Force Majeure

Force Majeure is a legal term used as the title for a specific clause frequently found in contracts. The term is French. It means a superior or irresistible power. The clause is included because forces beyond the control of the two parties can affect the outcome of the contract.

Below is a sample of a Force Majeure clause that might appear in a particular contract. (Wikipedia)

Clause 19. Force Majeure

A party is not liable for failure to perform the party's obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalisation, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service. No party is entitled to terminate this Agreement under Clause 17 (Termination) in such circumstances.

I want you to notice that such events that are covered in the Force Majeure clause do not cancel the contract. They merely delay the completion of the contract.

Think of the money equation as a contract with yourself.

Money In = Money Stored + Money Spent,
(Integrated over the course of your lifetime)

The right hand side of the money equation is pretty easy to discuss. If you do the right things consistently over the course of your lifetime there is a very high probability of a good outcome. If you spend less than you earn, if you save the surplus, if you invest in a cautious systematic manner, you have a shot at becoming a prodigious accumulator of wealth no matter what your income. That number is a calculation based on your income and age.

The left hand side of the equation is where things get a little tricky. This is where you and nobody but you defines success. You write the contract with yourself. You make the decisions that result in the outcome we call life. If you choose a path with a low probability of a high income, you will have to live with the results of that decision. This may be easy for an artist with a nice garden living in an obscure corner of Hawaii. It is brutally hard on a football player who dedicated 15 years of his life to make it in the NFL only to be cut in his first training camp. Now what, a lifetime of selling cars in a college town, living on past glory?

Most of us never even make any serious effort to pursue our dreams. We look for a job that will provide a living. Sometimes just making a living is challenge enough. Some of us choose to make a conscious compromise with reality. We decide on an acceptable lifestyle. Then we find the least objectionable path that will provide us with whatever it is that we consider the good life. Jesus asked the question, “And what do you benefit if you gain the whole world and lose your soul?” I am afraid that most of us in this materialistic consumer culture, have lost at least a part of our souls by focusing too hard on the left hand side of the equation.

Sometimes events happen that force us to invoke the Force Majeure clause in the contract we have made with ourselves. Years of diligent effort can disappear in a flash. Even when facing overwhelming circumstances, considering yourself a victim is useless, even if you are a victim. Taking responsibility for your life, no matter what the situation, at least gives you a chance. Life is not always fair. The innocent suffer unjustly at the hands of the wicked. Sometimes we are the victims of our own bad decisions. Sometimes we are simply the victims of the impersonal forces of the universe we mistakenly term Acts of God.

If nothing else, choosing a courageous response in the face of the difficulties we face in this valley of tears gives us an opportunity to live a life with dignity and integrity no matter what the cost.

There are a special kind of people who don’t invoke that clause when any reasonable person would allow them to suspend that contract.

I call them heroes.

If I knew what gave them their courage, I would put it in a bottle and sell it. I don’t know where it comes from, but I know it and respect it when I see it.

I knew a man who suffered complete kidney failure. Nothing I had ever heard about dialysis was good. In my ignorance I believed that either a dialysis patient received a kidney transplant or they would die pretty soon from renal failure. He proved me wrong.

With a consistent courage that I have seldom seen in this world, he just continued to work day after day, year after year to the best of his ability. If he wasn’t able to get to work, he worked at home. He never complained. He never asked for anything more than a chance to keep fighting. He never gave up. It is a humbling experience to meet a man with that kind of character. I am certain I would have gone out on disability after no more than a couple of months of dealing with something as horrific as dialysis.

I saw more in this man than personal integrity in business and heroism in facing a major life threatening tragedy. I also watched him deal with other men. As is true for all of us, life was not always fair to this man. Others take credit for our work. Other men do not always treat us fairly. No matter what the provocation he always took the high road. He always did the right thing when dealing with others even as he was fighting a personal battle I can’t even imagine.

For over ten years he fought the good fight. Finally he succumbed to forces beyond his control. Today he lives in an Eternal Hall of Fame, a fitting place for a hero who faced life with consistent courage and personal integrity; no matter what the challenge; no matter what the cost.

Resumes, Necessary but not Sufficient

In the good old days, one wrote a one page chronologically ordered resume. Since this resume was going to be printed by a professional, one size had to fit all. This generic resume was then placed in an envelope with a cover letter custom tailored for the particular target, sealed, and placed in the mail. During my 1978 job search I did my cover letters by hand in chancery cursive with a calligraphy pen to differentiate my resume from the competition. I sent out about 35 resumes. I got two interviews and one job offer. In 1985 at the dawn of the computer and laser printer age, I once again prepared two (as I recall) generic resumes one for factories and one for laboratories. Again I prepared custom cover letters. I printed them myself both to establish my computer literacy and because printing was free since I had a university computer account. I sent out over 100 pieces of mail. I received two interviews at one company, no job offers, and over 60 rejection letters. I saved this collection for quite a long time. I found it very amusing that all personnel offices use the same rejection letter, “While we are amazed and astonished by your skills and experience, we just don’t have any positions available for someone of your remarkable abilities.” I think that as early as 1985, the computer was devaluing the resume in the hiring process.

Today, while there is little agreement on what should go into a resume, how it should be structured (by chronology or major accomplishments), or even whether a resume is worth anything in the hiring process, everyone agrees that you absolutely need to have a resume.

Some of these questions comes from an article entitled “6 Controversial Resume Rules Even Recruiters Can't Agree On” by Vivian Giang some of it from my own experience and readings.

Everyone pretty much agrees that a one page resume is still the standard since the recruiter will spend an average of six seconds before tossing your resume into an electronic or physical garbage can. I think if you are applying for a position as director of research and development for a Fortune 500 company, you might need more than one page to build your case, hopefully you would need more than one page to list your publications. Maybe the one page resume is still the standard, but have a longer resume to offer your interviewer if she wants more information now that you are deeper into the hiring process.

Nobody seems to agree on an objectives paragraph at the top of the resume. On the one hand it lets the reader know what you really want. On the other hand it can pigeonhole you when what you really need is a job, any job that lets you get your foot into a desirable company. Maybe this is a good place to customize. Like the cover letter of yore, this part of the resume could be aimed at a particular target.

Chronology could be bad if you have long periods of unemployment on your resume. Everyone seems to agree (including personnel officers) that the longer you are without work the harder it becomes to find a job. Personnel officers recommend you tell the truth. List the months you were unemployed and tell them what happened. Professional resume writers (yes, there are such animals) suggest listing chronology by year. This makes it difficult to discover you were unemployed for six months in some given year or subsequent years. Maybe you could try using one of those accomplishment resumes that seem to have gone back out of fashion if you want to hide the blanks.

For a while photographs were in vogue. Now they seem to be out of fashion. Since most resumes are sent electronically, photos can cause problems with the formatting of your resume on an alien computer. Given universal formats like .pdf, this argument sounds weak to me, but photos also provide you age, sex, race, and appearance. That may not be a good thing at a very early stage in the hiring process. I will let you answer that question for yourself.

If you are older, how much of your experience should you include in your resume? Some believe that 15 years is the cut off point. Others suggest as long as it is relevant it should be included in your resume. For example if I was looking for work in management, I would include my experience as a factory supervisor and a supervisory industrial engineer. Even though for all practical purposes those experiences have disappeared into the mists of time, combined with my experience as an engineering project manager, I could show a lifetime of relevant experience.

In 1985, although I didn’t know it, the handwriting was already on the wall. I landed a job I really wanted, not because of what I knew, but because of who I knew. During a university job fair, I pitched my team’s junior design project, an all terrain wheelchair for a little crippled girl. It really worked well and actually appeared on the local TV news. It turned out that personnel officer was the specialist for recruiting handicapped employees. Because she thought our project was pretty cool, she put me in direct personal contact with six different managers each of whom had the authority to give me a job.

Go ahead, prepare your resumes. Send them out in both electronic and snail mail versions. Always carry paper copies of your resume when you are visiting a potential employer. Don’t expect that much of anything will come from all this effort, but it is still part of the process. If you want a job at a particular organization, in the current environment you need to establish some kind of personal contact with somebody on the inside. This will not only give you an obvious leg up on the competition, but it will also provide you with valuable intelligence data. You can learn how people in that company dress, talk, and behave. You can learn their value system. All this will establish you as a person of worth when it comes time for the interview.

Bank Fees! Don't Pay Them!

For 27 years I did not have a bank account. My savings, checking, and credit card were all handled through my little one branch credit union. I simply did not have to worry about fees and mystery charges. Everything was free if you followed a few simple rules, like pay your credit card bill on time. With the death of my mother-in-law we needed a bank with convenient branches in three different states. That meant one of the big four. Working with B.O.A. Citigroup, J.P. Morgan Chase, or Wells Fargo requires a different mind set. Unlike my not for profit credit union (still my primary financial site) they are in business to make money for their managers and share holders.

I started my relationship with one of these banks with a simple premise, I do not pay fees. Ever! You are borrowing my money at close to or exactly 0.0% interest. You then lend it out at rates between 4% and 23% to your customers or victims. If that isn’t enough profit, it is your problem. Not my problem! Over a year and a half they tried to slide charges into my accounts on three different occasions. In each case a phone call to the branch manager resulted in refund. If he did not refund my money, I would have certainly closed that account.

Let’s look at some of these fees. One of the oldest is the monthly checking fee. This can run about $10.00 a month. For most banks this fee is waived if you keep more than $1,500 in the account. Be careful not to get too close to the line. The way the bank calculates the minimum balance is not the way you calculate the minimum balance. True no minimum balance free checking still exists in credit unions and even some banks. If you can’t keep an acceptable minimum balance in your current bank, do a little searching on the web.

Overdraft fees are a veritable gold mine for the banks. Overdraft fees are currently running at $32 Billion a year. From the stories I have heard, these fees are generally triggered by the careless use of debit cards. Not only do you get hit with a $35 overdraft fee but at B.O.A. if you don’t make it right in 5 days you get hit with another $35 fee. If you can’t handle a debit card, lock it up. Use cash and paper checks. Be sure and enter those withdrawals in your check register.

ATM fees are totally unacceptable. You’re charging me to access my money? The average charge for using an out of network ATM is $4.00. Don’t pay them. Ever! Keep enough cash on hand, go to a brick and mortar branch, or find another bank. Schwab runs a bank as well as a brokerage firm. They will refund your ATM charges when you use an out of network machine.

Because I am an old school curmudgeon who still uses paper, I don’t really know about these things from experience but some banks charge $10.00 a month to download information to Quicken. Don’t pay the fee. Use mint.com, Money Strand, or Personal Capital instead. Again I have no experience with any of these programs, so don’t take my word on this without some research.

E Banking with the big four can have its disadvantages. B.O.A. charges its e-customers a $5.00 teller fee for using a brick and mortar branch. If, like me, you need two banks, go ahead. Open accounts with two banks. I still use my credit union as the central hub for various transactions to brokerage accounts, mutual fund companies, and the like. However, I need checks with a local bank as well as quick access to cash. The local branch of the big four bank that handled my mother-in-laws account seems much better than their other branches. I have opened a simple checking account about three miles from my house. That is a lot more convenient than 500 miles from my house. If they disappoint me with fees, I will fire them. They are not the only bank with a branch in my little town.

Start with the premise, “I don’t pay fees. Ever!” There is almost always a way to avoid paying a bank to use your own money. Recently, my wife wanted to help one of her friends who was in a bit of a bind. She needed $400 and she needed it fast. Normally we don’t do that sort of thing. Mixing money and relationships is a dangerous business. Here is a link to a post on the subject of loaning money to friends or family members.

Friends and Family Plan

This time we decided to make an exception. Western Union wanted $35 to move $400. That was not happening. Calls to my bank and credit union indicated that fees for electronic transfers to her checking account would run about $15.00 on my end. I was also told she would get hit with another $15.00 charge on her end. That was not happening. I considered overnighting cash for about $15.00. This would entail the risk of lost mail or theft. I didn’t like that option. Finally, I called her credit union. I discovered that her credit union belonged to a nationwide network of credit unions. One of them was located about eight miles from my house. I could carry $400 (in cash) over to that credit union. The money was directly and instantaneously added to her checking account with no charges. Problem solved.

You simply should not pay fees to have access to your own money. The banks are loaning your money to their customers at whatever rate the market will bear. They are not paying you even a fraction of what they are earning with your money. That should be enough. Other charges for their convenience and profit are not acceptable. Period.

500 Posts: A Time for Reflection

I knew that I was approaching 500 posts on the blog, but I didn’t notice I had past that milestone until I hit 502. It seems like a good time to pause and reflect both on the past and on the future. Those of you have been around for a while know the history of this blog. If not, here is a link to a post I wrote back in July 2010 at the 125 post marker. It seemed like a lot of writing at the time.

A Word About What is Happening Here

I saw so many people causing themselves so much avoidable pain I just had to do something to help.

It all comes down to the money equation.

Money In = Money Stored + Money Out

Pretty simple isn’t it? Over 500 articles fall under one or some combination of the three components to the equation. Some of this material contains very basic teachings. Some of these posts successfully condense complex subjects into simple metaphors. Some seem (at least to me) a bit tedious and academic in nature. Some are a bit abstract and philosophical. On rare occasions I write red faced rants aimed at some outrage or injustice.

I was fortunate enough to be raised in a family that understood how to make certain less money went out than came in. It is a joke in my family that we know how to squeeze a nickel so hard that the buffalo bellows. I was also raised with a third generation fear of debt. During a boom time when other farmers were taking on more debt to buy more land, my grandmother was convincing my grandfather to pay down the debt on the farm. She was right. My family was one of only two families in their part of the county to hold on to their farm throughout the depression. This story was told over and over again at our dinner table. In fact, at age 62 I am blessed to still hear the family stories from my parents. I was also raised by parents who believed whole heartedly in the Protestant work ethic. They might have gone a little overboard making certain that I understood the connection between work and money, but I wasn’t surprised by the world when I was finally out on my own.

I was raised to love and respect education. It is the only way I knew how to jump start the “money in” side of the equation as I moved through my life and my career. The rules have changed. Another degree is no longer a guarantee of anything for most people, other than student debt. I have spent a great deal of time in an effort to understand the rules of the new economy. I have tried to study what is working and what is not working. As I have learned I have tried to share my findings with you, my readers.

Finally, over the last ten or twelve years, I have learned a lot about the discipline of investing. A member of my family is born knowing how to squirrel away money in a bank account. I had to learn what to do with it once I had it. I have been blessed. I am thankful. Now I try to share what I have learned with others, particularly the young. The guarantees I grew up with are gone. I expected that health insurance would always come free with my job. That is no longer the case. Even though my former employer is paying two thirds of my health insurance premium, my share is my largest regular monthly expense. The guaranteed pension is a relic of the past. Saving for retirement is now your responsibility. Social Security? Well I think Social Security will remain in one form or the other no matter what happens, but expect the payments to get smaller. Expect the age for full retirement to increase.

I don’t really know all my readers. One of the disappointments I have faced as I have continued to write the blog is a lack of comments. I have found that people are just about as unlikely to share their money mistakes and problems as they are to share the intimate details of their sex lives. The only readers I am sure I have are the ones who communicate directly with me in person, by telephone, or other means of electronic communication. Some of the posts I have written were written for specific individuals facing specific problems. In some cases I know they have been read and I know the results. In other cases, I can only guess.

If you are having problems with money, I am writing this blog for you. If you want to jump to a higher level, I am writing this blog for you. If you stuck in a dead end, I am writing this blog for you. Overall, I address most but not all the components for a balanced life. Obviously this blog addresses personal finance, business, and career issues. It also touches on personal spiritual issues and how they interact with more worldly concerns. Finally, they consider your legacy. You will carry what you contribute to this world during your life into eternity. While I am writing as a Christian, I think my readers who walk other paths will understand the truth contained this passage.

1 Corinthians 3:11-15

For no one can lay any foundation other than the one already laid, which is Jesus Christ
If anyone builds on this foundation using gold, silver, costly stones, wood, hay or straw,
their work will be shown for what it is, because the Day will bring it to light. It will be revealed with fire, and the fire will test the quality of each person’s work.
If what has been built survives, the builder will receive a reward.
If it is burned up, the builder will suffer loss but yet will be saved—even though only as one escaping through the flames.

When I give away a Silver Eagle, it comes with a notebook. The recipient is instructed to write down something they have learned about money every day. If they face a problem they don’t understand, they are instructed to ask God for wisdom. One of the recipients asked me if I kept a notebook. The question caught me off guard, but I quickly realized this blog is my notebook. I am just sharing everything I have learned with you, my readers.

I am still learning. If you read all 500 posts you will notice my understanding of these subjects continues to deepen with time and experience. I don’t have all the answers, but I continue to study, every day. I even study authors with whom I have serious disagreements. Bruce Lee said it very nicely, “Absorb what is useful, discard what is useless, and add what is uniquely your own.”

Go thou and do likewise.

The Way of The Value Investor (Part III Conclusion)

The first rule of making money is, “Don’t lose what you already have.” Keep an age appropriate percentage of your money in a wide variety of relatively safe stable investments. Don’t put too much at risk at one time. This is particularly true after retirement. When you are no longer a part of the workforce, it becomes very difficult to recover from financial disasters. When you are young you can take more risks, but only after you pay off those credit cards and build up an emergency fund. “Safe” includes investment grade bonds, Treasury Bills, Government National Mortgage Association (Ginnie Mae) funds, cash (insured money market funds and the like).

For new readers, your age in bonds, cash, and CD was the old rule of thumb. Hence, at age 30 one would hold 30% in safe investments and have 70% of their holdings in stocks and stock mutual funds. The new rule of thumb is based on the fear of inflation. It recommends your age less 15% in safe holdings. Hence, at age 30 one would hold 15% in safe investments and 85% in stocks. Even the young who are playing with relatively large amounts of time and relatively small amounts of money need to keep some powder dry. When the market tanks, and it will, that money will allow you to purchase once in a decade bargains.

Value stocks with a low beta are all good bets for capital preservation. Beta is a measure of volatility that can be found on quote pages on sites like Google Finance. A beta of 1.00 means a stock is as volatile as the market. Less than 1.00 means it is more likely to be safe and boring. Greater than 1.00 means the stock moves faster than the market, both on the way up and on the way down.

The Price Earnings Growth Ratio, commonly called the PEG ratio, is the PE ratio divided by the company’s growth percentage. Let’s say a company has a PE ratio of 20 and it has been growing at 10% per year and you expect it to continue to grow at that rate. The company has a PEG of 2. The lower the PEG ratio the more likely the stock is a bargain. A PEG ratio of 1.0 is considered neutral.

Peter Lynch, the genius who managed the mighty Magellan Fund during its glory days, put a slightly different spin on this measure. He suggested adding the growth rate to the dividend payout, then dividing the result by the P/E ratio. Hence a stock with a growth rate of 7% plus a dividend of 3% divided by a P/E ratio of 15 would be 0.67. This would be pretty typical in today’s market. Peter Lynch considered under 1.0 poor, 1.5 neutral, and over 2.0 good.

As an engineer and an embittered old cynic, I have a problem with the PEG ratio as well as the more sophisticated number suggested by Peter Lynch. I am very comfortable with interpolation, the art of taking two know points on a graph and estimating the value of an unknown point between the two known points. I am not so happy with extrapolation. A trend is a trend until it is no longer a trend. The line on a graph may be linear up to some point and then take a wicked curve in the opposite direction. When I plug a number into the denominator of the PEG ratio, do I use history and extrapolate, or do I just make a guess after looking into my crystal ball? Neither option appeals to me.

Buy what you love. One of the first and best places to begin your research would be your favorite companies. What companies do you love? My wife loved Yankee Candles. I thought that scented candles were a pretty stupid idea. Any fool with a stove, a pot, some wax, and some scent could make the things. My wife assured me that Yankee Candles were different. When the company went private a couple of years later we came close to a three banger. We almost tripled our investment!

Don’t buy what you don’t understand.

One of the most successful investors of the 20th century, John Templeton observed, “If you don’t understand what you’re investing in – don’t invest!” This advice will save you from an enormous amount of pain. I consider it the prime directive of investment. Yes, you will miss a few opportunities, but sometimes the certainty of not losing money is more important than the chance to make money. The art of investing, unlike the game of baseball allows you to wait for your pitch; you are never out on called strikes in investing. Warren Buffett observed, “The problem when you’re a money manager is that your fans keep yelling, “Swing you bum.”

The Way of The Value Investor (Part II P/E Ratio)

After identifying a righteous sustainable dividend in quality well managed company, look at the Price Earnings Ratio (P/E). This number represents the price of a share of stock divided by the earnings per share. For example if a share of stock costs $50.00 and the earnings per share is $2.50, this stock has a P/E of 20. All things being equal (they never are equal) a lower P/E ratio indicates the possibility of better value. Historically across the market 16.0 seems to be about average. Robert J. Shiller is famous for applying P/E to the entire market. The Shiller P/E index is a pretty good indicator of the future value of an average stock purchased in the market today. Under 16 it will be relatively easy to find bargains. Currently, the Shiller P/E ratio is 19.75, high but not dangerously high. History indicates that if the Shiller P/E ratio goes over 25, the market is heading for a fall. In early 2009 the Shiller P/E index dropped below 15 at such levels a blind monkey can pick winning stocks.

The key to using the P/E ratio is to help locate sustainable high dividends. Over the last 50 years, the number one best single stock you could own has been the cigarette manufacturing company the Altria Group (MO). Because of the fear of law suits, high taxes, and government regulations these stocks have been persistently undervalued. For the same reasons cigarette companies have been generous with their investors. They would rather see their shareholders get their profits than passing the loot to governments and lawyers. History indicates that these fears were somewhat unfounded. Government really doesn’t want to stop smoking. They would lose all that tax revenue. Money lost to the lawyers can be passed on to today’s smokers. Finally, it is a big world out there and American cigarettes are still the gold standard for coughin’ nails. Today MO has a P/E ratio of 14.40. It pays a dividend of 5.17%. Try and find that kind of return on a bond or CD. It has a payout ratio of 80.0. That’s a little scary, but as I mentioned, they are generous with their investors. For the record, I do not own MO. My wife does not wish to be a merchant of death. I respect her wishes. She does own a very small amount of a cigarette company in her managed IRA. However, if you won’t tell her, I won’t tell her. Also, “ethical” investing is impossible if you have anything in mutual funds. There is no telling what you have somewhere in that stew of 200 or more companies.

Patience in investment, as in life, is a virtue. Don’t think in terms of annual or quarterly return on your investment. Look at the long term. Buy cheap and hold. Think like a catfish. Sit on the bottom and wait. Something tasty will show up.

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

The Way of The Value Investor (Part I Dividends)

Personally, I recommend beginning your investment portfolio in a diversified, age appropriate mix of low cost index funds. Normally, this process would start in tax favored retirement accounts such as 401 (k), 403 (b), traditional IRAs, and Roth IRAs. Once you have that foundation in place, consider the way of the value investor. The definitive text on this subject is The Intelligent Investor by Benjamin Graham.

The value investor attempts to buy (and occasionally sell) stocks just as he would make any other purchase, the highest possible quality at the lowest possible price. Almost all products follow an S shaped price performance curve. Consider: You can purchase a car that can go 60 mph for $300. You can purchase a car that can go 100 mph for maybe $6,000 or $7,000. If you want to drive on the Interstate at 160 mph, be prepared to part with over $60,000. If you want a car that is capable of 200 mph, you will need more than $300,000. What is your top speed on that morning commute, 80 mph while passing a truck on the Interstate? How much did you pay for 350 hp under the hood? How often will you actually need to use that kind of power?

Always start with quality. Look for the “wide moat.” How difficult would it be for someone to start a business in competition with the stock under consideration? A wide moat is an economic advantage that is very difficult to overcome. Imagine building a new railroad to compete with the Union Pacific Railroad out in California. That is a wide moat. Coca Cola (KO) is an obvious example. They have the most valuable trade name on the planet. Dasani, Coca Cola’s bottled water, is a popular brand in India, because people trust their products. A wide moat is not limited to large companies. I once met a man who owned a small company that produces specialty products for use in deep oil wells. In his colorful Texas vernacular he informed me patents weren’t worth a damn. His goal is to produce the highest possible quality then sell for a price that is so low, no one will dare compete with his products.

Next, look for a righteous dividend. “Righteous” will vary from industry to industry and will depend on the size and age of the company. Be careful to compare apples to apples and oranges to oranges. Buy things that pay you to own them. Try to avoid wasting money on things that cost to own. This is one of the key principles to building wealth. Consider: A smart phone might cost $500 plus $100 a month. What do you really do with that thing? If you use it as an important tool in running your business, more power to you. If you use it to surf the web and update your facebook page while at work, consider a better way. Verizon (VZ) pays a 4.19% dividend and offers some possibility of future capital gains. At 4.19% without any capital gains a $500 initial purchase of VZ shares plus a $100 a month over ten years will amount to $15,620.58. Can you live with a less expensive phone? Can you invest the difference? Hopefully, dividends will be the number one source of your income in retirement. Studies have shown that over half of your total investment returns will come from dividends.

Yield, the return on your dividend, consists of two parts the price of a share of stock and the dividend per share. If a share of stock costs $50.00 and the dividend is $2.50 per share, the yield is equal to 5%. That money is paid out to you. Every quarter (usually) the company deposits an amount equal to the number of shares you own multiplied by the quarterly dividend into your brokerage account. That money belongs to you. You can take that money off the table if you need the income or you can chose to automatically reinvest that money in more shares of the same stock without any brokerage fees. This is called DRIP (Dividend Re Investment Program) investing. It is a simple potent way to put the power of compound interest to work for you.

There is another component to determining what constitutes a “righteous” dividend. Is it sustainable? If you are lucky enough to buy an undervalued stock paying, let’s say a 3% dividend, and it doubles in price; you are effectively receiving a 6% dividend. The first quarter of 2009 was a perfect opportunity for this kind of bargain hunting. However, bottom fishing is not without its risks. Sometimes that stock is undervalued for good reasons and that juicy dividend is not sustainable. Watch the cash flow. Dividends should not be consuming too much of a company’s profit. The dividend payout ratio is the amount of money distributed to the shareholders divided by total earnings. If a company paid out $1 Billion in dividends from total profits of $4 Billon, the payout ratio would be 25%. Various rules of thumb have been proposed to define a sustainable dividend. If the payout is over 60% you are in a danger zone. Such a stock might be a “value trap.” If you choose to buy such shares, understand the risk. Between 40% and 60% watch not only the number, but the direction of that number over time. If a dividend payout ratio is 50% and climbing that is not a good thing. If it is 50% and falling it is probably a better deal. Under 40% you are probably OK. Again, an acceptable number varies from industry to industry. Be sure to compare a potential investment to its peers.

A good place for the value investor to start his search would be with a list of Dividend Aristocrats. These stocks have increased their dividends every year for at least 25 consecutive years. Once a company makes it on to this list, it is going to try to remain on the list. Even for a company that is not a dividend aristocrat, cutting dividends is a sign of weakness that often results in bloodshed on executive row. These are the stocks you can ALMOST buy and forget. Sometimes they are called widow and orphan stocks. Dividend aristocrats are good candidates for your core equity holdings. Unfortunately nothing is perfect. GE was a dividend aristocrat until it wasn’t. I took a beat down on that one. Various advisors would also include regulated utilities, consumer staples, and other “wide moat” companies as possible candidates for your core equity holdings.

Ugly Debt

There are certain subjects that I shouldn’t have to know about or cover in this blog. I doubt that anyone reading this will ever or has ever been victimized by this blight, but perhaps the day may come when you can help another avoid the trap of payday loans.

Personally, I think payday loans and title loans should be illegal. You see the neon signs on the wrong side of town offering check cashing services, money orders, and loans to the poor, the ignorant, and the desperate, essentially banking services for those without banks. The people operating these businesses claim that they are providing assistance to a community in need of access to basic financial services. They are sucking blood from the poor and from their impoverished communities. The Bible explicitly states that the people who run such businesses are in the Lord’s gun sights.

Proverbs 22: 22, 23

Do not exploit the poor because they are poor and do not crush the needy in court.
For the Lord will take up their case and will exact life for life.

A typical charge for a two week payday loan is $15 per $100 loaned. That works out to an annual percentage rate of 3,686%! Credit cards that charge 23% are generally considered usurious.

The people that are placing themselves under such horrific burdens are generally using the money to cover normal everyday living expenses. They don’t know any better and they do not believe they have any alternatives. However, if they didn’t understand the concepts of budgeting or saving for a rainy day, they will learn the discipline of saving their money, but for the benefit of a predatory lender. Fortunately, in this country there are limits to what these people can do to collect from their victims. In some countries, like India, these kinds of loans can lead to a lifetime of legal slavery.

Title loans are a step up from payday loans. They require that the victim own clear title to a car. Using the vehicle as collateral rather than granting an unsecured loan, the title loan company then offers a loan that can range from $100 for two weeks up to 50% of the Kelly Blue Book value of the car. Interest rates on these loans can range from 36% APR to 400% APR depending on the jurisdiction. Frequently they require a balloon payment at the end of the loan. If the debtor can not make the final payment, no problem, the store front loan company will cheerfully continue to bleed their victim. Really, I don’t think they want the car. They want a debt slave. However, sometimes the victim also loses their car.

Public schools should be teaching the basics of financial literacy. Children, no matter the socio-economic class of their parents, should understand the basics of saving for a goal and the concept of an emergency fund. If you ever have an opportunity to steer someone away from this kind of victimization, go ahead; light a candle in the darkness. If payday loan companies can not be outlawed, they should at least be tightly controlled by state and Federal regulation.

Oh, by the way, just because you have access to the mainstream banking system doesn’t mean that you can not become a victim of predatory lending practices. Check out these numbers from Wikipedia!

$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR

The Way of the Elf (Technical Analysis)

Poker is not a game of chance. It is a discipline that involves the use of probability theory, logic and psychology; strategic thinking, bluffing, and reading the opponent. Yes, even the best players can’t win if they don’t get the cards, but the same faces seem to have a way of appearing over and over again at final tables of the big tournaments. Although poker is a game popular with millions, very few people will ever earn a living as poker players. To most it will become an occasional distraction. They will lose or make a few bucks playing with their drinking buddies. Even in those games, I expect the winners and losers are pretty much the same people from week to week.

Technical analysis is a method of predicting the movement of stock prices by studying past market data including opening prices, closing prices, daily highs and lows, market volume, as well as historical averages and derivatives calculated from this data using various mathematical formulas.

Let me be honest. I am not a trader. When I buy a stock, I do so with the expectation of keeping it forever. Of course, if a stock gets so high I can’t sleep at night or it drops and doesn’t come back, I will sell it. However, trading is not what I do. There are people who make their living studying and practicing the discipline of technical analysis. In fact, the hedge funds that were at least partly to blame for the crash of 2008, applied the principles of technical analysis to what is termed high frequency trading. They used sophisticated computer programs that analyze real time trading data looking for anomalies that signal large scale movements such as those made by mutual or pension funds. Their computers then execute orders faster than the human players in the market can possibly respond. These programs are the result of decades of research and millions of dollars invested in programming and hardware. They really work; at least most of the time. When they fail, it is spectacular. It isn’t illegal, but don’t think for a minute the little $3,000 technical analysis program running on your PC will ever be able to compete with great investment banks or even the major hedge funds.

Most of the people who attempt to practice technical analysis are frequently called day traders. They are not investors (those who buy for long term gains) or traders (those who buy and sell for short term gains). They are gamblers. They buy and sell on hunches, instinct, and emotion. They tend to end up in bankruptcy court.

If you decide that you want to try your hand at technical analysis, decide in advance how much are you willing to lose in this experiment? Set that amount and no more aside and account for it (including all brokerage fees) in an Excel spread sheet.

Become an expert. Decide what you are going to trade, a particular stock, stocks from a particular area, an individual commodity or something similar. Learn all you can about that stock, its price history and absorb all the fundamental research you can find. Yes, just like all value investors are aware of technical analysis techniques, all traders need to understand the underlying fundamentals of their stock. Consider, Bank of America. Its price is extremely sensitive to public perception, changes in accounting rules, law suits, and major moves by powers like Warren Buffet. Even as you buy and sell on price movements, you still need to understand what is driving these changes.

Once you have decided on an area of specialization, take a few months to play the game with “practice money.” This is good advice for any novice investor who wishes to make their first move from a balanced portfolio of low cost index funds and conservative dividend stocks to more exotic, risky investments like precious metals, technology stocks, small cap pharmaceuticals, covered calls and the like.

Before you make a buy using real money, write down something coherent in your Excel spreadsheet explaining why you are making that buy. Recording your logic for further study is an important part of the learning process. It will help you build your decision making model and then constantly refine it.

Likewise, when you sell a stock, write down why you sold it and study the results.

Successful traders recommend setting price targets and using stop loss orders as a further discipline that will take emotion out of the decision making process. Emotion is always the enemy of successful investing. It will cause you to buy at market peaks and sell at market bottoms, exactly what you should not be doing.

Here is how the process works. At the time you put in your order to buy a stock at market price. Set a stop loss limit. What this limit might be is up to the individual investor. Some people recommend 10% as a maximum acceptable loss in any given trade. The stop loss order will trigger a sale if the price drops to your predetermined number. Do this on the day you purchase the stock and never, ever, for any reason change it to a lower number. If you lose 10%, so be it. Learn from your mistake, take the tax loss, and move on. If your stock goes up in value, reset the stop loss number to reflect that increase. That way you will never lose more than 10% of the current value of your investment.

Some traders take it a step further. They will set a price target on the same day they buy the stock. I remember one author thought that if one of his trades went up by 25%, he should take his winnings and look for a new opportunity.

As you make your trades, always entering them into to your spread sheet calculating the gains or losses, you will watch your starting number (the maximum you are willing to lose) increase or decrease. If you lose all your money, you are obviously not a trader. If the process makes you excessively nervous, you are not a trader. If your stake increases and you find the adrenaline rush of buying and selling is better than sex (just kidding) you are a trader.

Also, remember if any given investment is small, say 1% or 2% of your total portfolio, even a bad loss in that particular stock won’t kill you.

P.S. The title? The practitioners of technical analysis are frequently termed "elves" in the financial press.

Money Questions

I just read an interesting article entitled “Why Warren Buffet and Sam Walton Got Rich, and You Won’t” by John Maxfield. In a nutshell, the most successful people really aren’t all that interested in money. At most it is a way of measuring success. Sort of like a kid playing a video game. Yea, he wants a good score, but mastery of the game is the real driving force.

Warren Buffet is famous for driving around in an old car and still living in a house that cost $40,000 when he bought it decades ago. Sam Walton is quoted as saying, “Money has never meant that much to me, not even in the sense of keeping score.”

It is about the game; not the score.

Richard Russell, author of the Dow Theory Letters, differentiates between rich men and poor men.

“In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.”

“The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.”

“But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).”

Does money control you or do you control it?

Who is in charge? Do you tell your money where to go and how to behave or does it control you? Many people just spend money without thought or plan until their mandatory monthly expenditures approach or exceed their take home pay. When this happens, the money in your life has just transitioned from under your control to in control of you. Think about it, your money now controls you. You can no longer go and come as you please. You must work to earn money that already has a designated purpose. For all intents and purposes you are a slave.

Proverbs 22:7
The rich rule over the poor, and the borrower is slave to the lender.

There is hope. The goal is freedom. You can gain control of money just as you can gain control of any problem in your life. Finding the solution will take some effort and some time, but the end result is freedom, the ability to live your life as you desire.

Is money your friend or your enemy?

Like it or not, you have a relationship with money. Is it a good relationship? Is it healthy? Does your money encourage and support your goals or is it an impediment to what you truly want to become. As your salary increases over time did access to more money give you an opportunity to indulge your lusts and vices or did it turn you towards freedom and light.

Do you hate money?

Do you think that money is evil; something that is out to destroy you? Is it likely that such a belief would help you or hinder you as you move through this vale of tears? When you sit down at the end of the day to balance your checking account if you use a debit card for everything or at the end of the month if you use a combination of cash and paper checks, what emotion do you feel. We are warned in scripture that the love of money is the root of all evil. However, a hatred of money is no more constructive than an unhealthy love of money. In the end it is only money, a tool that can create good or evil in your life. Learn how to use it in healthy productive pursuits. It will be a blessing. Learn how to give it away. In the end it isn’t yours anyway. You can’t take it with you is an old truth. However, you can leave a legacy of blessings for others that will last long after you go the reward that really matters--in eternity.

Do you fear money?

Put a dollar bill on a table. Look at it. Rub it between your fingers. How does it feel? Does it make a noise when you crumple it up? Does it have a smell? Maybe it kind of smells like your wallet? What is it? Really, money is a measure of energy. You had to expend energy to get that piece of paper, mental energy, emotional energy, time, physical labor are all contained in that little piece of paper. It is a piece of your life. You expended energy. Now you hold in your hand a bit of potential energy. You control it. After you pay your taxes, you get to decide how to use it. There is nothing to fear. It is your money. You are in control. Think about that every time you touch a piece of currency; every time you write a check; every time you swipe the plastic; remind yourself, “This is my money. It is a measure of how I choose to expend the energy of my life.” Watch your fears dissipate, vanishing like mist in sunlight.

Do you lust after money?

Remember that ultimately your treasure is in heaven. Of course we work, not only for the basic necessities of life, but for the pleasures that make life worth living. When you have saved enough money to pay for your midlife crisis car, more power to you; enjoy the fruits of your labor. Just remember you have not been blessed just to see how many possessions and experiences you can accumulate before you die. Share your blessings with others. This isn’t limited to money. In fact money is only the first step in a long journey that ends in a heart that is open to others even when that proves a very costly and painful gift.

A link to a famous short letter on investing by one of the masters, Richard Russell.

Rich Man Poor Man

Marketing (Know Your Enemy)

"Marketing is the process of communicating the value of a product or service to customers, for the purpose of selling that product or service."
Wikipedia

They’re everywhere and they are out to separate you from your money. They are some of the smartest most creative people on the planet, backed by best high technology money can buy, psychologists, statisticians, and sociologists. They are watching you, studying your behavior, and planting their messages deep in your mind.

Outdoor Advertising
Newspaper Advertising
Magazine Advertising
Direct Mail
Radio Advertising
Television Advertising
Internet Banner Ads
Email Advertising
Social Media Advertising

I just read that the total amount of money spent on advertising in 2011 was $464,000,000,000. That is 464 Billion; with a B dollars. This money was spent by flinty eyed, hard nosed businessmen for one reason. It works. Of course they want your undivided attention. They want to tell their story. They do not want you to dump spam emails without opening them, but they do not need your undivided attention. Radio ads are subconsciously delivering their message even as your mind is focused on something else. Certain ads intentionally distract your mind to subconsciously deliver the message. Men, consider beer ads that feature bikini girls jumping around in front of flashing lights. You are not paying attention to the message but it is registering in your brain. Women, whenever you see a strong handsome man holding a baby or playing with a little puppy, someone is coming after your money.

"Data mining (the analysis step of the "Knowledge Discovery in Databases" process, or KDD), an interdisciplinary subfield of computer science, is the computational process of discovering patterns in large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics, and database systems. The overall goal of the data mining process is to extract information from a data set and transform it into an understandable structure for further use. Aside from the raw analysis step, it involves database and data management aspects, data pre-processing, model and inference considerations, interestingness metrics, complexity considerations, post-processing of discovered structures, visualization, and online updating."
Wikipedia

According to a 2009 article from the New York Times entitled “What Does Your Credit Card Company Know About You?” the data mining revolution began back in 2002 at Canadian Tire. One of their executives, J.P. Martin began to analyze every single credit card transaction from the previous year. As he sorted through this data he discovered our purchases were “a window into our souls.” What we bought as well as the brands we bought were in and of themselves very good predictors of our willingness to pay off our debts. Some his discoveries seem pretty funny, “People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.”

Every time you walk into their store, every time you use your credit card, or one of those loyalty cards that hang from your key ring, they are watching you. 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.

“Marketers must shift their focus entirely from “telling and selling” to “listening and learning.” Customers do not want marketing relationships with your company they want service relationships.”
Hans Peter Brondmo

This quote captures the essence of what is called new paradigm sales, a theory that begins with the notion that every person has his own values and goals. These are not the same as your values and goal but they are every bit as valid and valuable to him/her as yours are to you. These techniques require a marketer to listen to the needs the prospective client. Rather than pitching a product, you as the facilitator allow the customer control of the content of the conversation. In this model the sales person controls only the structure of the conversation, allowing the customer the opportunity to discover her own needs through carefully constructed questions that lead the client to a conclusion that makes them believe buying from you is safe. The goal for the new model marketer is not to treat every prospect as a potential sale but to treat every prospect as a potential profitable relationship.

The utilization of social media, such as Facebook or Twitter is still in its infancy but consider how much information is available, personal information. Right now companies are just using banner ads and an occasion “like this” ad in your stream. If you like it, they spam you. Sooner or later, they will get smart and begin to tailor what you see to who you are. Remember, you are the only product that Facebook has to sell to its real customers, the ones who pay the bills. Consider, what if a really smart marketer determined I was interested in investments from data mining my Facebook page. He already knows my age. He could learn from my posts that I am retired. How valuable is that information?

The best marketing organizations already understand retention is the name of the game. This has been called “Thank you” marketing. The casinos in Las Vegas have been living on this for years. Their best customers receive a limousine ride to their local airport where a private jet will whisk them to Las Vegas at no charge. Even when a really small time gambler who worked in my office went on an annual trip with his buddies to a second tier casino in Vegas they upgraded their rooms, gave them money to put in the slot machines, and discount coupons for their meals. Loyalty card programs are beginning to offer coupons that you might actually want to use based on your buying patterns. Say you buy a bag of coffee every two weeks. Right before they think you will be buying your next bag of coffee, you will magically receive a discount coupon for a more expensive brand. As the use of Facebook or Twitter or the “next big thing” become more sophisticated, thank you marketing will become more personal and more important.

This is for churches.

“Suppose one of you has a hundred sheep and loses one of them. Doesn’t he leave the ninety-nine in the open country and go after the lost sheep until he finds it?"
Luke 15:4

Some marketers have even figured out the parable of the lost sheep. Why would the good shepherd leave the ninety and the nine to waste his time on the one? This doesn’t make any sense. Why would Steve Wynn, one of the men who built Las Vegas, celebrate and reward his employees when they engage in this kind of activity. Why would the Internet millionaire, Gary Vaynerchuk, tell stories about giving ridiculous levels of personal service even when it does not make any financial sense? They understand it isn’t about the lost sheep. It is about the ninety and the nine who are talking with their friends in person, on Twitter, or Facebook. How many thousands could ultimately hear your story because, just for a couple of hours, you left the ninety and the nine?

These very smart men know there is another Bible verse that applies the shepherds who understand the parable of the lost sheep.

My sheep hear my voice, and I know them, and they follow me:
John 10: 27

Too Soon Old Too Late Smart

It was a while ago so I don’t remember the particular event, but it was one of customer service center phone calls. I think it may have had something to do with the estate bank account. We were hit with an unwarranted fee. It was going to be removed or the account would be terminated. Period. I was not a happy camper. After going through the phone tree and listening to several minutes of elevator music punctuated with apologies I had the opportunity to speak with a human being who could actually speak English. She removed the offending fee or fixed the problem. Then I hung up the phone. My wife observed, “You didn’t say thank you.” She then preached a little sermon on the virtue of saying thank you to people who actually do what you want them to do for you.

Mea culpa, mea culpa, mea maxima culpa.

I think I was pretty good at saying thank you in the workplace, but I probably have been pretty bad about rewarding (through a simple thank you) behavior that I want even if I didn’t get the desired result or in the case where getting the desired result was a pain in the butt. Behaviorists have demonstrated that the most effective method of conditioning involves rewarding the desired behavior; not the desired result or punishing undesirable behavior. I think anyone who has ever tried to train a child or a puppy understands this concept.

I am trying to do better. I don’t like saying thank you to people who are just barely doing their job or who work for an organization that is manifestly not doing its job, but I am trying to improve. I am willing to admit that my wife and my mother are probably right on this one.

I like to really mean it when I say thank you. When a clerk goes to the storage area to determine if they have something that is not out on the shelf, I thank them profusely whether they find what I was looking for or fail in the attempt. Sporadically, throughout my life I have tried to put some teeth in my thank yous for really extraordinary performance. Most recently I wrote a letter to the president of my first alma mater, detailing the extraordinarily excellent performance of one of his ticket agents. One time she opened her office and fired up her ticket machine an hour early just for me. On the second occasion she gave me a free upgrade to better seats because she could not provide me with what she considered acceptable seats. If he had six more employees like that one working in his ticket office, I believe ever game would be a sellout.

Hey! It doesn’t cost you anything and it just might make the world a better place. Can you imagine a world where your boss noticed what you were doing and actually thanked you for desirable behavior?

Why do I have this memory of my mother saying in that tone of voice that mothers get, “Say thank you to the nice man.”

An Old Man Meditates on The Jobs of a New Millennium

I was born into a world where a high school graduate could reasonably expect to support his family with a somewhat unpleasantly mindless job in a factory. If he was even half way reliable, he could expect near lifetime job security minus a layoff or two here and there along the way. The same job would provide the employee and his family with health insurance. After thirty years of faithful service, he could expect to receive a gold watch and a guaranteed pension. A little further up the socioeconomic ladder a college degree, any college degree guaranteed a white collar job in some factory back office, a bank, or some Governmental sinecure. A degree in a technical or medical specialty guaranteed a good paying job for life.

That world is gone. Globalization, automation, and regulations (particularly environmental regulations) have eliminated something on the order of 20,000,000 industrial jobs in this country. American industry, once the wonder of the world, generated the surplus wealth that allowed an unprecedented quality of life for even average men and women.

If your job can be outsourced to a lower cost subcontractor in this country or a low wage worker in some third world country, your job will be outsourced. If the task you perform on the assembly line or even if you practice a skilled trade, if you can be replaced by an intelligent automated machine tool or a programmable robot, you will be replaced. This applies equally to white collar jobs that are disappearing into the cloud. If regulations make an industrial operation unprofitable in this country, those jobs will migrate to a less regulated region of the world. The Chinese in particular are intent in building their country into a first class superpower. A few million dead from industrial pollution is considered acceptable collateral damage.

Today we are maintaining the illusion of wealth through two income families and borrowed money. There will be a future. Some will become successful, but that future will demand new assumptions and new skill sets.

First, do not assume that you will be able to support yourself throughout your lifetime with one skill. Even technical and medical skills can grow stale. Certification in some computer specialty that is in high demand today will be worthless tomorrow. The ability to operate a hard chrome plating bath is of no value when regulations limiting exposure to hexavalent chromic acid fumes shuts down your plating operation.

Think like an employer. Ask yourself, what am I worth? If you want to earn $40,000 a year, understand that you are costing your employer somewhere between $60,000 a year and $80,000 a year depending on the overhead associated with your industry. Would you pay yourself $75,000 a year for what ever it is that you do? If you want that job you will need to provide at least that much value to your boss or he will go out of business.

The best way to increase your value to your organization is to increase your own personal value. How can you make yourself a more valuable human being? What skills can you add to your toolbox that will make you a more desirable employee? What are the problems and questions that keep your boss awake at night? How can you answer those questions?

Of all the skill sets that will be required in this brave new world, I believe entrepreneurship will be the number one, most important skill. When I was in school we were not even taught how to spell entrepreneur let alone how to become one. We were taught how to sit in rows and obey orders. Those were valuable skills on an assembly line in the industrial age. They are no longer of much use.

An entrepreneur needs:

The ability to spot opportunity
The ability to properly evaluate risk
The ability to sell a product

Psychological and social skills including:

The ability to engage others, generally (networking)
The ability to negotiate with other organizations
The ability to organize and inspire employees

Oh, let me mention sales skills a second time.

English is still the worldwide language of science, technology, and business. This is gradually changing as globalization continues to develop. As the newly industrialized states of the developing world begin to generate surplus wealth, they will develop their own technological and financial infrastructures. The ability to speak a second language, now a luxury, will become a necessity. A second language by itself isn’t worth much, but a second language combined with a valuable technical or business skill set will make you an extremely valuable employee in this country or in another country. Your children or grandchildren may become immigrants even as your grandparents or great grandparents were immigrants in this country.

Because one skill is no longer enough, dedicate yourself to becoming a lifetime learner. The world is constantly changing. There is no guarantee that what you are doing today will be of value to anyone tomorrow. Look for opportunities to study new subjects or keep your current specialties current. I think this is particularly true in the scientific and medical communities, but even more humble trades like the automobile mechanic have become technical professions requiring advanced computer diagnostic tools as well as specific certifications for particular types or brands of vehicles.

Do not believe that another degree or certification in another computer language will guarantee your future any more than that first degree that didn’t get you a job. Once you have that new skill, find a way to practice that new skill, even if you need to start your own business.

Teach others even as you learn. Knowledge and wisdom are the only things that you still possess once you have given them away. If you are able to successfully teach a skill to another you will find that you have deepened your own understanding. You have also made the world a better place. That will not go unrewarded.

Think Like a Sicilian

You know the story. Virgil “The Turk” Sollozzo has a dream. He wants to become the drug kingpin of post World War II New York. He has the connections necessary to bring the drugs into this country, but he lacks a distribution network, start up cash, and political and police protection for his new business. An alliance with the Tattaglia family provides him with a supply system through their prostitution network, but only one man in New York has all the judges and politicians in his pocket, Don Vito Corleone. The Turk sets up a face to face meeting with the Corleone family. In exchange for $1,000,000 in cash, as well as political protection for his racket, Sollozzo offers Don Corleone a 30% interest in his business, “Three or four million in the first year. More after that.”

Don Corleone declines, but as Tom Hagen, the family consigliere, observes Virgil Sollozzo is a Sicilian. He is not a man who will take no for an answer. Sollozzo, a new immigrant just off the boat, orders the murder of Don Vito Corleone, the most powerful mob boss in New York. The failure of this assassination attempt results in an all out bloody gang war involving all the Five Families. Sollozzo attempts a peace meeting with Michael Corleone, a man he seriously underestimates. It turns out that like the Turk, Michael Corleone is a Sicilian. Along with the key members of the family, Michael plans the murder Sollozzo. Michael is willing to murder the man who attempted to murder his father, no matter what the cost. If he dies, so be it. If he spends the rest of his life in exile, so be it. If he ends up in the state electric chair, so be it.

No matter how much it costs; no matter how long it takes; no matter how much effort is required; Sollozzo will die.

In the course my work in this ministry I am confronted by people with very serious problems. Some of them have lost a job. Some of them are heading towards bankruptcy. Young people are facing the option of no education or crippling student debts. When I consider these problems, I feel as though I am standing on holy ground. What I say may change the course of a life for good or evil. It is difficult, because while I can provide the basic tools necessary to help solve a particular life problem, I can not live another person’s life.

Many of these situations require something more than tools. They require a personal commitment that says, “This game isn’t over until I have won.”* There is a time for thinking like a Sicilian. I am not suggesting you tape a handgun to the back of a toilet to murder your former boss. I am suggesting that you make the decision: No matter how much it costs; no matter how long it takes; no matter how much effort is required I will achieve this goal. I will find a job. My family will be debt free. I will graduate from college without student loans if it takes me 10 years of night school.

In looking at my own life, there are only three times where I made this kind of commitment. Like Tom Hagen, I am German Irish, not a Sicilian. I am not a super competitive kind of guy, but there were three times that you simply did not want to get in the way of what I was trying to achieve. In each case the results were life changing.

In 1969 I decided that I was going to marry the woman who became my wife. I wasn’t going to take no for an answer. If plan A wasn’t working, I tried plan B, plan C, and plan D. I never gave up. It took over five years, but we have been married now for almost 39 years.

I decided I was going to engineering school so that I could leave the American factory forever. I didn’t have any money and I was told I would be a C+ student. That didn’t matter. School became my job. If 50 hours a week wasn’t enough, I would work 60. I learned how to get free tutoring from professors. I learned how to collect homework, class notes, and tests from previous semesters to bolster my own efforts. I got a scholarship and a work study grant. I even managed to obtain a key to the building so I could work on the computer network on weekends when the building was locked. I graduated with a 3.8. I found a job in Research & Development.

I started the final run to retirement when I was about 50 years old. Don’t make the mistake of starting that late. However, I went after that goal with a ferocity and passion that matched anything in my life. Losing 20%-25% of my money in 2008 only served as motivation to increase my efforts. I continued to invest all the way down. Then the market came back. In one year, through savings and capital gains, I increased my net worth by more than my total pretax income from my full time job. I was able to safely retire at age 62.

There are times in life when it is appropriate to think like a Sicilian. I can’t tell you when you are facing one of those situations. Ask God. Ask your heart. I think you will find the answer. If you are facing something that is threatening your family or the basic quality of your life, make the decision, “This game isn’t over until I have won.” No matter how much it costs; no matter how long it takes; no matter how much effort is required I will achieve this goal.

If you lost your job, do not say, “I am unemployed.” Instead tell yourself you have a new job looking for work. If you worked 40 hours a week at your old job work 50 hours a week at your new job.

Don’t limit yourself to personnel officers and financial aid counselors. While you should use their services, remember part of their job is keeping people like you from reaching your goal. If you want to work somewhere try and meet people who already work there. If you want to get a scholarship or a grant begin to cultivate relationship with your faculty. Somewhere there is a man who has powerful friends, a million dollars in cash, a man who carries around politicians in his pocket like so many nickels and dimes. Somewhere there is a man or a woman who could provide you with a job or a scholarship. It is part of your job to find out who has that kind of power. It is part of your job to convince them that they need to change your life.

It turns out in some companies about 50% of their new hires come from personal recommendations made by their existing employees. This is a growing trend that crosses many types of businesses. Companies are looking for quick efficient results. If a high quality ambitious employee is willing to put their reputation on the line by recommending someone in their network, there is a very high probability this person will be a very good employee. I don’t imagine finding scholarship and grant money is all that different.

*Thanks to Les Brown

The Millionaire Next Door

I went on a search to determine the number of millionaire households in the United States. These would be households with a total net worth in excess of $1,000,000. This proved to be a pretty elusive number. Different articles and even different statistics collected by Government agencies present different results. I have learned that net worth and even the number of households are estimated and reported in different ways.

The best numbers I can come with are between 5.2-5.9 million American households have a net worth in excess of $1,000,000. There are somewhere between 114-118 million American households. That means roughly 4.5%-5.0% of American households are worth in excess of $1,000,000. Somewhere between 1 out of 20 to 1 out of 25 of the cars you see out on the Interstate as you drive from here to there contain a millionaire family. Any way you cut it; that is a lot of millionaires.

What else can we say about millionaires? The most complete study of millionaires I have read is The Millionaire Next Door by Danko and Stanley. I classify this book as a must read for anyone looking to better their financial situation. It will totally revolutionize the way you think about wealth.

The millionaire household is normally a traditional family unit, one husband, one wife, for one lifetime. Divorce is a great destroyer of wealth. The number one cause of divorce is money problems. Then people who could not maintain one household are forced to maintain two households after enriching a couple of attorneys.

About 50% of millionaires are self employed.

About 80% have college degrees, but only 18% have Master’s degrees. 8% have law degrees and 6% have medical degrees.

Dry cleaning has produced a larger number of millionaires that any other business.

Between 75%-85% of millionaires are self made first generation millionaires. Most inherited wealth is dissipated by the second or third generation.

Most are in their 50s or are older, but 80% are still working. Only 20% of millionaires are retired. This makes sense. Most people outside of sports, music, and entertainment aren’t going to make most of their money in the first three years of their career. Danko and Stanley also discovered that millionaires, particularly self employed millionaires love their jobs.

Jewish and Asian households contain a much higher than average number of millionaires. I couldn’t find a good number on the percentage of Asian households, but I discovered that about 18% of Jewish households have a net worth in excess of $1,000,000. It would appear that a strong work ethic, a love of and respect for education, a strong social or family support network, a willingness to take risks, and an above average IQ all contribute to high personal net worth.

Some of these components, such as the ability to take a calculated risk have been studied by Danko and Stanley. Millionaires typically know how to evaluate risk. Think about the boat people from Vietnam. After risking death on the high seas in a rickety boat in a nearly suicidal effort to escape Communism, what is the risk involved in quitting a secure job to start a new business?

I have seen studies that demonstrate a close correlation between salary and IQ up to 120. Beyond that number there is no correlation between IQ and salary. I have never seen a study that correlates net worth and IQ.

Danko and Stanley have observed a number of common characteristics of millionaires that have made their study famous. Millionaires consistently live below their means. They avoid buying luxury or status items. They avoid debt. They spend more time planning their investments than they spend in researching and buying their cars. Generally they buy pretty ordinary used cars. Like everything else they purchase they avoid debt when buying a car.

Danko and Stanley discovered a simple formula that is surprisingly accurate for individuals and couples over 40 years old. It produces some pretty weird results for folks in their 20s.

Predicted Net Worth = (Age X Current Annual Salary)/10

Hence a 50 year old couple earning a combined income of $100,000 a year should have accumulated a net worth of approximately $500,000. That seems pretty reasonable with equity in the family home and things like 401 (k) accounts or IRAs added into the total.

People with roughly twice that number are categorized as Prodigious Accumulators of Wealth.

People with half that number or less are termed Under Accumulators of wealth. Surprisingly many professionals, such as doctors, would be classified as Under Accumulators of wealth. Many doctors tend to live a high consumption lifestyle, buying mansions and driving the latest and finest examples of German technology. They tend to believe they can earn their way out of any cash flow problem or debt. Since their income is somewhere in the top 1% or 2% of all American households. This is probably true.

So how are you doing? What could you do to improve your situation?

Remember the money equation:

Money In = Money Stored + Money Spent
(integrated over the course of a lifetime).

Earn more, spend less, or put your savings to work. Any or all of these actions will lead to financial freedom; however you may choose to define that term.

Irish Spaghetti and Your Investment Portfolio

How would you learn to cook spaghetti? If you were really serious about becoming a great chef you might enroll in the Culinary Institute of America located in Hyde Park, NY. If you wanted to do a little upscale cooking for your family and friends as a hobby, you might take a course or two at a local community college. If you were a hungry single man without a lot of money, you might buy a couple of jars of commercial spaghetti sauce, a pound of ground beef, and a box of spaghetti noodles. Then eat the results of your experiment over the course of the next few days. If you were cooking for your girlfriend, you might want to add a loaf of garlic bread from the frozen food section and a bottle of cheap red wine to the menu.

Irish spaghetti is something I can cook. It is always popular at potluck suppers, so I know it isn’t just me who likes the stuff. It is really pretty good. Take two jars of any commercial spaghetti sauce that is on sale at your grocery store. Add one pound of browned ground beef. Add one pound of cooked Italian sausage slices. Add a palm full of salt. Add maybe 8 ounces (uncooked) sautéed sliced mushrooms. Chop a large Vidalia onion into very small pieces, dump it into the pot with everything else, and let it simmer for several hours, until the onion bits essentially disappear into the sauce. You can sauté the onion bits before dumping them in the pot or throw just throw them in raw and cook them longer. If you want to get really fancy, chop up some garlic, sauté it for a few minutes, then throw it in the pot. I have never put too much garlic into my spaghetti sauce, but I really like garlic.

The real key to learning how to cook spaghetti sauce is (you guessed it) cooking spaghetti sauce; then tasting the results. Really, there isn’t too much risk if you start with decent ingredients in reasonable proportions.

Learning to be an investor isn’t all that different. Start with a couple of jars of low cost index funds (both stocks and bonds). Add a pound or two of conservative dividend paying stocks chopped up into a number of different small holdings. Then add small amounts of something spicy, like technology stocks, small cap pharmaceuticals, foreign stocks from developing nations, or precious metals. Then cook the mixture for a really long time. The only difference is that you dump everything into the spaghetti pot at one time. You continuously add small amounts of ingredients to the investment pot over a very long period of time.

The real key to learning how to invest is (you guessed it) putting money into investments; then watching the results. The biggest risk is never taking the first step. If you want to become a world class investor get a Master’s degree at the Wharton School of Business then go to work for Goldman Sachs. If you want to be better than the average investor, read the classics like The Intelligent Investor by Benjamin Graham. If you want to learn how to do a little better than 0.1% in an insured money market fund just go ahead. Get it started. A lit bit here added to a little bit there cooked over a long period of time makes for a pretty tasty sauce.

It’s 10:00. Do You Know Where Your Children Are?

Back in the 1960s and 70s, every evening a serious announcer would ominously intone, “It’s 10:00. Do you know where your children are?” Back in those days some cities had curfews. It was illegal to be out roaming around after 10:00 if you were 18 or under. If the police found your child out on the street you could retrieve him at the local stationhouse-after paying the fine.

If parents have minor children it is their responsibility to know the comings and goings of their progeny. Apply the same principle to your money. If you don’t know where your money is located or where it is heading, someone will grab it. Unfortunately, when dealing with banks or credit card companies, you have to pay the fine but you don’t get your money back.

It is the first day of a new month. Absolutely, no exceptions unless you are rich enough that your accountants handle this task for you on a quarterly basis, calculate your liquid net worth. Do this every month for the rest of your life. There is no single action that can tell you more about your money in less time or with less effort. If you have a mortgage, handle that as a separate calculation. Once you have performed this task a couple of times, it shouldn’t take more that 20 minutes even if your financial situation is complicated by multiple credit card balances. Given the power of the Internet, the hardest part of this task is remembering all your passwords. Kind of like giving your kid a cell phone; now you have him on a first class electronic leash.

First add up all your assets that can be converted to cash (bank accounts, money market funds, brokerage accounts, and retirement accounts). Then subtract all your debts except your mortgage. This would include credit cards, car notes, and unsecured loans. The sum of these numbers is your liquid net worth. Now compare these totals with last month’s numbers. This can be done in a spreadsheet or on a simple piece of paper. Since I am painfully old school, I keep these numbers in my Franklin Planner.

If you don’t like what you see or you don’t understand what you see dig into the numbers. If you honest with yourself (and that is a big if) it won’t take long to figure out what is going on. If you really don’t know what happened to your money, track all your expenses to the penny for a month. Then you will know the truth. The formal budget is the gold standard of basic money management, but let’s save that lecture for another day.

This month the balance in my primary working checking account dropped a couple of thousand. What happened? There was a foul up with my retirement annuity. I was told by the Navy that Maryland state taxes would be deducted as when I was drawing a regular paycheck. I found out by accident from OPM when changing my health care provider that nothing had been withheld for that purpose. A quick trip to my CPA for an estimated tax calculation and $2,400 later, problem solved. Since a number of my readers are Federal employees approaching retirement, this could be something you need to know. OPM does not withhold state income tax unless you specifically tell them how much to withhold.

When I had a mortgage I kept my payment history on a spreadsheet. Every month I knew my exact remaining balance. I had a pretty good idea of what house in my neighborhood was worth, so:

The Value of My Home – Remaining Mortgage Balance = Equity

Add that number to your liquid net worth. Now you have your total net worth.

Note: I don’t include cars or furniture in this calculation; neither should you. Consider that money fully expended on the day you buy the item. If you get anything back when you finally trade it in, you will be using that money to buy the next car.

If you don’t know where you are, you are lost. If you aren’t already calculating your net worth on a monthly basis, start today.