short term: poor people work to earn money today; rich people work to earn money to pay for their investments, which pay for their future.”

You can’t control the future but you can plan for the future. The best we can do is to consistently engage in financially prudent activity and then trust God for the rest.

Now let’s be careful out there.

Saturday, August 13, 2011

The Rise of the Amateur

Yesterday I wrote about the rise of the “just in time” employee. I think this mindset has created an unintended second order effect, the rise of the amateur. In this post I will explore two examples of this phenomenon.

When I started work back in 1973, we had secretaries. These women were expert typists. They were fast, accurate, and were familiar with the proper format for any correspondence or reports that were required by their job. With the rise of word processing software, the typing task passed to managers and engineers. These individuals could not type very fast or very well and they were frequently unacquainted with the style guide. Sending a document produced by an amateur to a customer was a bad idea, so review chains became longer and slower. However, the secretaries could be eliminated. Since engineers can charge the customer for billable hours and the secretaries are paid for out of overhead it is good thing for the organization. The engineer typist is generating income and the now unemployed secretary is not an expense. Often strange behavior in organizations is easily understood once one is familiar with the accounting rules.

The second example includes publications like this blog. Warren Buffet says, “In business, I look for economic castles protected by unbreachable ‘moats’.” Attacking companies like Coca Cola or Dell Computers would be difficult for a startup. At best they could only chip around the edges, making an odd new beverage for a limited clientele or assembling a small number of custom computers in a residential basement on a special order basis. Starting something like a new railroad would simply be impossible. Printing a paper and distributing it was a significant barrier to entry. Now the Internet allows any penniless crackpot the opportunity to stand on an electronic soap box and share his opinions with the world.

Once every city of any significance had at least two newspapers, a morning paper and an evening paper. The articles in these publications were written by professional reporters, reviewed by professional editors, the layout was done by professional artists, and the paper was printed by skilled tradesmen. First network television news killed the evening paper. Then the electronic revolution killed the printers. Now the Internet and cable news are killing the surviving morning papers. Who wants to pay 50 cents for day old news that has to be recycled when it is available the instant it is happening on the new media?

The few surviving daily papers are fighting back with “just in time” techniques. Professional reporters have been replaced with stringers, essentially amateurs paid by the story or hired on a part time basis. Again this is nothing new. Freelance photography has always been a part of magazine and newspaper publication since the technology first appeared in the middle of the nineteenth century. It is the continuation of an existing trend to new areas. It also appears that publications like USA Today are not as carefully edited as in the past. If the casual reader can routinely find spelling and grammatical errors in the articles (and they do) USA Today has a problem.

It is obvious to the author this blog could use the services of a professional editor, but since I can’t afford one, spell checker and an occasional consultation with the wife will have to suffice.

It's Broken

The machinery that creates jobs in America is broken. After over a trillion dollar bailout of the banking industry undertaken with the hope of freeing up money for loans that would reenergize industry in general and the housing industry in particular; after over a trillion dollars in stimulus projects, the official unemployment rate hangs stubbornly at 9.1%. The more realistic measure, U-6 that includes discouraged workers who have just given up stands at a depression era level of 16.1%. These are the worst numbers in 30 years and there is no indication they are going to get any better anytime in the near future.

The reasons for this situation are complex and interrelated. First and foremost is a lack of demand. When surveyed, employers almost always give, lack of demand as the primary reason they are not hiring new employees. It is easier to focus on improving the productivity of existing employees or scheduling a little overtime when absolutely necessary. Stimulus and bailout money intended to break our economy out of what Keynesian economists term a liquidity trap, didn’t work. Although, these expenditures have increased our national debt by a few trillion dollars, they did not increase demand. In fact the news of this very day announced American consumer confidence has hit a historic low. Unemployed people can’t buy all that much stuff. People with a job are frightened. For the first time in nearly 30 years the personal savings rate is in a multi-year upward trend. People are paying down their personal debts. Apparently we are learning that buying things we don’t need with money we don’t have is a bad idea. Unfortunately this new found sense of responsibility is not helping the unemployed find work.

The demand for Government employees is also dropping not so much from a lack of demand, as a lack of resources. States like California, New York, New Jersey, Illinois, and Rhode Island are facing bankruptcy. For the first time since the great depression, cities and counties are going into bankruptcy court and receivership. As much as these entities might want to hire new policemen or teachers, there is simply no money available.

Threatened and actual changes in taxes and regulations are given by employers as a reason they fear hiring many new employees. Personally, a friend of this blog has told me when Obamacare kicks in he will have to layoff some of his employees. He simply cannot pass the additional cost on to his customers. Surprisingly, the threat of additional taxes and regulations is not currently perceived as that large an impediment to new hires.

So much has been written about the loss of 20 million American factory jobs to countries such as China, there is no point in repeating that story in this article. However, there is some new information from What’s Wrong With America’s Job Engine, by David Wessel. During the past decade, “the multinationals cut their U.S. work force by 2.9 million and increased it abroad by 2.4 million.” Two reasons are now being given for this trend, the traditional reason of lower wage scales and less regulation and a new reason, their new customers live in these countries. Consumption of Buicks, Coca Cola and Kentucky Fried Chicken is increasing—in China!

Likewise much has been written about automation in the factory and computers in the office that has simply eliminated millions of job. This sort of structural loss, termed “creative destruction” by some economists is unavoidable. Industries rise and fall. The personal computer and word processing software has replaced the typewriter. There was no longer much call for buggy whips after the Model T Ford made its debut. This sort of change, while painful, is unavoidable. Our society has been hit with too many technological revolutions over the past 30 years. The cultural adjustment has been hard and painful. The average employee with just a high school diploma is in trouble. In 1960 a man willing to work 40 to 50 hours a week in a factory could reasonably expect to support a wife and a couple of kids in middle class comfort. That is no longer the case. Today far too many two job couples struggle just to make ends meet.

There is another disturbing trend in American employment. Wessel notes, “Executives call it structural cost reduction or flexibility. Northwestern University economist Robert Gordon calls it the rise of the “disposable worker,” shorthand for a push by business to cut labor costs wherever they can, to an almost unprecedented degree.

I believe this trend began with “just in time” inventory techniques pioneered by organizations like Toyota and Walmart. By keeping inventories of parts and products at a bare minimum and working with suppliers to constantly lower prices, these organizations became two of the largest most profitable corporations in the world. It isn’t that much of reach to apply the same principles to people. This is nothing new. When I want a bathroom remodeled I don’t hire a fulltime handyman. I bring in a contractor for a few days. Then he goes on to the next job. Employers have always used temps to smooth out big seasonal jumps in demand. However, more and more work is being contracted out. GM no longer hires cafeteria workers. Instead they contract that work out to a restaurant services contractor at considerably less cost. They have also divested themselves of the unprofitable parts supply houses like Delco. In order to survive in the global economy, those employees have lost job security, pay, and benefits.

Microsoft is notorious for the use of “permanent temps.” Most of their workers are not permanent employees that share in the great wealth generated by that once in a century natural monopoly. They work for as long as the law allows. Then they are laid off until the law allows them to be rehired. Companies who engage in this sort of practice avoid a great deal of the wage and benefit costs associated with permanent employees. It is also much easier to dismiss a temporary employee for any cause, legitimate or not.

When I worked in factories, I observed the human costs of unemployment. Every time there were significant layoffs, crime, alcoholism, and especially domestic violence would increase. The only jobs available in those days were entry level positions that paid less than a living wage. Traditionally these were jobs for teenagers. Now those jobs are disappearing. The news is reporting that teenaged unemployment has past 50% in the District of Columbia. The situation is much worse than that, since only those actively seeking employment are considered unemployed. How many young people are just not trying because they know the job they want does not exist?

Michael Saltsman, research fellow at Employment Policies commenting on this appalling unemployment rate observes, “Young people are facing more competition for fewer jobs, a lingering consequence of the recession and wage mandates that have eliminated entry-level opportunities. The consequences for this generation of young people missing out on their first job are severe, including an increased risk of earning low wages and being unemployed again in future years.”

May God have mercy on our Nation.

Sunday, August 7, 2011

A Portfolio For All Seasons

Almost everyone agrees that an investment portfolio needs to be diversified. However, there is a great deal of disagreement on what sort of diversification makes sense in a given market or at different phases of life. Craig Israelsen, Ph. D, a professor at Brigham Young University has examined a number of possible models and proposes a 7Twelve Portfolio as core portfolio for all seasons. He considers the core portfolio as the foundational, unchanging part of a portfolio that does not vary over time. Like most students of investment, Israelsen allows that this core will become a larger or smaller portion of an entire portfolio over time but it will never go to zero, even in extreme old age.

First Israelsen would suggest that an investor place 65% of his assets in equity and diversifying assets and 35% in bonds and cash. These two broad classes are then broken down into 7 components and then into 12 sub-components as listed below. Each sub-component is allocated an equal 8.33% of the total. Exchange Traded Funds (ETF) or mutual funds are the preferred vehicle for the professor’s model.

1.0 Equity and Diversifying Assets

1.1 U.S. Equity (Note: 25% of the total is invested in U.S. Equities)
1.1.1 Large Cap
1.1.2 Mid Cap
1.1.3 Small Cap

1.2 Foreign Equity
1.2.1 Developed Markets
1.2.2 Emerging Markets

1.3 Real Estate
1.3.1Global Real Estate

1.4 Resources
1.4.1 Natural Resources
1.4.2 Commodities

2.0 Bonds and Cash

2.1 U.S. Bonds
2.1.1 U.S. Aggregate Bonds
2.1.2 Inflation Protected Bonds (TIPS)

2.2 Foreign Bonds
2.2.1 International Bonds

2.3 Cash
2.3.1 U.S. Money Market

Comparing his model portfolio to a core consisting of 100% in U.S. stocks and the more typical portfolio split 60% U.S. stocks and 40% bonds, the results are pretty dramatic. Across the “lost decade” between 2000 and 2010 an all stock portfolio would have lost money, a 60/40 portfolio would have provided a 2.56% annualized return. A 7Twelve asset core would have doubled in value over the worst decade in 80 years, not too shabby.

Israelsen contends that his research indicates this is a core portfolio for all seasons. He believes it will provide the best possible protection regardless of investor age or the current financial situation. I would certainly have some questions for the good professor. What is a U.S. Aggregate Bond Fund? Why so little cash? Why didn’t energy make the cut as a sub-category? I am familiar with U.S. REITs and I have seen foreign companies with extensive real estate holdings, but I am not familiar with Global real estate funds. Also, Israelsen reminds me that I lack any position in developing markets. I know this is a mistake, but the BRIC countries, Brazil, Russia, India, and China are all a little scary to this aging American Investor.

I have posted a number of articles on various diversification strategies and will continue to do so as I discover new ideas I think are worth consideration or really bad strategies. This one sounds pretty solid. More information on this topic can be found on line at:

Saturday, August 6, 2011

The Itsy Bitsy Spider

To say the least, the past month has been interesting. We have been treated to an amazing performance by our elected officials ending in the unthinkable, the first ever downgrade in U.S. debt. Or is it? Well, not quite. Remember the expression, “Not worth a Continental?” Our nation’s first currency was paper (fiat) money that was viewed as essentially worthless.

From Wikipedia, “By the end of 1778, Continentals retained from 1/5 to 1/7 of their face value. By 1780, the bills were worth 1/40th of face value. Congress attempted to reform the currency by removing the old bills from circulation and issuing new ones, without success. By May 1781, Continentals had become so worthless that they ceased to circulate as money. Franklin noted that the depreciation of the currency had, in effect, acted as a tax to pay for the war. In the 1790s, after the ratification of the United States Constitution, Continentals could be exchanged for treasury bonds at 1% of face value.”

During the Civil War the United States Government issued “greenback dollars” that were backed by nothing. Literally, there was nothing printed on the back of these bills. This currency gave rise to the expression, “not worth a greenback dollar,” to describe a particularly worthless person or thing. The Government defaulted on this currency in 1862, refusing to redeem the dollars in gold. The value of a greenback dropped to about 40 cents on the dollar.

During World War I the United States issued Liberty Bonds denominated in gold. When it came time to pay up, Franklin Roosevelt had made it illegal for private citizens to own gold, in effect defaulting on this loan. The entire sad story of the Liberty Bonds is too complicated for this blog, but makes for an interesting read if you enjoy history.

Depending on whom you choose to believe the debt crisis trigged by peripheral states of Europe, the so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) is worse (or not) than our predicament. Japan is facing a national debt of 200% GDP. The Chinese government is losing control of inflation in their economy. The Australian government is dealing with a real estate bubble very similar to the one that started our recent recession.

The stock market reacted to all this good news by dropping over 6.5% in one week! So what can we do? The market is down about10.5% since its most recent peak. At some point stocks and bonds will once again be a bargain and the wise investor will be buying equities. There are no guarantees in life, but the odds are in your favor if you keep doing the right things in the right way. The sun will come out again, it will dry out all the rain, and Lord willin’ we will climb that spout again.

The itsy-bitsy spider
Climbed up the water spout
Down came the rain
And washed the spider out
Out came the sun
And dried up all the rain
And the itsy-bitsy spider
Climbed up the spout again