Want to Save More? Automate and Simplify!

I have some new numbers on an old problem, the emergency fund. We all know that we need to set aside something for a rainy day. The financial gurus recommend that we have between three months and eight months take home salary in something like a bank account or a money market fund. How many Americans actually have that kind of cushion against the slings and arrows of outrageous fortune? From the Winter 2012 edition of Charles Schwab onInvesting:

28% Have No Emergency Fund
21% Have Less Than 3 Months in an Emergency Fund
17% Have 3 to 5 Months in an Emergency Fund
25% Have 6 Months of More
9% Declined to Answer

I have seen and reported on numbers that are worse than those seen in this survey. Why don’t people do a better job preparing for both the known unknowns, (when will I need to buy another car), let alone the unknown unknowns like hurricane Sandy? Sheena Iyengar has studied the human decision making process. She has discovered there are four keys to making better decisions. I will add one more to that list.

The first key to saving for a better future is automation. Set up an automatic debit on your checking account that goes straight into savings. If you never see that money, as with a pretax deduction for a 401K, it is even better. A one time decision takes the burden off your memory and puts at least a little money out of harm’s way every week or every month. If you do not yet have a bank account, that is no excuse. The envelope system used by your great grandparents will work just fine. Every time you receive some money, put a predetermined amount in an envelope, preferably that envelope should then be locked in a box.

Sheena Iyengar has discovered that too many choices results in paralysis. There are thousands of individual stocks and mutual funds out there. Which one do I choose? Her studies indicate more fund choice in a 401K program actually lowers participation. People, afraid to make the wrong choice make no choice even if they know they are harming their own future.

Her next recommendation is concretize your decision making process. The more vivid the consequences of a decision, the more likely you will make a good decision; asking the participants in a 401K to write down a couple of benefits of saving money for retirement on the plan application form dramatically increased participation.

Categorize! Humans deal with choosing categories, then making particular selections better than confronting complexity. Stores have discovered that people confronted with 300 magazines in an unorganized rack seldom make a decision. If the magazines on the racks are clearly separated by category, people are more likely to buy. I would zero in on the financial section, maybe travel if planning a vacation, or pro football in the late summer.

Finally condition for complexity; in a study of purchasing a new car, Sheena Iyengar discovered the customer would become more engaged in the sales process if first presented with a simple choice, a four cylinder engine or a V-6 then with the more complex choices culminating in choosing between something like 56 different color combinations. If the sequence was reversed it is easy to lose the customer.

How does this work. Once you have that emergency fund in place, start simple. Start with something you understand. I understand the concept of an integrated oil company. They sell gasoline. I buy the stuff every week. Oil companies make a lot of money in good times and in bad, so one of my first stock purchases was Chevron. In my mind, at that time it was either Chevron or Exxon, a simple choice. My wife went through a similar process choosing Johnson & Johnson. She likes their products and trusts the company.

For picking mutual funds or exchange traded funds start with a fund family or a category depending on your situation. For example if you are heading from the general to the particular, Vanguard is the unchallenged king of low cost funds. Fidelity is also a well respected fund family with a wide variety of options. If heading from the particular to the general, say an emerging market exchange traded fund, just do a Google search then dig into the particulars of each offering, especially sales load and total fees.

Picking funds for your 401K can be a little more complex. If you can’t deal with complexity consider a life cycle fund that invests in a balance of stocks and bonds their managers think appropriate for your age. As you learn more, you can begin to make your own decisions as to particular funds and fund mix.

So there you have it. Go and do it. Getting started is the hardest choice. Once you learn that it works, increasing your savings rate and making more complex financial decisions will, surprisingly, seem very easy and natural.

1)Automate Your Savings Process
2)Cut the Number of Choices
3)Make it Real
4)Categorize
5)Condition Yourself for Increasing Complexity

Another Look At The Golden Rule

Matthew 7:12 (King James Version)

“Therefore all things whatsoever ye would that men should do to you, do ye even so to them: for this is the law and the prophets.”

We all know that this is the old truth. Similar statements are found in every major religious tradition on earth.

But why?

“Six degrees of separation is the idea that everyone is approximately six or fewer steps away, by way of introduction, from any other person in the world, so that a chain of "a friend of a friend" statements can be made, on average, to connect any two people in six steps. It was originally set out by Frigyes Karinthy and popularized by a play written by John Guare.” (Wikipedia) Mathematicians question the veracity of this proposition, but the principle is true. We live in a remarkable interconnected universe. All of us are tied to one another in ways we can’t imagine. Perhaps, we should consider that when we offer loving kindness and compassion to another we just might be giving a gift to ourselves.

There is no way that we can predict how some respectful consideration of another might trigger an unlikely series of events that ends in a miracle. Consider the story of Naaman (2nd Kings Chapter 5). Naaman was the commander of the Syrian army, a highly respected very successful general, but he had leprosy, a horrible incurable death sentence. In his house he had a servant girl, a slave captured in a raid against her people Israel. This young woman told her master that there was a prophet of God living in Samaria who could cure his leprosy. I am sure by that time Naaman had consulted the best doctors in his country, maybe even a fortuneteller or the priests of his religion. He was just desperate enough to listen to a servant.

Not wanting to start a war, Naaman sent a letter to the King of Israel before he went down to meet with Elisha, the prophet of God. The King of Israel was terrified that this request to cure the incurable was a pretext to start a war. He tore his garments in despair, but Elisha told the King send him on down so that he will know there is a prophet in Israel.

When he arrived at the house of Elisha, the prophet did not answer the door. He sent a servant with a message. Naaman was instructed “Go, wash yourself seven times in the Jordan, and your flesh will be restored and you will be cleansed.”

This annoyed the general. He noted that Syria had better rivers than the Jordan. He was about to leave when one of his soldiers counseled him, “My father, if the prophet had told you to do some great thing, would you not have done it? How much more, then, when he tells you, ‘Wash and be cleansed’!”

Of course Naaman obeyed the prophet. When he came out of the Jordan River the seventh time he was healed. Three times the mighty general considered the counsel of slaves and servants with the same respect that is normally only given to the wise or the mighty.

The fact is you just don’t know who has that particular piece of information you need to change your life. You don’t know how a chance meeting can trigger a series of events that could result in your blessing. “In chaos theory, the butterfly effect is the sensitive dependence on initial conditions, where a small change at one place in a deterministic nonlinear system can result in large differences to a later state.” (Wikipedia) Folks we live in just such a nonlinear system.

The Golden Rule is not limited to those who can obviously benefit us or even those we consider below us in this material world. It also applies to the energy vampires, people who have the ability to drive us wild with their peculiarities. There is another old truth that covers this situation that is found in Matthew 5:41, “If anyone forces you to go one mile, go with them two miles.” Before you ask the question, the text doesn’t say 22 miles. Most of the time when confronted with energy vampires, I can’t make it through the first mile, let alone the second mile.

Does this work in real life? When I was looking for a job in research and development back in 1985 I met a woman at a job fair representing my current employer. She was a low ranking personnel functionary who ran the disability program at the laboratory. For a junior design project our team designed and built an all terrain electric wheelchair for a little crippled girl. It was a success. We even made the local TV news. Our professor was happy with us, but I heard the Dean of the Engineering College dismissed us as a bunch of garage mechanics. I used photographs of our device in my pitch to prospective employers. This young woman thought that our project was pretty cool. She bypassed all the normal bureaucratic nonsense required to get a Government job, putting me in immediate contact with the men who actually had the power to hire me. I was given three job offers! Let me add that about six months after starting work at the laboratory I received one of those form letters from our personnel office telling me that while they were amazed with my remarkable abilities and accomplishments they had no openings at this time for someone of my remarkable talents. 27 years later I still have that letter.

Jeff Bezos is the founder, chief executive officer, president and chairman of the board of Amazon.com, a man with an estimated net worth of $20.2 billion dollars. Recently he delivered the commencement address at Princeton University. During most of this 12 minute speech, one of the most powerful men in our country told a story from his childhood. He was an exceptionally bright child with an unusual aptitude for math. He disliked his grandmother’s cigarette smoking, so one day while riding in the car with his grandparents he calculated how many years cigarettes had cut from his grandmother’s life expectancy. When he announced this fact, his grandmother burst into tears. His grandfather pulled the car off the road. The old man stepped out of the car asking his grandson to join him. Jeff did not know if he was going to be praised for his intellectual accomplishment or punished for its effect on his grandmother. His grandfather told him, “Jeff, one day you’ll understand that it’s harder to be kind than clever.”

Many years later Jeff Bezos ended a lecture to a group of the most intelligent and academically successful young people with a series of questions. One of these questions was, “Will you be clever at the expense of others, or will you be kind.”

Matthew 25:

34 “Then the King will say to those on his right, ‘Come, you who are blessed by my Father; take your inheritance, the kingdom prepared for you since the creation of the world. 35 For I was hungry and you gave me something to eat, I was thirsty and you gave me something to drink, I was a stranger and you invited me in, 36 I needed clothes and you clothed me, I was sick and you looked after me, I was in prison and you came to visit me.’

37 “Then the righteous will answer him, ‘Lord, when did we see you hungry and feed you, or thirsty and give you something to drink? 38 When did we see you a stranger and invite you in, or needing clothes and clothe you? 39 When did we see you sick or in prison and go to visit you?’

40 “The King will reply, ‘Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.’

The concept for this blog post has been shamelessly taken from a sermon by Joel Osteen, America’s preacher and the Princeton commencement address delivered by Jeff Bezos, a man who changed the way the world goes shopping. The links are below.

Joel Osteen’s Gate Keeper Sermon

Jeff Bezos Commencement Address

888-995-HOPE (4673)

This is not the kind of thing you will usually see in this blog. My presupposition is that through good decisions, hard work, and persistence you can change your life. But sometimes things happen. Hard working, clean living, perfectly wonderful people lose their jobs or can no longer work due to accident, illness or situations totally beyond their control. Then what?

If this sort of misfortune befalls your family, take action quickly. List your monthly expenses, especially your monthly payments. Ditch anything that is not absolutely necessary, like cable TV. Contact your creditors, especially the bank that holds your mortgage. Negotiate new terms on your own if you can. Be sure and document every call thoroughly and completely. Always ask for a written confirmation of your phone conversation with these representatives. I always prefer face to face over phone if that is possible.

The key here is survival. Protect what Dave Ramsey calls the four walls, your house, your utilities, food and clothing for your family, and a car. Notice I said a car not the car. It might be time to trade those monthly payments for a paid for clunker.

If you can’t reach a mutually acceptable resolution with your bank to keep your home, there are options other than foreclosure, including a short sale. Short sales are not a perfect solution. There are also Government programs that are designed to help you hold on to your house. Start with Making Home Affordable.Gov. 888-995-HOPE (4673)

Making Home Affordable

This website contains good information on a wide variety of available programs and how to begin your journey on what will be a time consuming and complicated process.

They also provide some general educational material including this list of common scams.

1. Beware of anyone who asks you to pay a fee in exchange for counseling services or the modification of a delinquent loan.
2. Beware of people who pressure you to sign papers immediately or who try to convince you that they can "save" your home if you sign or transfer over the deed to your house.
3. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
4. Never make a mortgage payment to anyone other than your mortgage company without their approval.

Look for qualified guidance sooner rather than later. The National Foundation for Credit Counseling provides certification for nonprofit credit and mortgage counselors. This service isn’t free but their charges are considered nominal. It is a good place to start if you find yourself in financial trouble.

The National Foundation for Credit Counseling

If serious financial problems overtake you find properly qualified professional help so that you can take action as soon as possible. Do not wait. And please, don’t try to live on your credit cards. No one ever got out of a hole by digging a deeper hole.

Guess What? You Are Not In Charge.

The Fiscal Cliff is coming. Or not. Maybe the Mayans knew that Nibiru, planet X is destined to hit the earth on December 21, 2012 ending my hopes for a comfortable retirement. Or not. Whatever may or may not happen, the best I can do are those things that God and common sense dictate as wisdom. Ultimately, man is not in control of his own destiny, much less that of the entire world. Our leaders can not be assured that their plans for the economy will work for even a day, let alone a ridiculously short period of time, like a thousand years.

I asked my broker a simple question. How will my dividends be taxed if we go over the fiscal cliff? I have heard contradictory reports on how dividends will be treated, given my new lower income in retirement. His answer straight from their legislative office, “Nobody knows.”

Later on that afternoon my broker gave me a call. Bottom line, “Nobody knows.” Nobody knows what kind of a deal Congress will negotiate with the President. Nobody knows how the large institutional investors who drive the market will respond to the Congress and the President. He added something that hadn’t occurred to me, lawsuits. Special interest attorneys are already preparing to sue in Federal Court over anything that comes out of the negotiations. I also expect lobbyists are working overtime to prepare for any and all possible contingencies.

I watch the financial press. It seems to vacillate between ostrich like optimism and hysterical panic depending on the purpose of the publication or the show. The big boys are clearly pessimistic. They are even borrowing money, yes borrowing money, at today’s low interest rates to pay their shareholders special dividends before the tax increase hits. I watch the genius investors like Soros and Buffett call for higher taxes on the rich. Interesting, almost all of their “income” is not classified as earned income by the IRS. It is classified as capital gains. Therefore it is taxed at a much lower rate. Anybody hear them calling for a new law to tax capital gains as regular income?

Then there is the law of unintended consequences. Engineers call these reactions, second order effects. The world economy is an incomprehensibly complex interconnected system. An input at one point will change the outcome at every other point in the system, sometimes in dramatically unpredictable ways. Recently Maryland enacted a special millionaire tax on high earners. The result, millionaires left the state. The amount of revenue collected from that tax bracket actually dropped as a result of a tax increase. It is now clear that the restaurant industry is cutting their number of full time employees in preparation for the oncoming impact of the Patient Protection and Affordable Care Act (PPACA). Employees working less than 30 hours a week are not covered by this act. Who knows what effects any budget compromise might cause as its impact ripples through the economy?

So what am I doing? I am at the low end of my range for stock holdings. Last time I checked, about 42% of my holdings (excluding real estate) are in stocks. The rest I have placed in bonds, bond funds, cash, or near cash (money market mutual funds). I have some plans on how to proceed, if things break this way of that. But ultimately it is all in God’s hands.

Quote by Mikhail Bulgakov from the Master and Margarita, one of my favorite novels.

“– But here is a question that is troubling me: if there is no God, then, one may ask, who governs human life and, in general, the whole order of things on earth?
– Man governs it himself, – Homeless angrily hastened to reply to this admittedly none-too-clear question.
– Pardon me, – the stranger responded gently, – but in order to govern, one needs, after all, to have a precise plan for a certain, at least somewhat decent, length of time. Allow me to ask you, then, how can man govern, if he is not only deprived of the opportunity of making a plan for at least some ridiculously short period, well, say, a thousand years , but cannot even vouch for his own tomorrow?

Downsize or Supersize?

Sometimes I think reporters write articles just to start an argument, thereby generating reader interest. Anne Tergesen of the Wall Street Journal recently questioned conventional wisdom with an article entitled, “Everybody Says You Should Downsize. Everybody May Be Wrong.”

For generations young people get married and have children. As these “household formation units” grow they accumulate stuff to house, clothe, and feed a growing family. As mom and dad grow older they earn more money, allowing them to buy the accoutrements of the good life, expensive furniture, big SUVs, boats, and giant TVs. Then the children move away to college or real life leaving the parents with a big house filled with stuff. As they drift towards retirement they begin to think about downsizing. Do two people really need a four bedroom house? We have two sets of everyday china and two sets of fine china. How many plates do two people need? Until the real estate bubble of 2006, the increasing value of a primary residence was a significant part of a retirement plan. People moved to areas where there were jobs after graduation from high school or college. These areas tend to have high real estate prices and high taxes. In retirement conventional wisdom dictated that a couple sell the big house in the expensive area and move to a smaller house in an inexpensive area or even into an apartment. The capital gains generated by the sale of their house was then added to their income producing assets to help support an important part of the American Dream, “retirement with dignity.”

There are the obvious reasons for not following this path. If your house has crashed in value past the point where its sale would generate enough revenue to justify the cost (including the emotional costs) of relocation, it makes more sense to stay put until the market recovers. In some cities, Detroit comes to mind, there is no point in waiting for a recovery. However, in suburban Washington I believe that patient money invested in single family homes will not go unrewarded. I really don’t think the Federal Government is going to become smaller or less important in the foreseeable future.

I have always loved big yards with lots of trees, but to be perfectly honest, yard work never amused me all that much. Today, I can no longer do the climbing necessary to trim branches or trim the 8 foot hedge that stood in front of my house for over 25 years. Even walking behind a lawnmower requires a break or two before the yard is finished. Does mom really want to clean all those empty rooms for the rest of her life? Can she? When we move I don’t plan on doing any more yard work. Will I really be willing to pay someone else to do something I can still do myself?

Then there is the stuff. After 25 years in the same house we have accumulated a lot of stuff. We don’t use half of it on anything like a regular basis. In addition readers of this blog know that after my mother in law’s death we put all her stuff into a storage unit. My mother in law managed to pack most of the stuff from a three bedroom house into a two bedroom apartment. Now we have two mountains of stuff. It isn’t just stuff. It is stuff chained to memories of a lifetime. It is easy for me to tell my wife, “Don’t even open that box of photographs. Just throw it away,” but that isn’t going to happen. Recently we spent a week living in a hotel near that storage unit trying to figure out what to do with a mountain of stuff. It isn’t easy. We finished about 1/3 of what needs to be done. My wife wants some of her mother’s stuff. Our house is at the point where topology is an issue. The mathematics of space has determined that for every new piece of furniture added to our house a piece of furniture must be removed.

Until this conundrum is resolved the storage unit costs the estate $188 a month.

Anne Tergesen observes, “In recent years, new breeds of professionals have sprung up to help people declutter, organize and move their possessions. Among their recommendations: sort your belongings a little at a time so you don't get overwhelmed; don't make judgments about what your spouse should or should not keep; and take only what fits your current lifestyle.” We are actually using the services of such a professional and her partner. This woman handled moving my mother in laws possessions into storage and is arranging estate sales to dispose of the more valuable material we neither need nor want.

One of these advisors, Ann Bass of Asheville, N.C. recommends that your new house gives both husband and wife some personal space for their personal stuff and their hobbies. The old joke says that in retirement a wife gets twice the husband and half the money. Psychologists state that the first year of retirement is the second most stressful year of a marriage after the first year following the birth of the first child. Plan on providing personal space for both the husband and wife to store their tools and to pursue their hobbies in your retirement home, unless you really like to fight. A woman we know proposed moving from a one story house to a two story retirement home so she would have a place to store a huge collection of children’s books she has accumulated over a lifetime (really). Mercifully, at least in this case, sanity prevailed.

I don’t expect that we will be able to downsize. I will be relieved if we can avoid supersizing our new home to contain all the stuff that my wife would like to retain. I would encourage my readers, especially young couples that life does not consist in an abundance of possessions. What is really important can’t be weighed or measured. Those things are held in your heart or your arms.

Luke 12: (NIV)

13 Someone in the crowd said to him, “Teacher, tell my brother to divide the inheritance with me.”

14 Jesus replied, “Man, who appointed me a judge or an arbiter between you?” 15 Then he said to them, “Watch out! Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.”

16 And he told them this parable: “The ground of a certain rich man yielded an abundant harvest. 17 He thought to himself, ‘What shall I do? I have no place to store my crops.’

18 “Then he said, ‘This is what I’ll do. I will tear down my barns and build bigger ones, and there I will store my surplus grain. 19 And I’ll say to myself, “You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry.”

20 “But God said to him, ‘You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?’

21 “This is how it will be with whoever stores up things for themselves but is not rich toward God.”

Ethical Investing

According to an article published by the Motley Fool, the number one best possible single stock investment of the last 50 years would be the cigarette powerhouse, Altria Group (ticker symbol MO). It has returned a stunning average 20.5% a year since 1968. That would have turned your $1,000 investment into $3,700,000 in fewer than 50 years. I don’t own any Altria stock. My wife is not comfortable profiting from a product that turns its customers into addicts then slowly kills them off. I would not invest in anything that grieved her conscience even if I believe it to be a really good idea. I think tobacco products are a legal as well as a traditional part of American culture. I don’t smoke; in my blog I recommend you don’t smoke for financial reasons, but if you want to smoke, I consider it your business.

I believe a company has a moral obligation to serve three groups customers, shareholders, and employees. I also believe they have an obligation to obey the law of the countries where their operations are located.

I haven’t invested in companies like Microsoft and Walmart because something about their business model makes me queasy. I consider Microsoft a classic 19th century predatory monopoly. Many of their products have not been all that good. They don’t take care of their customers. Microsoft eliminates innovative competitors by making crude copies of their products, then packaging them at a low cost into the Windows Operating System or by buying their competitor’s company. Their use of large numbers of “permanent temporary” employees bothers me. They haven’t treated their shareholders (other than insiders with stock options) all that well since the dotcom crash of 2000.

Walmart really is a two edged sword. On the one hand no retailer in history has done more to provide the best possible value to the largest number of customers. On the other hand the appearance of a Walmart on the edge of town has the same effect on local small business as a nuclear weapon. Walmart has consistently provided their shareholders with more than respectable returns. But then the value Walmart has provided to customer and investor alike has been at the expense of their employees and their suppliers’ employees. I seldom shop at Walmart; to be honest in part because it is not convenient. I have never invested in Walmart, as I question some of their business practices. However, I hope that someday Walmart will offer the same level of benefit to their employees as they do to the customers and investors they have served so well.

If ethical investing is really an issue in your mind there are 150 mutual funds and 17 exchange traded funds that will screen tobacco, alcohol, weapon systems, or environmentally offensive companies out of your life. There are funds for conservative Christians, environmentalists, and even Moslem fundamentalists. Normally, these funds underperform their competition. This is not surprising since the universe of acceptable investments is smaller for funds with a conscience.

The following information is from “The 7 Top Funds for Ethical Investing by Thomas Anderson.

Kiplinger reports that the best of these funds over recent history are Amana Income and Amana Growth. Over the last five years they rank in the top 1% of all funds in their respective categories. These funds invest according to Islamic principles, no pork, pornography, gambling, or alcohol. In the past year they have not done all that well since they do not invest in financial firms that are involved in usury. They invest a lot of their money in health care companies.

If you are big fan of alternative energy, check out Portfolio 21. They are really serious about ecologically safe and sustainable products. They are also opposed to the use of nuclear power to address global warming. As you might expect, they like companies that produce wind turbines. They also invest a lot of money in health care.

If you don’t like alcohol, gambling, pornography, tobacco, or weapons you might like the Appleseed Fund. They seek “ethical” bargains and keep about 8% of their portfolio in gold to protect their investors against high inflation they see in our future. Over the last three years the Appleseed fund has topped the S&P 500 by 12% per year. Not too shabby.

Christianity is a religion of freedom and grace, not a religion of rules and regulations. If a particular investment bothers your conscience, don’t buy it. If your brother has no problem investing in that same company extend him the grace to follow his own conscience. Don’t be too proud of your own righteous behavior. If you have a 401K, investments in an index fund, or any kind of a managed account, the chances are pretty good you own some minuscule speck of something you would find offensive.

Romans 14: (NIV)

Accept the one whose faith is weak, without quarreling over disputable matters. 2 One person’s faith allows them to eat anything, but another, whose faith is weak, eats only vegetables. 3 The one who eats everything must not treat with contempt the one who does not, and the one who does not eat everything must not judge the one who does, for God has accepted them. 4 Who are you to judge someone else’s servant? To their own master, servants stand or fall. And they will stand, for the Lord is able to make them stand.

5 One person considers one day more sacred than another; another considers every day alike. Each of them should be fully convinced in their own mind. 6 Whoever regards one day as special does so to the Lord. Whoever eats meat does so to the Lord, for they give thanks to God; and whoever abstains does so to the Lord and gives thanks to God. 7 For none of us lives for ourselves alone, and none of us dies for ourselves alone. 8 If we live, we live for the Lord; and if we die, we die for the Lord. So, whether we live or die, we belong to the Lord. 9 For this very reason, Christ died and returned to life so that he might be the Lord of both the dead and the living.

10 You, then, why do you judge your brother or sister? Or why do you treat them with contempt? For we will all stand before God’s judgment seat.

"Bah!" said Scrooge, "Humbug!"

Maybe I am not the best person in the world to write a Christmas post. I come from a family that through a consciously negotiated pact refrains from giving gifts beyond immediate family. My wife comes from a family where people buy gifts for other family members to give out on Christmas so they (the person spending the money) will not feel guilty about the moral failure of their offspring or sibling. For most of our married life Christmas sparked off at least one really ugly argument. Finally we reached the point where we understood just about how far we could push these issues without a major explosion. Now we are both pretty unhappy with most Christmases, but neither one of us is too unhappy at the other’s expense.

We all read the stories, “Woman Trampled to Death at Walmart.” It starts on Black Friday with millions of Americans standing in line for hours to save $50 on a tablet PC; children raising guilt manipulation to an art form to receive the latest overprice piece of plastic junk they saw on TV; mothers on the verge of a nervous breakdown because they can’t give their family the perfect Norman Rockwell Christmas complete with a gourmet seven course meal. Let’s not even consider people losing their jobs over drunken performances given at the office Christmas party or the huge increase in the number of suicides committed during the holiday season.

For heaven’s sake, if there is anything that requires a budget summit between husband and wife, it is Christmas. Have all your arguments finished months before the advent (a pun) of Black Friday. Under no circumstances borrow money to fund Christmas. In olden times, banks offered Christmas Club Accounts. Every week during the course of the year, money was deposited in these accounts to assure enough funding for the family Christmas. Even though such things haven’t been offered for years, maybe you could start an account for funding the Christmas budget on January 1.

Don’t give Christmas gifts to people for whom it would be difficult to reciprocate in kind with the exception of children, of course. It is no favor. The Japanese have a word for this burden O-Kaeshi (translated honorable return). In Japan once you have received a gift you are obligated to give one in return. It starts a complicated cycle of guilt driven giving, based on the social standings of the participants relative to one another. This practice is quite totally insane. The people spending the money need the money and the people receiving don’t need or perhaps don’t even want the gift.

The true spirit of giving is captured in the classic O’ Henry short story, “The Gift of the Magi.” Most of us read it grade school, but if you haven’t read it, I won’t spoil it for you. If this doesn’t bring a tear to your eye, you need to work on your heart.

The Gift of the Magi

Ratchet everything down a bit.

That dinner doesn’t need to be all that extravagant and expensive or perfect. If you are that worried about impressing someone else, don’t invite them.

You don’t need to go into debt to buy a $500 I-Phone for a twelve year old child.

Find ways to teach your children and yourself about the true spirit of Christmas over the course of the holiday season. Since Christmas is a celebration of the birth of Jesus Christ, perhaps his story and his Church might be a good place to start. The first Christmas gift was Jesus. He is the Lamb of God given to us for our salvation and that we may live with him forever.

The first gifts given to celebrate his birth were given by the Magi. These gifts were treasures given by kings to the Son of God. Go thou and do likewise. Give something extra to the works of God this month.

The Bible teaches that our savior is an advocate for the needy. Perhaps this is a good time to give to ministries that care for the poor or maybe you could donate an hour of your time to a homeless shelter during this season. Remember, your children are watching you. What you do is a hundred times more important than what you say.

Give something of yourself that doesn’t require a lot of money. Give someone a sheet of homemade chocolate chip cookies instead of a senseless gift. If you are good with your hands make a Christmas ornament for someone’s tree.

The greatest gift that you can give someone who really loves you is your time. Spend time with those you love creating memories and traditions that will make you all better people.

From the movie the “How the Grinch Stole Christmas”

The Grinch: It came without ribbons. It came without tags. It came without packages, boxes, or bags.
Narrator: The the Grinch thought of something he hadn't before.
The Grinch: Maybe Christmas doesn't come from a store. Maybe Christmas...
Narrator: He thought
The Grinch: ...means a little bit more.

The First Sunday in Advent

The Collect.

ALMIGHTY God, give us grace that we may cast away the works of darkness, and put upon us the armour of light, now in the time of this mortal life, in which thy Son Jesus Christ came to visit us in great humility; that in the last day, when he shall come again in his glorious majesty to judge both the quick and the dead, we may rise to the life immortal, through him who liveth and reigneth with thee and the Holy Ghost, now and ever. Amen.

Casino Capitalism and The Las Vegas Line

The idea of a casino intrigues me. Why would anyone go to play games at a place where they are absolutely guaranteed to lose money? Slot machines are computer controlled to pay out about ninety cents on the dollar, or less depending on the casino. Slot machines obviously require no skill, but what about bets that the casino can’t control, like those placed on the outcome of football games? I remember how fascinating it was to discover that Las Vegas sports books do not bet their money on anything as stupid and unpredictable as football games. Las Vegas bookmakers try to set the line so that exactly the same number of dollars are bet on each team. The casinos are quite content with the 9% or 10% they take from the gamblers for providing this service. If too much action is falling to one team, they will change the line to attract money to the other team. Back in the old days, handicappers who messed up the line and lost too much of their casino’s money were given one way rides into the desert in the trunk of a Lincoln Continental. The casinos are not gambling with their money. They are letting you gamble with your money.

Just for grins I looked up the line on the upcoming Army Navy game. Here is how it is presented.

Navy -7 (-115)
Army +7 (-105)

Translation: In order to win a bet on Navy, the midshipmen must score at least 8 points more than the cadets of West Point. The second number in parentheses means that in order to walk away with $200 in your pocket, you must place $115 at risk. If you win the casino keeps that extra $15.

If you wish to win a bet on Army your team needs to lose the game by no more than 6 points. Obviously if the teams tie or Army upsets Navy (an unlikely outcome) you will win your bet. The second number in parentheses means that in order to walk away with $100 in winnings you only need to place $105 at risk. If you win the casino is happy to keep your $5.

What happens if the Navy scores exactly 7 points more than Army? That is called a push. In theory it would mean that the casino should return all the bets placed on that game. Obviously that isn’t going to happen. Some casinos set the line with ½ points to make sure it can’t happen. Some casinos specify the push goes to either the winning or losing team. They are in business to make money.

The Las Vegas line represents the collective wisdom of every gambler in the world. Even though picking winners of football games requires a measure of skill, it also contains a measure of luck. It is difficult for anyone to beat the line over an extended period of time. In the aggregate, the entire universe of sports gamblers will lose 10% of their money over the course of a season. The casino will take this 10%, even though the gamblers are the people supplying all the money and accepting all the risk.

What does this have to do with anything sensible?

Consider financial vehicles such as mutual funds and variable annuities. The mutual fund does not place any of its own money at risk. It is gambling in the stock market with your money. Depending on the mutual fund provider, initial fees range from 0% to 8.5%. In order to recover from an 8.5% fee, your money must earn 9.3% just to break even. These commissions are hidden from the investor in various ways. Some funds are back loaded, that is you pay the commission when you cash out your money. Others prorate the sales charge over a number of years.

Mutual funds also charge ongoing administrative fees for running the fund, management fees for managing the funds assets, and transaction fees for buying and sell stocks on your behalf. These fees which are charged on an annual basis range from 0.05% for an index fund that requires no active management to as much as 2% of your entire investment! 2%! Every Year! These fees will have a very significant impact on the long term value of your holdings.

Like the sports book the mutual fund does not supply the money or take any risks. Keep that in mind when you study mutual funds.

Another thing to keep in mind is the Las Vegas line. Beating the major averages such as the S&P 500 or the Wilshire 5000 over time is very difficult. Consider the mighty Magellan Fund, once managed by the genius, Peter Lynch. As the fund prospered it attracted more money. The more money it had to invest the harder it became for Lynch’s successors to find outstanding opportunities. Finally, the Las Vegas line caught up with the Magellan fund. Under Bob Stansky, it under performed the market. During this time the fund’s holdings so resembled the S&P 500 Stansky described himself as a “closet indexer.”

When a salesman says his fund’s management is worth that extra large sales commission, be very suspicious. Morningstar rates mutual funds on the basis of their performance from a high of 5 stars to a low of 0 stars. Studies have shown that over time the high rated funds tend to drop and the low rated funds tend to get better. John Bogle, the founder of the Vanguard family of funds, has demonstrated that the impact of fund costs and the difficulty of beating the Wilshire 5000 over long time spans prove such claims to be false.

Of course betting on the outcome of a game played with a prolate spheroid by giant men on a pretty green field is not the same thing as investing in companies that produce real products. However, it is wise to consider some of the similarities especially when investing in financial products that contain fees and sales commissions.

Now, let’s be careful out there.

For those who wish to further explore the relationship between skill and luck across many kinds of human activities from chess (pure skill) to buying lottery tickets (pure luck), I would recommend an excellent white paper entitled Untangling Skill and Luck by Michael Mauboussin.

Untangling Skill and Luck

Thomas Jefferson: A Dozen Cannons of Conduct in Life

This was shared by a Facebook friend. I believe that this is only the second time I have offered a post without my comments.

Thomas Jefferson sent this list of A Dozen Cannons of Conduct in Life to a young granddaughter, Cornelia Jefferson Randolph.

1. Never put off to tomorrow what you can do to-day.

2. Never trouble another with what you can do yourself.

3. Never spend your money before you have it.

4. Never buy a thing you do not want, because it is cheap, it will be dear to you.

5. Take care of your cents: Dollars will take care of themselves.

6. Pride costs us more than hunger, thirst and cold.

7. We never repent of having eat too little.

8. Nothing is troublesome that one does willingly.

9. How much pain have cost us the evils which have never happened.

10. Take things always by their smooth handle.

11. Think as you please, and so let others, and you will have no disputes.

12. When angry, count 10. before you speak; if very angry, 100.