Sunday, May 31, 2015

My Biggest Investment Regret

Recently USA Today linked an article from the Motley Fool, a very useful website, entitled, “Ask a Fool: Your Biggest Investing Regret?” The authors confessed their greatest regret. One was pretty silly. Investor A bought Tesla at $20 and sold at $70. Of course Tesla went on up to $244. However, if your greatest regret is a trade that more than tripled your money, all I can say is, “Poor baby.” Investor B had a more realistic regret. He failed to increase the contributions to his automatically debited investment accounts in the years the stock market declined. At least he didn’t buy when the market was high and sell when it was low. All too many Americans made that mistake in 2000 and 2008. The final author made a serious mistake not once but twice. He cashed out his 401(k) for immediate cash needs. Not only did he pay taxes and a penalty to net a lousy $6,500 but he denied himself the power of compound interest over future decades. Currently, that $6,500 would be worth $23,000. He calculates that if the market continues to generate a historically reasonable rate of return in the years running up to his planned retirement, that $6,500 would have been worth $195,000.

My greatest regret? Not starting soon enough with enough.

For a variety of reasons, some of them not my fault, I lost a decade at the beginning of my career. However, once I had an engineering degree I was able to secure a stable job with benefits. One of these benefits was the Thrift Savings Plan, a tax favored retirement account with matching money for Government employees. I didn’t put very much into this account in the beginning. Although I wasn’t saddled with any student loans, I had less than $2,000 on hand when I finished engineering school. Like all Americans, we wanted to buy a house. At that time in Montgomery County MD, that would require $18,000 cash money.

Retirement was not an immediate concern. Wrong. Retirement begins at twenty two.

Then, in 1995 Clinton and the Republicans in Congress shut down the Government. Because I worked in a Navy laboratory, I was considered a “mission critical employee.” My paycheck was never in danger. However, Clinton seized all the G Fund money in my retirement account. He just took it. Nobody gave him permission. Congress didn’t change the law. He just stole my money. Of course it was refunded when the crisis passed, but this did not increase my confidence in investing large sums in my TSP account. Instead, I bought a house, paid if off in less than 10 years, and started investing in a taxable brokerage account.

Eventually, over time, I increased my contributions to my TSP account whenever I received a raise until I reached 14%. That would be 1% shy of the widely recommended figure of 15% of your pretax income into tax favored retirement accounts. However, my taxable Schwab brokerage account became the apple of my eye. It received the lion’s share of my discretionary income as well as the benefit of constant attention.

I could have done better, a lot better. I could have contributed more--sooner to that TSP account and still bought a house, paid it off early, and learned the basics of value investing. All that extra TSP money would have been growing tax free with the addition of 5% free money from my employer. It took me a while to claim all of that available 5%. Don’t make that mistake. Any time anyone offers you free money, take it and run.

My second regret? The Roth IRA came along too late to do me much good. Young people, if at all possible once you get any available matching money from your employer 401 (k), fund your Roth.

We will all make investment mistakes. Don’t worry too much about the past. You can’t change it. Instead, in this present moment, plan for your future and take a meaningful step towards that future. I hope, like investor A your biggest regret will be missing out on the last half of a ten banger. However, even if you make a serious mistake, you can recover. Consistent effort over long periods of time will produce the desired results with a high degree of probability.

Thursday, May 28, 2015

Financial Engineering

The Wall Street Journal just published a solid piece entitled Wall Street Gamblers At Work—U.S. Firms Spend More on Buybacks Than Factories. Following the crash of 2008, The Federal Reserve Bank cut interest rates to near zero in an attempt to kick start the economy and recapitalize the banks damaged in the subprime loan fiasco. While they successfully rebuilt the banks’ balance sheets at taxpayer expense, they weren’t so successful in restoring Main Street.

Corporations took advantage of the cheap money, but not to construct new factories, buy new machinery, and hire new workers. Instead, companies increased their bottom line by replacing old high interest rate debt like my beloved GE 6.25% preferred with commercial paper that paid more in the neighborhood of 2.5%. Once they refinanced their own debt, they did use some of that cheap money to buy new equipment like programmable machine tools and acquire artificial intelligence applications like cloud accounting systems. This allowed companies to replace expensive employees with low cost data entry clerks or completely eliminate those pesky humans along with their salaries and health insurance.

As long as the Fed is passing out cheap money, the big corporations are willing to take their share. Now they are increasing profits by financial engineering. Rather than making more products or new products, they are finding it more profitable to engage in activities like share repurchase programs, commonly called buybacks.

Buybacks are a pretty common way for management to give something back to the shareholders without losing control of that money. It can be a very good way to increase shareholders value without the specter of the taxman’s cold dead hand. If the share price is undervalued, buybacks will increase that price through several mechanisms. First of all when a buyer (in this case the company) is purchasing large blocks of stock, the price will increase through simple supply and demand. Even after the buyback is complete there are now fewer shares available to the general public. This should tend to hold the price at a higher level. Also the company (now the shareholder) is paying dividends to itself. This gives the company’s managers more money to invest in new projects or to increase dividends at some later date. In essence the company is doing dividend reinvestment for its shareholders without any income taxes. In this scenario, if the shareholder decides to sell then he will pay capital gain taxes. Most likely this will be at a lower rate than income taxes.

In this particular case, much of this activity is the result of activist investor groups, like hedge funds, buying control of corporations, then using their leverage to improve the value of their shares through buybacks and less often through increases in dividends.

What’s wrong with this picture? Share prices are going up. Potential tax liabilities are going down. Profitability is just a few notches below record levels. The article quotes Laurence Fink, chief executive of BlackRock Inc., the world’s largest money manager, “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”

The problem is the future.

There are other unintended second order effects to generating profits through financial engineering rather than creating real wealth in the material world. Building a new factory puts money in the hands of suppliers, truck drivers, and construction workers as well as the new workers the factory will eventually and hopefully permanently employ. This is the kind of economic activity that will ultimately make our country strong and prosperous.

Like most financial problems there is another side to the story. The great investor Peter Lynch was famously afraid of buying shares in a company that had too much cash. It was his experience that managers given control of other people’s money inevitably found something stupid to do with it. Responding to the spectacular growth and failure of conglomerates like LTV during the 1960s, he coined the term, “diworsification.” In our own times think about the AOL fueled merger with Time Warner, perhaps the worst corporate merger in history.

The article also quotes a letter from the activist fund Starboard Value LP, “The history of corporate America is littered with a long line of companies that relinquished their leading industry position and spent enormous resources attempting to reinvent themselves and ultimately failed.”

That would be the truth.

There are other considerations driving the decisions of our corporate managers. The United States has the highest corporate tax rate in the world. We punish companies for creating jobs and keeping profits in this country. We reward them for creating jobs in other countries and not repatriating those profits. There are currently over 1,000,000 Federal regulations. The cost of even knowing they exist, let alone the cost of compliance is enormous. Whether it is a good thing or a bad thing, environmental regulations alone make it impossible to build a new primary steel mill in this country.

The best way for a company to avoid the interference of activist investors is to run a tight disciplined ship. A company that sticks to its knitting; pays a steadily increasing sustainable dividend over long time periods; that reinvests its money wisely won’t need any fancy financial engineering to thrive over decades, sometimes centuries.

You can find companies like this in lists like the Dividend Aristocrats, S&P constituents that have increased their dividends for 25 consecutive years or longer. They aren’t flashy, but they have been doing a very good job for a very long time.

Tuesday, May 26, 2015

Talkin' 'Bout My Generation

People try to put us d-down (Talkin' 'bout my generation)
Just because we get around (Talkin' 'bout my generation)
Things they do look awful c-c-cold (Talkin' 'bout my generation)
I hope I die before I get old (Talkin' 'bout my generation)
The Who

The Baby Boom, my generation. We stepped on the stage with such moral certainty. We just knew we were totally right to protest the Vietnam War and that supporting the civil rights movement would surely cause love to steer the stars. Although a few of my generation are still lost in the Sixties, reliving their glory days, over and over again, most of us have come to realize the world is not black and white, but composed of more than 50 shades of grey—At least those of us who aren’t bald.

I remember in 1973 I met a veteran of World War II who was lost in the skies over Germany, still flying his P51 into harm’s way. In his mind, he was still a young hero facing the pilots of the Luftwaffe, making the world safe for democracy. Unfortunately his P51 was a large expensive station wagon and the only danger he faced came from his unhappy wife. At the time I thought this very strange. I understand him better now that I am older.

We have had such an enormous effect on the culture of not only this country but the entire world. Yet, we have had so little effect on the institutions where we have toiled over the last 40 years. Unlike the wish enunciated by The Who, most of us didn’t die before we got old and we didn’t do a very good job preparing for retirement.

The latest numbers on my generation are out:

40% Have No Retirement Savings!
21% Have Less than $100,000
13% Have Between $100,000 and $250,000

Only 19% Have More Than $250,000

The missing 7% answered, “I don’t know.”

That is pretty dismal. Some of it is our fault. Some of it just happened. It was hard to get any financial traction during the Seventies. Stagflation, oil shocks, and the recession that started the Eighties all took their toll on our pocketbooks. Over the 40 years of our working lives, the defined benefit pension has all but vanished from the American landscape. I couldn’t find a hard number I trust with a quick Google search, but it appears that only around 25% of us have a pension. Almost all us began work with the promise of a pension. Then the world changed.

We were given a really good fifteen year run. Fed Chairman Paul Volcker, a Democrat first appointed by Carter, broke the back of runaway inflation by triggering the recession and the unemployment of the early Eighties. Regan laid the groundwork for economic growth with cuts in tax rates and regulations. Then the Personal Computer and the Internet gave us a first class financial boom. It was crazy. Companies with no price earnings ratio spent money at a fabulous rate. Everyone was chasing the pot of gold at the end of the dotcom rainbow.

It seemed that: This Time It’s Different.

(These are the four most dangerous words an investor can ever hear. Remember them.)

It wasn’t different. When Y2K proved a bust, the boom ended. During the years of plenty, instead of paying off our mortgages and consistently investing in a boring, balanced, well diversified portfolio of stocks and bonds, we bought new cars, resort condos, and took vacations at Club Med.

We had one more shot to get it right, the 10 year housing bubble that started in earnest around 1996. In most metropolitan areas, the price of a single family home began to accelerate at an unusually rapid rate. This spurred the construction of ever larger and more expensive housing. In the Washington DC area many of these new buildings were termed McMansions.

We responded by treating the rising equity in our homes as a personal ATM. Some took out second mortgages to put money in the stock market, just in time for the crash of 2008, but most of my neighbors used those second mortgages to lease new SUVs or take expensive vacations. One of my neighbors was flipping houses. He owned seven or eight properties when the subprime crisis ended the real estate bubble. At one time he owned a Rolls Royce. He lost one job. Then he found another job. Then he lost that job. He was able to arrange a short sale for the house where he actually lived in our neighborhood. I don’t know if he was that lucky with his other properties.

One of the houses in my neighborhood was purchased by highly dubious Hispanic family at the ridiculously inflated price of $410,000. It was clear they were attempting to pay for it by running it as a boarding house. The one family was there all the time. A variety of young single men and their old cars came and went over the months. In another subprime tragedy the family lost the house in foreclosure. The bank eventually sold the property for $205,000 exactly half of the total of the two mortgages used to purchase the house.

A couple more numbers from the survey:

27% are confident they will have enough for retirement (maybe they are the ones with the defined benefit pensions?)

36% said they plan to retire at 70 or later.

Undoubtedly that 36% understands the numbers. Sandwiched between unemployed boomerang children and elderly parents requiring their attention; they will need to work until they are 70 to enjoy the traditional retirement with dignity that was at one time in our history was almost a guarantee. Unfortunately, not all of them will be able to work until they are 70. Already, I have buried a few friends and coworkers; some were younger than me at the time of their deaths. Other friends have heroically battled cancer or suffered life threatening heart attacks, strokes, or the onset of type two diabetes. There is no guarantee that all of the 36% will be able continue working until they have enough money to retire.

It is possible to live on less than the 80% of preretirement income recommended as a minimum by most financial planners. Moving out of expensive urban areas into more rural less expensive areas can allow some to basically maintain their lifestyle with less than 80%. However, many of my generation are facing the prospect of an uncomfortable retirement after 40 years of hard work.

It isn’t pretty, but if you can work another ten years, you can still make it.

Sunday, May 24, 2015

So I Made a Phone Call to Someone I Know

Stanley Black is a real estate tycoon and philanthropist. His company, Black Equities Group, currently owns over 18 million square feet of commercial real estate space in 35 states. His father died when he was a 21 year old veteran returning from the Korean War. His uncles, per their partnership agreement, bought out his father’s share of the family textile business. Although his mother got the money, this decision denied him a job, his family legacy, and a future. Starting with nothing more than a connection to a friend of the family in the construction business, he went on to become a wealthy and powerful man.

In listening to a Stanley Black interview, I was struck by how often he said something like, “So I made a call to someone I know, and…” Every week, on Friday, Saturday, and Sunday, Black meets different groups of friends and business associates for lunch at different restaurants in the Los Angles/Beverly Hills area he calls home. Some of these lunches have been going on uninterrupted for nearly 50 years. He admits that sometimes business is discussed by the attendees, but the purpose of these meetings is comradeship, personal connection, and information. At the Sunday luncheons various charitable organizations, governors of California as well as presidential candidates make their presentations to what I am sure is one of the most influential groups in California.

Stanley Black likes to have his photo taken with U.S. presidents, politicians, and celebrities. He supports candidates of both parties and various political persuasions. The Obama campaign told him it would cost $35,000 to get a photo op with the then candidate Obama. Mr. Black, thought that price tag excessive, so at a later date “I made a phone call to someone I knew who worked with Barbara Boxer.” The long and the short of the story is a photograph of Stanley Black and his son standing next to Obama. The cost? a $5,000 donation to the Boxer campaign. Jack Black, his son, and the President of the United States then spent 10 minutes watching basketball videos on Jack’s cell phone.

Most of our friends are just people like us that we happen to know. They are entertaining, but sometimes they tend to bring us down to their level, encouraging weakness, and bad behavior. A few of our friends prove to be trustworthy comrades in the battle we call life. They are there to pick us up when we are weak or injured. They are there to listen to us when we are alone in the middle of the night. They are there to push us forward when we are too lazy or frightened to take another step. I believe that we will stand with such people not only in this life but in eternity.

However, we need to cultivate other kinds of friendships that are more specifically geared to expanding our opportunities. Can you say, “So, I made a call to someone I know, and…?” I have to admit, while I knew people at work that could help me (or a friend) get the job done, I couldn’t make too many phone calls like a Stanley Black to benefit a business associate or even improve my own situation.

We need others in our life that are not like us. We need others who can and will do us a favor if it isn’t terribly inconvenient and we need to stand ready to reciprocate when the opportunity presents itself.

When you are starting out in life, look for a mentor, someone who has become the man or woman you want to be. Be honest about why you are inviting them into your life, ask them for guidance, advice, and help learning what can’t be found in your job description or those wretched on line training videos. When you are one of the “old guys,” look for opportunities to be a blessing to the next generation. When I was first learning the art of factory supervision, an old shift superintendent took me under his wing. He taught me a lot. If I knew how to listen better when I was still in my twenties, I would have learned even more. After 33 years, I still call him up from time to time to catch up with his life and thank him again for showing me the ropes.

While it has always been true that who you know is more important than what you know, networking has become a critical component in finding a new job. In some companies about 50% of their new hires come from personal recommendations made by their existing employees. This is a growing trend that crosses many types of businesses. Companies are offering iPads, large screen TVs, and cash prizes to employees who recommend new hires. These companies save time and money bypassing bins filled with shotguned resumes and the services of websites like Job seekers who follow the traditional path (resumes, internet sites, and job fairs) are called “Homers” by personnel officers. That would refer to Homer Simpson, a lazy donut eating dullard.

Companies are looking for quick efficient results. If a high quality ambitious employee is willing to put their reputation on the line by recommending someone in their network, there is a very high probability this person will be a very good employee.

When you meet someone in some random chance encounter, don’t discount the possibility that some day, she could become a gatekeeper in your life. Joel Osteen likes to tell the story of how he met his first publisher. He was staying in a hotel in another city (not Houston). Wishing to attend a well known church in that town, he asked a teen aged bell hop for directions. The kid told him that church was too far away, he would never make the service in time. Without any idea who he was talking to, the young man suggested a nearby church he thought Osteen would like. Joel Osteen took the suggestion. After the service he met the minister. They became friends. The minister introduced him to a publisher who suggested Joel write his first book. He was even willing to front Osteen an advance. The rest as they say is history. Joel Osteen has sold so many books he no longer takes any money from his church or TV ministry.

In the end, I think you will find that the spiritual calculus of friendship has nothing to do with double entry bookkeeping, for sometimes in giving we receive more from a friendship than we could possibly imagine.

Thursday, May 21, 2015

Three Wise Turtles and The Law of Attraction

Most mornings I walk around the lake at Furman University, adding a few miles along the Swamp Rabbit Trail. I always expect to see something interesting. Sometimes I write a little blurb about what I have seen, posting it with an appropriate stock photograph on Facebook. There are people to watch; sometimes walking or cycling with their cell phones, dogs and children. A pretty good variety of waterfowl live near or on the Furman Lake. My path takes me through carefully manicured gardens, managed and unmanaged forests, and swamps filled with various sorts of snakes. On my walks, I see deer, squirrels, and rabbits.

I also know where the turtles live. A few box turtles inhabit the dry forests around the North end of my walk along the Swamp Rabbit Trail. Small black water turtles are easy to spot in the shallows along the edge of the lake. I have even seen a couple of big snapping turtles, one in the Northwest corner of the lake and another near the swamp where the snakes live.

Yesterday, I saw three turtles swim towards a particular spot in the lake as though they were on their way to attend a scheduled committee meeting. Humans and baboons hold meetings in order to establish their position in the troop hierarchy. I speculated that perhaps the turtles were wiser than humans.

What kind of wisdom would turtles share with one another?

Water turtles are hard to spot. They spend a lot of their day underwater. The rest of the time only their little heads are poking up out of the lake. It isn’t until later, in the afternoon, that they can be found sunning on half rotten tree branches that have fallen into the water.

Did my thoughts bring the three turtles to their morning conference or was something else at work?

There are a lot of what I will term, mind science teachings that are popular today. They come in different religious flavors and varying degrees of sophistication but they all contain a similar teaching often termed the law of attraction. These teachers believe that like attracts like. By thinking positive thoughts you can bring positive results into your life. Likewise, by thinking negative thoughts you can cause yourself all sorts of problems. In the movies and books produced by these gurus, the law of attraction is inevitably applied to financial goals.

If you think about prosperity, it will appear in your life.

Because I was thinking about turtles when I looked at the surface of the lake, three turtles were manifested in my life.

These authors all claim mind or intention is the beginning of all things. That is correct. They all claim that before something can materialize in your world, you must have the thought in your mind. That is correct.

But my thoughts did not create three turtles.

Some authors offer methods of visualization to help you learn how to clearly see your goals. Visualization works. Even Olympic athletes utilize visualization techniques as part of their training. It has been found that mentally rehearsing a gymnastic routine or even shooting foul shots will improve an athlete’s actual performance.

But I wasn’t even visualizing turtles when their heads popped up out of the water’s surface.

I was taking action. I was out for a walk, on the lookout for interesting or entertaining sights. Usually, the lake is a good place to look. The ducks are quacking. The blue herons are patiently fishing the shallows. Turtles and fish are exploring the depths. Because I knew where to look, because I was paying attention, I found—turtles—Right where one would expect to find—turtles.

Don’t stop with the law of attraction. It implies that you do not need to practice or continue exercising in the face of disappointment and discouragement to achieve a goal. In fact, even the exceptional athlete runs hundreds of wind sprints and spends hours in boring repetitive drills of fundamental skills.

You need to have clearly defined goals to reach financial freedom. However, it takes patience, persistence in the face of disappointment, and just plain hard work to bring them from your dreams into this material world.

Wednesday, May 20, 2015

Don't Kid Yourself! It's An Investment!

Don’t kid yourself. Your career decision is an investment. The time and money you spend getting job skills and a career are as much or more an investment than choosing a portfolio of stocks and bonds. For most Americans, the notion of education for education’s sake is a relic of a past that never really existed. The lifetime difference between a degree in early childhood education and a degree in petroleum engineering is over $3,000,000.

In the years prior to 1970, a college degree, any college degree was enough to guarantee the graduate a job that required a college degree. That sheepskin was proof enough to a prospective employer that the young person in front of his desk was reasonably intelligent and disciplined enough to survive in a cubicle or an office. That guarantee began to fall by the wayside in the recession of 1973 that was triggered by the first oil crisis.

According to Moneybox, the current unemployment rate for recent college graduates is running about 8.5%. The U-6 rate for recent graduates that includes discouraged workers and those working part time because they can’t find full time employment runs about 16.8%. It is a little more difficult to find a hard number on recent college graduates working full time in jobs that don’t require a college degree, but it is somewhere in the 40%-45% ballpark. Not only are those disappointed unhappy college grads, but their presence in the workforce denies less desirable potential employees the opportunity to take an entry level job.

There is another very bad dimension to this story, a $35,051 average debt load for the class of 2015. That isn’t too much of a problem for the petroleum engineer, but $35,000 will handicap the graduate in early childhood education for maybe 20 years of his life; if he is lucky. Some numbers? Student loans totaling $35,000 at 8% paid over 20 years will cost the unlucky student a realistic $293 a month. That totals out at $70,261.

Every decision we make has consequences, some planned, some unintended.

Probably degrees in the medical field represent the safest possible investment for the foreseeable future. As the Baby Boom declines into dotage, there will be no shortage of work for medical doctors, registered nurses, pharmacists, medical technicians, and specialized administrative assistants of all sorts.

Obtaining a degree in Science, Technology, Engineering, and Math, one of the (STEM) disciplines, tends to be a pretty solid decision, but be careful. When my father graduated in 1942 with a BS in chemistry, it was the workplace equivalent of Willy Wonka’s golden ticket. Today that degree might get you a job washing test tubes. I know a man who once upon a time found himself in this position. Since he could drive a tractor, his employer also let him cut the grass. He returned to school to earn a Master’s degree. Then he was allowed to work as a chemist. When my father retired he was in charge of a small group of chemists working in a research laboratory. Every one of my father’s employees had a Ph.D. If you want to become a chemist it will take seven years or longer, fully 1/10 of the three score and ten years given to man to labor and sorrow under the sun. Without scholarships, grants, or assistantships, $15,000 a year as a commuting student at an inexpensive state school will run you $105,000. At an expensive private school, that number will be more like $735,000.

Wikipedia tells us that, "The liberal arts are those subjects or skills that in classical antiquity were considered essential for a free person (Latin: liberal, "worthy of a free person") to know in order to take an active part in civic life, something that included participating in public debate, defending oneself in court, serving on juries, and most importantly, military service."

As far as I can tell in the more immediate past, the primary purpose of the liberal arts degree was the application of a veneer of culture to the sons (not daughters) of the landed gentry. The universities also offered an education in the liberal arts to bright young men from any social class in order to provide the state church with a reliable source of priests, and generate enough teachers to make the university a self sustaining operation. If you are the son or daughter of a wealthy politically powerful family, the liberal arts degree combined with a Juris Doctor degree might well guarantee you a proprietary seat in congress. If you are planning a career in teaching or the ministry one of the liberal arts might make a good choice. Otherwise I find it difficult to justify spending four years of your life and $250,000 of your parents’ money obtaining a bachelors degree in English Literature from a private university. The social sciences are not much better.

If your first name is Amadeus or Leonardo perhaps you are destined for a career in the fine arts. Like athletics, there are a few big winners, but most students will never earn a living practicing music or art. While I believe music class and art class have their place in elementary education and that offering elective classes such as band or chorus in high school is a fine thing, I don’t think going to college to get a degree in the fine arts is a good investment of time or money for most students. If you want to play the guitar, just play the guitar. If you are good enough, someone will pay to listen to you or learn from you. That is also true of those of us who like to write. Maybe, someday, I will get good enough that people will pay to read what I write, but until then, as the song says:

Let the boy boggie woogie.
It’s in him and its and its got to come out.

Here is a brand new, exhaustive study from Georgetown University analyzing the economic value of just about any imaginable college degree. Of course the selection of a major and a career require that one be attracted to that discipline, desire to do the work required to reach proficiency, and have enough aptitude to make the grades. However, it is still an investment decision requiring some cold blooded, hard hearted analysis.

The Economic Value of College Majors

Friday, May 15, 2015

Yes! The Game is Crooked.

Canada Bill Jones was a notorious Wild West card sharp and con artist. Once one of his victims complained that he was running a crooked game, Canada Bill replied, “Yea, the game is crooked but it is the only game in town.”

If one of his marks’ protests became excessively heated, Canada Bill had another famous quote up his sleeve. “No son, you lose. ‘Cause this is a Smith & Wesson I’m holdin’ here.”

Yes, the game is crooked and yes, it is the only game in town. The powers that be want debt slaves and tax donkeys. Worldwide, during 2014, in just one year, $545.40 Billion was spent on advertising. You are in the gun sights of an incredibly sophisticated big green marketing machine operated to make you desire and consume more than you can possibly afford. Politicians, bureaucrats, corporations, banks, and self proclaimed leaders of every sort (including religious leaders) are working overtime to separate you from your money or looking for new ways to limit your freedom.

Even most members of that dastardly 1% can legitimately claim to be victims of the system. If they are self employed over 50% of their income is consumed in taxes. Although I never reached that level, it only takes $300,000 a year to make it into the 1%. It isn’t until you reach the top one hundredth of one percent (0.01%) that you can no longer claim that you are a victim of taxation without representation. At that level it is likely that your contributions and lobbyists assure you that your elected representatives are the best that money can buy.

Has it ever been any different? We live in one of the most corruption free countries on the planet. Although I believe it was better during the Eisenhower years and could be better again, money has always been the mother’s milk of politics. Power controls money. Money buys control of power. This was true in the days of the Roman Empire, during the Middle Ages, and even during the mythical days of the founding fathers of our nation.

In spite of all the obstacles we Americans face, there are people who find their way to financial freedom without the kind of advantages that have given Chelsea Clinton a net worth in excess of $15 Million while still in her early thirties. Roughly 80% of American millionaires are first generation, self made men and women. Many billionaires including Bill Gates, Warren Buffet, Howard Schultz, and Mark Cuban came from working class or middle class families.

It can be done, but not if you let them trick you into playing the game they want you to play by their rules. If you don’t want to be a victim or a parasite, you have three options.

1) You can play their game by their rules and win. Many powerful CEOs of fortune 500 companies and extremely successful professionals were born without a silver spoon in their mouth. Intelligence, talent, hard work, and psychological sophistication propelled them to the top of their fields. Don’t tell me it isn’t possible. Look at our current president.

2) You can play their game, but not by their rules. Exploring pathways to financial freedom for more average folks is the purpose of this blog. If you work hard, heck, if you just show up you are ahead of most of your competition; if you pursue opportunities to make yourself a more valuable member of society; if you avoid debt like the plague; if you consistently live on less than you make; if you make systematic disciplined investments in a boring age appropriate portfolio; there is a high probability that you will find your way to financial freedom even if your income is in one of the middle quintiles.

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.

3) You can play your own game by your own rules. I know people who are actively finding ways to become more self sufficient. Their goal is complete freedom from the system. They grow their own crops and raise their own animals. They trade with their neighbors and sell their surplus to like minded individuals in their area. They are taking greater responsibility for their own health through lifestyle changes and personal explorations into the world of alternative medicine. Some of them are even looking into developing their own alternative energy sources that will allow them to move completely off the grid.

It’s up to you. It isn’t just about luck. Poker is not a game of chance. It is a discipline that involves the use of probability theory, logic and psychology; strategic thinking, bluffing, and reading the opponent. Yes, even the best players can’t win if they don’t get the cards, but the same faces seem to have a way of appearing over and over again at final tables of the big tournaments. One of my former coworkers is a serious poker player. He visits nearby casinos and he wins. He is a licensed professional engineer. He understands the math behind the game. He studies. He keeps a logbook detailing every game he ever played. He records what he did, why he did it, and how it worked out.

You are not responsible for the hand the dealer gave you, but you are 100% responsible for how you choose to play your cards. The game isn’t fair. No doubt, the guy across the table from you has the edge, but you can win. It isn’t as easy today as it was in the years immediately after World War II when we had the only intact industrial infrastructure in the world, but people are still finding their way to financial freedom.

You can do it too.

Wednesday, May 13, 2015

Can I Trust The 4% Rule in 2015?

Back in 1994 Bill Bengen published the first article on the four percent rule in the Journal of Financial Planning. Little did he know that this article would be the beginning of a thriving cottage industry. Since then numerous academic studies have validated the 4% rule. The most famous is the 1998 Trinity Study published by three professors from that university. Along the way other studies have questioned the validity of the 4% rule in various possible scenarios, including the one that we face today.

The four percent rule states that a retiree can safely draw 4% of the total from a balanced retirement saving portfolio (50% cash, CDs, and bonds, 50% stocks and stock mutual funds) in the first year of retirement. After that the retiree can withdraw an amount equal to that drawn in the initial year adjusted for inflation.


$1,000,000 in retirement savings multiplied by 0.04 = $40,000 that can be spent in the first year of retirement.

Assuming a 3% increase in inflation over year one the retiree can safely withdraw $40,000 X 1.03 or $41,200 in year two.

After 30 years the studies indicate that the retiree should have somewhere between a 95% and 98% chance of not outliving his money. If nominal retirement age is 65, that means at 95 you can still pay your bills.

The obvious major problem with this rule of thumb would appear if a major stock market crash occurred in the first few years of retirement. Be certain not to retire a year or two before a stock market crash. Seriously, I would recommend a more conservative position than 50/50 in the first few years of retirement. If you can live on less than a 4% draw in those first few years, err on the side frugality. Later you can loosen it up a bit.

In the last few days I have read a couple of articles questioning the validity of the 4% rule in our current market conditions. The Shiller Price Earning Index stands near 27. Historically, this is dangerous territory. The Federal Reserve Bank has attempted to recapitalize the banks and rejuvenate the economy with unnaturally low interest rates. This has fueled an asset bubble in stocks. Serious people are predicting total average annual market returns of about 2% over the next decade. Compare this with the normal long term return on equities of 7% after taxes and inflation predicted by Siegel’s constant.

Fixed income investments are nearly worthless, barely offering any protection against inflation. Savings accounts are measured in tenths of a percent. Six month to two year CDs run in the ½% to 1% range. The ten year Treasury, once the gold standard of retirement, barely breaks the 2% barrier. Intermediate term investment grade tax free municipal bonds and investment grade corporate bonds yield around 3%. The Vanguard Total Bond Market fund yields 2.5% with an average maturity of 5.6 years.

You will notice there are no numbers in the last two paragraphs that are equal to or larger than 4%. In normal times capital gains on your stock holdings will protect you against inflation and fixed income investments will provide you safety from “corrections” in stock markets. These are not normal times.

While these articles question the safety of the four percent rule in our current market environment, none of these articles offer any rule of thumb that can replace the four percent rule. One of the authors frankly admits that he can’t suggest anything better, but like this author recommends caution.

I am fond of saying that a rule of thumb is a rule that works thumb of the time. It offers a quick and dirty reality check on your assumptions and your behavior. If you are retired and able to live on the income generated by your portfolio, loosen up a little and enjoy life; maybe give a little more to charity. If you are drawing down more than 5%, you better look for ways to cut your expenditures. If you aren’t retired and you are not sure you can live on 4% of your savings, plus Social Security, plus whatever pension or annuities you might possess, work another year.

Folks! Let’s be careful out there.

Sunday, May 10, 2015

In God We Trust. All Others Pay Cash (Part III)

“When we are no longer able to change a situation, we are challenged to change ourselves.”
Viktor E. Frankl.

“God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And the wisdom to know the difference.”
Reinhold Niebuhr

I have concluded that what we believe about ourselves and our money, the nature of the workplace and the marketplace, as well as the assumptions we make about the motivations of other humans trapped here with us in the material world is far more important than our actual physical situation. There are motivations implicit in our belief system that leads to behaviors that are either productive or unproductive. In writing the last two posts, I have spent some time examining my personal meta-narrative, the overarching story that I believe explains what is happening to me and to others. For whatever reason, it seems that I have been chosen to study and teach in the area of personal finance. This same technique can be applied to the issues of life that are far more important and more private than money.

Your meta-narrative is nothing more than a collection of thoughts. There are many things in this world I can’t control. However, I can change my thoughts. Spend some time listening to the stories you tell yourself about life. Are they useful? Are they productive? Are they moving you closer to your dreams or are they a hindrance? Be honest with yourself. If your beliefs are not moving you closer to the person you want to become, you can change them.

When you change your mind, you will change your life.

If your thoughts tend to lead you in the general direction of one of the seven deadly sins, anger, greed, sloth, pride, lust, envy, or gluttony chances are there is something in your meta-narrative moving you in a bad direction.

To that list I would add fear and hatred of others. We all have our own personal boogey men, Democrats, evil rich people, bankers, Republicans, Christian fundamentalists, Muslims, welfare cheats, the list goes on and on. In The Gulag Archipelago, Aleksandr Solzhenitsyn observed, “If only it were all so simple! If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?”

The time you spend trying to make yourself a better person and the world a better place is time well spent. Time spent dividing the world into us and them, the good guys and the bad guys, leads to schism, hatred, and murder, sometimes on a global scale. Of course, there are times when we must make a stand against evil. However, if you find yourself sewing the seeds of discord, ask yourself what kind of harvest are these thoughts and words likely to produce.

It is also pretty easy to tell when your meta-narrative is serving you well. The classic list for Christians is found in Galatians 5:22-23 “But the fruit of the Spirit is love, joy, peace, forbearance, kindness, goodness, faithfulness, gentleness and self-control. Against such things there is no law.” If what you believe about the world and your place in it is generating the fruit of the Spirit in your life, you are on the right path.

To that list I would add compassion and sympathetic joy. Pity is something that we extend to that poor person over there. Compassion is born of a sharing of hearts, an understanding that we are both in this together. If you can find joy in the success and happiness of another, even as you are suffering from the lack of what another possesses you are a pretty high level human being. Not many of us walk this path.

Too often we are imprisoned by our meta-narrative. It is a prison without bars, built brick by brick in our own minds. If you think you are in prison, you are in prison, even if you are free. Perhaps the saddest dimension to this problem is that we tend to like the prison cells we have constructed in our own minds. They are familiar, comfortable, and safe.

There is a better way. Even in prison, your mind can find a way to freedom.

The holocaust survivor and psychiatrist, Victor Frankl, observed, “We who lived in concentration camps can remember the men who walked through the huts comforting others, giving away their last piece of bread. They may have been few in number, but they offer sufficient proof that everything can be taken from a man but one thing: the last of the human freedoms -- to choose one's attitude in any given set of circumstances, to choose one's own way.”

Saturday, May 9, 2015

In God We Trust. All Others Pay Cash (Part II)

“The man who believes he can and the man who believes he can’t are both usually right.”
Attributed to Henry Ford

I had occasion to work the Houston Offshore Oil & Gas Conference as part of my job. I found Houston a culture shock after working in the Washington, DC area for more than a decade. In Washington, it was all about control and fairly dividing up the pie, a view based on the assumption that wealth was finite and that ordinary people could not be trusted with freedom. When I observed that Houston was the only town I ever visited where one could find a strip club, a Jesus saves, heals, and delivers temple, and a bug exterminator all on the same corner, I was informed that Houston didn’t have any zoning laws. People were more or less free to build whatever they wanted, wherever they wanted. I can’t imagine that this could be completely true, but the residents of Houston seemed to worry a lot more about trying to live their life than trying to control the way their neighbor might choose to live his life. It seemed that everyone from the newest illegal alien to the billionaire wildcatters landing their helicopters in the parking lot (really) didn’t view money as a finite commodity. They believed everybody could grab a piece of the action or if there didn’t seem to be enough cash around at any particular point in time; they could pump an entirely new pile of money out from under the sands that cover the bottom of the Gulf of Mexico.

I have continued to consider the question, “What do you believe about money?” Intention is the beginning of all things. Before I can begin to work towards a goal, I must be able to define that goal and I must believe that it is a goal that is worthwhile and possible for me to achieve. At this point the mind science teachers are correct. What you believe about money, your relationship with money, and what you believe about yourself are for most of us, the greatest impediment in achieving financial freedom. However that is not the end of the story. There is a whole lot of patience, perseverance, and plain old hard work necessary to get us from point A to point B.

Affirmations are not going to force the universe to manifest a Mercedes Benz in your driveway.

I graduated from college just in time for the recession of 1973. There weren’t many jobs available, but I remember running a thought experiment in my mind. I asked myself the question, “If you were tied up in a bag, with no money, and dumped into a strange town, how long would it take to get back on your feet?” My answer was no more than three weeks. After a couple of weeks, I found a job as a human robot packing rolls of cloth in burlap sacks. I also discovered the true value of a liberal arts degree, but that is another story. I was thoroughly convinced that no matter what life threw at me I could not only survive but I could thrive. I am not so sure I would be as confident in my 64 year old self as I was in my 22 year old self.

I was raised to believe in the “good job.” If I earned the correct degree, if I was a trustworthy hard working cog in a great bureaucratic machine, ultimately I would be given a “good job.” Then I could buy a big house in a nice neighborhood and drive cool cars. It never entered my parents’ mind or my mind that I could create my own personal enterprise out of nothing. I still haven’t crossed that bridge. I know I can help people do a better job of managing their money. I’ve done that; more than once. I know I can help people discover the questions that will help them find a better path that will lead them to their ultimate goals, but I can’t yet seem to believe (really really believe) that it is possible for me to make money helping others even though the world is filled with successful self help authors from every possible belief system.

I have learned to follow a hybrid of two classic investment paths. I hold a well diversified, age appropriate mix of index funds and individual conservative dividend paying stocks. Because I am a cautious soul, I tend to hold more than I should in cash and cash equivalents, a habit that severed me well in 2008-2009. I also believe that every portfolio should have something like 2% to 5% precious metal and maybe even a little in gold mining stocks. My largest position is in an exchanged traded fund (GLD) that holds my physical gold in a vault in London.

I am aware of some of my shortcomings. I find it hard to make a high risk, high reward gamble with even a small amount of money. I am overly skeptical of investing in foreign markets. The U.S. share of the world’s economy is shrinking. The rest of the world is growing. Last time I checked, my International positions were on the order of 15% or less of my liquid net worth. They should probably be twice that amount. I am slowly trying to take that next step.

I am still learning how to spend money. I am a natural tightwad. I am still learning how be a giver. I have come a long way over the last forty years. I hope I continue to improve. I want to be a blessing in this unhappy world. I also need to learn how to do a better job enjoying my blessings. I don’t need to keep cars until they are worn out. I can buy new clothes before they are so frayed that they can’t be given to a thrift store. I especially need to learn how to spend money wisely on the food I put in my stomach. Convenience food, fast food, and restaurants are not going to help me loose weight.

There is something else. I am always dissatisfied, not with the amount of money I possess or my lifestyle, but with the limits of my knowledge and wisdom. I know. I just know; that somewhere out there someone is doing a better job with his money because he knows things that I have not yet learned and applied in my life. Although I don’t want this person telling me what to do or doing it for me, I want everything he has to offer.

The Tragical History of Doctor Faustus is seen by some as a key myth in the development of Western Civilization. We have, as a culture, always been ready to trade our souls for knowledge, even under singularly unfavorable terms. We are always searching for keys to unlock mysteries concerning our own nature and to learn to effortlessly control our environment and our destinies. I simply can’t wait to read that next book or enter into a conversation with someone who knows more than I know.

As a Christian, I know there are dangers on that path.

“O, Faustus, lay that damned book aside,
And gaze not on it, lest it tempt thy soul,
And heap God's heavy wrath upon thy head!”
The Good Angel
(Marlowe's Doctor Faustus)

Wednesday, May 6, 2015

In God We Trust All Others Pay Cash

When the chips are down, where do I place my trust? Of course, being a Christian, my answer should be God, but for most of us, that wouldn’t be the truth—at least not the whole truth. So what do I trust? I think in my case it is a combination of God, myself, money, and other people.

After examining my heart, I concluded I was doing better with money than I initially feared. I can’t find the quote, but J. P. Morgan once observed that money granted one a certain Buddhistic quiescence. This is true. It is easier to sleep at night knowing the bills have been paid and that something still remains to cover future liabilities. However, I have lived long enough to understand that money can never be completely trusted. I was unemployed during the recessions of 73, then again during the recession of 82. I lived through the wretched stagflation of the seventies that basically ruined what should have been the best decade of my life. I watched friends and coworkers slammed by the dotcom crash of 2000. I knew a man, a knowledgeable and skilled investor, who lost a fortune in that year. I don’t think he ever recovered. During the real estate boom that ran from 1995 to 2005, some my neighbors tried to turn the increasing equity in their homes into their own personal ATM by means of Home Equity Lines of Credit. When home values crashed in 2006 many were left underwater, unable to extricate themselves from debt. In 2008 I lost about 40% of my holdings in equities. Fortunately I had about half of my money in bonds and cash, so I was able to recover. Other men I know who are really smarter and more successful than I can ever hope to be sold out at the bottom in 2009 to preserve what remained. They have never recovered.

It is obvious that the borrower is slave to the lender. The person who takes on too much debt in the mistaken belief that money buys happiness will likely learn a painful lesson. But those who successfully pursue money in the belief that it will bring happiness are equally foolish. I have seen people, rich people, become servants to their money. If money consumes your life, you are walking in folly.

I think my biggest problem with God is me. Like most American I was raised to be self reliant, as my mother would say, “Not to be beholden to anyone for anything.” Whenever I was knocked down I always got back up. My self talk when I faced what I believed to be an unfair situation included the story of the U.S. Army Rangers who assaulted the German gun positions at Pointe du Hoc during the D Day invasion of Normandy. The German Army and a whole lot of guns were at the top of a 100 foot cliff. At enormous cost, the Rangers climbed that cliff and captured the German position. I would remind myself they didn’t ask for an even playing field. When my wife, then my girlfriend, discovered the quote from Friedrich Nietzsche, “That which does not destroy me makes me strong.” She laughed, instantly thinking about my approach to life.

There is a problem with trusting in self. Whatever I have in the way of mind, will power, and emotional strength exists in a body of flesh. When I was 37 years old, I injured my lower back while working on my car. I never completely recovered. Whenever I attempted some stupid demonstration of manly strength (usually in work situations) I ended up in a doctor’s office with back spasms. When I was about 45 years old, arthritis in my knees forced me to give up the practice of the martial arts. In my early 50s I developed a heart arrhythmia that has required daily medication. What waits in my future? Alzheimer’s? A wheelchair? I don’t know. Ultimately, I can’t trust myself.

How about friends? I am fortunate. I have some friends who have proven themselves over 40 years and more. They have stood by me in good times and bad. They have put up with my eccentricities when they would have been justified kicking me in my butt. I believe I am developing new friendships that will blossom and mature over time into real blessings for them and for me. Always remember the friends with whom you share your life are precious. They are there to lift you up and push you forward when you are too tired or weak to take another step in your own strength.

I didn’t expect much from “work friends.” I have frequently compared particular work situations to a psychology experiment in which the researchers come to the startling realization that if you place a group of rats in a sequence of smaller and smaller cages while giving them less and less food, sooner or later the rats will start biting each other. However, I have been pleasantly surprised to discover that a few of my “work friends” are still there for me even though many years have passed since we shared life together in a factory or a laboratory.

My biggest disappointment in the area of friendship has been the Church. I have come to realize that in spite of all the family of God rhetoric, most “church friends” are just that and nothing more. When you are a member of that particular church, they speak and act as though they are your friend. However, once you no longer share church membership they are out of your life, forever. In some instances, when I have attempted to reconnect with church people I believed to be my friends, they politely and gently encouraged me to go away.

So why don’t we trust God? I expect for most people, including myself it is a combination of things like the deep pain of some personal disappointment. We ask God, “Why did you let this happen to me?” In some cases we fear that God is out to deprive us of some good thing we greatly desire, like a mate. Sometimes I think our distrust of God is a form of buyers’ remorse generated by an inaccurate picture of God painted by one of his salesmen. Finally, I think I tend not to trust God because I can’t see him and I don’t make enough effort to get to know him. How can I trust someone any further than I know him?

I hope that I continue to grow in my understanding of God and my trust in God. Where else can I go?

He has the words of life.

Monday, May 4, 2015

Jobs Careers Callings

I find it difficult to write about work as a meaningful part of life, perhaps because I made what I have come to term, “the great compromise.” After nine years spent in American factories, I decided to look for the least objectionable way to earn a sufficient salary to provide us with the standard of living we wanted. By this time I had discovered that I liked machines and machines liked me, so I went back to school in mechanical engineering with the desire to find a job in a research and development laboratory. It was a job, that gave me a career, but it wasn’t a calling.

For at least thirty or forty years in an advanced nation like the United States, it is necessary to find or create a job, that as Dr. John would say, will allow you to earn enough bread to buy the bread to have enough strength to come back and work another day. A job is about survival for you and for your family. Fortunately our nation has a social safety net to help in time of need, but if scamming that system for the rest of your life is your goal, your life will be pretty wretched. If you fall down, be thankful the net is there to catch you, but please get back up. Take a job, any available job. If one does not exist, create your own. If you preserve, it will not be the end of your road, but a beginning.

I know a Hispanic man who found a job as a janitor working for a Government contractor. I expect he wasn’t earning what some would term a “living wage” when he started in a position that would be considered, menial, by most Americans. He performed his job with excellence. Not only did he do what was required, but in his spare time he swept out a building that was 5/8 of a mile in length. As far as I know that was the first time that was done since the building was constructed. A Government supervisor was so impressed with this man’s work ethic and personal integrity that he hectored his management until they created a special position as a entry level mechanic just so that he could hire that janitor. Our new employee not only learned to perform his freshly minted job, but continued to voluntarily perform in his old role as a janitor. Everywhere he went, everything he touched was clean. Before I retired, I noticed this man was learning the basics of a skilled trade. Our machinists were teaching him how to run a lathe and a milling machine. I fully believe that in another ten years, he will be classified as a machinist.

A career starts as a dream and ends as the story of your life. Consider the career path of an aspiring young conservative Protestant minister. Once he earns his M. Div. at some appropriate seminary, his first job is likely to be as a youth minister or an assistant minister at some reasonably successful suburban church. In some rare instances this young man might take the job as “senior pastor” at a small rural church or even hang out his own shingle in front of some strip mall storefront in an inexpensive part of town.

As the years pass, he will feel ready to take on the challenge of running his own church, probably a reasonably successful suburban church similar to the one that employed him as an assistant. If he choose to become the senior pastor of the First Baptist Church of Skunk Hollow, West Virginia, he will probably move on to a larger church in a larger city. Unless our pastor is fired, a very real possibility in some denominations, it is likely he will end his full time career at this church. Pastors never completely retire. They come back as temporary ministers. Somebody has to do the job until the man given the left boot of fellowship is replaced. Football teams and Protestant churches don’t know that one of the basic laws of good management is, “Don’t fire someone until you are certain you have someone better to replace him.”

If the young man is a star, at some point he will go back to graduate school, earn a Th. D. write a book on some arcane topic, and become the pastor of the First Church of the Mercedes Benz in a place like Dallas or Atlanta. His sermons will appear on local television. If he is something special, his show might be syndicated on a national basis. He won’t gain weight. His hair will remain thick and turn silver. His books will sell copies numbered in the millions and thousands will attend his funeral.

Now that is what you call a career.

For most of us, our career is at least something of a disappointment. When we are young we have so much hope, so many dreams. Then life gets in the way of our desires. Happiness, it is said, is the differential between expectation and reality. If our reality exceeded our expectations we are a success. If reality falls, short we view ourselves as failures.

Callings seem to come in two flavors those that we bring upon ourselves and those that come from a higher power.

Once you make the decision to become man and wife, you have a calling. You have sworn a pretty serious oath before God and man. If you are a man you now have the calling to provide for and protect your wife. If you are a woman you have sworn to become a faithful helpmate to your husband.

What were two has become one.

Becoming a parent is an even more serious calling. At least you made the decision to get married. Your child had no say in the matter. Unfortunately, nearly half of our marriages end in divorce, but only in the rarest most extreme cases is a parent and a child legally or permanently separated.

The other kind of calling just kind of sneaks up on you, sometimes unbidden and unexpected. It is hard to believe that I am still writing this blog after more than six years. Thirty years ago or even ten years ago I doubt that you could have convinced me that I would be spending this much time helping others find answers to their personal finance questions.

God willing, you might want to question me in another twenty years, but today I am of the opinion that both kinds of callings always contains a blessing and they always make you a blessing to others.