I am going to deviate a bit from my normal practice on this one. I have found so much material on the impending student debt disaster I am not going to spend a lot of time referencing articles. I will just list a sample down at the bottom of the entry. Fueled by easy money backed by Federal guarantees the cost of higher education has soared. Since 1985, the total cost of inflation has increased by 115%. In the same time period the cost of a college degree has increased 498%. Between 1999 and the first quarter of 2011 total household debt excluding student loans has increased by about 150% and remember, Oh my friends and neighbors, that number includes the follies of the housing bubble. In the same time period student debt has increased by a whopping 511%.
This situation is rapidly growing worse. The shape of the student debt graph is taking on that parabolic look that always (and I do mean always) spells disaster. It is not only the young and naïve who are being exploited by the education industry but unemployed middle aged Americans taking one last desperate swing at the middle class life their parents promised them. Times have been good for colleges and universities. Nonprofit private institutions and public universities have been building new laboratories, buying new equipment, and raising the salaries of the tenured. The private for profit schools are rolling in profits. Well intention federally guaranteed loans have meant that universities could raise prices without restraint.
Everybody buys the idea that a college education is required for the good life. Last time I checked two of the three plumbers I know live in much nicer homes than this mechanical engineer. It appears to me that much computer industry hiring is based on a prospective employee’s body of work and a required certificate or two rather than a degree in Computer Science. Personally, I believe that entrepreneurs possess the most important job skill for the new millennium. Men of the industrial age (like me) are an endangered species. Yes, degrees are still important. Try practicing medicine without one. But the cost of most degrees, especially in the liberal arts, the social sciences, and the fine arts has greatly exceeded the utility of such degrees.
“We're burying our country's future under a mountain of debt.”
One of the authors begins his article with this quote. I don’t think he really understands the full truth of that statement, but let me save that rant for another day. The most recent estimate by the Federal Reserve Bank of New York puts the student debt total at $870 Million. Two thirds of all college seniors now graduate in debt. A total of 37 million Americans now owe money on education. Remember, not all of those people graduated. Not all of the graduates found jobs. But those student debts do not go away even in bankruptcy. Blame that one on the baby boom. Too many of my peers found the easiest way to discharge their student loans was to declare bankruptcy in their early twenties.
The average student debt is $45,000. However, even the student debt crisis has its 1%. It is reported that Kelli Space went to Northeastern University to earn a degree in sociology and graduated with $200,000 in student debt. No, that is not a typographical error. $200,000 for a degree in sociology!
Surveys indicate that 65% of students misunderstood or were surprised by some aspect of their loan. Do you think that might have something to do with financial aid officers telling their 18 year old victims how easy it will be to pay off their loans? This has been reported.
“A whole 20 percent were taken off-guard by the size of their monthly payments. Another 20 percent were surprised by their repayment terms. About 15 percent hadn't fully anticipated the interest rate they would be paying. Although more than 3,500 graduates took out both federal loans and private bank loans, almost two-thirds said they didn't now the difference between the two (hint: private loans tend to be a lot more expensive to pay off).”
80% of student debtors learned about loans from university counselors or the university website, obviously a bad place to learn lessons in basic financial literacy, especially the power of compound interest. Graduating with $100,000 in college debt is just about the same as having a mortgage and no house. I have seen this exact situation put a life on hold for a decade. As a society we must do a better job teaching financial literacy to our children.
This part of the story is simply unbelievable. The Education Department of the current administration has hired debt collection companies to go after the $67 Billion in student loans now in default. The Federal Reserve Bank of New York estimates about 25% of student debtors are behind in their payments. Your Government paid these companies about $1 Billion on a commission basis. Some of these contracts paid commissions as high as 20% of recoveries to companies that ran “boiler rooms” giving collectors bonuses of thousands of dollars a month, restaurant gift cards, and even trips to foreign resorts for the money they collected from debtors.
Last year the Federal Trade Commission received 181,000 complaints concerning illegal practices by debt collectors. The department of Education is using three companies that settled out of court with state governments and the Federal Government for allegations of abusive debt collection practices. The Department of Education stated these investigations did not involve the companies’ work for the agency.
Remember, under U.S. law, student loans cannot be discharged, even in bankruptcy. The Government can also confiscate tax refunds, Social Security payments, and paychecks without normal judicial procedures to repay these loans.
“Student-loan debt collectors have power that would make a mobster envious,” Harvard Law Professor Elizabeth Warren, who helped establish the Consumer Financial Protection Bureau and is now running for a U.S. Senate seat from Massachusetts, said in 2005.”
If you want the whole enchilada complete with gut wrenching horror stories check out the last article in the list.
http://www.theatlantic.com/business/archive/2012/03/the-real-meaning-of-1-trillion-in-student-loans/254928/
http://www.theatlantic.com/business/archive/2011/08/chart-of-the-day-student-loans-have-grown-511-since-1999/243821/
http://finance.yahoo.com/news/1-student-debt-crisis-owing-163540505.html
http://inflationdata.com/inflation/Inflation_Articles/Education_Inflation.asp
http://finance.yahoo.com/blogs/daily-ticker/student-loans-could-next-housing-bubble-robert-reich-144742652.html
http://www.bloomberg.com/news/2012-03-26/obama-relies-on-debt-collectors-profiting-from-student-loan-woe.html
Friday, March 30, 2012
Thursday, March 29, 2012
My Ten Basic Rules (Version 3)
It has been a year since I last put up my ten basic rules for young couples. I would guess that it has been over six years since I drafted the first version. In the following years I have only changed 1c. I am going to change it again. In the last three years I have personally seen the crippling impact of student loans on young lives. On the national level it appears that the parabolic growth in student loans is likely to be our next trillion dollar disaster.
It is not that I am not a friend of higher education. I have two bachelor’s degrees and a master’s degree. I still believe an extremely judicious and limited use of student loans can be justified to obtain degrees that come close to guaranteeing a job such as MD, BSRN, or MSCE. Otherwise student loans are just too dangerous. I will expand on this subject soon.
Basic Financial Rules for Young Couples.
1)Stay out of debt unless absolutely necessary (four exceptions)
a)Just about no one can pay cash for a house
b)Medical bills come whether you have money or not
c)Borrowing for school even with a realistic goal is dangerous. Scholarships and work study grants or even a part time job are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive.
2)Pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last.
3)Don’t use a Credit Card unless you can pay it off every month.
4)When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.
5)Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.
6)No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.
7)Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.
8)When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.
9)Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.
10)Give something to God without expectation of return. It is good for your heart.
It is not that I am not a friend of higher education. I have two bachelor’s degrees and a master’s degree. I still believe an extremely judicious and limited use of student loans can be justified to obtain degrees that come close to guaranteeing a job such as MD, BSRN, or MSCE. Otherwise student loans are just too dangerous. I will expand on this subject soon.
Basic Financial Rules for Young Couples.
1)Stay out of debt unless absolutely necessary (four exceptions)
a)Just about no one can pay cash for a house
b)Medical bills come whether you have money or not
c)Borrowing for school even with a realistic goal is dangerous. Scholarships and work study grants or even a part time job are better.
d)Starting a new business or expanding an existing business. Keep that cash flow positive.
2)Pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last.
3)Don’t use a Credit Card unless you can pay it off every month.
4)When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.
5)Many people recommend a budget. We have never had a budget except the one in my head. That worked pretty well for us but I think a formal budget would be even better.
6)No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.
7)Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.
8)When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.
9)Start thinking about retirement when you are young. Take advantage of anything offered by your employer. This was not a problem or an issue 50 years ago, but my retirement picture is not all that good. Your retirement picture is positively scary. This is a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.
10)Give something to God without expectation of return. It is good for your heart.
Sunday, March 25, 2012
The Monthly Budget and Me
Once again I will be coordinating Dave Ramsey’s Financial Peace University at our church. This course and many others recommend that the student prepare and live within a formal monthly budget. The only time in my life I have actually used a formal budget was during the time I was teaching this course. I am not going to tell someone else to do something and then not do it myself. I have wondered how I managed to do OK without this structure in my life. A formal budget is really the way to go particularly if your family is experiencing financial problems.
First, for some reason I seem to be able to carry more facts and numbers around in my head than most people. Back in the day, when car insurance was a big deal, I knew that I was going to be hit in January and July. I knew how much I was going to need and I socked away a little extra every month so it would be there when I needed it. I also could pretty well guess what the utilities were going to do to my pocketbook. Summer in South Carolina could really run up the air conditioning bills.
Secondly, I was raised with a pathological fear of debt. When I was a child my mother would give me unsolicited credit cards my parents had received to cut up into little pieces. She told me they were evil and dangerous. I heard the tale about how my grandmother nagged my grandfather into paying off the mortgage on the farm when all his neighbors were borrowing to expand their operations. My family was one of only two in that part of the county that held on their farm all the way through the depression. When the time came to buy cars or go back to school, the idea of borrowing money simply did not enter my head. It was just something people in my family didn’t do.
Years later when reading about sociological studies of successful people, I learned that such people focus relentlessly on the bottom line. They are intently interested in whether their net worth is headed up or down. They check it every month. If it is headed down they take action. I did that even when I didn’t have enough money to bother tracking. Rule 4 from my Basic Financial Rules for Young Couples states, “When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.”
Finally, I think it was the Grace of God that at the beginning of our marriage I insisted on no your money and my money, only our money. We only had one check book and until I was 35 no credit card. By that time living without a credit card had become ridiculously inconvenient. Rule 6 states, “No secrets. If you or your spouse spends more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.”
This approach has worked very well for a long time. However, there is a new challenge on my horizon. A year from now I hope to be retired. Instead of a regular paycheck, I will be living on Social Security, a small pension, and my investments. I think until I am comfortable with that new life, I might should better, prepare a monthly budget.
First, for some reason I seem to be able to carry more facts and numbers around in my head than most people. Back in the day, when car insurance was a big deal, I knew that I was going to be hit in January and July. I knew how much I was going to need and I socked away a little extra every month so it would be there when I needed it. I also could pretty well guess what the utilities were going to do to my pocketbook. Summer in South Carolina could really run up the air conditioning bills.
Secondly, I was raised with a pathological fear of debt. When I was a child my mother would give me unsolicited credit cards my parents had received to cut up into little pieces. She told me they were evil and dangerous. I heard the tale about how my grandmother nagged my grandfather into paying off the mortgage on the farm when all his neighbors were borrowing to expand their operations. My family was one of only two in that part of the county that held on their farm all the way through the depression. When the time came to buy cars or go back to school, the idea of borrowing money simply did not enter my head. It was just something people in my family didn’t do.
Years later when reading about sociological studies of successful people, I learned that such people focus relentlessly on the bottom line. They are intently interested in whether their net worth is headed up or down. They check it every month. If it is headed down they take action. I did that even when I didn’t have enough money to bother tracking. Rule 4 from my Basic Financial Rules for Young Couples states, “When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.”
Finally, I think it was the Grace of God that at the beginning of our marriage I insisted on no your money and my money, only our money. We only had one check book and until I was 35 no credit card. By that time living without a credit card had become ridiculously inconvenient. Rule 6 states, “No secrets. If you or your spouse spends more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.”
This approach has worked very well for a long time. However, there is a new challenge on my horizon. A year from now I hope to be retired. Instead of a regular paycheck, I will be living on Social Security, a small pension, and my investments. I think until I am comfortable with that new life, I might should better, prepare a monthly budget.
Saturday, March 24, 2012
Cloud Computing
A friend of the blog asked for my observations concerning an article promoting a report that would reveal the names of several companies that could greatly increase in value with what the author viewed as the inevitable rise of cloud computing. It also reveals a weakness in my style of investing. Enjoy.
35 years ago if you wanted a computer for your corporation or university, you would go to IBM and buy something big that came with software from IBM. A really large corporation would hire a room full of geeks to write custom applications for their company. If not you would buy more applications from IBM.
Then the PC revolution occurred. Everybody could buy there own PERSONAL computer and load it with whatever hardware and software they wanted. If you wanted a gaming machine, for example, you could buy a hot processor and a fast graphics card. Individuals could buy word processing software from a dozen different companies. They could even get freeware and shareware for little or nothing. Microsoft took advantage of this once in a century opportunity to develop a classic predatory monopoly. They owned the operating system. By bundling free copies of products like Word and Excel with their Windows operating system they drove better products like Word Perfect and Lotus 123 off the market.
Then the Internet happened. For the last 10 years prophets of doom have been calling for the demise of Microsoft. They really have only two profitable products, Windows and Microsoft Office. What happens to Microsoft if no one needs copies of Windows or Word? What if you could buy a dumb terminal with a keyboard and a mouse for $300 hook it up to an 8 megabyte per second fiber optic cable? No processor from Intel. No hard drive. No mother board. But you still have all the functionality of your PC.
Think Google. You are part of the cloud whenever you use their search engine or access your Gmail account. You don’t use a copy of the Encyclopedia Britannica (in fact it is no longer printed). When you want to know something, you use Goggle. You no longer need Outlook to handle your email on your hard drive. Gmail lives on a Goggle server. All you need to access your email is a simple web browser. Whenever you order something on Amazon, you are part of the cloud. You don’t need Borders.
Why do you need an operating system or a copy of Microsoft Office? There is no reason you could not use Goggle Office in the clouds, if such a thing existed. There is such a thing as Goggle documents. It’s coming. When my employer bought a new accounting system, they actually bought access to SAP’s computers, software, and hard drives. I just access their servers by secure Internet connection. SAP does everything else.
The author sees computing evolving to a system of “clouds” (Google, Amazon, SAP) connected by high speed fiber optic cables to your cheap simple dumb terminal. You pay some kind of low monthly fee to a central, perhaps regulated, provider (utility) rather than having a $1,500 computer with a Microsoft operating system and a copy of Microsoft Office sitting in your study. If you were to buy shares in this provider before they won control of access to the cloud, you would become a very rich man.
An aside:
How about privacy? When a group of large companies can give access about everything I think, do, or say to salesmen or the Government, I get a little nervous.
“New Technology” stocks are notoriously high risk propositions. Ten go bankrupt for every one that hits. Quite frequently they start off at a low price. Then for some reason there is a big buzz about that company or technology. Since the total dollar value of the company is very small, it doesn’t take much new money to double triple or quadruple the price. This can happen literally over night. Then the little company loses the big contract or the big company decides not to buy it. Then the stock drops to zero. This can literally happen in an hour.
If you hit you hit really big. It can be like winning the lottery 1000% or more is possible. In 1996 you could purchase Apple for $6.00 a share. Today that share is worth $600!
You can invest in such things with money you can afford to lose. I do too little of this. I could afford to lose few thousand on a long shot, but I never do it. Because I avoid what I perceive as high risk investments, it is unlikely I will ever make a big score.
Traders love these stocks. They jump in and out over and over. Those who are truly skilled and disciplined can make a great deal of money on a stock that goes nowhere but to bankruptcy court.
Curiously, when it comes to investments, I am very careful to eat my vegetables before I even consider ordering desert. If only I could apply that logic to the dinner table.
35 years ago if you wanted a computer for your corporation or university, you would go to IBM and buy something big that came with software from IBM. A really large corporation would hire a room full of geeks to write custom applications for their company. If not you would buy more applications from IBM.
Then the PC revolution occurred. Everybody could buy there own PERSONAL computer and load it with whatever hardware and software they wanted. If you wanted a gaming machine, for example, you could buy a hot processor and a fast graphics card. Individuals could buy word processing software from a dozen different companies. They could even get freeware and shareware for little or nothing. Microsoft took advantage of this once in a century opportunity to develop a classic predatory monopoly. They owned the operating system. By bundling free copies of products like Word and Excel with their Windows operating system they drove better products like Word Perfect and Lotus 123 off the market.
Then the Internet happened. For the last 10 years prophets of doom have been calling for the demise of Microsoft. They really have only two profitable products, Windows and Microsoft Office. What happens to Microsoft if no one needs copies of Windows or Word? What if you could buy a dumb terminal with a keyboard and a mouse for $300 hook it up to an 8 megabyte per second fiber optic cable? No processor from Intel. No hard drive. No mother board. But you still have all the functionality of your PC.
Think Google. You are part of the cloud whenever you use their search engine or access your Gmail account. You don’t use a copy of the Encyclopedia Britannica (in fact it is no longer printed). When you want to know something, you use Goggle. You no longer need Outlook to handle your email on your hard drive. Gmail lives on a Goggle server. All you need to access your email is a simple web browser. Whenever you order something on Amazon, you are part of the cloud. You don’t need Borders.
Why do you need an operating system or a copy of Microsoft Office? There is no reason you could not use Goggle Office in the clouds, if such a thing existed. There is such a thing as Goggle documents. It’s coming. When my employer bought a new accounting system, they actually bought access to SAP’s computers, software, and hard drives. I just access their servers by secure Internet connection. SAP does everything else.
The author sees computing evolving to a system of “clouds” (Google, Amazon, SAP) connected by high speed fiber optic cables to your cheap simple dumb terminal. You pay some kind of low monthly fee to a central, perhaps regulated, provider (utility) rather than having a $1,500 computer with a Microsoft operating system and a copy of Microsoft Office sitting in your study. If you were to buy shares in this provider before they won control of access to the cloud, you would become a very rich man.
An aside:
How about privacy? When a group of large companies can give access about everything I think, do, or say to salesmen or the Government, I get a little nervous.
“New Technology” stocks are notoriously high risk propositions. Ten go bankrupt for every one that hits. Quite frequently they start off at a low price. Then for some reason there is a big buzz about that company or technology. Since the total dollar value of the company is very small, it doesn’t take much new money to double triple or quadruple the price. This can happen literally over night. Then the little company loses the big contract or the big company decides not to buy it. Then the stock drops to zero. This can literally happen in an hour.
If you hit you hit really big. It can be like winning the lottery 1000% or more is possible. In 1996 you could purchase Apple for $6.00 a share. Today that share is worth $600!
You can invest in such things with money you can afford to lose. I do too little of this. I could afford to lose few thousand on a long shot, but I never do it. Because I avoid what I perceive as high risk investments, it is unlikely I will ever make a big score.
Traders love these stocks. They jump in and out over and over. Those who are truly skilled and disciplined can make a great deal of money on a stock that goes nowhere but to bankruptcy court.
Curiously, when it comes to investments, I am very careful to eat my vegetables before I even consider ordering desert. If only I could apply that logic to the dinner table.
Thursday, March 22, 2012
The Tortoise and the Hare
For years Warren Buffett offered a famous bet with no takers. He contended that over ten years an S&P 500 Index Fund would beat any hedge fund chosen in advance over the same time period. The terms of the bet? The loser would donate $1,000,000 to the charity of the winner’s choice. Finally, Protégé Partners accepted the bet if they could use the average return of 5 hedge funds rather than any single hedge fund. Warren Buffet accepted these terms. By the way, the names of the five hedge funds will not be released until the end of the bet.
The logic of Buffet’s bet is based on fees. Vanguard S&P Index Fund Admiral Shares charge a paltry 0.06% per year on a minimum investment of $10,000. Actively managed hedge funds typically charge 2% per year, plus 20% of any profits! Buffet believes that no one is smart enough to deserve that kind reward from somebody else’s money.
That was four years ago. In 2008, the first year of the bet, Protégé lost 23.9%. Warren Buffet’s Vanguard Admiral Shares lost 37%. Vanguard won in 2009, 2010, and 2011. Today Protégé’s five fund average is down 5.89% and the Vanguard 500 is down 6.27%. Not something to write home about. Allow me a brief aside about claims by various funds. Let us say a certain fund increased 100% in the first year, and then lost 50% in the second year. That fund could claim an average increase of 25% per year when in fact the investor would not have made a penny. Be certain what the salesman is talking about when you listen to such claims.
What I find truly comical about the bet is the collateral. Buffet and Protégé each put up $320,000 to buy a zero coupon Treasury security that will be worth $1,000,000 at the conclusion of the bet. Due to falling interest rates over the same time period, the bond is currently worth $930,000. A total increase of 45% in the first four years! Of course the maximum value it can obtain is $1,000,000. Still that is something to think about.
Who knows? Maybe this year Buffet’s tortoise and Protégé’s hare may both break even. This is a good example to the extreme importance of large early losses in an investment. If, for example, an investment loses 50% of its value in the first year, it then must increase by 100% just to break even. That is not a common outcome.
And Please! Let’s be careful out there.
The logic of Buffet’s bet is based on fees. Vanguard S&P Index Fund Admiral Shares charge a paltry 0.06% per year on a minimum investment of $10,000. Actively managed hedge funds typically charge 2% per year, plus 20% of any profits! Buffet believes that no one is smart enough to deserve that kind reward from somebody else’s money.
That was four years ago. In 2008, the first year of the bet, Protégé lost 23.9%. Warren Buffet’s Vanguard Admiral Shares lost 37%. Vanguard won in 2009, 2010, and 2011. Today Protégé’s five fund average is down 5.89% and the Vanguard 500 is down 6.27%. Not something to write home about. Allow me a brief aside about claims by various funds. Let us say a certain fund increased 100% in the first year, and then lost 50% in the second year. That fund could claim an average increase of 25% per year when in fact the investor would not have made a penny. Be certain what the salesman is talking about when you listen to such claims.
What I find truly comical about the bet is the collateral. Buffet and Protégé each put up $320,000 to buy a zero coupon Treasury security that will be worth $1,000,000 at the conclusion of the bet. Due to falling interest rates over the same time period, the bond is currently worth $930,000. A total increase of 45% in the first four years! Of course the maximum value it can obtain is $1,000,000. Still that is something to think about.
Who knows? Maybe this year Buffet’s tortoise and Protégé’s hare may both break even. This is a good example to the extreme importance of large early losses in an investment. If, for example, an investment loses 50% of its value in the first year, it then must increase by 100% just to break even. That is not a common outcome.
And Please! Let’s be careful out there.
Sunday, March 18, 2012
Equanimity
Equanimity: Mental calmness, composure, and evenness of temper, esp. in a difficult situation.
Everybody loves March Madness. 68 college basketball teams from all over the country, big teams, little teams, deserving team, and undeserving teams all get a shot at the national championship in a one loss and you’re done tournament. In a 5 or 7 game series, usually the best team will win. In one game anything can happen, especially in college basketball, a game in which one player on a hot streak can change everything. Every year some unknown team of nobodies knocks off a couple of the big boys, advancing to the Sweet Sixteen. Office pools are running all over the nation, as workers waste time choosing their brackets and putting their money down. Even the President of the United States selects his own bracket. I don’t know if he puts his $5.00 down but it would not surprise me to learn the White House has its own office pool.
As the tournament progresses, people holler and yell as their teams win or lose. For a few days every year it seems like the entire nation is on an emotional roller coaster fueled by the performance of 68 college basketball teams. It reminds me a lot of how we react to the stock market. We choose our positions then thrill as they advance, proving our amazing perspicacity or wailing in agony as the fickle finger of fate strikes down our holdings. It couldn’t be we made a bad decision, could it?
Since the dark days of late 2008, early 2009 the market has been on a hell of a run. This increase has been primarily fueled by the Federal Reserve printing money to bail out the banks and driving the interest rates to near 0%. Except for a couple of months of an insane carnival ride last summer after the U.S. lost its AAA credit rating we have been on an outstanding three year run. I find myself cheering my stocks as they reach new highs, as though they were one of my sweet sixteen selections. I find myself tempted to buy something I shouldn’t as my bonds and cash return nearly nothing. People are leaving conservative sectors, like regulated utilities and consumer staples, for more speculative ventures. This is a traditional sign of an impending market top, a time to sell not to buy.
Do I know what the market is going to do? No! My crystal ball isn’t telling me a thing. Equanimity is what we need in investing as well as in other aspects of life. The pagan Stoics understood equanimity was a virtue, as well as the Hindus, Buddhists, and Christians. Why is equanimity so lacking in human behavior? Choose a proven investment style, yes discipline that matches your personality and life condition. Then stick with it. Don’t give in to greed or fear. Just keep on doing the right thing with faith there will be a reward for those who persist. Accept where you find yourself in the present moment even as you work towards a better future, always remembering there are many things that are more important than money.
Philippians 4: (NIV)
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.
Everybody loves March Madness. 68 college basketball teams from all over the country, big teams, little teams, deserving team, and undeserving teams all get a shot at the national championship in a one loss and you’re done tournament. In a 5 or 7 game series, usually the best team will win. In one game anything can happen, especially in college basketball, a game in which one player on a hot streak can change everything. Every year some unknown team of nobodies knocks off a couple of the big boys, advancing to the Sweet Sixteen. Office pools are running all over the nation, as workers waste time choosing their brackets and putting their money down. Even the President of the United States selects his own bracket. I don’t know if he puts his $5.00 down but it would not surprise me to learn the White House has its own office pool.
As the tournament progresses, people holler and yell as their teams win or lose. For a few days every year it seems like the entire nation is on an emotional roller coaster fueled by the performance of 68 college basketball teams. It reminds me a lot of how we react to the stock market. We choose our positions then thrill as they advance, proving our amazing perspicacity or wailing in agony as the fickle finger of fate strikes down our holdings. It couldn’t be we made a bad decision, could it?
Since the dark days of late 2008, early 2009 the market has been on a hell of a run. This increase has been primarily fueled by the Federal Reserve printing money to bail out the banks and driving the interest rates to near 0%. Except for a couple of months of an insane carnival ride last summer after the U.S. lost its AAA credit rating we have been on an outstanding three year run. I find myself cheering my stocks as they reach new highs, as though they were one of my sweet sixteen selections. I find myself tempted to buy something I shouldn’t as my bonds and cash return nearly nothing. People are leaving conservative sectors, like regulated utilities and consumer staples, for more speculative ventures. This is a traditional sign of an impending market top, a time to sell not to buy.
Do I know what the market is going to do? No! My crystal ball isn’t telling me a thing. Equanimity is what we need in investing as well as in other aspects of life. The pagan Stoics understood equanimity was a virtue, as well as the Hindus, Buddhists, and Christians. Why is equanimity so lacking in human behavior? Choose a proven investment style, yes discipline that matches your personality and life condition. Then stick with it. Don’t give in to greed or fear. Just keep on doing the right thing with faith there will be a reward for those who persist. Accept where you find yourself in the present moment even as you work towards a better future, always remembering there are many things that are more important than money.
Philippians 4: (NIV)
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.
Sunday, March 11, 2012
Debt Forgiveness and The IRS
Debt that is forgiven or written off by the lender is considered income by the IRS. The lender must issue a 1099-C tax form declaring this “income” just as though it was income from an investment. The taxpayer is liable unless they can prove that this debt was discharged in bankruptcy or that they were considered insolvent under the law at the time of the discharge. This year the IRS is projecting 6.4 million 1099-C forms will be sent to debtors for debts the creditor has written off as uncollectable or forgiven as part of a negotiated package.
This is just one more way the Great Recession has found to kick Americans who are down. Over the last three years the numbers of debtors who have defaulted on their credit card payments have increased dramatically. IRS regulations encourage companies to write off these debts within 36 months. In addition, companies have been carrying bad debt on their books for as long as 20 years. Now, as part of the general clean up of financial institutions following the crash, these companies are writing off old debts they believe are uncollectable. That means tax payers are receiving 1099-C forms for old debts, sometimes discharged in bankruptcy many years ago. They have lost the paperwork. Having no proof that they discharged this debt in bankruptcy, they are on the hook for income taxes. Not surprisingly some of these 1099-C forms contain errors that seldom favor the borrower. There have even been cases of the finance companies “double billing” the debtor for one credit card balance. In the eyes of the IRS the debtor is guilty until proven innocent. In some instances, establishing a legally valid paper trail is impossible.
The real landmine in this sad story lies just around the corner. In 2007 legislation was enacted to protect homeowners who lost their principal residence in the real estate crash. Debts discharged in foreclosure, short sales, or forgiven as part of a loan modification, would not trigger a 1099-C for additional income tax. This law is set to expire at the end of 2012. No one in Congress thought this problem would last that long. If the law is not reenacted, some Americans, who can least afford it are going to receive some very large nasty surprises. How can an unemployed worker pay the Federal Income Tax on a $150,000 foreclosure?
Most of the information found in this article comes from USA Today.
This is just one more way the Great Recession has found to kick Americans who are down. Over the last three years the numbers of debtors who have defaulted on their credit card payments have increased dramatically. IRS regulations encourage companies to write off these debts within 36 months. In addition, companies have been carrying bad debt on their books for as long as 20 years. Now, as part of the general clean up of financial institutions following the crash, these companies are writing off old debts they believe are uncollectable. That means tax payers are receiving 1099-C forms for old debts, sometimes discharged in bankruptcy many years ago. They have lost the paperwork. Having no proof that they discharged this debt in bankruptcy, they are on the hook for income taxes. Not surprisingly some of these 1099-C forms contain errors that seldom favor the borrower. There have even been cases of the finance companies “double billing” the debtor for one credit card balance. In the eyes of the IRS the debtor is guilty until proven innocent. In some instances, establishing a legally valid paper trail is impossible.
The real landmine in this sad story lies just around the corner. In 2007 legislation was enacted to protect homeowners who lost their principal residence in the real estate crash. Debts discharged in foreclosure, short sales, or forgiven as part of a loan modification, would not trigger a 1099-C for additional income tax. This law is set to expire at the end of 2012. No one in Congress thought this problem would last that long. If the law is not reenacted, some Americans, who can least afford it are going to receive some very large nasty surprises. How can an unemployed worker pay the Federal Income Tax on a $150,000 foreclosure?
Most of the information found in this article comes from USA Today.
Saturday, March 10, 2012
Are You Pregnant? Target Knows
This is one of those stories that is all over the Internet, but didn’t seem to get all that much attention in the main stream media. An incensed father of a teenaged girl walked into a nearby Target store, demanding to see the manager. Waving a handful of coupons for baby clothes, cribs, and such things, he accused the manager and the Target chain of promoting teenaged pregnancy. In a couple of weeks the father returned to the store to apologize to the manager. Turns out his daughter was, indeed, pregnant.
They are watching you, every time you walk into their store. They have more time and money to study you and modify your behavior than you have to study them. They even have a given this field of study a name, predictive analytics. It is being used by politicians, football coaches, as well as every major retailer in America. The ultimate goal, the brass ring of this discipline is identifying and capturing your mind at key turning points in your life, when you break old patterns and start new patterns. If they lock you into a new pattern, they have you for years. When we are presented with a new challenge, like running a maze for a piece of cheese, our brains are working overtime. We are presented with a trigger, the maze, then we begin an activity, exploring the maze, this results in a reward, cheese. As we are repeatedly exposed to this same pattern, over time we put our brains on autopilot, just living and reliving the activities of everyday life.
One of these lifetime sales opportunities occurs when a woman is expecting the birth of her first baby. By the time she actually has the baby, it is too late. Everybody and their brother are sending her catalogues and advertisements. How does a store determine when a woman is early in the second trimester of her first pregnancy? Andrew Pole was hired by Target to answer that question. As Pole analyzed the data stored in Target’s enormous computer data bases, he identified 25 purchasing patterns that signaled pregnancy. If she is buying scent free soap, zinc and magnesium supplements, cocoa-butter lotion, and things like a large purse (that could be used as a diaper bag) Target can assign an accurate numerical probability to her condition.
If you have ever shopped at Target using anything other than cash to pay for your purchases, the company has assigned you a Guest ID Number. They are associating all your behaviors with their goals. They know when to send you coupons. They know how to trigger an associated reward, like giving you a coupon for a free cup of Starbucks Coffee. They know more about your shopping behaviors than you know because most of your activities are unconscious habits. Their computers never sleep.
There is no need to be paranoid. They are just doing their jobs. However, I would encourage you to be a little more conscious when you are doing your weekly shopping. Think about what you are doing and why you are doing it. When you see those coupons and special offers on the back of register tapes, ask why did they do that? Treat these people with the respect they deserve. They want your money and they know how to get it.
The best article I found on this subject is “How Companies Learn Your Secrets” by Charles Duhigg published by the New York Times. Check it out.
http://www.nytimes.com/2012/02/19/magazine/shopping-habits.html?_r=2&pagewanted=all
They are watching you, every time you walk into their store. They have more time and money to study you and modify your behavior than you have to study them. They even have a given this field of study a name, predictive analytics. It is being used by politicians, football coaches, as well as every major retailer in America. The ultimate goal, the brass ring of this discipline is identifying and capturing your mind at key turning points in your life, when you break old patterns and start new patterns. If they lock you into a new pattern, they have you for years. When we are presented with a new challenge, like running a maze for a piece of cheese, our brains are working overtime. We are presented with a trigger, the maze, then we begin an activity, exploring the maze, this results in a reward, cheese. As we are repeatedly exposed to this same pattern, over time we put our brains on autopilot, just living and reliving the activities of everyday life.
One of these lifetime sales opportunities occurs when a woman is expecting the birth of her first baby. By the time she actually has the baby, it is too late. Everybody and their brother are sending her catalogues and advertisements. How does a store determine when a woman is early in the second trimester of her first pregnancy? Andrew Pole was hired by Target to answer that question. As Pole analyzed the data stored in Target’s enormous computer data bases, he identified 25 purchasing patterns that signaled pregnancy. If she is buying scent free soap, zinc and magnesium supplements, cocoa-butter lotion, and things like a large purse (that could be used as a diaper bag) Target can assign an accurate numerical probability to her condition.
If you have ever shopped at Target using anything other than cash to pay for your purchases, the company has assigned you a Guest ID Number. They are associating all your behaviors with their goals. They know when to send you coupons. They know how to trigger an associated reward, like giving you a coupon for a free cup of Starbucks Coffee. They know more about your shopping behaviors than you know because most of your activities are unconscious habits. Their computers never sleep.
There is no need to be paranoid. They are just doing their jobs. However, I would encourage you to be a little more conscious when you are doing your weekly shopping. Think about what you are doing and why you are doing it. When you see those coupons and special offers on the back of register tapes, ask why did they do that? Treat these people with the respect they deserve. They want your money and they know how to get it.
The best article I found on this subject is “How Companies Learn Your Secrets” by Charles Duhigg published by the New York Times. Check it out.
http://www.nytimes.com/2012/02/19/magazine/shopping-habits.html?_r=2&pagewanted=all
Saturday, March 3, 2012
The Poet Rumi and Your Car Keys
Rumi, the famous Persian poet, once told a story. A drunk is searching the ground under a street lamp. A friend happens to walk by and asks him what he is doing. The drunk slurs, "I'm looking for my key." The friend helps him search every where. Half an hour later they still have not found the key. The friend asks, "Are you sure you lost it here?" "No," replies the drunk, "I lost it inside my house." "Then why are you looking here?" "Because the light is here."
I read The Plight of the Fortunetellers by Riccardo Rebonato not once but twice. I am not sure I have managed to absorb half of what is offered but this book is changing the way I evaluate risk. The author analyzes why the quants, some of the brightest men in world armed with the largest computers money could buy failed to properly evaluate risk during the real estate crash of 2006 and the subsequent stock market crash of 2008. In short, they were applying statistical methods that while mathematically correct were treating all available data, say 200 years worth, as equally valuable then using that data to predict events that might only happen once in 1,000 years. Such an approach is deeply flawed. First, while we can make such statements about events like flipping a fair coin with a limited data set, the stock market is not as predictable, since it is driven by human greed and fear more than by rational behavior. Secondly, engineers and scientists know that extrapolation beyond points in a known data set is a recipe for disaster. Predicting the future is at best a risky proposition.
It turns out there is a solution. For those who are interested the technical name is Bayesian Probability. Think of it as common sense applied to higher level statistical analysis. The author examines the results of considerable psychological research. Turns out we humans are pretty good at predicting the probability of common events within the most likely 90% of a statistical distribution. It is improbable outcomes out on the tails of these distributions where we run into trouble. We are likely to guess wrong when predicting high cost, low probability events. This results in unprofitable behavior like the purchase of cancer insurance. We are equally bad a predicting the likelihood of highly desirable but unlikely events. This leads us to behaviors like the purchase of lottery tickets.
If you are attempting to solve a problem develop a model based on common sense and the experience of experts in the field. If you were looking for lost car keys, you would intuitively assign a probability to a number of different areas. The first place I would look would be the ignition switch, then on the floor of the car, then on the carport, then the kitchen, moving systematically from the most likely to the least likely spots. Each time I eliminate a location, such as the ignition switch, I unconsciously reassign a new probability to each of the remaining locations. Continue to refine your model until you find the keys.
Do you want to learn more about managing money? Find some old guy who has earned a lot of money over a lifetime. Take him out to lunch and ask him how he did it. Do not ask your broke buddy about his investments. Borrowing money to buy a bass boat is not likely to lead to a high net worth. Read books by recognized experts. This is a little more difficult because there are a lot of kooks out on the Internet promoting themselves as experts. Use this information to develop a model.
I started looking for established companies with a track record of paying a dividend. I then started looking for low Price Earning Ratios. Then I started considering the Price Earnings Growth Ratio. Then I started wondering about how to predict the sustainability of the cash flow necessary to continue paying me my dividend every quarter. Now I am just beginning to consider book value. What does that really mean? Is the real estate used to calculate book value carried at market value or some other fictitious number? Even if the number is good, can the property be conveniently sold some time in the immediate future? What is an abandoned sheet metal factory in Terre Haute, Indiana really worth on today’s market? The learning process never ends. The model is always in flux as old beliefs are discarded and new data is added. This is just me. Your model may look different and work even better.
One more thing, let’s be careful out there.
I read The Plight of the Fortunetellers by Riccardo Rebonato not once but twice. I am not sure I have managed to absorb half of what is offered but this book is changing the way I evaluate risk. The author analyzes why the quants, some of the brightest men in world armed with the largest computers money could buy failed to properly evaluate risk during the real estate crash of 2006 and the subsequent stock market crash of 2008. In short, they were applying statistical methods that while mathematically correct were treating all available data, say 200 years worth, as equally valuable then using that data to predict events that might only happen once in 1,000 years. Such an approach is deeply flawed. First, while we can make such statements about events like flipping a fair coin with a limited data set, the stock market is not as predictable, since it is driven by human greed and fear more than by rational behavior. Secondly, engineers and scientists know that extrapolation beyond points in a known data set is a recipe for disaster. Predicting the future is at best a risky proposition.
It turns out there is a solution. For those who are interested the technical name is Bayesian Probability. Think of it as common sense applied to higher level statistical analysis. The author examines the results of considerable psychological research. Turns out we humans are pretty good at predicting the probability of common events within the most likely 90% of a statistical distribution. It is improbable outcomes out on the tails of these distributions where we run into trouble. We are likely to guess wrong when predicting high cost, low probability events. This results in unprofitable behavior like the purchase of cancer insurance. We are equally bad a predicting the likelihood of highly desirable but unlikely events. This leads us to behaviors like the purchase of lottery tickets.
If you are attempting to solve a problem develop a model based on common sense and the experience of experts in the field. If you were looking for lost car keys, you would intuitively assign a probability to a number of different areas. The first place I would look would be the ignition switch, then on the floor of the car, then on the carport, then the kitchen, moving systematically from the most likely to the least likely spots. Each time I eliminate a location, such as the ignition switch, I unconsciously reassign a new probability to each of the remaining locations. Continue to refine your model until you find the keys.
Do you want to learn more about managing money? Find some old guy who has earned a lot of money over a lifetime. Take him out to lunch and ask him how he did it. Do not ask your broke buddy about his investments. Borrowing money to buy a bass boat is not likely to lead to a high net worth. Read books by recognized experts. This is a little more difficult because there are a lot of kooks out on the Internet promoting themselves as experts. Use this information to develop a model.
I started looking for established companies with a track record of paying a dividend. I then started looking for low Price Earning Ratios. Then I started considering the Price Earnings Growth Ratio. Then I started wondering about how to predict the sustainability of the cash flow necessary to continue paying me my dividend every quarter. Now I am just beginning to consider book value. What does that really mean? Is the real estate used to calculate book value carried at market value or some other fictitious number? Even if the number is good, can the property be conveniently sold some time in the immediate future? What is an abandoned sheet metal factory in Terre Haute, Indiana really worth on today’s market? The learning process never ends. The model is always in flux as old beliefs are discarded and new data is added. This is just me. Your model may look different and work even better.
One more thing, let’s be careful out there.
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