Saturday, December 31, 2011

High Hopes!

It is time to revisit the most under appreciated investment skill I have learned in these last ten years, what I term the sisters, patience and persistence. In 2011 the market moved sideways. The S&P went from $1,257.64 on December 31, 2010 to $1,257.60 on December 31, 2011. Woo! Hoo! It has not been a bad year, but any year that bonds beat stocks can’t be considered a good year, unless you have been investing with patience and persistence. Then your mix of dividend paying stocks and stinky old bonds combined with a disciplined approach to savings has increased your net worth, even if only a little.

Just what makes that little old ant
Think he'll move that rubber tree plant
Anyone knows an ant, can't
Move a rubber tree plant

But he's got high hopes, he's got high hopes
He's got high apple pie, in the sky hopes

So any time you're gettin' low
'stead of lettin' go
Just remember that ant
Oops there goes another rubber tree plant

The ant is doing things right. First he has a dream, a vision of what could be and the intention to make it happen, but that is not enough. Persistence is the point at which divine will takes shape in human hands. We can say this mountain will be removed from my life, but mountains are large. Rent a bulldozer and start digging. If the rock is worth something, people will pay you for a chance to haul it off. If you believe you have found God’s will for your life, persist in seeing your goal, even as you work towards that goal.

Persistence has a sister, patience. If you set a very large goal, at some point in time you will be tempted to cry out, “The task is too great.”

Patience says, “This is not so. Can you put aside a little money today, even a little pocket change? Can you do that again tomorrow?”

When troubles call, and your back's to the wall
There a lot to be learned, that wall could fall

If you keep doing the right thing in the right way you will get closer and closer to your goal. If God has truly told you, this mountain will be removed. It might take some effort, but enough bulldozers, enough dump trucks, and enough time and that mountain will be removed from your life.

Once there was a silly old ram
Thought he'd punch a hole in a dam
No one could make that ram, scram
He kept buttin' that dam

but he's got high hopes, he's got high hopes
He's got high apple pie, in the sky hopes

So any time you're feelin' bad
'stead of feelin' sad
Just remember that ram
Oops there goes a billion kilowatt dam

With Many Thanks to Frank Sinatra:

Thursday, December 29, 2011

New Year's Resolution--Lose Some Weight!

Every year at this time we make well intentioned New Year’s Resolutions that last for all of a week if we are lucky. One of the most popular for those of us over 40 is, “In this coming year I will lose some weight.” Unfortunately, new year after new year, in about a week or so, my diet plan returns to, “I eat what I eat and I weigh what I weigh.” In spite of my failures let me encourage you to plan on losing some weight in the coming year.

By the way, I am not talking about that kind of weight.

Get rid of some of your debt—Debt slavery is wrecking our nation and our families. Do we really need all that stuff we can’t afford to be happy, to be safe? Resolve to lower your debt burden in 2012.

Cut up some credit cards—How many credit cards do you really need? A case can be made for two credit cards, a primary card and backup card if for some reason the primary is rejected. That has only happened to me once in over 25 years. The telephone lines were down somewhere between Hawaii and my credit card computers located somewhere in Florida. The next morning the problem was corrected.

Work on financial stressors—The lack of an emergency fund is a frequent source of financial stress. Start small. Put aside $1,000 for emergencies. Then you won’t need to use that credit card when your car fails state inspection. The goal here is six months take home salary, but that will take some time to achieve. If you don’t have an emergency fund start one.

Simplify your financial record keeping—How many accounts in how many banks, credit unions, brokerage houses, and mutual fund families do you carry? Is that really necessary? If you have fewer things to track for record keeping, financial planning, and taxes, your life might get a little easier.

Get rid of some stuff—There was a point in time at which I could move everything I owned in a 67 Chevrolet with a roof rack. Twelve years later, a move required two trips in a Ryder rental truck. After 24 years in the same house, it will require a van, even if I manage to downsize some of my mess. Does all this junk make me happier or does it just weigh me down, limiting my options and my freedom? If it has been in a box or a drawer for more than a year, sell it or throw it out.

Over this coming weekend let us spend some time focusing what is really important, what really makes us happy. Maybe, we could find a way to want what we already have rather than that which we do not have. There will always be another “If only.” It will never lead us to happiness only to another, “If only.” My current “If only,” is “If only I could retire, then I would be happy.”

Happiness is found in the moment, not in, “If only.”

Hebrews 1:12 (NAS)

Therefore, since we have so great a cloud of witnesses surrounding us, let us also lay aside every encumbrance and the sin which so easily entangles us, and let us run with endurance the race that is set before us,

Saturday, December 10, 2011

Credit Unions

I haven’t had a bank account for over 26 years. Instead I do business with the Taylor Model Basin Federal Credit Union. I love my Credit Union. It is definitely a desirable fringe benefit for employees of my laboratory and their family members. When I first started working in a textile mill back in the 1970s Credit Unions paid more in interest than banks and charged less when lending their members money but could not offer checking accounts or other services. Today they are full service financial institutions. Credit Unions typically kill commercial banks both on interest rates and on fees. U.S. News and World Report notes, “Credit Union customers saved $6.78 billion in interest and fees compared to bank customers.” Credit Unions are not for profit co-ops not for profit corporations. It makes a difference.

There is more to it than that. My Credit Union is one of those places where everybody knows your name and they are always glad you came. The board of directors are my coworkers. The employees have seen me every week or so in some cases for decades. They know me. They know my quirks. They know my behavior patterns. In one case they even called me when they saw an incoming debit to my account that they did not understand. You simply are not going to get that kind of service from one of the large national banks unless you have several millions on deposit. My mother-in-law had several accounts at the same Wachovia branch for many decades. They treated her well. After the death of my father-in-law they even assigned an employee to keep an eye on her accounts. Then Wachovia went bankrupt and was acquired by Wells Fargo. The transfer process was unnecessarily frightening and complex. Adding my wife’s name to her mother’s safety deposit box proved impossible even though her name is on every single one of her mother’s accounts and she has durable power of attorney for her mother. It wasn’t the employees’ fault. Lord knows they were trying, but they just couldn’t make the computer accept the facts. In the end we had to close down one safety deposit box and open another, ridiculous.

Unlike Wachovia, my Credit Union was never in any danger of bankruptcy. They are in business to lend money to their members, who in this particular case are Government employees. Since our paychecks are direct deposited to our Credit Union accounts, these are pretty safe loans. Credit Unions didn’t get involved in the derivative markets that took down the Bank of America, Citi Group, Wachovia, and others. They just made simple boring loans to boring reliable engineers with secure jobs.

There are some downsides to Credit Union membership. There is only one branch office for my Credit Union. This will complicate things when I retire and leave the area, but since most Credit Unions are part of a network of 28,000 surcharge free ATMs perhaps I will be able to get by with a separate account in a small local bank or a bank account with the Charles Schwab Bank, affiliated with my broker. By the way, Charles Schwab Bank offers some pretty good deals.

Back on November 5 a grass roots protest organization promoted something called Bank Transfer Day. They encouraged everyone to leave their big bank for a smaller bank or a Credit Union. This particular protest was fueled by the big banks’ plan to start charging a monthly fee for debit card use. Although there were enough outcries to put that particular fee on hold, they will be back with more and higher fees. Recent financial reform legislation cut into their profits. The big banks will find a way to make up those losses.

Even in trying to leave their bank customers discovered there were fees as high as $25.00 to close an account. In many cases these customers were forced to talk to a manager before closing their accounts. Some retaliated by leaving one penny or one dollar in their account. “The Credit Union National Association, an industry trade group, estimates that 650,000 consumers joined Credit unions in between Sept. 29 and the first week of November.” (Wall Street Journal), so I guess this can be classified as a successful protest. However, the large banks are awash with Federal bailout money so they probably are not really missing those little accounts.

One more reason why I believe too big to fail = too big to exist.

Friday, December 9, 2011

7 Immutable Laws of Investment from James Montier

I really like James Montier’s 7 Immutable Laws of Investing. The author is a member of the GMO asset allocation team. GMO is a privately held global investment management firm with $93 Billion in assets. Montier believes in a disciplined approach to investment with a particular interest in tail risk. Tail risk is defined by Investopedia as, “A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.”

Notice how many successful investors seem to believe in a disciplined approach?

1. Always insist on a margin of safety

There are a lot of rules that apply to this one. Never be “all in” any one investment. Even in poker that only occurs when a player is on the verge of bankruptcy. Diversify across many types and classes of investments. As King Solomon said, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Hedge your positions. Do you have some tech stock? Hedge it with some bonds. Do you have some money in a small cap growth stock fund? Hedge it with some gold or dividend paying large cap shares. You get the idea. If you never have more than 2 or 3 percent of your net worth in any single investment, you will sleep better at night. One more thing to think about: be sure to keep some cash on hand just in case.

2. This time is never different

Montier observes, “Sir John Templeton defined “this time is different” as the four most dangerous words in investment. Whenever you hear talk of a new era, you should behave as Circe instructed Ulysses to when he and his crew approached the Sirens: have a friend tie you to a mast.” After the tech bubble of 2000 and the real estate crash of 2008 we shouldn’t need to be reminded that nothing goes up forever.

3. Be patient and wait for the fat pitch

Patience in investment, as in life, is a virtue. Don’t think in terms of annual or quarterly return on your investment. Look at the long term. Buy cheap and hold. Montier mentions Benjamin Graham’s deep value screen as an example of the fat pitch, “In order to pass this screen, stocks are required to have an earnings yield of twice the AAA bond yield, a dividend yield of at least two-thirds of the AAA bond yield, and total debt less then two-thirds of the tangible book value. Think like a catfish. Sit on the bottom and wait. Something tasty will show up.

4. Be contrarian

Your brain is wired to sell when your losses are at their greatest and buy when a market is nearing its peak. Your brain is wrong. Lord Nathan Mayer Rothschild (yes, he was one of those Rothschilds) observed, "Buy to the roar of cannon, sell to the sound of trumpets.” It was sound advice during the Napoleonic Wars and it is sound advice today.

5. Risk is the permanent loss of capital, never a number

The author sees three types of risk common in investment. To understand his definition of risk, consider, if you lose 50% of your money, you then must double your money to return to your starting point. Doubling your money is hard and takes a long time.

1) Valuation risk – you pay too much for an asset. If you are contrarian, you will avoid this trap.
2) Fundamental risk – there are underlying problems with the asset that you are buying (aka value traps); I bought GE thinking I purchased an undervalued industrial conglomerate. In fact nearly one half of their profits came from GE Capital which collapsed in 2008.
3) Financing risk – leverage: Making bets with borrowed money is great if you win. If you lose, expect a visit from Tony Soprano’s leg breakers.

6. Be leery of leverage

In this section the author expands on what he covers in financing risk. He considers most innovation in investment strategies to be nothing more than the discovery of a new way to use leverage. No money down real estate scams help lead us into the miseries of the housing crash. The author points to the junk bond debacle of the as example of the down side of leverage and quotes J.K. Galbraith on the subject, “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” If you hear the promotion of a get rich scheme based on borrowed money, Montier suggests that you run away.

7. Never invest in something you don’t understand

One of the most successful investors of the 20th century, John Templeton observed, “If you don’t understand what you’re investing in – don’t invest!” The author believes this is just plain old common sense. He contends that the financial industry intentionally makes things as complicated as possible to increase their commissions and fees.

The author believes American investors are ignoring his advice in a search for juiced returns in a market where bonds are held at artificially low rates of returns by the policies of the central banks of Europe and the Federal Reserve. He advises caution.

So, let’s be careful out there.

Thanks to the Big Picture blog for the link (below) to this excellent article. I encourage you to read it in its entirety at your leisure.

Sunday, December 4, 2011

The Ghost of Jacob Marley

Where I work the term “golden handcuffs” refers to the old Civil Service Retirement System. Management and employee both understood that after 10 or more years of Federal service, an employee was trapped for the rest of his working life. The cost of losing that pension was just too great. Unfortunately I started after the advent of the new FERS system, sometimes referred to as Fools Expecting Retirement Someday. In private industry the term golden handcuffs is used to describe a package of incentives, like stock options, that are timed in such a way as to prevent a key executive from leaving the company.

I would like to expand the meaning of golden handcuffs to the totality of all our decisions, both good and evil, that ultimately form our lives and our legacies in eternity.

In the beginning chapter of A Christmas Carol by Charles Dickens, Ebenezer Scrooge is visited by the ghost of his dead partner, Jacob Marley. Marley has been condemned to wander the earth dragging a heavy chain clasped about his middle, “It was long, and wound about him like a tail; and it was made (for Scrooge observed it closely) of cash-boxes, keys, padlocks, ledgers, deeds, and heavy purses wrought in steel.”

``You are fettered,'' said Scrooge, trembling. ``Tell me why?''

``I wear the chain I forged in life,'' replied the Ghost. ``I made it link by link, and yard by yard; I girded it on of my own free will, and of my own free will I wore it. Is its pattern strange to you?''

We all make decisions that have nearly irreversible consequences. We get married. We have children. Some of us manage to keep on track moving on with the mission of the Kingdom, making wise decisions on how to use our money and our lives. Some of us take out student loans in pursuit of the good life. Some of us take on mortgages we can ill afford. Some of us strive mightily to keep up with the Jones, buying new SUVs and designer clothing. Link by link and yard by yard we form the chains that bind our lives. One morning we wake up with a dream, to become a missionary, to return to school, to pursue a career in the arts, only to discover we can not follow our dreams because we are chained to the consequences of a lifetime of decisions.

This is one of the reasons I preach against debt. Nothing can better chain you to years of servitude, denying you the freedom to pursue your dreams or your desire to serve God in some particular way. It is the reason I encourage my readers to save and invest. As I have said in previous posts, money equals options.

Of course the other side of that coin can be found not only in the lives of Jacob Marley and his partner, Ebenezer Scrooge, but in First Timothy 6:10 “For the love of money is a root of all kinds of evil. Some people, in their eagerness to get rich, have wandered away from the faith and caused themselves a lot of pain.”

Scrooge trembled more and more.

``Or would you know,'' pursued the Ghost, ``the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!''

Saturday, December 3, 2011

More on the Problems with Debit Cards

Debit cards seem to becoming the new cash. For the first time, the number of debit card purchases has exceeded the number of purchases made with cash, checks, or credit cards. In a recent article posted on The Street, “5 Places Never to Use Your Debit Card” by Brian O’Connell, we are reminded there are still problems with these things, beyond the college student who forgets to log all her purchases on a daily basis, thereby triggering all those horrible overdraft fees. For the record I do not have a debit card.

Hopefully it is common knowledge that using a debit card to make a reservation or for anything that requires a security deposit is a bad idea. A car rental charge that might run $125 would not hit your credit card until you returned the vehicle. Using a debit card, the same rental could trigger a $500 deposit charge that would hit your checking account the second they swipe your debit card. Of course they will return those funds when you return the car, but you do not have the use of that money until it is returned. If you carry large balances in your checking account of say, $10,000 or more, you may not view this as a problem. However, I would suggest that if you are carrying that kind of cash in a no interest account perhaps you could find a better use for your money. This also applies to hotel reservations and equipment rentals.

Recently a major identity theft ring in New York City was busted. The bandits were waiters and waitresses in upscale restaurants. They used pocket devices no larger than a tube of lipstick to steal information off their customers’ cards. Typically, if you become the victim of this kind of crime while using a credit card, your losses are limited to $50.00. If your checking account is cleaned out by a fraudulent use of your debit card, it could be much harder to get your money back. Basically, the bank could consider you guilty until proven innocent. While some banks offer debit cards with similar loss limits to their credit cards, this is not required by law. Even if you have a debit card with loss limits, during the adjudication process you have still lost control of all your money. The pendulum of common wisdom seems to be in swing. Once again, “they” are recommending customers use cash in restaurants unless they never loss sight of their cards.

Operations like phone companies, gyms, life insurance companies, and cable TV services that live on monthly fees, love to get their sticky little fingers on your checking account. Automatic debit is convenient but it is also a clever way to slide in small increases without your notice. It also makes it harder to cancel a service. Be suspicious of anything that masks or minimizes actual cost (your pain). This would also include things like “average” billing for utilities.

The article states never use a debit card to make an online purchase at a Wi-Fi hot spot since many of those business use an unsecured wireless connection. Maybe I am just paranoid, but I would be afraid of accessing my facebook account at such a place. The idea of exposing any kind of financial information to hackers and identity theft in any public computer or Wi-Fi service just wouldn’t even enter my mind.

Oh, the last problem mentioned by O’Connell, that would take us back to the first paragraph. If you are not absolutely religious about entering your debit card purchases in your check register the specter of those onerous overdraft fees is just waiting to strike.