Wednesday, April 30, 2014

Working on Work

Lately I have been spending a lot of time thinking about the soft side of money management rather than the nuts and bolts of keeping a budget or the basic principals of modern portfolio management. I have identified several job search paths.

1)Do what you love the money will follow: No guarantee of that happening – good luck. If you succeed, some do, you might appear on the Oprah network when you publish your book. I might even buy a copy.

2) Split the Difference: Find the least objectionable path that will provide you and your family with an acceptable lifestyle – I tried this. It works but it will leave you with regrets.

3) Cold reality: Look at who is actually hiring and what they are offering. Then follow the money. – This is the only path in some nations. In America, you can do better.

4) Look for an opportunity to serve others: The logic is that we will be paid if we provide a valuable service to others. Look for opportunities to serve more people or provide a more valuable service. – This has promise. However, the marketplace gets to choose the value of the service you provide. Maybe $20,000,000 a year for a premiere left handed major league pitcher; somewhat less for schoolteacher.

5) Follow your energy: As you work in school or in a paid position, notice when you lose track of time; notice where your energy naturally flows. Look for a job that will pay you to lose track of time. – The more time I spend exploring this idea the better I like it. Particularly when combined with #4 on the list.

Those of us who have studied psychology, sociology, or management theory have learned about Maslow’s Hierarchy of needs. The original model had five levels, starting with physiological (food, water, air), then safety, love and belonging (friendship, family, intimacy), esteem (self esteem, respect, confidence), and finally self actualization (morality, creativity, freedom). Only this morning I learned that Abraham Maslow proposed a larger pyramid, one with eight levels, before his death in 1970. In spite of various criticisms offered by philosophers and psychologists, this model of human needs has weathered the test of time.

Chip Conley, the founder of the Joie de Vivre chain of boutique hotels, applied Maslow’s Hierarchy to the workplace. His simplified pyramid has three levels.

1)Money: Hey? If it isn’t paying you enough money to provide for your basic needs (not wants) you need to be looking for a better job. Conley equates money, with the first level of employment satisfaction he calls, a job.

2) Recognition: The satisfaction that you derive from mastery, self respect, the respect of others, and self confidence is what separates a job from what Conley terms, a career. Once you have satisfied your family’s needs and at least some of their wants, look for a path that will allow you to look back with satisfaction on the body of work you have produced in a lifetime.

3) Meaning: Can you ultimately find a path that is moral, creative, one that brings beauty into your life and into the world? Congratulations. You have something more than a career. You have found your calling. You have found freedom, because you have lost track of your small self in the joy that is your life.

I think Conley’s three level pyramid can generate some pretty good questions to ask yourself and to discuss with your spouse and friends.

Will this idea provide us with enough money to live? If the answer is no, either start over or lower your standard of living.

Will I be proud to tell others what I do for a living because it brings me satisfaction and happiness? Running a payday loan company might be a very profitable business, but I want no part of it.

At the end of my life will I have joy or regrets because I made myself a better person and the world a better place?

Tough questions; it is hard to think deeply when caught up in a world that isn’t going to stop until you find your answers.

To paraphrase General Corman from Apocalypse Now: Things get confused out there. Power, ideals, morality, and practical necessity. But out there in the marketplace we will face temptation. Because there's a conflict in every human heart, between the rational and irrational, between good and evil. And good does not always triumph. Sometimes, the dark side overcomes what Lincoln called the better angels of our nature.

Keep walking towards the light.

Monday, April 28, 2014

Alice and the Cheshire Cat

Alice: “Would you tell me, please, which way I ought to go from here?"
Cheshire Cat: "That depends a good deal on where you want to get to." Alice: "I don't much care where –"
Cheshire Cat: "Then it doesn't matter which way you go.”
― Lewis Carroll, Alice in Wonderland

Lately I have felt the need to write more often than usual about the importance of others in our financial lives. Today I will write about two kinds of people, door keepers and models.

There are times when we have simply come to end of the rope. We find ourselves facing overwhelming obstacles. All of us, even if our situation is not so dramatic, are in need of counsel in times of uncertainty. In the simplest possible language, sometimes we just need a break. As a Christian, I believe that normally such counsel, instruction, or opportunities come from the Lord by means of other people.

Somewhere out there a doorkeeper is waiting for you. This person has the answer you need. She has access to the resources you need and she is willing to share them with you. He can introduce you to the man who actually makes the hiring decisions for the company of your dreams. Perhaps there is a doorkeeper who may even be able to introduce you to your future husband or wife.

Here is where it gets tricky. This person may or may not be someone you like or respect. Alice found the Cheshire Cat annoying and quite mad. Yet the creature had information and wisdom she needed on her journey through Wonderland. This person may or may not become a permanent part of your life. I doubt that Alice kept the Cheshire Cat as a house pet once she woke up from her dreams on that riverbank. However, for whatever reason, the doorkeeper is a person who holds a necessary key to your future. For this reason unless you are a clairvoyant, you must live by the Golden Rule, “Do to others what you want them to do to you. This is the meaning of the Law of Moses and the teaching of the prophets.” You simply don’t know. This cuts both ways. You may not be a nice person, but you may hold the key bit of knowledge or opportunity that would bless someone you may not even like. Bless them anyway. You will find joy in the success of others. You will not find happiness if you injure others or withhold blessings that are within your power to bestow upon others.

If you don’t like some aspect of your life, you must change yourself to change your life. As much as that goes against the spirit of this age, it is the truth. Don’t expect the world to change for your convenience. Find someone who is succeeding in an area where you are failing. There is an important difference between a doorkeeper and a model. A doorkeeper is a person who has something you want or need. A model is someone you want to become, a person just like you only better.

The easiest place to find models is on the bookshelves of your public library. Somewhere there is a person who overcame your problems, with your personality and your resources. Study their life.

The best place to find a model is in your circle of friends and acquaintances, your tribe. If you do not have a model or models in your immediate circle, your circle is too small or you are living in the wrong tribe. If your friends are encouraging you, supporting you, and yes, even kicking you in your backside when you need it, these are people you want in your circle. If they are dragging you down to their level, tempting you to give up your dreams, or excusing your bad behavior, it is time for you to move on.

When you find a model, make them a part of your life. Treat them with respect. Don’t be afraid to invite them out to lunch. Ask them questions. Ask them how they found a path to fulfillment facing the same handicaps that you face. If you have found a model, you will know it. When you hear their advice, your heart will confirm it with a resounding, “Yes!” This is different from even the best advice given by a doorkeeper, advice that you might desperately need to hear. Sometimes a prescription given by a doorkeeper, might not taste very good. I don’t like to think about the diet I should be eating if I really want to continue losing weight.

The very best outcome to your search for doorkeepers and models is finding both in the same person. We generally call such people mentors. These people can provide us with opportunities, ongoing counsel (sometimes for decades), protection from our enemies, and a model of how to live a good life in keeping given our personality, gifts, and dreams.

Happy hunting; may you be blessed with the doorkeepers you need, the models you want, and a mentor to guide you through the valleys and mountaintops of life.

Now just relax and enjoy a conversation between Alice and that annoying cat.

Alice and the Cheshire Cat

Friday, April 25, 2014

Three Solutions to The Money Equation

There is no one size fits all solution to your money problems. The possible solutions are ultimately only limited by your imagination. However for any of them to actually work in this material world, they must satisfy the money equation. That is not always easy.

Money In = Money Stored + Money Out

People in our culture tend to focus on Money In. If only I had a better job that paid $XX, XXX or even $XXX, XXX dollars a year, I would be happy and all my money problems will be solved. Well maybe? Maybe not if you forget about the right hand side of the equation. Many doctors earning significant six figure incomes have relatively low net worths because they spend it as fast as it comes in. Many professional athletes have been bilked out of millions by questionable investment advice (Money Stored) or the expense of a posse of “friends” who are very willing to spend their home boy’s money until it is all gone. Generally speaking, the left hand side of the money equation is where we find our big wins. Jumping your annual income by $10,000 a year can buy a lot of $5.00 lattes at Starbucks. Can you by education, by working harder, by working longer, or even by working smarter think of a way to juice the left hand side of your money equation?

In retirement making your money work for you instead of working for your money is the name of the game. Focusing on Money Stored becomes very important. However, every adult, no matter what age, needs to calculate his net worth every month. Through a combination of savings and investments a portfolio of $1,000,000 can realistically be accumulated by an average American family willing to avoid the debt trap. There are people who have no other job than focusing their attention on Money Stored. They are call investors. While it is unlikely that you will become the next Warren Buffet, you can make your money work for you. Then with a lot of hard work, some self control, and a little luck (blessings of our Lord) the day will come when you will find financial freedom. You will no longer need to work for a living. You will be able to work at your calling, whatever that might be.

Frugality (Money Out) is an important factor in reaching financial freedom for most of us. If we do not watch and control where our money is going, there are plenty of people who are watching our money. They are only to willing to take it from you. This is where the dreaded monthly budget forces us to project and then control how we use our money.

Why do I see a hard hearted, flinty eyed old man waving his cane at me while pronouncing, “A penny saved is a penny earned.” Actually given taxes a penny saved is more like a penny and a half earned, but let’s save that rant for Facebook.

There is no question about it, the formal zero balance budget is the gold standard. If you are in trouble, use it, at least to you are out of trouble. Hopefully, by that time you will have learned enough good money habits that will stick with you if you decide to use one of many budgeting variants that fall short of the full court press zero balance budget.

The bottom line is the bottom line. If more money is coming in than is going out, your net worth is increasing. That is good. If more money is going out than is coming in you will ultimately find yourself in world of hurt.

Wednesday, April 23, 2014

Is It the Destination or the Journey?

A lot is written on the question, “Is life a destination or a journey?” The answer is both. By definition, you can’t reach a destination without a journey. A journey without a destination is a sure fire way to waste a lot of time and money that will ultimately take you nowhere. I see two kinds of mistakes people make handling their finances. Surprisingly they are almost mirror images of each other.

The first mistake is too much focus on the journey, particularly obstacles. Too often instead of remembering their goal, people lock in on the obstacle. There are three kinds of obstacles.

The first are the road bumps of life. Roll over them. Then put the pedal to the metal.

The second type of obstacle requires planning and effort to overcome, but it is possible to overcome these obstacles. This is sometimes called the four step method. It is frequently used by engineers and scientists working on technical problems.

1)First spend some time understanding the nature of the obstacle and your limitations.
2) Then make a plan that you believe has a good chance of overcoming the obstacle.
3) Implement your plan.
4) Then examine the results. If you are not getting the results you want return to step one and try again.

The third type of obstacle can not be overcome, either because it is not in your control or because you are limited by time or resources. In financial matters, people fall victim to focusing on problems that they can not control or overcome rather than what they can do get closer to their goal.

Consider this conversation. A person needs to get from Baltimore to Miami by the end of next week. They ask me how to get to Miami. I tell them just get on I-95 South. Stay on that road until you get to Miami. Then they inform me they do not own a car. If fact they tell me they need at least a $20,000 car in order to feel safe on the Interstate. They just don’t have that kind of money.

I think a minute before replying, “OK, You can fly to Miami on Southwest Airlines from Baltimore to Ft. Lauderdale, just 28 miles from Miami for less than $200.”

They reply, “But I don’t have a car or $20,000 that I would need to buy a car. How could I get to the airport?”

Really, I have had conversations that are all that different from this silly example. Usually, there is no financial problem that can not be overcome given enough time. However if you are constrained by the reality of your situation, bypass the problem or change your destination. Generally this kind of obstacle leads to an almost hypnotic state of paralysis. However, sometimes even the wise charge on against an immovable object. I am sure General Robert E. Lee would have repositioned the Army of Northern Virginia on better ground if he knew in advance what would happen to Pickett’s Charge.

The mirror image of an unhealthy focus on the journey is keeping your eye on the destination without planning or counting the cost. This kind of planning always includes a schedule and a budget. Too often I see people try to make the trip from Baltimore to Miami by riding a bicycle to the West. After a few days they reach Ohio. “This isn’t Miami,” they lament. Then they turn around and come home.

If asked, I tell them, “Get in your car and head south on I-95. It should take you less than two days.” I give them the journey of 1,089 miles begins with a single step speech and send them on their way.

But a few days later they are back in Baltimore. They tell me, “I didn’t like the traffic on I-95. I am going to find a different route.”

I shrug my shoulders, ruefully shake my poor old bald head, and wish them well, knowing in my heart that there is a good chance they will never reach Miami. But you never know, they might actually find a different route to Miami that works for them. No doubt it will waste a lot of time and money, but my prayers are with them as they journey through this valley of tears.

What I am talking about are ultimately problems that exist in our heads. We all have blind spots. You have yours. I have mine. It is easy for me to see your blind spot. After all, it isn’t my blind spot. Sometimes I am not aware of my blind spot because it is my blind spot. They wouldn’t call it a blind spot if I could see what was going on there. Sometimes I know where my blind spots are located. If I know that I have a blind spot, I give an extra effort to find out what is going on in my blind spot before I make a move. I have owned two cars that had significant blind spots. I owned the second for 14 years. So far, I would rate it as the best car I have ever owned, but it had a fastback roof that gave it a bad blind spot. I learned that I just couldn’t rely on the rear and side view mirrors before changing lanes. I had to turn my head so I could see into my blind spot. I traded in that car for a new model four years ago. My new car only has a small blind spot. I no longer need to turn my head in such a dramatic fashion, but I still find that it is a habit deeply ingrained in the way I drive a car. It is not a bad thing to spend too much effort making certain that your blind spot is clear before you change lanes as you drive down I-95 on your way to Miami.

One more thing, Let’s be careful out there.

Monday, April 21, 2014

It's Only Money

It seems like a good time to examine the nature of money. Money is nothing more than a societal construct to facilitate the exchange of value. It isn’t good. It isn’t evil. It is a tool. Think about it. If money was evil why would the leadership of our churches spend so much time and energy collecting it from the faithful? Money isn’t even physical! Its value only exists in the hearts and minds of you and your neighbors. Anything can be money if a society agrees that it is money. Gold, strips of paper, or even Yap stones have all served as money in one culture or another.

In our society, money is a piece of paper or electronic blips on a computer. It is backed up by nothing but a promise. The American dollar is debt. The reality is probably more complex than can be contained in a 500 page book but here is the essence. The American government creates money by creating debt when the Treasury Department issues a bond. This bond is sold through the Federal Reserve Bank to “primary dealers” who must make bids on this debt through an auction process. Who are these guys? “For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.” (From Wikipedia)

Then through the magic of fractional reserve banking, a dollar of debt becomes the basis of a loan that creates more debt. There are mathematical formulas that predict the outcome of such activities based on the amount of money the regulators require the banks to hold. A 10% reserve turns one dollar into nine dollars. If this was being done by someone other than the government it would constitute fraud.

That debt can be exchanged for food, gasoline, a new BMW, or even medical care because every member of society believes they can then take that debt and exchange it for something else of value.

Here is a different way to think about money from the rabbinical tradition. Money is the proof that you have performed some service of value for your fellow man. If you are not a thief, a con artist, or someone who is using political power to create an artificial shortage of some desirable commodity the money in your pocket is proof that you have faithfully served your neighbor. Rabbi Daniel Lapin suggests that you should not ask God for more money. Instead ask God how you can be of service to a greater number of your fellow men or how you can provide a more valuable service to your neighbors.

Then you will have more money.

In Psalm 73 the author asks God why the wicked prosper. He recounts all their evil deeds asking God why he should even try to walk in righteousness when these people are healthy, happy, and free from the burdens common to man. Then he understands. God will judge the wicked. Their destruction will be certain and complete. Let’s forget eternity for a moment. Even in the short term, it is unlikely that a thief or a con artist will continue to prosper for a very long time. Sooner or later law enforcement will learn the name of the thief. Then backed by the considerable resources of the state, the police will bring the thief to justice. The more notable the thief’s accomplishments, the more hours will be spent investigating their crimes. The more outrageous the con artist the more certain their destruction; infomercial king, Kevin Trudeau was just sentenced to 10 years in a Federal penitentiary for his frauds. Leave the fate of the wicked in God’s hands. Just focus on being of value to your fellow man.

Just do your best. Let God take care of the rest.

Thursday, April 17, 2014

Three Little Words

I am passionate about my investments. I want to understand and control what I am doing with my money. I don’t feel that way about everything. I don’t want to understand my income taxes. I want to cover my eyes and make loud noises so I can’t hear or see what is happening to my money. Thank heavens for my CPA. Sometimes it is hard for me to understand that there are people out there who not only don’t understand investments, but don’t want to understand investments.

I have three words for people who don’t want to understand their investments, “Vanguard Lifecycle Funds.” There are now low cost offerings from other companies that compete with the king of low cost funds, but before you invest in anything make sure you compare it to what Vanguard is offering.

Lifecycle funds choose a balanced age appropriate mix of investments on your behalf.

Let’s take a look at the Vanguard offering for folks who are looking to retire in 2045, people age 32 to 36.

Vanguard Target Retirement 2045 Fund (VTIVX)

Minimum Investment: $1,000 (Normally, Vanguard’s house minimum is $3,000)

Management fees: 0.18% (Really Cheap)

12b-1 fees: None (If anyone tries to sell you a product with 12b-1 fees, run away.)

Purchase fees i.e. sales commissions: None. Zero. Nada. Halleujah!

Redemption fees: None

Account Service Fees:

Simple IRAS: $25 a year
403(b)7 Plans $15 a year
Individual 401 (k) Plans $20 a year

Nonretirement Accounts, Roths, traditional IRAs, SEP-IRAs, UGMA/UTMA, and ESAs $20 annual service fee for each fund with a balance under $10,000. This fee is waived if you choose electronic delivery of all correspondence.

Fees are a very important factor in determining the ultimate quality of your investment. If you are giving a salesman more than 5% of your investment up front, it is very difficult to ever recover that money no matter how astute the fund manager.

Now, let’s look at what they are giving you for your money, a nice aggressive package for folks in their early thirties that covers the entire U.S. stock market, a healthy dose of foreign markets, and some reserves in bond funds. I would be a bit more conservative, but I don’t have any problems with their selected mix of funds.

1 Vanguard Total Stock Market Index Fund Investor Shares 62.9%
2 Vanguard Total International Stock Index Fund Investor Shares 27.1%
3 Vanguard Total Bond Market II Index Fund Investor Shares 8.0%
4 Vanguard Total International Bond Index Fund 2.0%
Total 100.0%

Of course if your company offers a 401(k), that is where you want to start your savings program. If you want to start saving for some kind of long term goal, but you don’t want to spend the time and effort to manage your own money, consider the lifecycle fund. If you automate your savings with monthly debits that increase over time as you gain confidence in putting your money at risk and as your income naturally increases over time, you should be in good shape when you reach 65.

Your ultimate target for retirement savings is 15% of your pretax income into tax favored accounts. Normally this would be a 401(k) and a ROTH IRA. Start small, gradually increase the percentage every time you get a raise, you will get to 15% if you persevere (really).

Wednesday, April 16, 2014

What is In Your Hand?

You know the story. Moses starts a conversation with God at the burning bush. He learns that the Lord has it in mind for Moses to return to Egypt, where he murdered a man. Then Moses is to go to Pharaoh with God’s demand, “Let my people go.” Moses is not sure this is a very good idea given the fact that he does not have an army or several trillion dollars to buy a nation of slaves.

Then the LORD said to him, “What is that in your hand?”
“A staff,” he replied.

The LORD said, “Throw it on the ground.”

Moses threw it on the ground and it became a snake, and he ran from it. Then the LORD said to him, “Reach out your hand and take it by the tail.” So Moses reached out and took hold of the snake and it turned back into a staff in his hand. “This,” said the LORD, “is so that they may believe that the LORD, the God of their fathers—the God of Abraham, the God of Isaac and the God of Jacob—has appeared to you.”

With that staff, Moses executed some of the flashier miracles that can be found in Scripture including the parting of the Red Sea.

Are you in money trouble? Are you looking for a job? Do you want to start a saving program so you can retire before you die?

Do something today because there will be a tomorrow. If not for you, then for someone you love.

Start with what is in your hand.

Don’t wait for the perfect opportunity. Take what is in your hand. Start a conversation with God about your dreams, your goals, and your problems. Ask God for wisdom. He has promised he will give wisdom to any who ask for it.

Then take action. Do something that makes sense. If you are in debt, don’t borrow any more money. Then begin to pay it off.

If you want a job, start networking. Six degrees of separation is a silly party game based on the theory “that everyone and everything is six or fewer steps away by way of introduction, from any other person in the world, so that a chain of “a friend of a friend” statements can be made to connect any two people in a maximum of six steps.” (Wikipedia) While there is some evidence this may in fact be true, the jury is still out. Sufficiently bored mathematicians may ultimately proof six degrees of separation is an urban myth. However, you are certainly only six degrees of separation away from millions of people, one of whom may hold the key to a new life.

If you believe in a God who is there and not silent, you are only two degrees of separation away from your answer.

If you want to begin an investment program, open a savings account. Once you have an emergency fund in place, buy some shares in a low cost index fund.

Presto! Chango! You are now an investor.

You can’t get where you want to go unless you are moving towards that goal. You can’t steer a ship that isn’t moving. Start with a goal you can control. I will not buy that latte. I will send that $5.00 to the credit card company. I will contact three friends today about potential job openings. I will fill out two job applications every week until I find a job. I will put $5.00 in my savings account every day. With electronic banking, that is a possibility.

Don’t think about what you can’t do. What you can’t do is of no interest or value to anyone, including yourself. One time Jesus and his disciples were out in a boat. The disciples forgot to bring along any bread. They only had one loaf in the boat and they were worried.

Aware of their discussion, Jesus asked them: “Why are you talking about having no bread? Do you still not see or understand? Are your hearts hardened? Do you have eyes but fail to see, and ears but fail to hear? And don’t you remember? When I broke the five loaves for the five thousand, how many basketfuls of pieces did you pick up?”

“Twelve,” they replied.

“And when I broke the seven loaves for the four thousand, how many basketfuls of pieces did you pick up?”

They answered, “Seven.”

He said to them, “Do you still not understand?”

A little kid with a bag lunch containing five loaves and two fishes turned what was in his hand over to Jesus. After the Lord fed 5,000 men plus an unknown number of women and children, there were twelve baskets left over.

Left over money, what a concept! It is possible you know. It is only money. It is the subject I write about, but this works for issues of life that are far more important than money.

Start today.

Start with what is in your hand.

Keep moving towards your goal.

Let God take care of the rest.


Tuesday, April 15, 2014

Trigger Securities (A Warning)

This morning I learned about a new investment vehicle that seems created to take advantage of people like me from the most recent edition of Richard Young’s newsletter. Trigger Securities sometimes called High Income Trigger Securities promise a higher income stream than available with conventional bonds, certificates of deposit, money market funds, or savings accounts. However, they appear to be a better deal for the bank or investment house selling them than for the individual investor is search of income.

There doesn’t appear to be a lot of information on these products. I assume they are a pretty new idea, but this is how they work according to and Richard Young. An investment house issues an unsecured debt obligation connected to the price of an individual stock or to the level of a stock index such as the S&P 500. Let’s say you invest $100 in one of these things. Here is what might happen. First the broker selling the product takes about $5.00 off the top. Then, like a bond, you own a security that will pay a guaranteed coupon rate for the term of the agreement, say 5% for two years. At the end of the term you will receive some portion of your money back or shares in stock as described in the agreement.

This is where things get a little tricky. Like annuities these agreements are complex. Each individual Trigger Security will be different, but basically three things can happen. Trigger securities have two points of interest, the price of the stock or level of the index at the time the security is sold and the trigger point, generally around 75% of the initial level.

If the asset or index has stayed above the issue price since time of issue or finishes above the issue price the investor may get his money back or even a little more than his original principal (read the fine print).

If the asset or index never dropped below the trigger price during the term of the agreement or finishes above the trigger price the investor will get his money back, like a bond.

If the asset or index dropped below the trigger price during the term of the agreement the investor will get some portion of his money back or a number of shares as calculated by the terms of the contract.

So, in this example, the bank gets to use your $100 for two years without investing it in any kind of an underlying security, perhaps they will lend it to a credit card holder at 18%. The salesman gets his $5.00 up front. You get $10.00 in interest income (less taxes) paid out over two years. At the end of the two years, you may or may not share in any increase in the asset. If the value of the asset drops below the issue price or finishes below the issue price but above the trigger price you will probably get your money back, but if it drops below the trigger price, unlike a bond, you will lose some portion of your original investment. Generally this loss will equal the total loss suffered by the security or index.

There isn’t a secondary market for trigger securities. This means that unlike a share of stock, you can not sell it for an easily determinable price at any time you need the money or change your mind about the future of the company. If you buy it you are pretty much stuck with it for the term of the agreement. Also please note that unlike ownership in individual securities or index mutual funds you aren’t getting any dividends from the stock or index connected to the trigger security. As readers of the blog know, I believe dividends are where it is at. Roughly half of your increase in your stock or stock mutual fund investments will be generated by dividends. Of course, if the company issuing the trigger security goes belly up, there is no underlying asset on which you can place a claim. Good luck with the bankruptcy judge; you might get a few pennies on the dollar. Evidently, the IRS has not yet decided what to do with income generated by these things. It may be taxed as capital gains or at the higher rates for regular income.

Richard Young indicates that these products are pitched at “free dinners” for investors. I get invitations to these things all the time. A long time ago, I went to one on estate planning at the recommendation of my broker. The jumbo shrimp were particularly excellent and the drinks were free. The pitch was professional, but I didn’t buy anything. Unfortunately, many people, particularly retired folk, have not been so lucky. They learned a painful lesson, “There ain’t no such thing as a free lunch.”

Please: Let’s be careful out there!

Saturday, April 12, 2014

Skin in the Game

Back in the day when I practiced Tai Chi, our teacher informed us that in old China, a family would pay a doctor of Chinese medicine a retainer to keep the family healthy. When a family member became ill, the cost of medicine and treatments came directly out of the doctor’s pocket.

Would American medicine (sometimes called sickcare) look any different if we adopted that model?

The student loan crisis has been generated, at least in part, because the educational establishment has no skin in the game. There is an almost unlimited source of Government funding and Government guaranteed funding that has allowed our universities to increase the cost of education at 5 times the rate of inflation. The university gets all its money up front—guaranteed—whether or not the student finds a job or even graduates. The lender’s money is guaranteed by the Federal Government by a law that does not allow the student to discharge those loans, even in bankruptcy.

If the parent cosigned the loan, it isn’t always discharged with the death of the child.

Would American higher education look any different if the university and the bank shared responsibility for the outcome of the loan with the student and parent? What if those loans could be discharged in bankruptcy if the student couldn’t find a job in her field after some reasonable period of time?

The Real Estate crash of 2006 and the subsequent market crash of 2008 were generated, at least in part, by banks and mortgage companies that granted loans on the basis of credit scores rather than manual underwriting that examined the entire financial situation of the applicant. The most egregious examples of this nonsense were the so called liar loans. The applicant simply stated they had a job that paid so much a year. The mortgage broker never investigated this claim or if he did it had no bearing on the outcome of the decision making process. The broker had no skin in the game. He got his commission the day of the sale. His employer didn’t have any skin in the game either. The mortgage was sold then bundled into Structured Investment Vehicles and derivatives like Synthetic Credit Default Swaps, guaranteed by Fannie Mae and Freddie Mac by the American taxpayer. These now infamous frauds were sold to the world as AAA investments backed by the full faith and credit of the American people, even though that was not technically the truth. When the truth was discovered it nearly collapsed the world financial system.

What if banks were required to maintain ownership of mortgages they granted for the life of the mortgage? What if salesmen were paid on an ongoing basis as long as the mortgage remained in force rather than getting all their commission up front?

Would the mortgage process look any different?

Just about everyone in the financial markets from hedge fund managers to mutual fund salesmen get most of their money up front, at the point of the sale. Then they typically receive some form of residuals based on the size of the investment rather than the increase in the size of the investment as a result of their investment acumen. There are exceptions to this practice. Vanguard comes to mind. That company charges no sales loads and miniscule ongoing management fees. Still even in that praiseworthy model, the customer is providing all the capital and accepting all the risk associated with the investment.

What if the investment manager was paid a percentage of the increase rather than a percentage of the total investment? What if the manager was responsible for making up a predetermined percentage of any losses, effectively sharing the risk with the investor who supplied all the capital?

Would this change the current brokerage model, dominated by commission salesmen rather than investment advisors who were willing to sign a fiduciary oath?

Is it likely that any system of childcare at any cost could equal the quality of childcare provided by parents? Who cares more about a child than her mother? Who loves a c child more than her mother? Who has more skin in the game than a mother?

Friday, April 11, 2014

Fair Isaac's Score

Recently I went through the annual credit report exercise recommended by one and all financial writers. I expect because I recently moved, I couldn’t get my credit reports on line or by phone. I had to send in a written request with copies of a lot of personal stuff, driver’s license, utility bills, proof of Social Security number, that sort of thing. In due course of time with one hiccup, I received copies of all three credit reports (Equifax, Experian, and Trans Union), but not my credit score. You must pay extra to get your credit score. There were a couple of very minor problems on one of these things. They misspelled my name in one place, although they got it right everywhere else. My former place of employment was listed as a residence. This was corrected with a quick phone call. Still, getting the reports was a pain in the butt. It took too long. When I even asked for a couple of simple corrections I felt like I had gone to the local headquarters of the brain police with a request to have incriminating evidence removed from my dossier.

There is one more player in this game, Fair Isaac, a mysterious entity that uses information collected by the three agencies to generate a credit score. Your FICO score is a three digit number that determines your access to credit and how much you pay for that credit. How that number is calculated is beyond the scope of a blog article. However, it is a measure of how you use credit. These companies want to see a consumer who is a faithful debt slave. They expect you to have two kinds of debt revolving credit (credit cards) and installment debt (car loans, student debt, and mortgage payments). Then they expect you to pay it in a timely manner every month for the rest of your life. With the credit card, it is enough to use it even if you pay it off in full every month. Just don’t put more than 30% of your credit limit on any one card in any one month. Even if you pay it off every month, if a high balance is reported to the credit bureaus it will ding your credit score by a bit.

Obviously your credit score affects your ability to get a car loan or a credit card. You can live without those things. It also affects your ability to get your first mortgage. Fannie Mae and Freddie Mac, those two quasi governmental giants that control 2/3 of the mortgage money in the country recommended banks use the FICO score in determining access to mortgage money. This proved to be a bad idea, since it doesn’t appear that your credit score is directly connected to your income in the same way your credit history is connected to the score. After the Real Estate crash of 2006, I have read that mortgage lenders, burned by their use of credit scores, were returning to manual underwriting. My initial investigations indicate this very desirable return to sanity is not wide spread in the industry.

Unfortunately you can’t get out of the game. Your credit score also affects your ability to get a job, a security clearance, or rent an apartment. Even if you are a debt hating old school retired curmudgeon, like me, your credit score still has an effect on your car and homeowner insurance rates. That’s right folks, if your credit score tanks, your insurance rates will spike thanks to our friends at Fair Isaac. This is so wrong it gives me fits just thinking about the subject. The correlation between your credit score and the cost of your insurance claims is simply beyond argument. However, no one has established a causal link between bad credit and car accidents. Maybe you aren’t paying attention when you drive because you are worried about your credit score? Who can say? It seems to me to be a convenient means of redlining, implementing higher rates for people who live in poor neighborhoods that are inherently more dangerous. If there was a strong correlation between income and accident rate or race and accident rate, could the insurance companies get away with spiking rates on that evidence? I don’t think so.

Your credit score should not be this important. Four companies that are inadequately regulated (if you believe half the horror stories I have read) have been given way too much power by the Government. If there is a problem, the burden of proof lies on the consumer, not the lender. If you are accused of owing a debt that you in fact do not owe, you are required to prove a negative. Logically, this is impossible. Yes the world is filled with scam artists, cheats, and ne’er-do-wells, as well as the innocent victims of divorce, illness, and the loss of job. All of them are bad credit risks. There must be a way for lenders to do their due diligence before handing out their money to strangers.

However there must be a better way.

I have recently completed reading the 2009 edition of Your Credit Score (Your Money & What’s at Stake) by Liz Weston, a respected financial columnist at MSN. If you are having a problem with your credit score, correcting your credit reports, or identity theft I recommend obtaining the latest edition of this book. In it Weston covers many strategies to improving or repairing your credit score. It is important that your actions are appropriate for the exact particulars of your situation. In some cases what will improve your credit score will make it worse in slightly different circumstances. She also covers the exact procedures and methods to use when communicating with these entities.

Wednesday, April 9, 2014

Career Counseling

Career choice is one of the topics covered by just about every personal finance author. I am not really happy with anything I have read, but I continue to study the question. My mind is full of “what ifs” and “buts.” I am comfortable making mistakes, little mistakes, in my investments. I know that investing is driven by probability. If I don’t invest too much in any one thing or too much at any single time there is a high probability that I will achieve my goals over sufficiently long periods of time. In my experience ten years of focused effort is a sufficiently long period of time to achieve major financial goals.

But I only have one life and I am not completely happy with some of the choices I have made in living that life. What advice can I give to others?

I think as you make a major career decision remember the goal is happiness and fulfillment, not money. Each of us (and our spouse) needs a certain level of material wealth to achieve happiness. That is a given, but it is not the goal.

This morning I heard once again, this time from an anonymous pamphlet from the office of career counseling at Wabash College, the advice to follow your energy. I am beginning to believe this is very important. It is slightly different than the advice to do what you love. When you are working in school or at a job, where does your energy naturally flow? What tasks energize you? When do you lose track of time? Those are pretty good indicators for happiness. What career choices are most likely to give you an opportunity to completely lose yourself for at least a few hours every workday? That is not a simple question. If you lose yourself on the basketball court you have to remember there are only 440 players in the NBA. If you are good enough to make that cut, go for it. If not, you might need a plan B.

Solomon observed that in a multitude of counselors there is wisdom. If the wisest man who ever lived sought out the advice of others, maybe that is something you should consider. Sometimes we are not the best judge of who we are. Listen to your spouse. If your decision makes him or her happy, you are already halfway home. Look around at the people in your life. Are they good for you or are they bringing you down to their level? Over time build your own advisory board of people who have your best interests in their heart, people who have proven both their good intentions and their wisdom. If you can find a mentor in an organization who will help develop your career, great. Not everyone is so lucky. However, every single person on this planet has friends and family members who will be able to listen to your heart and help guide you on your path.

Ultimately you are responsible for your own decisions, but seek out wise counsel. Cherish and nurture those relationships when you find them.

Look at the people who work in a particular field or for a particular company. Is that what you want to be? When I was still in engineering school I interviewed with EDS, at the time one of the glamour jobs for people with computer skills. The recruiter was honest about what she wanted to find in a prospective employee and I knew enough about the company to know that I was a bad fit. H. Ross Perot famously combined the ethos of the United States Marine Corps with a fundamentalist worldview and the competitive values of a Wild West pistolero. As I said, not a good match.

Matthew 7: 7-8

Ask and it shall be given to you; seek, and ye shall find; knock, and it shall be opened uto you:

For everyone that asketh recieveth; and he that seeketh findeth; and to him that knocketh it shall be opened.

Jesus reminds us that we learn by moving. Most men enjoy watching a good fight. Back in the day when boxing was on free television, the big fight was always a topic of conversation at work. Today young men seem to enjoy watching mixed martial arts competitions. But how many of them would really enjoy that lifestyle? It hurts when really strong skilled guys hit you. Some people think that is fun, but not very many of us are cut out for a career as a full contact fighter.

Before you commit to a career, try to find ways to experiment. Fail early; fail often; fail cheap is one of the bedrock commandments of a successful research and development program. Today most universities offer internships, at least in some majors. I think it is an absolutely wonderful idea. Take a semester to work as an intern at some job you think might be promising. If nothing else, you will learn something about yourself and have an opportunity to build your network. If you get lucky, your employer might just decide to keep you on once you graduate.

Never stop learning. Even if you have found the perfect career, it is not a destination. They call it a career path for a reason. The terrain and the obstacles you face, particularly in a technical field, are constantly changing. With ships, submarines, and aircraft low speed control is a real problem. Until the control surfaces have enough water or air flowing over them to generate sufficient force to turn the vessel it is hard to steer your ship. This will be true in your career. You have to keep moving to modify or maintain your direction on the path we call our life. This may take the form of further education, or accepting new job assignments that are a little outside of your comfort zone, or even starting your own company. How does that last idea grab you? It scares me but some people could never find happiness working for anybody but themselves.

Even if God places a direct calling on your life, you are ultimately responsible for your own choices. You evaluate your goals in the light of your values and your gifts. As you progress, examine the results of your efforts. Are you getting the results you want? How do you feel about what is happening around you? How do you feel about the people who surround you? How do you feel about the person you are becoming?

Monday, April 7, 2014

Balance Balance Balance

There is a famous Japanese story about a proud young champion archer who feels ready to challenge the most famous master archer in the land. He goes to the old man’s house, boasting of his skills. They walk outside. The young man points to a tree that is so distant the old man can hardly see it, “Watch me hit that tree.” And he hits it.

The wise old man picks up his bow and a quiver full of arrows saying, “Follow me.”

They climb the mountain outside of town until they reach a place where there is a deep gorge between two cliffs. A somewhat rotten looking log serves as a bridge from their side to the other side. The old man walks out on the log. Taking a arrow out of his quiver, he calmly draws back his bow, shooting the arrow into a nearby tree. As he returns to safety, he looks at the young man, “Let’s see if you can make that shot.”

The young man walks out on the creaking shaky log. Overcome with fear he can hardly draw back his bow. Naturally, he misses the tree altogether. The old man smiles, “Just keep practicing. You’ll get better.”

Balance is so important; in life; in finances. It is hard to maintain your balance when the winds start to blow and the log over the gorge begins to shake, but learning to maintain your focus will lead to mastery. An age appropriate balance of bonds and stocks is one of the keys to maintaining your investment portfolio through good times and bad.

Old Conventional Wisdom: Keep your age in bonds and cash.

Hence in my case, I would 63% in bonds and 37% in stocks.
For a thirty year old that would be 30% in bonds and 70% in stocks.

New Conventional Wisdom: Your Age Minus 15% in Bonds:

In my case, that would be 48% in bonds and 52% in stocks.
For a thirty year old investor, that would be 15% in bonds and 85% in stocks.

Breaking it down a little further, I would note that the thirty year old couple should be primarily building their cash position in a six month emergency fund. It is unlikely that they have achieved that goal with so much going on in their lives. I believe in retirement, I should hold about 10% of my liquid net worth (excluding the value of my primary residence) in cash. This includes money in checking accounts, savings accounts, and money market accounts.

I can not predict the future. I didn’t know when the stock market would hit bottom. I don’t know when the current bull run will end. However, I do know that we are now closer to a top in April 2013 than we were in April of 2009. Therefore I have a little more money in cash and bonds than is usual. When nearing a bottom I will, hopefully, have more money in stocks than in cash and bonds.

I believe an age appropriate range for someone of my age, 63, should fall between 40% and 55% of my net worth excluding my primary residence in stocks and stock mutual funds. If my holdings fall outside of this range, it is time to rebalance.

Even before you have any money to invest balance is important in setting up a budget. Different teachers suggest different target allocations. This one is from Kiplinger’s, “Use 30% of your take-home pay for housing, 10% for utilities, 15% for food, 10% for transportation, 5% for clothing, 10% for debt repayment, 5% for entertainment and 5% for insurance and miscellaneous expenses. That leaves 10% for savings or special purchases.”

It might be wise to record all your expenses, all of them--to the penny--without exception, for a month before actually setting up your first budget. If you do this exercise, you will discover that there are discrepancies between your spending patterns and reality. You will also discover that your spending patterns do not reflect your values or priorities. If you want to save for a down payment on a home, you may not want to spend 10% of your take home pay in bars and restaurants.

Maintaining your balance out there on the budget tightrope requires the flexibility to respond to unexpected wind gusts. There are several tools that will help. First, you can reallocate money from the “blow” category to cover an unexpected expense, like a car repair. If that isn’t enough, you can move money from the clothing line to the car maintenance line to cover the shortfall. Finally, if all else fails use the emergency fund. That is why you have an emergency fund.

Don’t make a budget too complicated. Have enough lines to cover what is necessary for you to see. For example, if you buy your cleaning supplies at the grocery store just budget for those expenses and record those expenses on the “food” line. If there are other expenses that are incurred at the grocery store that you want to control as a separate line item, such as beer or cigarettes, pull them out of the register total. Don’t worry about where the sales tax on these items lands.

Listen to the old master’s advice to the young champion, “Just keep practicing. You’ll get better.” Don’t give up if you miss the target. Some shots look easy, but when it is you out there on that log 500 feet above a rocky mountain river, things get a lot harder.

Even the great Michelangelo observed, “If people knew how hard I worked to get my mastery, it wouldn’t seem so wonderful at all.”

Saturday, April 5, 2014

Another Way to Think About Goals

It is pretty obvious that the subject of setting goals and objectives would come up from time to time in a personal finance blog. One of the best know methods of goal setting was first proposed by George Doran in the November 1981 issue of Management Review. A lot of variations have appeared to the original S.M.A.R.T acronym suggested by the author. Here is an example of how this might work in practice.

S: Specific: Lose weight
M: Measurable: 15 pounds
A: Assignable: I am responsible
T: Time: Within the next month

In practice setting goals can be a little treacherous. Specific is in the eye of the beholder. Lose weight isn’t really specific until a measurable quantity is attached to the next criteria. Even when the number of pounds is assigned, there is nothing to say if the party to whom the goal is assigned finds it meaningful, attainable or even as desirable as the alternative of gaining 15 pounds in the next month.

The process can be improved by asking questions like, “Why?” or, “How?”

I have read in a number of different sources that by far the most successful diets are undertaken by brides preparing for their wedding. The goal is not to lose weight but to look beautiful in a wedding dress on the most important day of her life.

S: Lose weight Why? Look beautiful in wedding dress
A: Assignable: I am responsible How? Leads to a plan that includes diet and exercise

Asking yourself questions as you set financial goals, career goals, or personal goals will lead to better goals. Don’t stop with just one level of questions dig deeply into what really is of value—to you.

Make the goal positive.

Losing weight is a negative. Looking beautiful is a positive. Entering a 5K race is another positive reason for losing weight.

Set a goal that is of benefit to you.

Looking beautiful in a tuxedo at a wedding is not of much benefit to me. I would need to find another motivation for losing weight.

Set a goal that is believable by you.

Organizations that set goals from the top are often disappointed because none of the people who are asked to perform these miracles believe they are possible.

Set a goal that you can control.

The greater the control that you have over the outcome of your effort, the more likely it is that you will succeed. I am actually losing weight. I do have a long term goal. I am not telling you, but I have written it down on a piece of paper I carry in my wallet. I have learned that my body does not respond in a predictable or controllable manner to my efforts. This could be discouraging if I did not have smaller goals that I can actually control. For example, I can’t say I will lose 5 pounds in the next week. I can say that I will walk more than 20 miles during the next week. Barring injury or illness, I can control that goal.

The deeper you go with this process the better you will understand yourself. The better you understand your own values and motivations the more likely your success. The next level of motivation for my weight loss effort is my heart condition, arterial fibrillation, a fast and irregular heart rhythm. There is a reasonable probability that if I can drop a significant amount of weight my heart would snap back into a normal sinus rhythm. Then I wouldn’t need to continue taking medication that has potential undesirable side effects.

Don’t stop there. Keep going down to deeper and deeper levels of understanding. In my case, I am no longer 18. There are still a lot of things I want to see and do over the remaining years that the Lord may give me. If those years are going to be full and rewarding, I better start working on my health before it is too late.

Set a goal that is Congruent with who you are, your values, and your gifts.

Congruence is a strange word, but it is the best word I know for the principle of alignment. In order to pursue and achieve or goals with a minimum of time and effort, it is important that every aspect of our person and our behavior is in alignment with our goals. Two sets of points are called congruent if both have the same shape and size and thus are indistinguishable. Perhaps it would be more accurate to say that we must seek congruence and coincidence in our life, that is we make the effort shape our actions, thoughts and beliefs in such a way that they take the same shape and point in the same direction. If your goal is in alignment with your passions, the natural flow of your energy, your talents and gifts, and most importantly with your true bedrock values, you will succeed.

Thursday, April 3, 2014

Buy It for Life

I wasn’t planning to write this article. Sometimes conversations cause me to think about questions that I wouldn’t think important. However, if different people are talking about the same thing, maybe it is something that needs to be discussed. I don’t focus on buying stuff. People who do put a lot of time and energy into buying stuff are unlikely to find financial freedom and that is the reason I share my explorations with you, my readers. Almost all of us, except a few who have chosen the monastic life, want to buy stuff. While seeking pleasure and satisfaction from material possessions is not a good plan from either a spiritual or financial viewpoint, I have found pleasure over the course of many years from at least some of my possessions.

The question then becomes, what do these long term possessions have in common. I think I have the answer, quality, reliability, and maintainability. There is another dimension to the question. These possessions must reflect, on at least some level, our true values. For instance a musician will find great joy and satisfaction from owning and playing a favorite guitar, even if he is not a professional. I know such a man. He has owned an old Fender Stratocaster for most of his life. Someone told him it is worth something on the order of $10,000 to $12,000, but its value isn’t what brings him joy. It is the quality the instrument brings to his life.

This weekend I discussed old stereo equipment with a friend. Our stories were remarkably similar. We both love music. It is an important part of our life. We both bought the highest quality equipment we could afford at the time of purchase. Now, although our stereos are old (like the owners) they both still work better than our aging ears. Over 20 years ago I purchased a Carver amp at a warehouse sale for about ½ retail price. Finally, about two years ago the controls began to fail. I looked into buying a new unit. I discovered I couldn’t replace that amplifier for $1,000. I (maybe) could replace it for $1,500 but I didn’t want to spend that kind of money on a new amp. I checked into having it repaired. I discovered that although Carver went out of business years ago, a man bought what was left of the factory and all that remained of their stock of component parts. He offered to rebuild my amp at a guaranteed price of $360 including return shipping from the west coast. Getting it to his shop was my problem. It turned out there was a long waiting list of people like me who loved their Carver amplifiers. After a couple of months he returned an amplifier that needed more work than he originally estimated, but he did not charge me any more money. Now I have essentially a new amplifier that might last another 20 years.

Fifty years ago, a man bought a watch to last a lifetime. It was expected that the watch would need periodic maintenance and cleaning, but it might even outlive the owner. When my father in law died, I inherited his Hamilton watch. The watch and I are exactly the same age, 63. When I first received it about 8 or 9 years ago, it was running slow and the crystal was scratched up. I had a watchmaker clean and restore it for about $100. Since then, it has worked perfectly. The watchmaker asked for right of first refusal if I ever want to sell it. Did I get a good deal? Yes, I could buy a new watch for $35 that might last four or five years. When it quit working, I could throw it away and buy a new watch, but I get a certain pleasure from owning a beautifully made antique that once belonged to my father in law, a man I greatly respect.

The list goes on. I own a Cross pen that was given to me as a Christmas present in 1976 or 1977. I used it every day at work for years. It feels good in my hand. It writes beautifully. The mechanism still feels and works like the day it left the factory. Cross refills are consistently excellent. We are so well acquainted that I have a rather large callous where it sits on my middle finger. That writing instrument might have cost $15.00 back in the day when Bic was selling pens for 15 cents….but.

We live in a throwaway world. Cell phones are considered obsolete after 6 months. Computers are obsolete after three years. Both can be replaced with something better, something up to date for less than the cost of repair, if repair is even possible. Will we reflect with joy that we bought an iPhone 4 back in 2010 in 2030 as we stroke its chemically strengthened aluminosilicate glass surface with our index finger or will we have forgotten that it ever existed? I expect my friend will still be alive and playing his old Stratocaster, still deriving pleasure from a purchase made almost 60 years earlier.

Rock on dude!

Wednesday, April 2, 2014

Godzilla Vs King Kong

Since everyone else is talking about it, I might as well throw my two cents into the game. Recently 60 Minutes did a classic hatchet job on high frequency trading (like it was something new). CBS reported on the findings of a new book by Michael Lewis, entitled “Flash Boys.” In the report we learn that Brad Katsuyama, a manager in charge of the trade desk at the Royal Bank of Canada, discovered that any time one of his big customers mutual funds, pension funds, major hedge funds, and the like started to make a major move into a particular stock, the price jumped more that could be predicted by normal market forces. I sure the same thing could be said about price drops when massive sales orders were executed by the same large investment entities. With the help of a technical genius, Katsuyama discovered exactly how the current crop of high frequency trading programs were jumping in front of the market, essentially skimming a fraction of a cent per share to a few cents per share in profits by anticipating the jump in price caused by a major order by only a few milliseconds.

This is not illegal and it is not new. The first time I became aware of what was then called “program trading” occurred in the aftermath of Black Monday, October 19, 1987 when the Dow dropped by 22.6% in a single day. In 1987 automated computer trading had reached a point where enough computers were caught in the same feedback loop that they managed to collapse the market. Since then the major markets have installed “circuit breakers” that shut the market down when threatened by this kind of automated trading.

Today trades untouched by human minds or hands account for roughly ½ of all market activity. It is reported that one company engaged in these activities, holds a position in a stock for an average of 11 seconds! What started as an attempt to automatically mimic the actions of human traders using the principles of technical analysis, has morphed into a market unto itself operating in the “hyper space” of trades executed in the realm of milliseconds.

The introduction of computers into the stock exchanges has revolutionized the way the “little guy” can play the game. Placing a trade once cost in the neighborhood of $150. Now if you are paying more than $10 a trade you are paying too much. The Internet has made it faster and safer to execute a buy or sell order than at anytime in history. Michael Lewis and Brad Katsuyama are incensed that what benefits you also benefits a new breed of players backed by hundreds of millions of dollars in high speed communication networks and the latest generation of supercomputers.

Like King Kong back in the 1930s the largest customers of the Royal Bank of Canada were happily stomping around world capitals without any competition. Then this giant radioactive lizard came out of the sea and spoiled their little party. Katsuyama, an enterprising imaginative capitalist, proposed a market solution that didn’t require any intervention by the Security and Exchange Commission. Backed by players like Goldman Sachs, once famously termed a “great vampire squid wrapped around the face of humanity,” in a Rolling Stone Magazine article, Katsuyama has opened a private stock exchange, the IEX Group, for high rollers that uses technology to cut Godzilla, the high frequency traders, out of the loop.

This is not a new idea. There is a name for this kind of private club, dark pools. In fact in one of the two interviews I watched on this subject, Katsuyama actually uses that term. Back in 2009 I wrote, “Dark Pools: Major trading houses set up off line electronic trading venues for their largest and best customers. Within these secretive private exchanges, high rollers can move huge quantities of shares away from public view. They affect the value of your stocks but you will never know what happened in private until it is way too late to do anything about it. If the dark pools become large enough, they will also affect the number of shares available on the open market creating a double price structure. Guess which price is the real price. It is currently estimated about 7% of all trades take place in dark pools.”

To tell the truth I am more worried by dark pools than I am by high frequency trading.

It is reported that the New York Attorney General, Eric Schneiderman and the FBI are actively investigating the activities of high frequency trading operations. In addition the Security and Exchange Commission are revisiting the current trading rules to determine if they still make sense given the improvements in technology. I have nothing against smart people learning how to work the rules to their advantage. That is why I pay a CPA to prepare my tax returns. That is why I worked with a lawyer and an estate planner when I prepared my will. However, I hope the people making and enforcing the rules aren’t too far behind the curve. Parasites, like high frequency traders, don’t increase the wealth of a nation. They merely divert a small portion of it into their pockets at the expense of the high rollers. Unfortunately, if you own shares in a major mutual fund or will someday benefit from a pension you are one of those high rollers.

When you invest in the market always remember that the high rollers play by a different set of rules. That is as it should be. If you are private investor who can bring $50,000 to the table, you will get a better deal from Vanguard (that most ethical of all mutual fund families) than you will get with their $3,000 house minimum. If you have over $250,000 in an investment account at Schwab, they will assign a broker to make sure you are happy and sleeping well at night.

At the end of the movie, after completely trashing Japan, Godzilla disappears back into the ocean that spawned him and King Kong begins the long swim back to Skull Island. Don’t worry. They will be back for the squeal. This time the monsters won’t be actors in cheesy rubber suits. They will be portrayed in 3D by the latest in high tech computer graphics.

Now. Please. Let’s be careful out there!