Saturday, October 29, 2011

Are Beer, Ramen Noodles, and Canned Tuna the Secret to Happiness?

Recently Yahoo Finance and a number of other websites have featured a series on living well on $40,000 a year, $20,000 a year, and $11,000 a year. I did not find them all that interesting nor do they contain anything all that surprising, but they do reinforce the virtues of frugality, deferred gratification, and a disciplined method of setting priorities. As I am fond of saying, important things are simple and simple things are hard.

They also remind me how complicated we Americans make our lives. There was a time, for some of us the college years, when a jug of wine, a loaf of bread, and thou were truly sufficient. I recently heard a sports show radio host, now in his early forties married with children, long for his undergraduate days. There was a time when all he asked of life was a girlfriend and money for beer and concerts. He wondered how everything had become so complicated. His co-hosts, who knew him in those days, reminded him of his rat trap apartment, his nasty (really nasty) sofa, and his diet that consisted mostly of beer, ramen noodles, and tuna eaten directly from the can. Those memories didn’t matter to one of the most successful radio personalities in sports journalism. He only remembered skipping class, picking up girls on the quad, and late night pick-up ball games with his drinking buddies.

I am approaching that point when I will begin to simplify and discard some of the trappings of the so called good life I have accumulated over the years. In one last frenzied burst of energy I am driving towards retirement, trying very hard to accumulate enough money for the remainder of our lives. Then what? Then if I am like most Americans, I will sell the big house in the expensive neighborhood. We don’t live in a very big house, but the Washington, DC area is certainly very expensive. Then we will probably move somewhere warmer and less expensive. Before the move, we will probably have a yard sale or perhaps pay somebody to put a big dumpster in our driveway so that we might fill it with all the junk we have accumulated while living in the same house for 24 years. Even if the market does well, like most retired Americans, for the first time in many years, we will learn to live on less rather than learning to live on more.

In the “Energy of Money” Maria Nemeth suggests a number of exercises to help you understand what underlies your financial behavior and how to find your way to what really matters. One of them, discovering your standards of integrity, will help you understand what is really important, to you, no matter what your financial condition. Take a sheet of paper and list everyone you really admire, alive, dead, real, or characters from fiction. Then take each name and list the qualities you admire in that person. Then list all the qualities that appear under all the names. Put a check next to the quality each time in occurs in one of your most admired. You will discover there are certain values that appear over and over again in the people you most admire. Those are the values that are really important—to you. The author also contends that those are the values that will lead you to enlightenment. My list? Authenticity (I don’t think I’ve done all that well with that one), courage, command presence (several military leaders in my list), loyalty, spiritual depth, wisdom, compassion, perseverance, creativity, and equanimity (oh well, blew that one). Try it. It is an interesting exercise.

Philippians 4 (NIV)

10 I rejoiced greatly in the Lord that at last you renewed your concern for me. Indeed, you were concerned, but you had no opportunity to show it.
11 I am not saying this because I am in need, for I have learned to be content whatever the circumstances.
12 I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.
13 I can do all this through him who gives me strength.

Your Credit Score

While looking through some old emails, I came across one sent by a friend of this blog. I am not sure why I never used it, but now seems like a pretty good occasion to revisit the subject. We live in a nation obsessed with easy credit. It should be no surprise that many Americans find their credit score an important topic. I guess the best answer to the question, “What is your credit score?” would be, “It doesn’t matter.” Avoiding debt wherever possible is still the best course.

Credit scores should not be a major issue in our financial life but they are. Of course your mortgage rate is driven by your credit score. That is the big one. Car loans, credit card rates, and other loans are also affected by credit scores. Unfortunately, that is not where it ends. Your car insurance rate, your ability to find employment, and even getting a security clearance are all affected by your credit score. Finally, every marketer in America wants to get that information to better target you.

The most common score is the so called FICO score produced and sold by the Fair Isaac Company. Wikipedia defines a credit score as, “A numerical expression based on a statistical analysis of a person’s credit files to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.” In the U.S. there are three such credit bureaus TransUnion, Equifax and Experian. The consumer is allowed to request a free report from each of these organizations once a year. This is a good idea, as it allows us to correct mistakes on our reports (I have found two mistakes on my reports over the years) and it can tip us off to identity theft activities. The bureaus are not required to provide a free credit score. That will cost you about $10.00 a pop.

Stay away from It isn’t free. Is the only authorized site for your free annual credit report.

Again from Wikipedia, “In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010.” Good and bad scores are somewhat difficult to define and are constantly changing with the economic climate, as lenders are alternatively driven by greed or fear.

Some important trigger levels:

620 Historic dividing line between prime and subprime

640 Current dividing line between prime and subprime

660 Some companies will not provide mortgage insurance below this number

740 Fannie Mae and Freddie Mac charge extra for loans with less than a 25% down payment if below this number.

The actual algorithm that produces your credit score is a carefully guarded secret. However, MSN.Money reports the following breakdown is used by the credit reporting companies.

35% - Payment History

30% - Amount of Debt

15% - Credit History (length)

10% - New Lines of Credit /Credit Mix (installment loans, credit cards, Amex, etc.)

10% - Credit Inquires/ Length of Employment /etc.

Lenders are looking for reliable debt serfs who have a long credit history, who apply for credit frequently but not too frequently, who borrow a lot but not too much, and always pay on time.

Here is a short list from Wealth Builders detailing the kind of things you can do that will quickly increase your credit score. I suspect the increase might be quick, but not all that great.

Pay all bills on time

Be aware that delinquent utilities, traffic tickets and library fines can show on your credit reports

Based on the new information, don't close accounts with a long history

Don't close credit cards that will result in a higher debt to income until you can pay the balances down

Avoid opening several new accounts at the same time

It is hard to remember if you are just starting out in life with nothing, or fighting your way out of a terrible debt trap, but the goal here is to reach a point where your credit score does not matter because you never have to borrow any money.

My prayer is freedom from debt for all my readers.

Sunday, October 23, 2011

The 1%

I have some misgivings about attempting to write this post. I make a very strenuous effort to keep my politics out of this blog. The goal here is to increase my financial wisdom and share anything I have learned that works (or that doesn’t work) with my readers. Then as I outlined this post in my mind, it became so complex I was not sure I was up to the task, but the issue is important and it is current, so here is my attempt to address the 1% protest movement.

First of all, who are these 1% villains inspiring the protest. Turns out they are not Wall Street Bankers with long black mustaches and diamond cufflinks. According to the IRS it takes $343,927 a year to make the cut. That is a whole lot more than my household income, but really it isn’t that large a number. A lot of highly productive professionals (like medical doctors) and small businessmen who are creating most of this country’s pitiful number of new jobs earn that much. The average salary of this group is bit higher, $960,000. Now we are talking real money, but is it always undeserved?

Yahoo finance reports there are just under 1.4 million household in the top 1%. They earn 17% of the nation’s income and pay 37% of its income tax. For the self employed the total tax burden including the double bite for Social Security is 50.3%. This does not include state taxes, local taxes, or a variety or licensing fees required by various jurisdictions. Really, the facts are not what the protestors would like us to believe.

How about those evil Wall Street bankers? The average salary of the top onepercenters (is that a word?) working in the security industry is $311,000 a year. Good pay to be certain, but not really rich for New York City. If someone earns that salary in Travelers Rest, SC, he is really rich.

Again from Yahoo Finance, in 2005 14% of the top onepercenters worked in the finance industry, executive and managers in other industries made up 31% of the top 1%, medical doctors contributed 15.7% to the top 1%, and lawyers made up 8.4%.

That said, there are some real issues here with serious merit. The same issues that energize the 1% protestors, created the Tea Party. The first is the issue of tax fairness. Let’s look at an example from the oftwominds blog. “The most egregious example of this is hedge fund managers who bought a loophole which enables their $600 million annual income each to be treated as capital gains, a rate of 15%.” Our tax code is littered with exemptions, loopholes, and subsidies that are totally unfair and unmerited. People, like the small businessman paying more than 50% in taxes, are justifiably outraged.

There is an inherent ever changing imbalance in our country between democracy that tends to redistribute wealth and freedom that inherently creates imbalances in incomes. It is the job of our elected officials in this Republic to see that neither part of the equation gets seriously out of whack. However, I fear too many of our representatives are bought and paid for by special interests that range from the Wall Street investment houses to thoroughly corrupt union officials.

The second is a very dangerous socially destabilizing trend in income distribution. As corporate profits increase CEOs should become richer. Unfortunately, they should also share in the pain when their corporations tank. Many of the men that brought the world’s financial system to the brink in 2008 should be in prison. Instead they walked with golden parachutes exceeding $60 million and were allowed to keep their ill gotten gains from CDOs, SIV, Credit Default Swaps, and a host of other essentially fraudulent instruments. No matter the economic condition of Wall Street, the CEOs are claiming an ever larger piece of the pie. In 1980 the average CEO earned 42 times the salary of his average employee. Today he earns 343 times the average workers salary. This is dangerous. Historically, extreme imbalances in wealth distribution leads to civil wars, revolutions, and dirty wars like the one that occurred in Argentina.

The real problem is not that the average CEO is earning $8,048,000 in 2010. The real problem is that the median household income in the United States was stagnant for a decade and now is headed down. Unskilled and semiskilled workers were the first to take the hit, as the great American corporations moved their manufacturing operations offshore. Now the same companies are discovering that computer programmers living in India will accept much lower pay than their American counterparts. Even patents are written by lawyers living in India and X-rays are being read by radiologists in the third world. Maybe we the shareholders of these companies should look into outsourcing our CEOs. Nah, just kidding, but I really believe we should all remember we are Americans and we are all in this together.

Saturday, October 22, 2011

More on Student Loans

When the facts change, I change my mind. What do you do, sir?
John Maynard Keynes

Six or seven years ago, I still thought student loans were OK if and only if the student had a plan. A plan sounds something like this: “I will earn a BS-RN in nursing so that I might specialize in the field geriatric medicine. Given the large number of Boomers approaching or already in their 60s, this should be a lucrative field for a very long time.” Over recent years, my opinion of student loans, which was never all that good for the average somewhat immature undergraduate, has been steadily dropping. Today, I still would never say never, but I would advise almost every student at any level to avoid the loan office. In the current economy, unless you are getting a MD or a MS in Petroleum Engineering, I would consider the danger of not finding a job just too great.

Student loans do not go away, not even in bankruptcy. Thank my generation for that one. Too many students my age discovered it was easier to file for bankruptcy than repay their student loans. Since these loans are typically guaranteed by the taxpayer, our Congress decided to change the law. These loans have to be repaid even if the student never graduates. Imagine, flunking out of school, unable to find employment, and saddled with student debt that never goes away. These loans have to be repaid even if the money was not used for education. Recently banks and universities devised a scheme whereby students were given their loan money in a live debit card. In fact, the use of that particular debit card was required for those receiving student loans by the university billing office. What this meant in practice was an 18 year old kid could use that debit card to pay for tuition, books, or buy beer for a road trip to Atlanta. The outcry from the effected parents ended that scheme in a hurry. However, it does give one some insight into the morals of both the banking and the education industry.

This week, USA Today reports that student loans have exceeded the $1 Trillion mark. Americans owe more on student loans than they do on credit cards (really)! That number is increasing at the alarming rate of $100 Billion a year. Students are borrowing twice as much as they did just a decade ago. They are graduating with a debt burden that is so large that even with a good job and a good degree they are unable to move on with the normal progression of a middle class life, marriage, mortgage, family. In an economy with a realistic (U-6) unemployment rate of 16%, a good job is not a guarantee.

As with any well intentioned Federal program, the availability of limitless government funds has produced a dramatic increase in costs. The universities have no reason to control their overhead, when their customers can easily obtain low cost loans guaranteed by the Federal Government. Why not raise the cost of our product faster than the rate of inflation? Since 1985, the Consumer Price Index is up 107.05%. In the same time period the cost of a college education has increased 466.8%. Starting around 2002 the rate of increase in this line jumped pretty dramatically.

There are no brakes on this train and we are headed down the Great Saluda Grade.

Monday, October 17, 2011

Just Hang on And Scream

Since Standard & Poor’s downgraded U.S. debt back in early August, the market has just gone insane. The most terrifying roller coasters can’t compete with the Dow which, in just in the two weeks of my current vacation, dropped something like 700 points and then jumped back over 1,000. These kinds of changes in the stodgy old Dow don’t happen in a typical year. Yet on one day, the Dow dropped close to 100 in the time it takes to drink a can of Diet Coke. The rise of Exchange Traded Funds has the potential of turning the last 20 minutes of any given trading day into a ride on the Zipper. If you have never seen a Zipper in action, check it out on Youtube. Only a lunatic would get on a carnival ride that looked like that.

I never quite understood why S&P downgraded U.S. debt at this time. As long as our debt is denominated in U.S. dollars and we own the presses that print the bills, our debt will be paid in U.S. dollars. The value of the dollar has been dropping steadily since F.D.R. confiscated gold coins back in 1933. If the downgrade was tied to the drop in the value of the dollar it should have started during the Carter or even the Nixon administration. The other stuff going on in the world is old news. Everybody knows there is going to be some kind of default on Greek debt. The only question left to be answered is who is going to pick up the bill. The answer to that question could trash a sector or a country, but all sectors in the entire world?

So, why the crazy gyrations? Who knows? As the football players say, “It is what it is.”

I have concluded this is a very good time to be a trader (which readers of this blog know I am not). A market that hops up and down in triple digit jumps should send every technical trader, both machine and human, into wild spasms of adrenaline fueled ecstasy. How about the rest of us, the value investor? The only thing I see that I can do that makes any sense is to just hang on and scream. If I have made wise investment decisions and own good companies that pay a righteous dividend, time is on my side. I don’t think people are going to stop buying Coca Cola, Band Aids, gasoline, or Tide laundry detergent. If the share prices get artificially low, the dividend reinvestment program buys more shares at a lower price. As long as those dividends keep rolling in I should be OK.

It is a very great temptation to join the crowd and sell in terror when the market is at a bottom and jump aboard a soaring stock just when it is at a peak. Retaining perspective and discipline when you are losing or making outrageous amounts of money in a single day isn’t easy, but history indicates this is what separates winners from losers. I hope history can be trusted. I want to retire 15 months and two weeks from today, but who’s counting?

At the recent bottom, I once again faced the question, “When to cut my losses and run?” I have three holdings that I find particularly annoying. I have written about GE on previous occasions. I stepped into a classic value trap on that one. I still believe in the company, they seem to be doing all the right things, but the stock remains at historic low levels. I would sell it but all the research reports give it good ratings. We shall see? I bought Apache at a bad time, when oil was near $150 a barrel. Obviously an oil exploration company is not going to be valued as highly when oil is selling around $90 a barrel. They also own considerable natural gas holdings. I still want a piece of that action so I am holding on. Hong Kong and Shanghai Banking Corporation is the last of my three embarrassments. They, like all European banks, are taking a bad beat down even though as far as the public knows they are well capitalized and one of the most liquid of the European banks. I originally bought this stock to gain exposure to China without the risk of corruption and fraud rampant in that country as they evolve towards something like a more mature form of capitalism. I still like it and it pays a 4.3% dividend that seems safe, at least for the moment, so I will hold on. Just to be honest, I seem to be better at deciding when to buy a stock than I am at deciding when to sell a stock.

And Please! Let’s be careful out there.

The Six Killer Apps of Prosperity

TED (Technology Entertainment and Design) is a global set of conferences owned by the private non-profit Sapling Foundation, formed to disseminate "ideas worth spreading." (Wikipedia)

If you haven’t already discovered the TED lecture series, I strongly encourage you explore this remarkable collection of contemporary human thought. The speakers come from many disciplines and viewpoints. No matter whom you might be or what you might believe, you will find speakers who will annoy you and speakers who will inspire you. They are limited to 18 minutes, less time than it takes to watch a second rate sitcom. The lectures are free and you don’t even have to listen to any commercials.

Several weeks ago, I discovered Niall Ferguson’s TED presentation on the Six Killer Apps of Prosperity (linked from the Simple Dollar Blog also well worth your time). It has been bumping about my head ever since, so here is a little synopsis and review.

Ferguson asks the question, “What are the common characteristics of a prosperous or rapidly improving economy?” He proposes six that span time, nationality, religious belief, and culture.

1)Competition --Economies that encourage competition inevitably do better than those that centralize economy control. This is true of modern centrally planned economies such as the Soviet Union or the medieval economies in which the king granted monopolies to his favorite and most generous courtiers.

2)Scientific Revolution--Ferguson defines this term as applying the discoveries of “pure” science to practical problems. One of the examples he presents is an early study that applied the then recent discovery of Newtonian mechanics to artillery. Now your cannons can hit their target. Talk about a killer app.

3)Property Rights--I would have termed this rule of law and included property rights as a part of a larger whole. Economies in which the rules are fair, clearly spelled out, and systematically followed do better than economies in which the rules of the game are constantly changed to benefit the rich or politically well connected.

4)Modern Medicine--Ferguson believes this subset of the Scientific Revolution is so important it merits a separate line item in his list. He points out modern medicine has more than doubled life expectancies in every economy that has made it a cultural priority.

5)Consumer Society--Ferguson believes the consumer society triggered the industrial revolution. Does a woman really need 40 pairs of shoes? No, probably 4 or 5 would suffice even in the most extreme four season climates. Ferguson observes that today most Indians are delighted their country chooses not to follow the path of self sufficient poverty promoted by Mahatma Gandhi. Even somebody with my taste in clothing wants to own more than two loin cloths.

6)Work Ethic--For an economy to prosper, people have to believe there is a direct connection between effort and reward. This encourages behaviors like deferred gratification that encourages savings that allow for investments that produce more wealth. This is what economists term the virtuous circle.

There you have it. If it is really as Bill Clinton famously observed, “It’s about the economy stupid!” perhaps we should consider the six killer apps when we vote in the next election.