Wednesday, August 26, 2015

An Exploration of Mastery

All fixed set patterns are incapable of adaptability or pliability. The truth is outside of all fixed patterns.
Bruce Lee

A few days ago, I watched a video on youtube exploring the Japanese sword art, Iaido. The narrator and host is an American who studied karate in Japan. He is an international tournament champion and now a high level instructor in his discipline. In this series he takes introductory instruction in an unfamiliar martial art, asks the masters questions, and allows them to perform sometimes painful demonstrations on his person. Iaido is an art that teaches the swordsman how to draw his sword from the scabbard and dispatch an opponent in a single motion. Today it is not practiced against a live opponent but is primarily a meditative practice. However, for this video an 8th degree master agrees to demonstrate on the narrator with a heavily padded practice sword. Three times a skilled martial artist in his late 30s draws his sword on a man twice his age. Three times the old master delivers a killing blow before his attacker’s sword is halfway to its target. At normal speed, the video appears to show that the master drew first, but when slowed by high speed photography it is clear that in every case some trifling twitch of a hand telegraphed the nature of the planned attack. The master responded perfectly, without thought, every time.

In my last post I stated, “On the other hand, you will never achieve mastery in any profession working a forty hour week.” I was asked for a further explanation by a friend of this blog. I wasn’t quite sure how to respond. In context it seemed pretty obvious to me, but then I realized I have never defined mastery. Even though I knew what I meant, as I attempted to nail down an explanation in my mind, the definition proved elusive.

Of course I have read and commented on Outliers: The Story of Success by Malcolm Gladwell. From this book we learn that even the most gifted artists require at least 10,000 hours to achieve mastery. I have listened to Robert Greene discuss the components of mastery and I have found the definition of intelligence offered in Godel Escher Bach: An eternal golden braid by Douglas Hofstadter a most useful way to explain the essence of mastery.

1) To respond to situations very flexibly;
2) To take advantage of fortuitous circumstances;
3) To make sense out of ambiguous or contradictory messages;
4) To recognize the relative importance of different elements of a situations;
5) To find similarities between situations despite differences which may separate them;
6) To draw distinctions between situations despite similarities which may link them;
7) To synthesize new concepts by taking old concepts and putting them together in new ways;
8) To come up with ideas which are novel;

I have been told it takes five years (about 10,000 hours) to become a competent automobile mechanic, but in that time can one achieve mastery? While waiting on a botched delivery from a local parts house, a local mechanic entertained me with some of his war stories. He had recently attended a class given by a company that provides tools to independent garages. The presenter, besides marketing tools and answering questions for his customers is a hired gun. He is paid by garages and dealerships to fix problems their own mechanics can not solve. On weekends he handles 3 or 4 of these questions in one day for a fee that averages between $300 and $400 per call. I don’t think he reached this level of competence working a 40 hour week. I rather suspect there were hours spent in classrooms obtaining specialized certifications, time spent on the Internet researching problems, and hours of uncompensated overtime, both at the shop and in thought experiments performed in his mind at night while his sleeping wife snored peacefully by his side.

One of my old supervisors was a remarkable genius. He solved some extraordinarily complex problems for the U.S. Navy in the course of his career. I once listened to him solve a technical conundrum that had stumped some rather brilliant men in less than thirty minutes during a meeting. He didn’t really need to even concentrate on the problem, a good thing since he was constantly interrupted as he described the solution. At that point he was drawing on thirty years of experience. When he was a young engineer, he had the luxury of creating his own experiments. There was funding for that sort of activity back in those days. Later in his career he was paid by the Navy to complete his doctoral degree. I know the solution to the problem that made his career came to him listening to the flow of water moving through pipes while taking a shower. His mind never stopped. Mastery isn’t a cheap commodity.

Competence isn’t mastery. I have reached a point in my studies of investment where I have read dozens of books on this subject, but I know that with some exceptions, I have, in fact read the same book dozens of times. I know there is a higher level. I have experienced a taste of what lies beyond what is generally taught in personal finance classes. Experiencing the same problems at the same job year after year isn’t moving you closer to mastery. You don’t have ten years of experience, you have one year of experience ten times. More than the forty hours offered by your employer will be required to move you towards mastery.

I began this post with a quote from Bruce Lee. He was considered a renegade, or perhaps even a traitor by the traditional Chinese martial arts community, because he did not always show proper respect for their traditions. Yet, before he created his own art, Jeet Kune Do, he achieved mastery in Wing Chun at the feet of one of the great martial artists of that generation. My former boss knew how to do the math, but his mind wasn’t limited by what he learned in the university. Instead his learning, his experience, his experimentations became a springboard to what was viewed by others (sometimes with good reason) as impossible. To paraphrase Bruce Lee, my former boss was free. Having mastered the routines, ideas, and traditions of others, he came to an understanding of engineering science based on a deep personal understanding of who he was.

That is mastery.

Tuesday, August 25, 2015

Jeff Bezos Vs The New York Times

I have considered throwing my two cents into the maelstrom of outrage generated by the now notorious New York Times expose detailing the working conditions at It is reported that their executives and white collar professionals, are driven to the limits of human endurance, but really, why is anybody surprised?

There have always been “ulcer” companies, like Amazon. They pay their professionals top dollar, but they expect them to strap on a single action Colt when they put on their pants in the morning and still be ready for a gun fight sixteen hours later after consuming four shots of whiskey at the Long Branch Saloon. Every year, General Electric fires the lowest performing 10% at all levels of their company. The highest performing 20% receive outrageous bonuses. All the survivors receive a salary that is well over industry standards. They all know what they signed up for. If you decide you are not cut out for such a life, the door is always open. No one is stopping you from walking out.

EDS was such a company. When I graduated from engineering school I was interviewed by a representative of Ross Perot’s creation. The company philosophy at EDS was once described as a mix of fundamentalist Christianity and the fanatical discipline of the U.S. Marine Corp. The woman from EDS really liked me, but they were very honest about what they expected. Since I was a Christian, I said no.

I expect everyone who walked in the front door at Amazon believed they could make it. Many of them didn’t, but I expect they can’t say they weren’t warned. I know a man who once interviewed for a marketing management position at Amazon many years ago when they were a much smaller company. During the interview, Jeff Bezos himself, told this man that if he ever saw him leaving his office at 5:00 PM, it better be for a lunch break. Since this man is a Christian (and not a lunatic) he said no.

However, if you are one of the few, the proud, the fanatical; working for Jeff Bezos will make you a millionaire many times over. I also expect that anyone who was good enough to make the cut at Amazon and survive for even six months as a glorified temp is good enough to pick up another job right quick. Those kinds of pyramids get really small at the top.

Ultimately, union or non-union, all employees are glorified temps. Whether gold collar professionals with salaries in the top quintile or human robots performing mindless tasks for minimum wage, you will only have a job as long as it is in the interest of your employer to provide you with a job. Not even the Government can provide lifetime job security, as many in NAVSEA (my laboratory’s parent organization) will attest.

In nine years I was employed by two American factories. During this time I worked for seven different plant managers. They had a shorter life expectancy than football coaches in the NFL. I saw way too many layoffs. Now both of those plants are gone, victims of environmental regulation and foreign competition. Since I didn’t want to live the rest of my life watching the death of American industry, I devised a plan to get a job in a R&D lab. Once I earned my BSME from the University of South Carolina, I choose to work for the Government, both because they were hiring during the glory days of the Reagan buildup and because I was willing to exchange about 20% less in salary for roughly an equivalent increase in job security.

There are no guarantees in life, but stop and think a bit before you apply for that new job. If somebody is willing to pay you money, something is wrong somewhere. If it was all that wonderful, you would be paying him to get to do it. On the other hand, you will never achieve mastery in any profession working a forty hour week. That truth would also apply to investigative journalists working for the New York Time.

Now, Let’s be careful out there!

Wednesday, August 19, 2015

And So Then What?

For about twelve years I was focused very intensely on saving and investing for retirement. I had a target date in mind. My goal was to retire at age 62 or at an even younger age, although I knew that was unlikely.

I was one of the fortunate ones. I was able to dodge what Susan Bruno CPA terms the five Ds. These are the events that can land your family in a real financial jam.

1) Death
2) Divorce
3) Disaster (natural)
4) Disability
5) Debt

She observes that three of the five Ds can be covered by enough insurance. Divorce is almost always a nasty wealth destroying nightmare, but sometimes it happens. She views debt as the silent killer of a family’s finances. “The younger wives don’t want to know and the older ones are petrified to know.” (The Thin Green Line by Paul Sullivan)

I made it. I retired on the first working day after my 62nd birthday. A little over two years into retirement it is steady as she goes. Since I am worried about the possibility of a market crash in the early years of my retirement, I have decided to hold a rather more conservative position than most advisors might recommend for someone of my age.

Once a few years have passed, I can see that I am going to have to ask the question, “And so then what?” I look forward to taking some trips and finding opportunities to be a blessing in this unhappy world, but what am I saving for when I am no longer saving for a particular time sensitive goal? I have a number of relatives who have lived long lives. I am assuming a thirty year retirement, but who can say? I may die tomorrow. I may live to 104 like my grandmother. I certainly want to be a blessing to others long after I shuffle off this mortal coil. I can see that at some point in the future, I will need to plan for a future that I will not live to see.

As I grow older and as I have learned more, my opinion of low cost “target date” or “life cycle” funds has increased. For some time I have suggested Vanguard target date funds as a good option for people who don’t want to learn anything about managing money. The target date refers to your planned date of retirement. Feed that one data point to Vanguard and they will take care of the rest, maintaining an age appropriate mix of low cost index funds that will be automatically rebalanced without any further oversight or action required by the customer. Auto-debit additional deposits to this account on a monthly basis and let the miracle of compound interest work in your favor.

Recently, Schwab has offered a competing product, Schwab Intelligent Portfolios. As I messed around with their website, I realized the key component that I could no longer provide was the target date. There was no target date. I will need to tap money throughout my remaining years, but if I wish to plan for a future I will not live to see, at least a small portion of that money will need to be treated as though I was a thirty year old man planning to retire at age 65. I will need to create a sub-portfolio that contains a large percentage of international and small cap stocks. Normally someone my age should be looking at a portfolio based on a foundation of full faith and credit instruments like Ginnie Maes combined with intermediate term investment grade bonds.

As I pondered the question of multiple sub-portfolios designed for different purposes, I came up with the idea “laddering” target date funds in much the same way as bonds are laddered to smooth out fluctuations in interest rates. I share this idea with an Internet community of investors. They understood the problem, but several of the members pointed out that, since the target date funds use different proportions of the same products, multiple holdings would dilute the effect of several different target date funds into one fund with some intermediate target date.

Instead, they proposed thinking in terms of “buckets,” constructed to provide cash for today, conservative investments for tomorrow, and a third bucket containing something akin to a portfolio for a man in the latter years of middle age to provide the possibility of capital gains for the more distant future. One of the contributors in this discussion shared an article that enjoyed a good reception from most of the participants.

A Retirement Strategy for Nervous Investor

In the article, Norbert Mindel, author of Wealth Management in the New Economy, proposes a hypothetical retiree with a net worth of $2 million. Therefore, following the 4% rule, this retiree plans on spending $80,000 a year. Mindel recommends a first bucket containing $240,000 an amount equal to three years expenses. This money would be invested in market funds and short term certificates of deposit. When necessary this bucket would be replenished from a second bucket containing $500,000 containing 80% investment grade bonds and 20% in low cost index stock funds. The third bucket would contain $1 million divided 60% stocks and 40% bonds. The author reasons that, even if the market drops 40% as occurred in 2008, enough money would remain in the first two buckets to cover almost 9 years of expenses. This would likely be enough time for the third bucket to recover.

While I don’t think this article specifically addresses my question or my particular situation, I do think the concept of three or possibly four “buckets” is an idea with merit. It will be a few years before I will actually need to begin any significant restructuring of my investment portfolio. Today, safety is my primary concern, balancing income with inflation protection a secondary concern, and capital gains a tertiary concern at best.

However if I am fortunate, I can see that the day will come when it will be appropriate to restructure my retirement portfolio, not only to address my needs and concerns, but for the welfare of those who will follow in my footsteps.

As always, the time to start asking questions and planning for tomorrow is today.

Monday, August 17, 2015

Freeman Capital

Sometimes I come across a story that is so good that I can’t stand not to share it. This one was sent to me by a friend of this blog.

Curtis Carroll has served 20 years of a 54 year to life sentence in the notorious San Quentin state prison for robbery and murder. However, he has become so good at investing in the stock market that he is even acting as a financial advisor for the prison guards.

Curtis, aka Wall Street, is quoted as stating, “I couldn’t believe that this kind of access to this type of money could be accessible to anybody. Everybody should do it, and it’s legal!” Absolutely correct. There isn’t a minimum requirement to open a Schwab brokerage account. Anybody can learn to play this game.

Born in Oakland, CA Carroll lived on the street. His mother and his grandmother were both crack addicts. After becoming a member of a gang, his crimes landed him in prison at age 17.

Carroll accidently fell into a life of finance one day when he asked another inmate to read him the financial section of the newspaper. He thought it was the sports section. He didn’t know what stocks were, but he found out. He concluded, “Whoa, I think I stumbled across something here!”

Starting with small investments in high risk penny stocks, Carroll began studying the financial news as he taught himself to read. Working all night and into the early hours of the morning, Wall Street learned how to make predictions. He learned how to keep track of his investments.

Wall Street and Troy Williams, a fellow inmate, founded a prison financial group they named Freeman Capital. With help from volunteers they are teaching the basics of personal finance to a class of 70 prisoners. Even though Carroll doesn’t have access to the Internet, he is still able to check the market by calling members of his family. He observes, “I’m in prison, but I’m on just the same playing field as Warren Buffett. I can pick the exact same companies. I can’t buy as many shares, but technically we’re just the same.”

At this point, I want to cheer.

Carroll teaches his fellow prisoners a four step system:

Cost Control (living on a budget)
Borrowing Prudently
Diversification (In your investments)

He is correct when he states, “Every person on this planet that has made money has mastered these four steps.”

Word about Wall Street’s skills is making its way to the outside. A few small community investment clubs are asking him for his advice. I hope this story makes its way to the governor of California.

This world needs Curtis Carroll.

Here is a link to the original article:

Inmate with Stock Tips Wants to be San Quentin’s Warren Buffett

Sunday, August 16, 2015

Friends, Mentors, and Role Models

Since I began my study of the creation of wealth nearly 14 years ago, I have learned many things. Only a few of these discoveries came as much of a surprise. I found most of it was just technical detail or common sense. However, I was surprised to discover all the masters put a very high premium on the selection of the friends and associates with whom you will share your life. You can’t do anything about your family, they are part of the hand you are dealt by life. However, you are responsible for the people who you choose to make a part of your adult life. Wise selection of friends, mentors, and role models will all contribute to your success or your failure.

While it is a little off topic, let me remind you that, man or woman, who you marry will be the single most important decision you make in your life. It will certainly be the most important financial decision you will make in your life. Who you marry will significantly impact the amount of money that you (as a couple) will earn. Who you marry will determine your spending habits. Who you marry will determine how you will invest money and plan for your future together.

Stop for a moment. Visualize the kind of life you would like to lead. Visualize the kind of man or woman you want to become. Do the people in your current circle have anything in common with your dreams? Probably not. It is more likely that the people in your life are like the kind of person you are not the kind of person you want to become. When you try to move on, it is likely they will try to hold you back. Don’t worry. I have found that it won’t be necessary to cut off your current friends. As you grow, they will disappear from your life. In only two cases have old friendships proven so negative that I had to consciously cut them off. It was painful, but it had to be done.

In some environments this process will prove natural and easy. When I left the factory floor for engineering college at age thirty during the Reagan recession, I became a part of a group of extremely serious older students. We studied together. We drank beer together. Most of this group ultimately became members of Tau Beta Pi, the national engineering honor society--together.

On most days, I walk several miles along the Swamp Rabbit Trail. While all us have a variety of reasons for walking, running, or cycling we all want to become more physically fit. I have found the camaraderie shared by total strangers to be quite amazing. I have received and shared words of encouragement and helpful tips from everyone from a man in his eighties recovering from a failed hip transplant to a woman training for marathons. We are all working towards a common goal. We are sharing the dream of something better.

Role models are useful. Look around you. Who is on his way to becoming the kind of person you would like to emulate. Watch them carefully. What are they doing that you are not doing? What kind of beliefs do they have about the nature of this world and their place in this world? Are your beliefs and actions consistent with the kind of person already on his way to whatever you consider success? If not, perhaps a little self examination is in order.

Of course role models can not only be found in school or in the workplace. They also live on the shelves of your public library and out there on the Internet. Somewhere, someone is living your dream. Find them. Learn from them. Make them a part of your life and you will move closer to realizing your true nature.

Mentors are rare and exceedingly valuable. One man or woman willing to take you by the hand and show you the way may be the key to unlocking the door to your success. When you are young, it is unlikely that you will want to listen to anyone who can’t immediately give you a better job. I didn’t understand this principle until I was in my middle thirties. Pay attention to the people in your life who are older and wiser, even if they are not in a position to catapult you to fame or fortune. Hopefully, before you are old, you will come to understand the value of the life lessons they have shared with you. Don’t worry about being a bother to someone who is acting as an informal mentor in your life. Us old folks like it when bright promising young people treat us like we are wise and important.

Be a mentor. If you see an opportunity to help someone avoid a trap, don’t hesitate to share what you know. Sharing wisdom and knowledge with others is the only gift you can give that will not lessen what you possess. If you light the candle of another, you have doubled the light in the world. Don’t believe that helping a coworker will lessen your chances for success. The universe is watching; let God take care of your reward. You will not be disappointed.

Finally, remain open and sensitive to that little voice that nudges you from time to time. You might hear something from a total stranger or a person of no particular importance that might prove a key to your future success. 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)

Joel Osteen is fond of telling his audience that once while he was visiting a city, he asked a young bellman for directions to a famous church he wanted to attend. The young man told him the church was too far away. He wouldn’t get there in time for the service. Instead, he suggested that Joel attend a nearby church. Osteen followed the young man’s advice. He enjoyed the service and became friends with the minister. This man introduced him to a man who would ultimately be responsible for publishing Joel Osteen’s first book. The rest, as they say, is history. Osteen’s first book remained on the New York Times best seller list for over 200 weeks!

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

Friday, August 14, 2015

Freedom is Never Free

How much freedom do you want? As the song tells us, “Freedom is never free.” There is always a cost associated with freedom. There is a tension in all democratic societies between freedom and equality. Freedom guarantees inequality. Equality guarantees a lack of freedom. Reasonable people can disagree as to where the optimum balance point might be located. Our elected officials spend a great deal of time debating this question.

On a more personal level the question becomes, “How much freedom are you willing to exchange for security?” When you are single any other single person is fair game. Once you are married, you have paid a price in freedom to obtain security in the most important relationship in your life. If you take a paycheck from an employer, for a certain number of hours per week, you have to do what your employer wants done, when and where he wants it done. You have exchanged a measure of your freedom for the security of a regular paycheck.

It is necessary to understand that the “powers that be” do not want you to enjoy your freedom. The banks and the corporations that want you as customers would prefer you become their willing debt slave. They want you to give them money on a regular basis. The governments are no different. Every time you do just about anything, the taxman is standing there with his hand out. Although gambling is illegal in all but 18 states (not counting casinos on Indian reservations), 43 states run lotteries. The lottery has been described as a tax on the willing and as a tax on stupidity. Both statements are true. Interestingly, Nevada, home to Las Vegas the greatest gambling Mecca in the world, doesn’t have a state lottery.

As always, the question is mindfulness. It is important that you consciously decide on how to use your money the way you want it used; not the way someone else wants it used. Back in the late 1960s Joe Dominguez began teaching ideas that ultimately coalesced into a personal finance classic, “Your Money or Your Life.” He found that people made better decisions about their money if they thought in terms of hours rather than in terms of dollars.

Ask yourself, “How many after tax hours of my life will this ongoing expense cost?”

Let’s take a look at one of my favorites, the cell phone. It is almost impossible to state with certainty how much cell phone service will cost when all is said and done, but these numbers are probably reasonable.

I looked on the Verizon website at a 10 Gigabyte monthly data plan that cost $80 a month plus a $15 per month per phone charge. That totals out to $95 a month. However, that does not include any taxes or additional charges. Checking out copies of Verizon bills posted on line by angry customers, it looks like that could add another $30 a month. The offer I saw, didn’t mention anything about the cost of the phone. I expect that is extra, but that it could be rolled up in a contract. Let’s say that your deluxe data plan totals out somewhere in the $125 a month neighborhood. Then let’s postulate that your after tax take home pay runs $15 per hour.

That means somewhere over 8 hours of your life will be spent working for the phone company for every month for the rest of your life.

Is it worth it?

If you are a real estate agent juggling 30 customers and 15 home owners while trying to find the locations and directions for addresses all over the county, you are probably taking home a good bit more than $15 per hour. The three hours or less it takes you to pay for that iPhone and Siri’s sarcasm is a bargain. If you are using this technological marvel to text your friends and keep up with facebook, maybe it isn’t such a good decision.

I use a pay as you go phone service and a six year old basic cell phone with no data capability. It costs me $20.00 every three months; 10 cents a minute with rollover if I don’t use the minutes. The only time I ever ran out of minutes occurred when I had both my parents in hospital at the same time. I feel bad that as a retired engineer I have missed out on an entire technology, but for the life of me I can’t imagine how a smart phone data plan could pass a simple cost/benefit analysis given the way I would actually use the thing.

Don’t bite the hook, make decisions that benefit the life you want to live, not the life somebody else wants you to live. Take a step toward freedom.

Saturday, August 8, 2015

The Thin Green Line

This morning at breakfast I started reading still another book. This one is titled The Thin Green Line. The author, Paul Sullivan, writes the “Wealth Matters” column for the New York Times. I didn’t make it through the first chapter before he grabbed me with something I just had to share. If you are a reader of this blog you have heard it before and Lord willin’ you will hear it again.

In his capacity as an employee of the New York Times, Paul Sullivan was invited to attend a meeting of the Tiger 21 Investment Group, although the Tiger 21 Club would be a more accurate description. Tiger 21 has 200 members. Each of them must have a net worth in excess of $10,000,000 although some of them are worth hundreds of millions or even billions. They each pay a membership fee of $30,000 a year to meet with other members of the club for lunch. At these lunches they agree to critique each others’ investment portfolios, no holds barred. As though he was one of the members, the author opened up his financial life to some of the wealthiest men in America.

He described the experience as being the mole in a Whack a Mole game.

The author was not criticized for his investments, but for living an excessively extravagant lifestyle given his salary and his plans for the future. He was also criticized for a failure to properly evaluate future risks. All of these men are thinking in terms of decades. Paul Sullivan owes a beach condo. He was told in no uncertain terms to dump it immediately. The ongoing costs of this luxury were simply out of sync with his financial goals. Sullivan protested that he was underwater on the condo. He owed more than he could obtain in a sale. He was told to lower the price and get rid of it. Even if he lost $20,000 or $30,000 on the sale he was told that he would be better off in the long run.

These men think, LONG RUN. It is one of the keys to life on the high side of the thin green line.

The author was criticized for not having adequate insurance. Sullivan and his wife both had life insurance, but not enough. He was told to buy cheap term insurance. He was encouraged to buy disability insurance. Even though this product is expensive, the men at the table told him that disability was five times more likely than death during his working years.

The author was astonished and if one reads between the lines a little annoyed that he was pilloried by Tiger 21 for not giving enough money to charity. He didn’t seem to want to hear this lecture from a man who was a former slum lord.

In general the men at the luncheon did not believe that Sullivan was properly considering all the risks he was facing. They didn’t consider his career as a journalist as all that stable. They didn’t think he was properly evaluating the future costs associated with raising his children.

The men of Tiger 21 didn’t think Sullivan understood the difference between being rich and being wealthy. Michael Sonnenfeldt tried to explain the concept. “What’s seen is the money they made, but what’s unseen is the choices that they have made. It’s what allows them to continue to be wealthy. It’s more about taking a very long view with all the potential negatives that we all fear.” From this experience author came to understand that there was a thin green line erratically jumping up and down as it crossed a chart recording the passage of time. Those who were truly wealthy, whether they were a retired school teacher living on his pension or a billionaire living in the Hamptons; were living on the high side of the line. They had enough. This is what I term financial freedom. A man could be rich and still be living paycheck to paycheck. He would never be wealthy.

It turns out that the men at the table all came from humble beginnings. None of them were born with silver spoons in their mouths. Sonnenfeldt tried to explain to Sullivan the importance of opportunity costs, what he termed optionality. When Sonnenfeldt and his wife were Sullivan’s age they lived in an OK apartment. Their neighbors, another young couple, spent $25,000 fixing up their apartment! $25,000 increasing the value of another man’s property! This young couple carpeted the walls. I remember the 1970s, they probably used shag carpeting. Sonnenfeldt noted that today this couple still had a nice lifestyle, but it was now considerably more frugal than in the days of their youth. Such a lifestyle, described by Sonnenfeldt as “extravagant bordering on foolish,” pretty much guaranteed that their former neighbors would end up somewhere below the green line.

The author left that day a sadder and hopefully wiser man. He was forced to consider the difference between what he needed and what he could afford. He was forced to consider the cost of his current plans, like renovating two of his bathrooms, not only today but the effect of that expense on his future, the future of his wife, and the future of his children.

After two decades as a business journalist, Paul Sullivan’s lunch with Tiger 21 gave him an entirely new perspective on life and money and the subject for a new book.

Thursday, August 6, 2015

A 529 Update

I have written about 529 college saving plans in a previous article. If you are considering starting to save for your children or your grandchildren, I recommend you read this introductory article and a great deal more before you decide where to invest your hard earned cash. Like anything that involves the IRS, not to mention the tax codes of our 50 states and commonwealths, things can get a little tricky.

An Introduction to 529 Plans

529 plans are not a subject that comes up very often in my conversations. Most people are worried about finding a job that pays more than minimum wage, getting out of debt, and finding a foolproof financial plan for their retirement. However, if you are well on your way to financial freedom, funding your progeny’s educational aspirations is a worthy goal. Dave Ramsey lists it as Baby Step Number 5 of 7. Ramsey puts this after saving a full 15% of your gross income in tax favored accounts for your retirement, but before making extra payments to principal on your mortgage. I might put a 529 after paying off your mortgage early, but it’s your life. If you are this far down the road to financial freedom, you are doing a good job.

In their most recent list of new monthly articles, Schwab notes there are five costly mistakes to avoid when using a 529 to save for the cost of a college education. Some of them seem rather obvious, but a few are new to me, so I thought I should pass them on to you.

1) Don’t assume that your 529 is going to going to grow. Anytime you invest in stocks and bonds, you are placing your money at risk. The funds you have purchased may go up or they may go down. Buy and hold never means buy and forget.

2) Every year check your allocations and your contributions. If you use a target date fund, your holdings will be automatically rebalanced on a regular basis. If you are selecting your own funds, your allocations could get badly out of balance over time. As with retirement as you get closer to your goal the risk level of your portfolio should decline. If the amount you are saving isn’t going to send Junior to his dream school, you might want to increase your contributions.

3) You have until April 15 to make contributions to your IRAs, however any contributions to a 529 must be made by December 31. Schwab also notes that if your contributions to a child’s 529 exceed the Federal $14,000 gift tax exclusion, you will need to file a gift tax return. If you find exceeding this limit to be a problem, I salute you.

4) Timing your withdrawals can be a problem. You are only allowed to withdraw enough money to cover “qualified college expenses” within that calendar year. Watch out if scholarships are covering some of these expenses. You could end up with a nasty surprise from the IRS.

5) What happens if Junior doesn’t need or can’t use the money? This money can only be used for “qualified college expenses” as defined by the IRS. If you withdraw the money for any other purpose, you will be taxed and hit with a 10% penalty. If Junior gets a scholarship, you can withdraw the exact amount of the scholarship and the 10% penalty will be waived. If Suzie is accepted to Oxford, you are out of luck. You can’t use the money in her 529 to send her to a foreign institution. You can continue to save it for the cost of graduate school, if she comes back home after matriculating at Christ Church College. If she decides to stay in England, you can make one of her siblings a beneficiary of those funds or you can use them to further your own education or for the education of your grandchildren.

Please be careful. Be sure to consult with your CPA before investing in a 529 or withdrawing money from an existing account. For most Americans, the 529 is the best available option. However, I believe it could be improved.

Wednesday, August 5, 2015

Monkey Business

Levitt and Dubner end the second book of their Freakonomics series, Super Freakonomics, with a little story about two researchers and seven Capuchin monkeys. Can monkeys learn to use money? Keith Chen and Venkat Lashminarayanan selected the Capuchin monkey because as Keith Chen observed, “The Capuchin has a small brain, and it’s pretty much focused on food and sex. You should really think of a Capuchin as a bottomless stomach of want. You can feed them marshmallows all day, they’ll throw up, and then come back for more.”

It sounds to me like they would make perfect additions to our American consumer society.

All the monkeys, four females and three males, lived together in one large cage. At the end of this cage was a smaller cage set up so the researchers could interact with one monkey at a time. Chen selected small silver discs with a hole drilled through the center as currency. Teaching the monkeys that these coins could be used in exchange for food treats was a long and tedious process, but finally the Capuchins got the idea. At the beginning of each experiment the monkey was given twelve coins that could then be exchanged for different food treats controlled by different researchers.

Once Chen and his associates determined the food preferences of the different monkeys they would raise and lower the price of a favorite food. The law of supply and demand works with the monkey mind as well as with us highly rational examples of homo-economicus. As the price for a particular treat increased the demand decreased.

Chen then experimented with monkey gambling. They were given a choice between two games. In the first game the researcher offered the monkey one treat. Then, if a coin flip favored the monkey, he was given two treats. In the second game the researcher offered the monkey two treats. If the monkey lost the coin flip he would only receive one treat. Although the two games are statistically identical in outcome, the monkey, like humans, proved to be risk adverse. They greatly favored the game with the potential of gaining a second, unearned treat.

Then one day Felix, the alpha male monkey, decided to take control of the experiment. When offered a tray containing the usual twelve coins. He grabbed the tray and threw it and the coins into the communal cage. He then escaped from the smaller experimental area to the larger cage where the monkeys were fighting over the money. When the researchers tried to get the money back, the Capuchins were having none of it. They continued to hold onto the stolen coins.

At first Chen thought that he had just witnessed an example of monkey altruism. However he noted that soon after the bank heist, one of the male monkeys gave his coin to one of the female monkeys. After a few seconds of grooming the pair engaged in sex. After finishing the first recorded act of monkey prostitution in the history of science, the female Capuchin brought her coin over to a researcher to buy a food treat.

At this point the Yale New Haven Hospital, owner of the Capuchin tribe, decided that enough was enough. They shut down the experiment, fearing that the love of money would hopelessly corrupt their monkeys. Too bad; one can only imagine what could have happened next. Perhaps we would have seen the rise of monkey governments, monkey taxes, monkey slavery, and monkey wars. Perhaps as the monkey economy became more sophisticated they would begin to issue monkey currency from monkey banks. Perhaps, we would have even seen monkey stock exchanges where shares in monkey corporations were bought and sold by monkey day traders.

It sounds like the basis for a good sequel for the Planet of the Apes movie franchise.