Monday, December 29, 2014

Risk Analysis

“Now listen, you who say, "Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money." Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, "If it is the Lord's will, we will live and do this or that." As it is, you boast and brag. All such boasting is evil.”
James 4:13-16

As the song says, “Whoop There it is,” straight from my least favorite book in the New Testament. Always start risk evaluation with the understanding that you just don’t know. You have no idea what might happen tomorrow. Yet, you must plan for tomorrow because there will be a tomorrow if not for you, for someone you love.

The Bible also observes, “A good man leaves an inheritance to his children’s children.”

Here is a simple method of calculating risk based on what I learned in school many years ago.

When you propose a plan consider the possible outcomes, in crude terms risk can be considered the product of two numbers, the probability of the outcome and the severity of the outcome. Frequently a 1 to 5 scale is used, with 5 being used for the most frequent and the worst case scenario. Therefore risk can be evaluated on a scale of 1 to 25, with 1 meaning little or no risk and 25 meaning really horrendous risk.

For example: NASA calculated the risk of a Space Shuttle disaster at 1/100. However, there was a great deal of disagreement over this number. Even if this number was correct, it would mean that there would be a 15% chance of catastrophic failure in every 16 planned missions. For comparison, the risk of loss of life in a Saturn mission was calculated at 1/50.

Choosing a number for the impact of a shuttle disaster is pretty easy. The loss of a $3.5 Billion vehicle and seven lives, live on international TV is certainly a five. However, what number would you put on a 1/100 chance of failure? Maybe a three? That would give you a risk number of 15.

Is that an acceptable risk?

This brings up the second problem in evaluating risk, you.

"It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle."
Sun Tzu

As you evaluate risk, you have to understand yourself. Even children exhibit wildly different perceptions of risk. One of my coworkers shook his head when trying to understand his son, observing that he was the only child in his kindergarten class who carefully packed his book bag before going to sleep. Needless to say, this child grew up to be an engineer. A little boy in our neighborhood wanted to grow up to be a stuntman. His mother was not comforted when told, “Don’t worry. Broken bones heal and chicks dig scars.” Both are true stories.

Based on almost 64 years worth of data, I know that I am risk adverse. I tend to overestimate the probability of failure and underestimate the possibility of success. Therefore I try to push myself out of my comfort zone, but not too far out of my comfort zone. I am currently holding somewhere in the neighborhood of 40% of my portfolio in equities. With the Case Shiller PE index at 27.43, I am concerned the market is overdue for a correction, but if the Fed continues to pump new money into the economy the market may continue to go up. I decided, in advance, after careful study, that for someone my age, a range of 40% to 55% in equities is the best I can do, since I just don’t know. If my holdings in equities stray too far from 50%, it will be time for me to rebalance.

Of course failure is not the only possible outcome that must be considered in your risk analysis. There will be a best case outcome, a most likely result, and a worst case scenario associated with any proposed plans. Often working through these possibilities, with or without assigning numbers, will give you the answer you need. If the worst possible outcome of a particular action is the same as the best results of a different proposed course of action, your decision is already made. This actually happened during my recent family emergency.

If the sale of some item, such as a share of stock, occurs without coercion in a transparent marketplace, it is by definition, a fair exchange of value. Even if investors are irrational and markets are not totally efficient (that is each participant in the exchange shares the same information) in the moment, over a sufficiently long period of time, a sufficiently diversified portfolio will produce predictable results with a high degree of certainty. Even if only a single equity is involved, the mostly likely outcome is the 7% to 7.5% return proposed by Siegel’s Constant. It is unlikely that you will loose more than ½ of your money in any single transaction unless you are betting on penny stock or a company teetering on the edge of bankruptcy. Who knows? You might get lucky and double your money in a couple of months. It happens. Most of the time all these outcomes are already contained in the price you pay for a share of stock.

Then are times when the outcome is inherently more important than the probability of an outcome. When facing another decision during my family emergency, the worst outcome was unthinkably horrible. One course of action had little hope of success and a great probability of a ghastly failure. The second course of action had little hope of success but the probable outcome was acceptable, a natural death without suffering. The third course of action (a lack of any action) would result in certain death. I choose the second course of action, leading to the predicted result.

I began a more philosophical exploration of this subject in Does God Play Dice with the Universe?

Does God Play Dice with The Universe

For better or worse, our universe contains an element of randomness. Perhaps it is one of the results of the fall. I don’t know. However, I do know that every day we must make decisions based on inadequate information. Every day we must plan for a future we can not possibly know. Fortunately, there are verses of comfort to be found in Scripture. We have not been left alone in a probabilistic universe. There is a God. He is present in His creation. He cares enough about mankind that the Christ’s sacrifice to redeem us from sin was foreordained before the foundation of the world.

And without faith it is impossible to please God, because anyone who comes to him must believe that he exists and that he rewards those who earnestly seek him.
Hebrews 11:6

Let them shout for joy, and be glad, that favour my righteous cause: yea, let them say continually, Let the LORD be magnified, which hath pleasure in the prosperity of his servant. And my tongue shall speak of thy righteousness and of thy praise all the day long.
Psalm 35:27-28

Thursday, December 25, 2014

Would You Like to Swing on a Star?

Would you like to swing on a star?
Carry moonbeams home in a jar?
And be better off than you are?

Or would you rather be a victim?

Recently I saw an election poster. The candidate observed that “we the people” have been given a system that makes a tiny number of people unbelievably wealthy at the expense of everyone else and turns everyone else into debt slaves and cheap labor.

Yep, but being a politician he forgot to add that his class is also looking for tax donkeys to give him and his family stupendous advantages over “we the people” and an unbelievable standard of living at our expense. A while back, I read Chelsea Clinton had a net worth in excess of $30 Million. Not bad for a young woman still in her early thirties. I'm sure it was solely the result of her business acumen.

First of all, any time anyone asks you to give up your money and/or your freedom for some greater good, particularly their greater good. Be suspicious. Be very suspicious. If a clergyman is telling you the way to riches is by giving your money to his ministry ask, “If you get rich by giving away your money, why don’t we have a reverse offering? I’ll let you give me some money.”

Politicians have been leading the nations of the world into destructive folly for millennia by asking peasants and slaves to sacrifice their lives for the benefit of the ruler and his elite inner circle.

Banks don’t lend you money because they want you to be a happy fulfilled customer. No. They want your money. They want debt slaves.

Given that this is the world as it is you have three possible options, other than giving away your freedom and your money to someone in the hope that they have your best interests in their heart.

1) You can play their game by their rules and win. Lloyd Blankfein is the CEO and chairman of Goldman Sachs, a company famously described by Rolling Stone Magazine. "The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

He also served as Secretary of the Treasury.

Blankfein was not born rich. He grew up in a New York City Housing Authority project. His father was a postal clerk. His mother was a receptionist. He went to public schools, but went on to get his degrees from Harvard.

2) You can play their game by your rules and win. This is the primary purpose of the Silver Eagle Experiment. I don’t know how to get from public housing to a Juris Doctor degree from Harvard Law School, but I do know if you work hard, avoid debt, consistently live on less than you make, and put the balance in an age appropriate investment portfolio there is a high probability your financial life will be OK.

Use your freedom and your money wisely. Take responsibility for yourself and your family. 1st Timothy 5:8 observes, “But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.”

Yes, the powers that be want a surplus of low cost docile labor both in this country and in China. However, you have the freedom to better yourself. You can improve both your standard of living and your net worth by the simple virtue of providing services or goods of greater value to benefit your neighbors.

It isn’t impossible. About 9.6 million American households have a net worth in excess of $1,000,000. That is a lot of millionaires. There are roughly 115.2 million households in this country. According to my calculator 8.4% of American households are millionaires. I have read the profession that has created the largest number of millionaires is—drum roll—dry cleaners.

3) You can play your game by your rules and win. I know a man who has a day job. This man and his wife also own and operate a small organic farm and emporium. In concert with like minded individuals in his area he offers herbs, heirloom vegetables, potions, lotions, and soaps, as well as high quality meat to their community. They are achieving a level of freedom and self sufficiency that is beyond my experience. They don’t like the system they have been given. They have decided that they will create and live in a totally different system.

So you see, it's all up to you
You can be better than you are

You could be swingin' on a star

How about Old Blue Eyes' version of this pop classic?

Swinging on a Star

Wednesday, December 24, 2014

Never Stop Learning

Tony Robbins, self help guru/motivational guru extraordinaire, has published his first new book in two decades, Money: Master the Game: 7 Simple Steps to Financial Freedom. Robbins began his career working for motivational speaker, Jim Rohn, the man who would ultimately become his mentor. He learned Neuro Linguistic Programming, an offshoot of Ericksonian hypnotic techniques combined with the teachings of family therapist, Virginia Satir, and others. For many years he marketed the resulting product on endless infomercials we have all seen on late night TV at one time or another. Robbins is also known for mixing a little side show humbug into his performances, most notably fire walking as proof of positive thought.

Whatever I think about Tony Robbins, he has accomplished much in his life. His net worth is somewhere North of $480 million. He has served as a “life coach” to a U.S. president, celebrities, and famously successful businessmen. It doesn’t surprise me that he has written another self help book. It doesn’t surprise me that he has chosen personal finance as a topic. So many Americans suffer from the effects of financial illiteracy. What I find a pleasant surprise is how Robbins did his research. He used his connections with the rich and famous to learn from the masters, men who have net worth beyond his paltry $480 million.

Even after achieving great success, he still believes he has something to learn.

I haven’t yet read this book but it looks like the men he interviewed Buffet, Icahn, Dalio, Schwab, and Bogle steered him in the right direction. His first step is “Make the decision to become an investor, not a consumer. By this he means the same thing I do when I say buy things that pay you to own them rather than things that cost money to own. My example is buy Verizon or AT&T rather than a new smart phone with an expensive contract.

Step 2 is become an insider on investing. Understand what you are buying and what fees you are paying to own it. Ultimately the only thing you can control is the cost of your investments. Market forces, politicians, and disruptive technologies are all beyond your control, but you decide how much you pay to own a mutual fund or how much you are willing to pay in brokerage fees.

Step 3 is make the game winnable. Set and plan to reach small obtainable goals rather than giving up before you start.

Step 4 is evaluate your asset allocation. Robbins learned that evaluating and controlling risk can be more important than finding the perfect investment.

Step 5 is Create a lifetime income plan. Robbins observes, “Income is all that matters. Assets won’t buy you food. They won’t let you travel. You have to focus on income. The investment community wants you to think about keeping your money in assets.”

Step 6 is invest like the .001% Here he means learn and apply what you can from the practices of men like Warren Buffett.

Step 7 is just do it, enjoy it, and share it.

Critics of Money: Master the Game: 7 Simple Steps to Financial Freedom point out a number of contradictions contained in a book that runs over 600 pages. For example while focusing on Modern Portfolio Theory, investing in an age appropriate balance of low cost index funds, Robbins lionizes the accomplishments of some super hedge fund managers, leaving the reader with idea that these genius investment managers are worth the high fees they charge.

Robbins also stepped on a hornets’ nest by quoting Elliot Weissbluth, CEO and founder of Hightower Advisors. “I am teaching people what to do, but they are going to look to someone for advise, I want to make sure the person they talk to is a fiduciary someone who is legally required to put your interest first.”

The Dodd Frank bill gives the Security and Exchange Commission the power to change the regulatory standard for brokers from “appropriate” to fiduciary. Right now your broker is not required to make recommendations based on your best interests. He is a commission salesman who can legally pitch products that are in his best interests or the best interests of his company as long as they are deemed “appropriate.” If this reform is implemented your broker will be required to sign a fiduciary oath guaranteeing that he will act in your best interests even if he suffers personal loss as a result. It is difficult to predict how such a fundamental change in the way Wall Street gets its money from the small investor might play out in the real world. Needless to say successful commission salespeople consider it a very bad idea.

I expect I will read this book at some point in the future. Tony Robbins has celebrity status. A lot of people are likely to read this book. They will have questions. It is the sort of thing I should know something more about than is contained in this essay.

However, the key takeaway for me is, “Never stop learning.”

Saturday, December 20, 2014

Choosing the Path, Finding the Way

I have been exploring the similarities between the practice of the martial arts and the practice of investing in the market. Both begin with a desire to better understand and control a sometimes hostile world. Observing that others have skills that produce the kind of results we would like to see in our own lives, we begin to ask questions. Then, perhaps, we read something in a magazine or a book that sends our life on a new direction.

There are only a finite number of skill sets that can be used in the martial arts. People are typically equipped with two arms and two legs. We can strike with our hands, elbows, knees, and feet. We can grapple with our opponents using our arms, legs, and hands. Therefore martial arts tend to concentrate in striking techniques in arts like western boxing and karate or on grasping techniques in arts like wrestling and judo.

Although the variations are endless, really there are only three proven techniques for investing in the stock market. Buying the Index as taught by Modern Portfolio Theory as taught and practiced by Jack Bogle, the founder of the Vanguard Group; value investing as taught by Benjamin Graham and practiced by his greatest disciple, Warren Buffet; or Technical Analysis as practiced by men like James Simons or by machines, shrouded in secrecy, developed by the great investment banks and hedge funds.

Some body types and personalities seem better suited for some martial arts than for other martial arts. A heavyweight Olympic boxer looks rather different than a heavyweight judo fighter on a national team. So it is with investment styles. A patient disciplined investor who is more concerned with minimizing risk while maximizing a safe return will select a different fighting style than a man with the soul of a poker star.

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who had practiced one kick 10,000 times.”
Bruce Lee

Select a style that seems to suit you. Then begin to practice. In the dojo, literally the place of the way, the student learns basic stances and practices forms before learning to spar. After a couple of years, students will learn the basics of actual fighting skills in a controlled environment with its own etiquette and rules. Finally the student will fight for real in a tournament or in the street.

Achieve at least a working level in one art before attempting to integrate what you have learned in other arts. Bruce Lee began his martial arts career with the study of Wing Chun under the legendary master, Yip Man. As fate would have it, the other students would not practice with Lee because he was part Caucasian. Therefore, Lee was one of only a handful of students personally taught by that master. It was the best of all possible worlds, a great teacher with superbly talented student. Warren Buffet wanted to attend Harvard Business School. He didn’t make the cut, ending up at Columbia as a disciple of the greatest teacher of value investment, Benjamin Graham.

Fighting and investing provide the practitioner with both immediate and long term feedback. There is no debating the results. Either you were knocked out or you knocked out your opponent. Either your investments went up or your investments lost money. Investing and the martial arts both attract a lot of humbugs and con-artists. However charlatans don’t last. They either get their butts kicked in a real fight or they are wiped out in a couple of market cycles. That a martial art has been around for a couple of hundred years is pretty good proof that it works.

“To be bound by traditional martial art style or styles is the way of the mindless, enslaved martial artist. But to be inspired by the traditional martial art and to achieve further heights is the way of genius.”
Bruce Lee

Don’t ever stop learning. No martial art will work in every possible situation. No market strategy will be optimal in every possible market. They all contain strengths and weaknesses. Tae Kwan Do is justly famous for powerful long range kicks. However, short range styles like Wing Chun are specifically designed to allow a smaller opponent to overcome a larger opponent’s natural long range advantage. On the ground in a choke hold applied by a skilled wrestler, Wing Chun won’t help you very much.

Strengths contain weakness. Index funds are based on market cap. Therefore, the fund will hold the largest amount of a stock when it overvalued and the smallest amount when it is undervalued, guaranteeing that your returns will never be optimized. The path of the value investor is littered with what are termed “value traps.” I have stepped in three or four of those along the way. Most people who try to practice technical analysis don’t have the necessary disciplined self control required by that art. They are the day traders that end up in bankruptcy court or committing suicide after losing all their money.

Once you have established an understanding of your base art, improve yourself. Learn something new. Bruce Lee studied the Philippine martial arts (Silat and Eskrima), the Korean art, Tae Kwan Do, and wrestling and jujitsu under the legendary Gene Lebell, the man who choked out Steven Segal (an interesting story). Ultimately, Bruce Lee integrated all he learned into his own art, Jeet Kune Do.

Whether you are studying the martial arts or the marketplace, you are on your own journey. Begin by studying the classics whether in the dojo or the library. Set up a practice portfolio before risking real money. You can go ahead a start a 401 (k) before you know what you are doing if you stick to a simple age appropriate mix of index funds. As you learn and grow you will develop a style that is uniquely your own.

“Adapt what is useful, reject what is useless, and add what is specifically your own.”
Bruce Lee

One more thought: In fighting and investing mistakes are inevitable.

“Mistakes are always forgivable, if one has the courage to admit them.”
Bruce Lee

Tuesday, December 16, 2014

Let's Be Careful Out There!

I was a big fan of the police drama/soap opera, Hill Street Blues back in the early eighties. The characterizations were exceptionally well done. The intriguing story lines contained just about the right amount of moral ambivalence. The world, after all, is a complex place requiring, well, compromise from time to time; or does it? Every episode began with the role call. Sergeant Phil Esterhaus, a tough old cop respected by one and all, announced shift assignments to the assembled uniform, plain clothes, and detectives. He informed the troops of special problems or areas requiring an unusual concentration of police resources. He always ended his sometimes serious, sometimes funny or absurd announcements with a warning, “Let’s be careful out there.”

I frequently end blog posts on investing with the same caveat. I simply do not know what the future will hold. Neither do you.

This appears to be a bad time to invest large sums of money. If you are at a time in life when you are essentially engaging in dollar cost averaging by having a percentage of your pre-tax income deducted from your paycheck for your 401(k), you really don’t need to worry. As long as you maintain an age appropriate balance over a sufficiently long period of time, Modern Portfolio Theory conclusively demonstrates that you will be OK. During your working years, you are investing relatively small sums of money over relatively long periods of time.

However, if you are retired and (hopefully) managing larger sums of money the stakes are higher and the risks greater. Now you are making decisions involving large sums of money over relatively short periods of time with no possibility of earning your way out of a serious mistake. Yuk!

Over the next week or so, I will need to decide what to do with the proceeds from a good old CD that paid an acceptable interest rate. In today’s zero interest rate world the Federal Reserve Bank is relentlessly punishing savers and conservative investors with low interest rates in an attempt to stimulate the economy. Although individual debt load as well as the baby boomers headed for retirement (a demographic time bomb about to explode) would indicate deflation rather than inflation, our national debt is now so large the only way out looks like a controlled devaluation of our currency. Inflation is deadly to cash, savings accounts, certificates of deposit, and bonds.

If interest rates are near zero can they fall any further or will they go up?

How about equities? The Case Shiller Price Earnings Ratio is flashing danger at 26.1 even after a rather nasty couple of weeks on the Street. Historically this average runs about 16.6. Anything over 25 will lead to a “correction.” In 2008, that correction destroyed about 40% of the total value of American equities. This is not a good time to buy stocks, unless you are adding small amounts to a well diversified portfolio in a disciplined manner.

How about bond funds? Bonds tend to track with CDs. The interest they pay is a function of perceived risk. Conservative bond funds holding investment grade securities from major corporations are hardly paying enough of a premium to justify the risk. Junk bonds are overvalued if you believe, as I do, that the world economy is headed for a slow down. A slow down could cause the default rate to jump overnight. This would reduce the value of your junk bonds to—junk?

The current U.S. recovery has never trickled down to Main Street. The unemployment rate has thankfully improved since the dark days of 2009, but higher paying full time jobs lost in the last recession have been replaced with lower paying jobs and a higher percentage of part time jobs. When calculating U3 unemployment, a part time job counts the same as a full time job.

Europe appears to be in worse shape than the U.S. The problems with the PIGS have not been solved. Over the last couple of weeks the Greek stock market has just about collapsed. It appears that an extreme left wing nationalistic party will win big in the next election. They want to stick it to the Germans who lent them money for the big party they threw for themselves back in the 1990s. A number of large Spanish banks are on the verge of collapse. In Spain the unemployment rate is running around 25%. For youth that number is running around 50%! There is a danger of a lost generation. The situations in Ireland, Portugal, and Italy are not much better. The two big boys, France and Germany, are better off than most of Europe, but France is starting to hurt. Their current government is generating serious problems. In Germany, the economic engine is finally running out of steam. Europe (with a few possible exceptions like Sweden) doesn’t look like a good place for new money.

Japan is heading towards a major financial crisis. With a national debt to GDP ratio over 200% and a major demographic crisis (worse than the Baby Boom) their future looks bleak. They are devaluing their currency in a desperate attempt to increase exports and pay down the national debt. Perhaps the high rollers can borrow Yen on the carry trade, but even the hedge fund managers are going to have a hard time finding a home for this “hot money.”

China is coming to the realization that they can not continue to increase GDP at 10% forever. The Chinese stock market has been a gamblers paradise. That appears to be coming to an end. Their notorious empty cities built with Government mandated money by corrupt crony capitalists have not solved the long term need for wealth producing jobs in the private sector.

How about the rest of the BRIC countries? Brazil has major problems. Russia is getting killed by the drop in the price of oil. The Ruble has dropped 50% in value over the last year. The Russian Government has responded by raising interest rates to over 17%. That should choke out just about any domestic economic growth. India is not in the news, but the level of corruption and a lack of financial transparence in that country make it difficult for the outside investor to know what they are actually buying. It doesn’t look like the developing world is a good place for my money.

About the only thing left are niche investments. Real Estate Investment Trusts (REIT) are paying out at 3%; not enough to justify the downside risk to the value of the underlying properties in another recession. Oil and gas pipeline Master Limited Partnerships (MLP) look interesting (for a little bit of new money), but given the current collapse in oil price where will the new money come from to “fuel” growth? I think I could put a few more bucks in Intermediate Term Tax Free Municipal Bonds, but again we are not talking a large amount of money. A number of municipalities are facing bankruptcy at the hands of public unions. Politicians made pension promises that they could not keep. Now the birds are coming home to roost.

All I can say is, “Please! Let’s be careful out there.”

Friday, December 12, 2014

If you want to know the truth, Follow the Money

According to the Consumer Financial Protection Bureau about 18% of all Americans believe they will never get out of debt. 43% believe they will escape the debt trap but at age 61 or later.

The same survey reveals that 31% of Americans aged 61 or older will never get out from under debt.

If this was a post encouraging the reader to get up and fight against debt slavery I might begin with the well known quote by Henry Ford, “Those who think they can and those who think they can’t are both usually right.”

But this is a post about staying out of debt by analyzing the motion of money; not what you want to happen; not what the people who want your money are telling you; not what the politicians are dreaming; instead, follow the money.

Look at student loans, a well intentioned Government program that promised easy access to higher education to lower and middle class students graduating from high school. What has actually happened could have been predicted by analyzing the motion of money.

Start with the colleges and universities. In this scheme they get all their money up front with no strings attached. They don’t have any contractual requirements to actually teach anyone anything. They get their money if the student can’t learn from a particular professor. They get their money if the student drops out for any reason whatsoever. By the way, according to the U.S. Government the six year graduation rate was 56% for males and 61% for females. Somewhere around 40% of those who start college don’t finish college.

The universities have no responsibility to provide the student with a job that requires a college education. The most recent figures indicate that 36.7% of recent graduates are working at jobs that only require a high school diploma. Their presence in jobs like waiters and baristas denies appropriate jobs to those with less education. The colleges and universities don’t care they already have their money.

With easy access to unlimited Government and Government guaranteed loans the colleges and universities were free (over the last 30 years) to raise the cost of an education at 5 times the rate of inflation! That is 500% higher! The presence of this money caused a disconnect between cost/value analysis. As long as the student could get access to those loans, it didn’t matter how fast the university raised the cost of tuition.

What have universities done with all that extra money? Well, they build a lot of pretty new buildings. They have more than doubled the number of administrative and support personnel who don’t teach in the classrooms. They have raised the salaries of just about everybody except for the graduate assistants and non-tenure track instructors who actually do the teaching.

They have also used some of that money to fund research. Isn’t that special, taking money from seventeen year old children to fund some tenured professor’s pet project, allowing him to better avoid his classroom responsibilities? Why can’t that professor go out and get grants from traditional sources like the government, foundations, or wealthy patrons based on the merits of his proposals?

How about the banks or Government agencies that actually made the loans. Well, their money is guaranteed. A student that can’t find a job is still on the hook. These loans can’t be discharged in bankruptcy. In some instances if a parent cosigned they can’t be discharged with the death of the student.

How does that work for the lenders? Consider the rule of 72. If you want to calculate how many years it takes double your money all you need to do is divide 72 by the interest rate.

For example, a 6% student loan doubles the lender’s money in just 12 years.

An 8% student loan doubles the lender’s money in 9 years.

Guaranteed by you, the taxpayer.

Let’s look how that works out for the teaching profession:

A full time teacher who graduates with a four year degree might run up $52,596 in college debt. This graduate is looking at a median salary of $43, 400. Given a 10% repayment rate of $4,340 a year this teacher can expect to be debt free in 21.8 years if she doesn’t get married, buy a house, have children, take out a car note, or otherwise play by the rules of a system that wants her to remain a debt slave for the rest of her life.

If you are interested in more examples for different professions, check out this article by Angela Johnson of CNN.

College Degrees With the Best Bang for Your Buck

There are a lot of assumptions in these numbers, but they seem realistic. The assumptions aren’t really important. You can make up your own assumptions and plug them into any of dozens of loan calculators available on the Web. The take away is the same.

The school gets its money up front—Guaranteed!

The bank will at least double it money—Guaranteed!

The student and/or the parent who signs the loan takes all the risk with no guarantees of anything.

Do you want to bet the next twenty years of your life on the outcome of a game played by these rules? If you can’t get a scholarship to Harvard, apply for a scholarship to Duke. If you can’t get a scholarship to Duke, try your state university. If you can’t get a free ride at your state school, go to your local community college on a Pell Grant. If you kill it at a two year school, your chances of getting a scholarship at a four year school will dramatically increase. If you flunk out, at least you won’t be paying for that mistake over the next twenty years of your life. You will be free to try again.

Wednesday, December 10, 2014

Not Even Me (Part II)

If you have a dream, a dream that won’t go away, listen to your heart. The path to your mountain top may not be easy or direct. Before Edmund Hillary and Tenzing Norgay became the first men to reach the summit of Mount Everest on May 29, 1953, many others tried and failed. Some of those men paid with their lives. It was considered impossible. I have read, that after years of planning Hillary decided on a different path than followed by previous expeditions. Once the plan was in place; once all the equipment and supplies were in place; once the team was assembled; it took seven weeks of climbing to reach the top.

If you have one of those dreams, don’t listen to others who tell you what you can’t accomplish. Don’t listen to the doubts and fears of your own heart. Don’t compare yourself to others.

A respected White Crane Kung Fu master, Dr. Yang, Jwing-Ming tells this story.

“I felt so depressed after comparing myself with one of my most talented classmates. I always felt awkward compared to him. I told my master about this. He again looked at me and said, “Little Yang! The reason you want to train is because you want to train. It is the same as plowing a field. When you plow, you simply do it for your harvest. Why do you look around? If you are ahead of others, you will be proud of yourself, you will be satisfied, and you will become lazy. If you are behind, you will become depressed and despise yourself. Why don’t you just bow your head and keep plowing? Do not look around. Just keep plowing. Until one day…He pointed his finger towards my face…when you get tired and take a break, suddenly you realize that there is nobody around you. You have left all the others far far behind and you cannot even be seen.”

Monday, December 8, 2014

Money on the Move

Money is always on the move. Perhaps that is why they refer to cash and near cash assets as liquid. It is important to watch the flow of money around the world. Although, sometimes it is impossible for an outsider to understanding what is happening until it is too late. Since these kinds of stories are often not reported in normal press outlets it can be pretty hard to discover the truth about stories that can change your financial life.

Tesla is the darling of the environmentally oriented investment community. It is a company run by a promoter who could put Harold Hill to shame. A quick look on the Web indicates that nobody really knows how many cars Tesla sells because they do not report that kind of information. I saw one industry source that reports 1,600 a year. These cars are really cool toys for movie stars. The costs start at $101,000 for a car with a 265 mile range. Then you have to plug it for 52 hours to, “Fill her up.” To be fair a $10,000 optional “super charger” can drop that time to 22 miles of range per hour of charging. This silly little company (yes they do have some interesting technology) is capitalized at somewhere around $30 Billion depending on the price of a share on a given day. Daimler Benz owned a 4.0% stake in Tesla. Recently they looked around, scratched their head, asking the question, “We own what! At what price!” Wisely they sold their stake, netting a profit of $780 Million. A couple of days later Toyota sold out their 2.4% of Tesla for a $640 Million profit.

What is driving the S&P 500 into dangerously overpriced territory? For some time we have heard stories about retired savers who can not live on a less than 1% return on their safe investments. People like me looking for something closer to the traditional 3% return on bonds are forced to move more money into riskier investments, like conservative dividend paying stocks. That drives money seeking capital gains out of conservative growth into the wild world of “story” stocks, like Tesla, that are pretty much naked gambles.

There are other, less often reported powers at play in the current rally. Japan is trying to drive down the value of their currency. This is an attempt to improve the sales volume of Japanese industry by lowering the price of their exports. It is also an attempt to monetize their considerable national debt. Money is moving by means of “the carry trade” from Japan to the American stock market. U.S. companies are borrowing money from Japan at ridiculously low interest rates, using that money to buy back shares in their own company, as well as shares in other companies. Rising share prices make for happy share holders. When they sell these shares at higher prices they then can repay their debts in cheaper Yen.

To paraphrase an old Doo Wop song, “Is it real or is it ain’t.”

Or does it matter? Yes. Because the Japanese taxpayer is going to be left holding the bag and retired American investors are going to get hit hard in what is euphemistically termed the next “correction,” potentially wiping out a lifetime of hard work and thrift.

Closer to Main Street, we are enjoying the lowest gasoline prices seen in quite some time. Gas is currently selling for $2.47 in my neighborhood. That is about 46 cents a gallon in 1973 dollars (the year of the first oil crisis). That is some cheap gas! Why would OPEC allow this to happen? The Saudis can turn off the pumps tomorrow, sending the price of a gallon back to $4.00 almost overnight. It is suspected that OPEC wants to shut down American wildcatters in places like North Dakota before they can become a threat to OPEC domination of the world’s oil supply.

These producers of oil are probably even more worried about the Russians who are on the verge of becoming a giant energy producer. This adds interesting geo-political questions to the mix. Currently Europe is trying to pressure Russia out of the Ukraine. The EU can’t apply too much pressure because their industries are largely dependent on Russian natural gas. This is why Germany is investing heavily in solar and other alternative energy sources. A German currently pays twice as much for his electricity as a Texan, even though his energy bill is heavily subsidized by his Government. But perhaps that is better than being dependent on one’s ancestral enemy. The Russians are probably not too thrilled that their economy requires the continued sale of energy to nations (including Germany) that are attempting to bully them out of their own backyard. The Russians have recently reached an agreement with the Chinese to build a massive pipeline that would give them the option of selling energy to the Europeans or the Chinese. Then the Russians can credible threaten to shutdown European industry if the EU refuses to play nice about the Ukraine.

A recent news story announced that the Europeans are pulling their gold out of the Federal Reserve Bank at the highest rate in the last thirteen years, 42 tons in just one month. The author does not speculate why this is occurring, unusual for the financial press.

Countries store their gold all over the world. Why this true is a little hard for me to understand. One hears comments like, “For settlement of international agreements.” What, pray tell, does that mean? We are told that gold is nothing but a superstitious relic from our barbarous past. The entire world operates on fiat currency. The American Dollar, the Euro, the British Pound, the Yen, and all the other major world currencies are all based on nothing but the promise that they can be used to repay debt.

Whoops! A few weeks ago former Fed director Allen Greenspan slipped up. He amazed and astounded the financial world by stating, “Gold is currency; no fiat currency, including the dollar, can match it.”

Go figure. Maybe the Chinese and the Indians are right. They believe gold is money, so they are hedging their positions in American Treasury Notes with a little gold. Just like me. I have also read that even though the Russians are in serious pain as a result of a partially successful Western boycott of their economy over the Ukrainian questions and the drop in oil prices, they are buying gold. The Russians are one of the largest gold producers in the world. They have considerable gold reserves, one would expect that they would be selling their gold to get their hands on hard currency in this time of trouble, but they are buying gold at what they obviously must believe are bargain prices.

In trying to learn a little more about this often obfuscated topic, I discovered we really don’t know how much gold we have in Fort Knox or who actually owns it. We are told that the United States has about 5,000 metric tons of gold in Fort Knox, but there has not been an audit since 1953. Back then we had about 20,000 metric tons of gold in all locations. Today that number has dropped to 8,133 metric tons. I discovered a more troubling question, “Who owns our gold?” It turns out that our gold can be used as collateral by the Federal Reserve Bank. That’s interesting. Maybe the Chinese already own all our gold. Maybe not.

Of course we trust our Government. They would never take any action that was potentially illegal or not in the best interest of the country. Would they?

Thursday, December 4, 2014

Not Even Me

In the movie, The Pursuit of Happyness, the character portrayed by Will Smith is playing basketball with his five year old son. The little boy is enjoying success while Will Smith is telling him not to pursue a career in sports. After all, he explains to the boy, I am not all that good at basketball and those kinds of talents tend to run in the family. He also expresses a common parental fear that he does not want his little boy spending all his time on a basketball court. Finally, the little boy becomes sad and discouraged. Will Smith understands he has damaged the child that he loves. As he apologizes to his boy, he delivers the speech found in the picture above, “Don’t ever let someone tell you that you can’t do something. Not even me.”

I first saw a clip from this scene imbedded in a short motivational video I was watching on Youtube. For personal reasons, it hit me hard. We all have dreams that just won’t go away. I am not talking about the uninvited daydreams that pass through our minds, like the roles we played in games when we were children. I am talking about the real, deep desires of our hearts.

Sadly, the first people who tell us we can’t do it are our parents. Sometimes they rain discouragement on our dreams for what they believe are very good reasons, and they may be right. Tens of thousands of little boys dream of careers in the National Basketball Association. Only a handful will ever play professional ball. Wouldn’t it be better to spend less time on the basketball court and more time with your homework?

Probably. And yet our hearts yearn for something more.

Teachers tell children and their parents they have a learning disability or some defect in their character that defines them as second rate. I think we all have at least one of these stories. We don’t tell these stories, at least not very often. They tend to dishonor our parents or teachers even as the telling would cause us to relieve the pain and shame that is a part of growing up. Not everybody has the raw IQ, memorization skills, and discipline necessary to make it through medical school, but should teachers be telling a child to give up his dreams?

Maybe. A case could be made that such a realistic appraisal will save the child from greater pain at some later time. And yet our hearts still yearn for something better.

We can absolutely count on the world, even our own friends, to tell us what we can’t do. Sometimes it is well intentioned and realistic. Sometimes it is just plain old jealousy. When you begin to experience success in some area of life, you will lose some of your old friends. They believe they can’t go where you are going. They know they are losing you. Out of insecurity they tell you that you can’t do it.

And yet our hearts know that with or without our old friends, we must move on.

In this business it is sometimes a temptation to tell people what they can’t do. I never want to be guilty of that sin. It is OK to advise people of a danger when pursuing a particular goal in a particular way. It is OK to suggest an alternative path that would bring them closer to their goals. But their dreams are their dreams; not my dreams. If God has given their heart a burden to achieve some particular goal, who am I to minimize their dream, or attack their faith, or person?

How does that make the world a better place?

There is one more enemy to consider in this meditation. That would be, yourself. It would be remiss if I didn’t add, “Don’t ever let someone tell you that you can’t do something. Not even you.”

I am always my own worst enemy. My fears, insecurities, desire for acceptance, tendency towards perfectionism, and a whole host of imagined devils both in my own mind and the minds of those around me have done more to limit me than the actions of the real enemies I have faced in my life.

I haven’t yet seen the movie, The Pursuit of Happyness. I have read that it is based on the true story of failing salesman making a life for himself and his son. He takes an unpaid position as an intern at an investment firm. Only one in twenty of the interns in this program will be given a full time job. In the short run this unrealistic decision results in their evection from their apartment. In the long run, the character portrayed by Will Smith becomes a Wall Street legend.

I think I am going to watch this movie, maybe buy it. If you haven’t seen the clip, here it is.

Don’t ever let someone tell you that you can’t do something.

Tuesday, December 2, 2014

A Reason to Smoke?

I eat breakfast at our local fast food restaurants more often than is good for my battle with the bulge, but that is a story for another day. Most of them are just ordinary fast food restaurants. The service and food are both predictable. One of them is different. Sometimes the service is surprisingly efficient. Sometimes it is painfully slow. Service speed did not seem to be dependent on the number of employees or the number of customers. Something else seemed to be at work, so I decided to watch what was going on behind the counter.

The difference seems to be the presence or absence of a particular kind of employee. The presence of employees who are capable of multi-tasking leads to rapid service, no matter what the work load. Employees who prefer to perform tasks in serial rather than parallel tend to gum up the works. The better employees are never still and their motions are not wasted. If they are waiting for one order, they take the next order, or fill the fry basket with tater tots, or do something to keep all the processes necessary to deliver my tasty grease bomb in a timely manner moving in the right direction. The mono-task employees frequently stand and wait for an order to be filled before undertaking the next task. When circumstances force them to undertake more than one task at a time they seem to freeze like a deer caught in a headlight. When they try to do more than one thing at a time it leads to mistakes in filling orders or spills that require cleanup time.

As I know some of the mono-task employees have been around for a while, it doesn’t seem to be so much an issue of training as an issue of personality or personal preference. I expect they might be better able to focus on a single task than some of their multi-tasking brethren. That might make them better at assembly work where focus on a single task is a valuable skill. Of course, in some professions like engineering, focus is everything. Creating a computer design tool might well require months of intense focus without interruptions or distractions of any sort. Even writing blog articles requires focus. I generally write these things while my wife is asleep. I play ambient background music to minimize auditory distractions. There is nothing but a bare wall behind my computer monitor; nothing interesting to look at back there.

There are times when the best way to go forward is to sit perfectly still, taking some time to clear my mind of all the comedy and drama that tends to go on in there. When I am overwhelmed with multi-tasking or frustrated beyond belief by a mono-task that refuses to be budged, it is good to call time out. I just try to sit still and breathe, say a prayer, or go outside and look at the mountain. Once I have calmed down, I can return to the task at hand.

In my parents’ day, the cigarette break was an almost universally accepted way to take a time out. This practice continued to be accepted through most of my working life. When an employee was overwhelmed he could lean back in his chair or if the risk of fire was a consideration he could go to the smoking area and enjoy a cigarette. Breathe in. Breathe out. Sound familiar? Of course I don’t recommend this practice for reasons of both physical and fiscal health, but I certainly understand why people continue to smoke. It is more than a physical addiction. It is a deeply ingrained habit that can be a meditative practice.

So, before beginning a job determine whether it will require serial or parallel action. If you can plan actions in parallel, that will lead to greater efficiency. Sometimes we are not granted the luxury of planning time. We have to react to multiple challenges at the same time. This can be difficult. There are certain jobs that have to be treated as a mono-task. If you need to isolate yourself for a period of time so be it. Then there is a time to just stop. Breathe in. Breathe out. Relax those shoulders. The arms. The legs.

Relax. Breathe in. Breathe out.

Friday, November 28, 2014

Self Examination (Part III)

I shouldn’t have to write a third part to this series, but I live in 21st Century America. Spirituality and money are deeply and inseparably intertwined; how you earn money; how you give money; and one more, how you store money.

The Money Equation:

Money Earned = Money Stored + Money Spent

Money Stored can be a negative quantity, debt. What is your relationship with debt? Do you believe what God has to say on the subject? God says debt is part of the curse. God says the ability to lend money to others is part of the blessing.

God tells us that, “The borrower is slave to the lender.” Everything in this world (including your own flesh) is telling you a different story. The world wants you to be a debt slave. Our national debt is approaching $18.0 Trillion, guaranteeing that all of us, our children, and our grandchildren will be debt slaves. Personal debt carried by individuals is closing in on $16.7 Trillion. $1.3 Trillion of that number is student debt. Our young people are beginning their adult lives carrying a serious debt load. The Government, corporations, and our own lusts encourage us to buy houses, cars, techno-toys, and clothing we can not afford.

“Mastercard, I’m bored.”

The Keynesian theory of economics espoused by the Federal Reserve Bank is printing money overtime.

As you can see there is no shortage of money in the economy. That money was created, at taxpayer expense, then given to the banks at artificially low interest rates. The purpose of this action was to encourage you borrow the money and spend it on something, like a new house or car.

Financial institutions of all sorts, Government programs that encourage or guarantee mortgage loans and student loans, and every commercial you see or hear is encouraging you to become a debt slave.

God tells us that debt is a curse. When the very wealthy are asked what financial advice they would give to ordinary Americans. They always seem to start by admonishing the listener to stay out of debt. The power of compound interest can work for you or it can work against you.

Why do we beg banks and credit card companies for the opportunity to be cursed?

Let me ask you a trick question. Do you want to be sick? Of course not; no one wants to be sick. Sickness is not a blessing. It is part of the same list that includes debt as part of the curse. Do you want to visit wherever the Government stores samples of infectious diseases so that you can be smitten by the botch of Egypt? Then why in the name of God do you go out of your way to enmeshed in unnecessary debt?

Signing a loan is a spiritual act. You are swearing an oath before God and man. God, as well as the repo-man is serious about your oath. If you are a Christian, it is your duty to fulfill your vows to the best of your ability.

Ecclesiastes 5:5
It is better that you should not vow than that you should vow and not pay.

Psalm 37:21
The wicked borrow and do not repay, but the righteous give generously;

Fortunately I live in America. Most loans (with the notable exception of student loans) can be discharged in bankruptcy court. In biblical times you and your children could be sold as a slave to repay your loans.

God also has advice for those who are fortunate enough to be in a position to loan money to others. This subject is covered in the Old and New Testament.

Exodus 22:25
If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.

Luke 6:34-35
And if you lend to those from whom you expect to receive, what credit is that to you? Even sinners lend to sinners, to get back the same amount. But love your enemies, and do good, and lend, expecting nothing in return, and your reward will be great, and you will be sons of the Most High, for he is kind to the ungrateful and the evil.

I find it interesting that both sides of the money equation are covered in exhaustive detail in the pages of Scripture. Money is spiritual. How we handle it is a measure of our faith. How we relate to money is reflection of what is in our hearts.

Thursday, November 27, 2014

Self Examination (Part II)

In the beginning God created the heavens and the earth. Some time later, the Lord got around to making man in his own image. He gave us dominion over his Earth. As we know, that didn’t work out so well. Although, we also know that situation will ultimately be rectified.

The first problem we face in managing our money is understanding that it isn’t our money. Our planet, the cattle on a thousand hills, the gold and the silver also; all of it belongs to the Lord. Whether God has given you one cow or ten thousand, they don’t belong to you. You are just managing them on the behalf of their creator. You are just passing through. All too soon someone else will take possession of your wealth; perhaps through misfortune; perhaps through bad decisions; perhaps through death, but it is a certainty you won’t take it with you. So keep these words in your mind as you walk through this valley of tears:

1 Timothy 6:17-19
Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. Command them to do good, to be rich in good deeds, and to be generous and willing to share. In this way they will lay up treasure for themselves as a firm foundation for the coming age, so that they may take hold of the life that is truly life.

Under the old covenant things were pretty straight forward. God commanded the people of Israel to bring 10%, a tithe, of all their increase to his temple. This money was to be managed by his servants, the Levites, according to His law. If you complied you would prosper. If not…well, not so good.

Malachi 3:10
Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the Lord of hosts, if I will not open the windows of heaven for you and pour down for you a blessing until there is no more need.

In the new covenant what was primarily a question of behavior was transformed into an issue of the heart. As always, controlling my heart is even harder than controlling my behavior (which is hard enough when it comes to giving).

Christianity is a religion of freedom and grace. How much you give and to whom you choose to give is a private matter between you and God.

However Scripture does provide some general guidance on these questions.

Just as ancient Israel supported the temple and the Levites, I think your giving should begin where you are receiving your spiritual food. For most of us that would be our local church. Some ministry or church or combination of churches are providing you with spiritual nourishment. These are the people who are watching out for you, praying for you, and bringing covered dishes to your family when you are in the hospital. Your pastor has a family. He needs a salary and health insurance; just like you and your family. Purchasing and maintaining an appropriate building that facilitates worship and fellowship events ain’t cheap.

If you don’t feel like you should give to your local church, you are in the wrong church.

If you listen, God will give you a heart burden for certain other ministries beyond your local church. Heed the guidance of the Spirit. The believers in local churches fueled Paul’s missionary journeys. We know because he thanked them for their generosity. We also know of godly men and women who took care of Paul as he spread the Word of God across the Roman Empire.

Finally, there are an abundance of Scripture in both the Old and the New Testaments about giving to the poor. Here is a sample.

Deuteronomy 15:7
If there is a poor man with you, one of your brothers, in any of your towns in your land which the LORD your God is giving you, you shall not harden your heart, nor close your hand from your poor brother;

Acts 4: 34-35
Neither was there any among them that lacked: for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold, And laid them down at the apostles' feet: and distribution was made unto every man according as he had need.

Take account of how much of your increase is going to where God is directing your heart to send it. Ask the Lord if you can do more. For me the answer to that prayer has always been, “Yes.”

Many years ago, I listened to Larry Burkett, the Godfather of Christian personal finance gurus, on the car radio on my drive home from work. He received phone calls from women (always women) who wanted their family to give more to their church or some ministry than their husband. His advice was always the same. Tell your husband to pick a number a little higher than your current level of giving. Tell him agree to give at this level for a year then let’s look at our financial situation in comparison to our current state. If it has improved, we can talk about giving more. If it is worse, I promise never to bother you about giving again. Burkett claimed that while he received many phone calls from families who improved their situation by taking this challenge, he never received any from people who did worse.

In spite of my fears and lack of faith, so far I have not been able to out give God.

Wednesday, November 26, 2014

Self Examination

I believe that how we earn and manage money are spiritual practices. From time to time it is good to stop to take an inventory of how your beliefs about money and, more importantly, how your practices are working. That is pretty easy. Just calculate your net worth every month. If you understand and are comfortable with why the numbers are going up or down, most likely you are doing OK.

There is a harder test that involves an examination of the heart. Unfortunately for people (like me) who are at war with our sinful nature, examining the condition of my heart is much more difficult than measuring the increase or decrease of my investments.

Are you a good employee? If you were the boss would you hire yourself or would you hope for something better? When I was the night superintendent at a saw chain factory, it was my observation that one out five employees met the spiritual standard found in scripture.

Colossians Chapter 3
“Slaves, in all things obey those who are your masters on earth, not with external service, as those who merely please men, but with sincerity of heart, fearing the Lord. Whatever you do, do your work heartily, as for the Lord rather than for men, knowing that from the Lord you will receive the reward of the inheritance. It is the Lord Christ whom you serve.”

About three out of five employees were about as good as their employer. If they were provided with a decent wage, tolerable working conditions, and respectful supervision they were good employees. If they were treated badly, they behaved badly.

I observed about one out of five new hires were just bad employees. When I was a new supervisor, I wasted a lot of time trying to encourage these people to do better. Finally I realized that the best thing that can be done with a bad apple is to just throw it away. My job was winning the hearts and minds of the three. I could measure my performance by measuring their performance. The one employee who met God’s standard of excellence was just a blessing, one that I didn’t earn.

Who is your boss? Is it that micro-managing, manipulative creep who is making your life miserable or is the Lord of the Universe? Too often in my career I was working for man, not for my God.

I have written about the “Confucian Work Ethic” that is replacing the Protestant Work Ethic in my country. Do you think it accidental that Asians have the highest median average household income in the United States, over 34% higher than the average of all races? Some of these people have been my neighbors and coworkers. Some of them came to this country with nothing but the clothes on their backs. Unable to speak English, with nothing, some of them risked death or imprisonment to escape their homelands. In less than a generation some of them were living in my neighborhood. They were sending their children to some of the best colleges in our country. They were achieving the American dream.

It wasn’t because they were good Christians. Many of them are Buddhists or have no particular faith. However, God’s laws apply equally to all. I know that very unfair bad things happen to good people, but remember that if you are walking in God’s ways, even if you don’t know you are walking in God’s ways, you don’t need an even playing field to become a person of excellence.

Proverbs 13:4
The soul of the sluggard craves and gets nothing, while the soul of the diligent is richly supplied.

Proverbs 14:23
In all toil there is profit, but mere talk tends only to poverty.

Proverbs 12:24
The hand of the diligent will rule, while the slothful will be put to forced labor.

Monday, November 24, 2014

Their Future Your Hands

Once when I was much younger, I was out doing something in the yard. I could hear our next door neighbors, a young couple, having a violent argument. Since the windows were closed, I couldn’t make out the individual words but I could make out the wife shouting in hundred word outbursts which were periodically answered by a few angry grunts from her husband. I saw their little girl, age five or six, standing in their backyard. She looked very solemn, very unhappy. She told me, “Mommy and Daddy are being mean to each other.” Then after a pause she added, “It’s about the bills.”

I tried to comfort her to the best of my ability, explaining in simple terms that sometimes paying the bills was a very difficult problem that could upset mommies and daddies. I would guess that little girl is now in her early thirties. I know she is a single mom, trying to care for a little girl of her own. She may not remember that incident, but it is there. It is a part of her relationship with money. I hope she has had better experiences with money. I hope she finds her way to financial freedom.

If you have children or if you are a child, consider the effects that the actions of parents have on their children. Consider what you are modeling for your children. They are watching you. Are you teaching them the basics of good money management by word and deed? Are they learning what it means to live on a budget? Are you teaching them that debt is a curse and that the ability to lend is a blessing? Are you teaching them it is more blessed to give than to receive?

You can change the stories you believe about money. Your life can be the beginning of a tale of multi-generational wealth. It is easier if you already have money, but even if you don’t have any money you can start. My grandfather was a poor dust bowl farmer during the Great Depression. He was so poor he literally had trouble keeping shoes on his children’s feet. Because his wife was terrified of debt, they managed to hold on to their farm through the depression. They were one of only two families in that part of their county to accomplish that feat. Even when this man was poor, he was planning for his children’s future. Before he died he bought farms for each of his four children.

Even in the midst a pretty desperate situation, his mind was in the future finding a way to be a blessing to his progeny. Work hard, spend less than you earn, give your money, your time, and your emotional energy to God and to your neighbors. You may not reap the harvest in your lifetime, but if you transmit a healthy relationship with money to your children, perhaps the day will come when your grandchild graduates, debt free, from medical school. Then you and your child can take pleasure in the accomplishments of a grandchild who will live on to carry the blessings that you sowed so many years ago into an unimaginable future.

You can do it. Really. You can change your family and your world.

Friday, November 21, 2014

My Favorite Candy (In Courage Mints)

Over 25 years ago, I set out to explore the C&O Canal Path, located near my home in Maryland. This marvel of the pre-railroad age follows the Potomac River from the Watergate in Washington DC until after 184 miles it ends in Cumberland Maryland. The canal path passes peacefully through some amazingly beautiful countryside, important historical locations such as Harpers Ferry, as well as interesting sites best described as industrial archaeology. Over the course of a couple of years I managed to walk the entire length of the canal, at least twice. Typically, I would start at a convenient access point, then walk down to the point where my last walk ended. Then I would turn around and walk as far as seemed reasonable. Finally, I would turn around one last time, returning to my parked car, thus covering the entire length of the canal at least twice. There were some sections that were particularly pleasant and/or close to my home that I walked many times.

These hikes averaged around 14 miles in length. During those walks I averaged around 3 miles per hour. That is about 20 minutes from mile post to mile post.

Two years ago, I started walking again, while in what is called “terminal leave,” my last, two month vacation prior to my official retirement. Initially, I could walk 1.1 miles, twice around my block. Over time the lengths of my walks increased to 5 miles. Then during and after my recent problems, the length has settled down around 4.25 miles. I was averaging around 2.5 miles per hour over most of this time. I really wanted to get back to 3 miles per hour, but that seemed impossible. A couple of months ago, I realized my average speed was increasing. First I found I was averaging around 2.6 miles per hour. When I reached 2.7 miles per hour, I shared the news on facebook. I received some positive feedback. I shared the news again when I reached 2.8 miles per hour. Finally, I reached my goal. After a rest day, I averaged 3 miles per hour over my 4.25 mile course. The day was cold and rainy. I expect I was walking a little faster than normal so that I could sooner return to my warm dry car.

I knew some of the encouragement I was receiving came from friends who are, like me, locked in their own battles with father time. Some of it came from younger folk who found an old man doing a Rocky imitation at least somewhat amusing. Whatever the reason, the encouragement I received felt good.

The experience reminds me that we can achieve our goals, if we really know what we want. Goals need to be well defined. They need to be believable (to you). They need to be important (to you). Usually, we don’t know what we want. Too often, even if we know what we want, we don’t believe in the possibility of our dreams. The truth is you can achieve just about any reasonable goal if you search until you find the right path.

I have a friend who wanted a Corvette for most of his adult life. His wife and children postponed the Corvette again and again for more than thirty years. Finally he found a low mileage used Corvette in immaculate condition for $9,000. He had to fly halfway across the country to take possession of his prize, but now he has achieved his goal. He is the proud owner of what he considers a particularly desirable Corvette convertible. He only drives his car when the weather is nice. He is constantly teased about how he cares for his car. We ask him if he has ever had it over 35 miles per hour. He laughs. After all, he is the guy with the Corvette convertible.

There is something more we need as we define, then work towards our goals with patience and persistence. We need people, two kinds of people. We need to find people who have already achieved what we are looking to achieve. If you want to learn more about investments, find someone who knows a lot about investments. Learn whatever he is willing to teach you. If I was as serious about physical fitness as I was about financial fitness, I would be talking to dieticians, personal trainers, and probably a Yoga instructor. My body is seriously lacking flexibility. We also need people who pick us up when we fall down and push us forward when we are tired and afraid.

The best way to find coaches and cheerleaders when we are in need is to be a coach or a cheerleader for someone else when they are in need. If you know something that can be of assistance to another, don’t be afraid to share it even if it takes a bit of money out of your pocket. For example, if you are an automobile mechanic, don’t be afraid to teach a young man in your church how to change the brake pads on his twelve year old Hyundai. Don’t worry, the God of the universe will see to it you will receive your reward.

Jesus said, “And if anyone gives even a cup of cold water to one of these little ones who is my disciple, truly I tell you, that person will certainly not lose their reward.”

It costs nothing to be a lifter and an encouragement. Don’t tell people what they can’t do. Don’t hold them back to your level. Lift them up when they fall down. Find ways to encourage them to take just one more step when that seems impossible. Do it for someone else. Someday someone will do it for you.

Wednesday, November 19, 2014

Not Always So

And the Zen master says, “Not always so.”
Shunryu Suzuki

Comments on “Do You Have Money Smarts?” an article by Carrie Schwab-Pomerantz exploring five “money myths.”

Let’s play some “Yes, but!” games with your mind.

Myth #1 “A will is the best way to ensure that your estate will be distributed the way you want.”

And the Zen master says, "Nothing ever exists entirely alone. Everything is in relation to everything else."

Every adult needs a will. If you going off to college, a $30 Internet will is enough. If you have children a will is an absolute necessity. If you die you want to determine who will have custody of your minor children. Don’t let the courts make that decision for your family. For everyone the will is the foundation of a good estate plan. The point the author wants to make is that your will is not the last word in every case. If that old life insurance policy names your ex-spouse as sole beneficiary, that is who gets your money. Choosing how to use the selection of beneficiaries wisely can save your family time and money when your will goes to probate. You can even name a family trust the sole beneficiary of CDs, annuities, life insurance policies, or even brokerage accounts. Talk to your lawyer every five years or after a major life event. Your will is a living document until you are dead.

Myth #2 “Every adult should have life insurance.”

And the Zen master says, "It is easy to start a family but difficult to maintain it."
Tibetan Proverb

If you have minor children, you need life insurance, a lot of life insurance, low cost term insurance. How much? Rules of thumb include ten times your gross annual salary or $250,000 for every planned child before you start having them. Stay at home moms need life insurance too. How much? How much would it cost to replace her? Yes, you do have to put a value on the labor you will have to pay to replace in her absence. If you don’t have minor children, you probably don’t need life insurance. In certain cases whole life policies can be used as an estate planning tool, but be careful you are not buying anything just to send the salesman’s daughter to the private college of her choice.

Myth #3 “You should start taking Social Security as soon as you’re eligible.”

And the Zen master says, “In the beginner’s mind there are many possibilities, but in the expert’s there are few”
Shunryu Suzuki

Oh my! There are so many ways to take Social Security it boggles the mind. What is best for you depends on how long you want to work, how much you earn, and how urgently you need the money. Strategies allow one partner (usually the low earner) to take earn Social Security then flip to a higher spousal benefit when the primary earner begins to draw Social Security at a later point in time. As always, more money makes tax considerations more important. Before making this very important decision use one of the Social Security calculators found on the web and/or consult with your CPA.

A final note: When you choose to take Social Security is ultimately a bet on your life expectancy. If you think you will die before you are 78 or79 take your Social Security at age 62. If you think you will live past 78-79, wait until your full retirement age. If you don’t need the money and believe you will live to a good old age, consider postponing your draw until age 70.

Myth #4 “You should purchase long-term care insurance when you’re in your 40s or younger.

And the Zen master says, “If you have less than $500,000 you can’t afford long term care insurance. If you have more than $1,000,000 you don’t need long term care insurance. If you have more than $500,000 and less than $1,000,000 you can’t buy long term care insurance.”

The new conventional wisdom on long term care insurance sounds so much like a Zen koan I just had to use it. We buy insurance to protect us against the financial consequences of events we can not afford to cover with our own money. Using that definition, we can no longer buy long term care insurance. Today, that very expensive product is sold in multiples of $100,000. The days of no limit long term care insurance are over. Some recommend $300,000 as the “sweet spot” giving the most coverage at the most affordable rates. The problem is most people with a net worth of less than $500,000 can not afford to buy this insurance and the people with more than $1,000,000, given the cost of the product, would generally be better off self insuring. If you are somewhere in the middle look into buying long term care insurance sometime around your 60th birthday.

Myth #5 “If you need cash while you’re still working, a 401(k) plan is a good place to turn for a loan or a withdrawal.”

And the Zen master says, "When you try to stay on the surface of the water, you sink; but when you try to sink, you float."
Zen Proverb

When 401 (k) plans came into existence some very bad financial advisors discovered that the owners of these plans could borrow their own money from these plans at a low interest rate that is going back into your plan. Essentially, you are paying the loan back to yourself. Hopefully, that bad idea has been put to rest by the responsible financial press. When you borrow money from a 401 (k), you are losing the 7% to 7.5% return on your investment predicted by Siegel’s Constant plus the added benefit of growth in a tax sheltered environment. Even if you successfully pay yourself back, you are using after tax dollars. When you take that money out in retirement, you will be taxed a second time on those same dollars. How special is that? If you fail to pay your loan off on time, you will get hit with taxes and penalties. If you lose your job you have 60 days to pay off the entire balance or face early withdrawal penalties and taxes. Now think about coming up with say, $50,000 cash on the day you lose your job.

Monday, November 17, 2014

New Car Math

The other day the manufacturer of my newest car sent me a rather complicated questionnaire. This survey was attempting to determine what motivated me to buy a particular car. I was given a long list of factors, some redundant. These included, value, gas mileage, reliability, long life, safety, fun to drive, stylish, and environmental impact. Once the respondent selected and ranked seven items from this list, another list of questions was generate to determine how you ranked your seven factors relative to each other by numerical score.

Surveys of this sort are scientific instruments designed by psychologists and sociologists. The information they provide is factored into what products are produced and how they are then marketed to the public. However this one didn’t capture the process I use to buy a car.

After housing, cars are typically a family’s largest expense over the course of a lifetime. The current average cost of a new vehicle is $32,086. That would be a monthly payment of $641 according to the Motley Fool. The bottom line is the average American can not afford to buy an average new car. suggests the “20/4/10” rule of thumb for determining if a car is affordable.

A down payment of 20%, say $6,400 just for grins.

The four is a maximum loan duration of 4 years

This would generate a monthly payment of $560 at 2.24% (If you could get it 3.9% is more realistic) add $100 a month for insurance for a total monthly cost of $660.

In order to meet the 10% part of the rule of thumb your gross household income would need to be in excess of $6,600 a month. That would be a gross annual income of $79,200.

The only problem with this example is the assumption that the family will only have the one car. Most families have two cars. How many households have a combined annual income of $158,400?

Another common rule of thumb suggests that a family can afford a car that costs 1/3 of their gross annual salary. For a household earning around $50,000 a year, that would be a maximum of around $17,000 for a car.

I have a better suggestion. Buy used. Pay cash. If you graph the average cost of a particular model by age or mileage, you will discover a parabolic curve that decreases significantly over the first four years of an automobile’s life the flattens out into nearly a straight line as it passes the ten year mark. You will see an inflexion point somewhere around three to five years depending on the make and model. That is the point of maximum value.

But you already knew that. Late model used cars are a better buy than new cars.

Let’s look at the down payment in the new car example. If you can come up with $6,400 in cash, what can you buy? A quick look at the Carmax website showed a 2006 Hyundai Elantra GLS four door sedan at $7,000. This car would probably serve a young family of four for at least six or seven years. If the family saved $600 a month for their next car instead of giving the money to the bank, after six years they would have $43,200 in cash at 0% interest.

What kind of car can you buy for $43,200? How about a 2014 Lexus GS 350 at $44,000?

Now we’re talking new car math.

Saturday, November 15, 2014

Lemons and Lemonade

GE was the first major company to consciously make their tax division a profit center. They have hired an army of the finest tax attorneys, lawyers, and former IRS executives money can buy to maximize the use of the existing tax code to their shareholders’ advantage. They are doing a pretty good job. In 2010 GE reported $14.2 billion in profit. They paid nothing in taxes. Instead GE claimed a tax benefit of $3.2 billion. In order to achieve these miracles GE files annual tax returns that run over 57,000 pages! As of April 2014 there were “only” 73,954 pages in the entire U.S. tax code.

I have used these facts to fuel my private rants about the insanity of our existing tax code, but this blog is not about cursing the darkness. It is my desire to encourage my readers and myself to keep on keeping on, trying to find a way to financial freedom in spite of the obstacles, even those shrouded in darkness.

GE is playing the game by the rules and winning. Given the amount of negative press the company gets for paying nothing in corporate income tax on $14 billion in profits, it is safe to assume that their tax return is one of the most carefully audited returns in the country. As an American, I play the game by two sets of rules. The first set of rules is the financial realities of the present moment. I am limited by the laws of our land and our current economic reality. The second set of laws is more stringent. They are found in Holy Scripture and hopefully in my heart.

How can you use the rules and your current situation to find a winning edge? As the old school motivational speakers ask, “How can you turn your lemons into lemonade?” Look around you. Someone is playing your game and winning. How are they doing it? What can you learn from their example? How can you apply what you have learned to your life?

I remember back in the early-mid seventies when I was earning something on the order of $9,000 a year, my wife’s cousin, a professional photographer and artist, managed to get a $10,000 federal grant to photograph tombstones in Southern cemeteries. My first reaction was anger. I was appalled at this waste of my tax dollars. Fortunately it didn’t take me very long to realize that my wife’s cousin was a very smart woman who found a way to game the system to her advantage. Instead of hating on her or the many ways our Government finds to waste taxpayer dollars, I decided I should listen to her more closely. Maybe I could learn something of value from a person who was finding a way to follow her dreams.

From her I learned art is a business. She consciously developed a network of acquaintances and customers that would allow her to connect with the right people in her industry, ultimately landing one woman shows in New York galleries. Of course she had to use her talents to produce a high quality product, but I learned that talent and a quality product is not enough. An artist either needs to be a businesswoman or find a good business manager to achieve success and financial freedom.

What could an individual investor learn from GE? Back when I bought my first home I received contradictory information from calls to the IRS on how to fill out my tax return, so I went to a local CPA. He smiled when he discovered that after buying the house, I rented it back to the people living in the house until their new home was complete. I just converted rental property into real property, earning a $3,000 deduction. At that point I decided it would be foolish for me to attempt to file my own tax return when I could hire a professional to do it for less than $200. My tax returns are more complicated than they were in 1987. It costs considerably more than $200 to complete my tax returns for the Feds and two states. Last year my combined forms ran 82 pages. I am a plain vanilla investor. I buy mostly index funds and conservative dividend paying stocks (including GE). I seldom sell anything. My taxes should not be that complicated, but they are. I consider the money I pay my CPA one of my best investments. Look at how seeking professional advice before paying taxes is working for GE. Benefit from their example.

Wednesday, November 12, 2014


In retirement, I have joined a local writers’ group. Over the last few meetings that I have been able to attend, they have been reviewing the chapter on investment I have written for The Silver Eagle Experiment (Exploring Pathways to Financial Freedom). I was hoping to have the completed draft ready by early November, but I spent most of the last five months dealing with our family emergency. Now that the crisis is over, hopefully, I can return to something approaching normalcy. I now know what I need to do with the chapter. It wasn’t really necessary to submit the last two segments for review but I really wanted to group to read the material because, I believe.

The writers’ group is a perfect test set for my material. The members are intelligent, well educated folks without a whole lot of interest in financial questions or knowledge about investment strategies. That my material is getting a preliminary edit from published authors and a college professor is just a bonus. I really want them to read my chapter on investment. I really want them to, “Get it!” I am absolutely convinced that if they diligently apply themselves using only the material in that chapter they can revolutionize their financial lives. In ten years they could look back at how far they have traveled in complete disbelieve. I realized I really, really believe in the value of this ministry.

I believe if you stay out of debt, you are already on the road to financial freedom. The debtor is slave to the lender. Debt is part of the curse. The ability to lend money is part of the blessing.

I believe if you learn to live on a budget, simplified, detailed, or old school envelopes you can work your way out of just about any mess. The money equation is very simple:

Money In = Money Stored + Money Spent

However there is no way to escape the money equation. Not for individuals. Not for families. Not even for countries that can print their own money.

I believe that once you break even you can learn to save for special purposes, a down payment on a home, college for the kids, and the 800 pound gorilla, RETIREMENT.

I believe you can learn to turn your savings into investments, more than doubling your expected returns over a sufficiently long time period. It can be as simple as a single lifecycle fund. Your investments can become as complicated and sophisticated as you can stand.

I believe that more divorces are caused by money problems than by any other single factor. There are simple effective strategies that can help to avoid divorce like no secrets and strict limits to the (my money, your money, our money) argument.

Finally, I am a Christian. I believe that how you choose to earn, manage, and spend your money are intensely spiritual questions. Ultimately, all the silver and all the gold belong to our Creator. You and I are just passing through. What we hold in our hands today will pass into the hands of another tomorrow or even our most cherished investments can simply disappear – overnight. Consider the demise of Enron.

As you walk your path to financial freedom. Be sure to check in with the Lord of the Universe who gives wisdom to all who ask and don’t forget to give something to God without expectation of return. It is good for your heart.

Tuesday, November 11, 2014

Millennial Problems

The Wall Street Journal reports that adults under the age of 35 have a negative savings rated of -1.8%. That means they are spending more than they earn; either by depleting their savings accounts or going further into debt. In the months following the recession this number peaked at +5.2% for these young adults sometimes called millennials.

This is scary dangerous. At that age there hasn’t been enough time for a young adult to build a significant emergency fund to protect against the loss of a job or some other misfortune. Unfortunately, this is the best time to save for retirement. Thirty years combined with the power of compound interest makes millionaires out of ordinary income earners. Even a few dollars regularly invested in a 401 (k) in the early years of a career can make a huge difference at age 65. Time is not a reversible process. Once those years are lost, it is very hard to recover.

It has always been difficult for people in their twenties to save. There are houses to buy, children to raise, furniture, as well as other traditional household formation expenses associated with young families. It has been more difficult for the millennials because many of them are preloaded with significant student debt. Before they can save for that 20% down payment on their first home, it can take a decade to get the student loans under control. Also they graduated just in time for a nasty recession. The recovery isn’t offering enough good jobs. College graduates are competing for jobs that do not require a college degree.

Anecdotal evidence seems to indicate that many of these young Americans have given up any hope of living what older folks would consider a normal middle class life. This age group seems to be spending a lot of money on their social life and travel. Some of it is understandable. With the average age for marriage and starting a family postponed by student debt and a shortage of good jobs, the millennials are spending more time socializing and more money in restaurants and bars than earlier generations. They also seem to spend a lot more time and money traveling than us older folks did at that time in our lives.

Money can not be spent twice. Money spent on an occasional luxury is gone. It can not be used to retire student loans or mortgage debt. It can not be used to invest for retirement or other long term goals.

From personal experience, I know that way too many of these young people, already dealing with higher unemployment and underemployment rates than older workers along with the added burden of student debt, simply do not understand the basic principles of personal finance. They didn’t understand that they were signing away ten or more years of their life when they took out those student loans. They didn’t understand that the free pizza and tee-shirt that came with the VISA card offered to them at the student center were going to turn out to be the most expensive “free” items they ever acquired. As parents and educators our generation has failed miserably in preparing these folks for life in the real nasty world where actions sometimes produce results that can not easily be remedied.