Saturday, November 26, 2016

One More Time: Follow the Money

I have already used the title, “If You Want to Know The Truth, Follow the Money,” for a post analyzing the student debt problem. If you want to know the truth, just look at where the money comes from, where it goes, who gets to keep it, and who has to accept what level of risk in the transaction. In this case, the money comes from the banks or the Government. The bank or Government is guaranteed a return on their investment by a law that doesn’t allow the debtor to discharge this obligation in bankruptcy and the power of the state to tax its citizens. The university gets all of their money in cash, up front. Only the student bears any substantial risk in this transaction.

Sadly, this past election has demonstrated that the commercial media, all of it, doesn’t even pretend to have a shred of journalistic integrity. Even if someone (like me) is making a serious effort to find the truth, I am beset by my own biases, world view, and life experiences.

Think about it. If you read two articles about the same football game in two different newspapers, the only point of agreement is likely to be the final score. If something so unimportant as a silly game can generate such different reports from professional eye-witnesses, how likely do think it is going to be that you will hear the truth from someone who is not only biased but has a personal interest in the outcome of a particular event when power, money, and his paycheck are at stake?

You can’t find a news source that doesn’t spin the news to further its own ends. Sometimes even reputable organizations publish outright lies, because they want to believe that they are true. The good ones apologize when they make such a mistake, usually in really small print on a back page after the damage has been done. The bad sources just lie and never apologize. Headlines exist to get you to read the article. Look at how they are written to make you angry or cause you to gloat in your own sense of moral superiority. Look at two different publications on the same day. What subjects are featured on the front page? What subjects are consigned to back of the section? What subjects are omitted on one source, but featured on the other source? What does the layout of the page tell you about the publisher’s opinions?

Early on in my quest to understand how to invest my money, I learned the importance of the Biblical truth, “In a multitude of counselors there is wisdom.” Often different professional, respected, objective research sources will produce different recommendations on how to best invest your money in the same situation. However, if you look at four or five different sources, you can usually ferret out something reasonably close to the truth. The same logic can be applied to any analysis of the news. Read a conservative journal. Then read the same story in liberal publication. Sometimes foreign sources, like the BBC or Al Jazeera, will provide a more balanced report on American news than any domestic source. I have even learned that RT, a Russian news service can do a pretty good job reporting on American economic news.

But if you really want to know the truth, if you are ready to deal with the truth, follow the money.

Money is the only news reporting service that never lies. Look at an individual, a politician, a corporation, a nation. Where did they get their money? What did they do with it once they had it in hand? What kind of obligations, contractual or implied, came with the transfer of that cash?

Nobody rides for free.

If I could analyze your finances, your income, your monthly expenses, your gifts to church or charity, your rate of savings, your investment choices, everything you do with money, I could paint a very clear picture of who you are and what you value. For example, the rate at which I wear out and replace expensive walking shoes combined with a record of my purchases of fast food and convenience food would expose one of my major psychological conflicts.

Remember. Money Always Tells the Truth.

Monday, November 21, 2016

What if Churches...

One of the simplest models for a budget suggests that a family divides all the money that comes into the household into three pots. Before spending the first penny, 10% goes into savings and 10% goes into giving to charity. Then the theory goes that if you consistently live on 80% of your take home pay, chances are pretty good that you are going to be OK.

What if churches operated under this simple rule? Many churches teach the tithe, that their members donate 10% of their income to their home church, but how many churches skim 10% of the take right off the top and give it to the poor, to windows, or to orphans in their congregation, or to other ministries in need of cash? Most churches have an “emergency fund” or two, a benevolent fund for the poor, a building fund for unexpected or large expenses, and a checking account for ongoing bills, but if they were all added up, how many churches would have the money for 3 to 6 months operating expenses sitting in the bank?

I hear a lot of readers thinking, “This is unrealistic,” and you would be correct. Most churches as well as most families spend every penny they get, but wait, it gets worse. The median household income is running about $56,000. A quick Google search didn’t turn up a figure for median household debt, but average household debt is reported in the $130K to $150K range. Curiously, the annual average interest expense for an American family is $6,658. That would be 9% of the average household income.

As a nation, we almost give a tithe of our gross (not net) income to the bank, before budgeting for our living expenses. Things are not quite as bad for churches, since they are classified as non-profit organizations they don’t have to pay taxes before they can buy food. However, many churches, like their members are paying the bank before God.

As for the emergency fund, 62% of Americans report having less than $1,000 and 30% of Americans report a zero balance in their savings account. 21% don’t even have a savings account. How many churches would issue a similar report?

OK, let’s be realistic. What is possible for your family? What is possible for your church? Could you commit to giving 1% of your take home pay to charity or 1% more if you are giving less than 10%? Could you commit to saving 1% of your income or 1% more if you are saving less than 10%? If you or your church can’t answer yes to both those questions, you are in trouble. It is time to take a hard look at your life. Try to understand what got you into this condition and what it would take to break even. Generally, we know the answer, but honestly and courageously dealing with the consequences of our bad decisions, in any area of our lives, isn’t a pleasant experience.

Imagine a church with a budget of $10,000 a week with $1,000,000 in the bank. What could be done with that kind of money? A scholarship fund for poor students? Monthly checks for faithful members who are windows or single moms? What could a check for $100,000 do for medical missionary operating in a third world country?

What if churches in America and their members, actually believed our God when he stated in Deuteronomy Chapter 28 that debt was a part of the curse and that the ability to lend money was a blessing?

Tuesday, November 15, 2016


There is a problem with hunger. The more you feed it, the more you want. This true of hunger for food, your drug of choice, and the hunger for whatever it is that you like to buy. Giving into hunger on a regular basis has something to do with my waist measure. It also just might have something to do with the balance you carry on your credit card.

Consider: Since I have inherited a few old watches that have some collectors’ value, I have developed an appreciation for fine watches. I have researched my watches (and some watches that I covet) on the Internet. I even read a book on the art of watch making I found at the Furman University library. Some days I hear one of those little bad angels sitting on my shoulder telling me, “Go ahead. Take a step into this cool new world. You could find a used Rolex or Omega in the $5,000 to $10,000 range. Think of it as an investment.”

Then, just for good measure, the little voice adds the kicker, “You deserve it.” How often do your bad little angels come up with that line?

Recently, I went to see the new Doctor Strange movie. In one of the early scenes, the brilliant rich arrogant neurosurgeon opens a drawer containing nine watches that cost about $20,000 apiece. This scene set up the, “pride cometh before a fall,” sequence that would ultimately land the good doctor, now penniless and alone, in Katmandu on the doorstep of the Ancient One. I wonder if any other person in the audience, like me, couldn’t wait to find out what kind of watch Doctor Strange likes to wear.

And the answer is, a Jaeger-LeCoultre Master Ultra Thin Perpetual Calendar, at $31,500!

Until the 1970s, men tended to buy a quality dress watch sometime around age 30. They expected to wear this watch for the rest of their life. I really like the 1951 Hamilton Darrell that belonged to my father-in-law. Watchmakers consider it a fine example of a quality American watch, but it isn’t anything that collectors are willing to pay a premium to own. You can find one in pretty good shape for $200. I can only remember my father-in-law wearing one of two watches, the Hamilton he bought in 1951 and a fancy quartz watch he was given as a premium for attending a time-share presentation. After the quartz watch quit working, it was consigned to the garbage can. After my father-in-law died, I had the Hamilton cleaned and serviced. After I wore the watch for about seven years, the crystal was scratched up, so I had it serviced for a second time. After 65 years, it still keeps excellent time. I believe that its classic art-deco look is still in good taste for a men’s dress watch.

When my father-in-law bought his watch, he was a professor at Georgia Tech, but he hadn’t yet completed his Ph.D. The retail price for this watch was $65, not an easy decision for professor just beginning his career. That is $605 in today’s money. You can buy a really good watch for $605, one that with proper maintenance would last the rest of your life. But today, we upgrade. We buy something new every time something new is available. How long do you keep a cell phone? A car? A husband? How many pairs of shoes are sitting in your closet? In our new home, we have not one, but two walk in closets to hold all our stuff. In our old home, we didn’t have any walk in closets.

Maybe the good little angel, sitting on our other shoulder, might be suggesting that it is time to fast for a few days or months from whatever hunger is causing us a problem. Hungers, no matter how legitimate, always lead to problems if overindulged.

James Bond prefers the Omega Seamaster at a paltry $3,875. Maybe if I just bought one of those things, I would finally be content.

Wednesday, November 2, 2016

The Stories We Tell Ourselves

At almost any moment of life we can be forced to make a decision based on inadequate information. P.S. Choosing not to make a decision is also a decision that can have far reaching consequences. We deal with uncertainty and the possibility of highly improbable events by plugging the facts as we know them into our metanarrative, the overarching story we tell ourselves about the universe and our place in it.

What if our metanarrative is no good? What if it is a bad model of reality? Every one of us has a metanarrative and although none are perfect, some are much closer to reality than others. What happens when reality conflicts with our metanarrative?

Let’s start with a relatively harmless example. I love cars. I read about cars I have no intention of ever buying just because I find pleasure in fantasying about high performance luxury sports cars while viewing glossy photoshopped images of automotive perfection.

Yes, I indented that last sentence to sound vaguely pornographic.

I also read about cars I could realistically afford to buy when the time comes. My metanarrative tells me that Honda Motor Company makes a reliable automobile. My 1996 Honda Prelude Si was the best car I have ever owned. It was fabulously reliable, fast, comfortable, fun to drive, and delivered good gas mileage. After 14 years I traded it in for a 2010 Acura TSX, a high end Honda product. After 6 years it is well on its way to overtaking my beloved Honda in my pantheon of automotive excellence. Unfortunately my metanarrative no longer lines up with reality. Consumer Reports has put the hoodoo on the nine speed transmission found in every Honda product I would consider buying. They are not alone. Other respected sources have lowered Honda’s standing from the top three manufacturers to the middle of the pack. This actually makes me angry, even though I believe Consumer Reports is not motivated by any conflict of interest to tell me lies. To be honest, if I had to replace my Acura today, I would have to look at a Lexus or an Audi. It almost feels like treason to make such a statement.

This election is messin’ with a whole lot of metanarratives. I haven’t seen this much commotion, anger, and confusion since the elections of 1968 and 1972. First, admit that you don’t have all the facts. Then do your research. Don’t just listen to sources that will feed your assumptions and prejudices. Try to look deeply into the facts, while ignoring the stories woven around the facts by self interested parties seeking power and money at your expense. Realize that there are no objective balanced news sources in America when it comes to reporting on this election. Sometimes foreign reporting is less filled with histrionics and folly than even the best known American media outlets, but it isn’t perfect. Look at your own values. Do they really reflect what you want for yourself, your children, your nation? Once you are truly comfortable in your own skin, this may take more reflection than you think, then compare your values to what you know of a potential candidate. Try to look at the entirety of their lives. Then cast your vote remembering that fear, greed, anger, and hatred are the enemies of good decisions.

It won’t be easy. There is much to consider and most of it isn’t good.

Once this election is over you and your metanarrative will have a more important problem, the rest of your life. Are the stories you tell yourself about the world you inhabit useful and accurate? Will your assumptions about the universe help you to enjoy a more abundant life or will they guarantee that you will never find financial freedom? Will they hinder the outcome of the more important aspects of a balanced life, like our relationships with our family, our friends, and our God?

How does this work? Suppose your boss ignores a report you send up the chain for review; does this mean that he thinks you are stupid and he hates you? Does it mean that he is busy and that you are a lower priority than some of the other irons he has in the fire? Does it mean he just forgot he told you to prepare it? How about instead of telling yourself all sorts of stories that involve your place at the center of the universe, you just ask? After allowing a reasonable amount of time to pass, this question will give you a little leverage, especially if your boss just forgot about your report.

One of the things I really enjoy about the more reputable sources for financial research is that they are all engaged in a genuine search for the truth, even when they disagree. There is a blessed absence of overheated rhetoric and psychological tricks designed to activate the lizard brain. Take in a deep breath then exhale. Relax the muscles in shoulders. Say a short prayer.

Then LIVE!

Wednesday, October 12, 2016

Three Secrets of Success

Fred Wilson, the real estate phenom introduced in the previous blog article has a list of three secrets to success. This is the shortest such list I have seen. Most of these lists seem to run either seven secrets, like mine, or ten secrets. I think the items in his list reflect his background in sales and competitive sports such as tennis.

1)The Law of Action—What you do
Wilson firmly believes in a cause and effect universe where you will reap as you sow. While it obvious that a salesman has goals, Fred Wilson believes that focusing on process is more important than focusing on the goal. The goal would be winning the match. Practicing the elements of your game under the supervision of a coach or mentor, then developing a game plan specifically for each contest will, naturally lead to the goal, winning the game.

2) The Law of Attraction—Where you place your attention
We have all heard about the law of attraction. All you have to do is sit around and visualize and whatever it is that you want will magically appear. Right. Wilson puts a different spin on this popular notion. Consider this example from my life: One morning, a little after dawn, about a mile into my walk, I noticed a mushroom growing next to the trail. Suddenly, I realized this was not the first mushroom of the morning. I had seen several earlier, but I wasn’t consciously aware of mushrooms until that moment. Subsequently, I discovered a multitude of mushrooms growing in the forest. Was this the law of attraction at work? Was a change in my spiritual vibration manifesting metaphysical mushrooms in my reality or was something more mundane at work in my life? Perhaps, because I was actively looking for mushrooms in places where mushrooms were likely to be growing, I found mushrooms.

Wilson believes that the law of attraction is about passion and purpose. When you are authentic; when you are clear about what you want and how badly you want it; your visualizations will reveal what was actually there all the time.

3) The Law of Acceleration—What I perceive
The law of acceleration is always looking for a combination of opportunity and benefit. Fred Wilson recounts a memorably bad day at work that ended in an ugly unnecessary argument with his wife. In the midst of this quarrel, he thought to ask himself the question, “Where is there an opportunity in this crisis?” He understood that there was an opportunity to apologize to his wife. He reaped the benefit of peace in his house when he exploited an available opportunity. Wilson firmly believes there are opportunities at all times everywhere you care to look. The difference between success and failure is in your perception of reality. He supports this proposition with many tales of how a casual conversation led to a profitable business relationship or the sale of some property.

Saturday, October 8, 2016

Are Your Internal Policemen Doing Their Job?

Appoint judges and officials for each of your tribes in every town the LORD your God is giving you, and they shall judge the people fairly. Do not pervert justice or show partiality. Do not accept a bribe, for a bribe blinds the eyes of the wise and twists the words of the innocent.
Deuteronomy 16:18-19

Fred Wilson is a Jewish American real estate mogul who practices Transcendental Meditation. He has a burden to teach others how to improve their lives in general and particularly their job performance. As a young man he brought the same competitive spirit that made him a successful tennis player to his job as a real estate salesman. Unfortunately, at this time of his life he was living the life of the rich and famous on borrowed money. He was such an outstanding salesman he could always make a few more calls and sell his way out of any financial problem. However, the stress of this lifestyle was taking its toll on his psychological health, his physical well being, and his marriage. When he finally reached the breaking point he told his employer he was leaving and he wasn’t sure he was ever coming back.

After a self imposed three week spiritual retreat, he decided to return, but there were going to be some changes. Taking these two verses from the Torah, he decided he needed to set up his own internal judges and policemen (here translated as officials) to keep himself on the straight and narrow. He also decided that living on borrowed money was tantamount to accepting a bribe. He reached this conclusion by reasoning buying something with borrowed money allowed him to enjoy benefits he hadn’t earned, just like a corrupt official accepting a bribe to pervert justice. It just wasn’t going to happen again in his life—and I thought Dave Ramsey was hard on debt!

As a part of his effort to judge and to improve his life, he came up with this test he takes once every three months. He gives himself a numerical score in each of five categories from 0-20 for a possible maximum score of 100.

1) Rest—This includes adequate amounts of sleep, breaks during work, and vacations to renew the soul.

2) Exercise—Appropriate balance physical exercise. In his case this meant not attempting to set a personal record every time he laced up his jogging shoes and stepped out of the door.

3) Administration—Time management, maintaining your personal financial responsibilities, and taking care of all the mundane everyday tasks of life such as cooking, housekeep chores, maintaining family automobiles, etc. etc.

4) Diet—As a competitive athlete he considers diet to be an important component of a healthy balance life.

5) Inner Work—Moving toward your goals, keeping your priorities straight, prayer, meditation, or other spiritual practices, and living according to your own moral standards.

The first time he took this test, I believe he scored himself at 56, a failing grade using the traditional ten point system. His most recent score was an 82, a B-. Was he too hard on himself or too easy? Who can say? If he maintains a constant scale over time it really doesn’t matter. I gave myself a 60, a D. My wife gave me 71, a C-. In both cases my grade point total was ruined by diet. There is only one word to describe my dietary habits, abysmal.

If I could ask Fred Wilson one question it would be, “Where does family and personal relationships figure into your five categories?” It is obvious that family and helping others are very high priorities to Wilson, but which categories are affected by service to others?

Tuesday, September 27, 2016

A Different Way to Think

Recently I was listening to a Brian Tracy video on methods to increase your income through focusing your personal efforts on what is important to the bottom line and delegating or outsourcing those activities that don’t generate income. Along the way Tracy went off on a unrelated rabbit trail that I found quite interesting. Brian Tracy actually knows Thomas Stanley and William Danko, the authors of the landmark study, The Millionaire Next Door. While talking with one of them, I believe it was Danko, Tracy learned that Danko overheard a conversation between several millionaires involved in his study. They were saying things like, “I have two.” Or, “I have four.” Puzzled Danko asked them to explain what they were discussing. The answer, the number of years they could support their current lifestyle without any additional income or capital gains.

Believe it or not, there are personal finance authors that encourage their readers not to have an emergency fund. I noticed one of these dreadful recommendations came from a website supported by (you guessed it) the banking industry. “Go ahead little girl, put that surprise auto repair on your credit card. It will not harm you.”

It turns out that Stanley and Danko’s self made millionaires don’t think like that. Instead of having the usually recommended three to eight months in an emergency fund, these individuals are thinking in terms of years. Of course, the classic emergency fund is money held in an insured near cash instrument like a savings account or money market fund. I am not suggesting that you put years of expense money in something that pays nearly nothing, but consider that various model portfolios suggest that retired folk keep as much as 10%-15% of their net worth in safe, near cash accounts.

Danko and Stanley discovered that financial freedom is a high priority to the men and women who actually achieve financial freedom. Their decisions are frequently made with the goal of freeing up cash for investment opportunities. Even though they could easily pay cash for new cars, they tend to buy relatively high priced late model used cars, taking advantage of the fact that a car’s value tends to depreciate about 19% in the first two years of ownership. Then they keep them for an average of ten years. This practice, alone, has the potential of freeing up significant amounts of money over the course of a forty year career while the allowing those millionaires next door to drive around in some pretty nice automobiles.

I consider The Millionaire Next Door a must read for anyone who wants to become financially literate. The subjects of their study are not remarkable people with unusual skill sets. They are your neighbors. They just don’t think about money the same way the average American thinks about money. Because their thoughts are different, their actions are different. Because their actions are different, they get different results. Because they get different results they end up living a different kind of life, one that includes financial freedom.

Go thou and do likewise.

Friday, September 16, 2016

Never Believe a Fact

Never Believe a Fact.
“When making investment decisions, or when reading news reports on the economy, never believe the facts. Trust no one. Always dig into the numbers until you understand how they were created and what they actually mean. The truth is out there, but so are a lot of lies and balderdash.”

I threw this little teaser up on my Facebook page hoping to start a conversation. It only received one comment and a couple of likes, not one of my more successful posts. However, the solitary comment gave me something to think about, as the statement is simultaneously true and false.

“I doubt the average person has the time or the know-how to dig into it to the degree required.”

Financial “facts” are seldom what they seem on the surface. Take U-3 Unemployment, the statistic reported on the nightly news. It really isn’t a measure of anything but U-3 unemployment. This number excludes anyone who is counted “as not in the workforce.” “Discouraged workers,” who are not actively seeking employment according to the government’s definition are not counted in calculating U-3 unemployment. That excludes over 94,000,000 unemployed Americans out the 243,000,000 that fit the definition of working age adults from the denominator of the unemployment rate. U-3 also counts someone working 3 hours a month selling used furniture on Ebay as “employed,” same as someone working 50 hours a week in a factory. Also there is no mechanism in the calculation of U-3 to prevent accidental double counting of an individual with more than one part time job. To add injury to insult, this number is adjusted on a seasonal basis. This means the statistician making the calculation just changes the result to a number his intuition and experience believes to be a little closer to the truth.

If U-3 is heading down that is good thing unless the number of discouraged workers is increasing faster than the number of jobs. Likewise U-3 headed up is a bad thing unless an increase in the number of unfilled positions is causing more Americans to meet the criteria for actively seeking employment.

There is no accurate measure of unemployment. U-6 is more realistic than U-3, as it accounts for both discouraged workers and part time employees seeking full time positions, but is seldom reported outside of the financial press.

There is no malicious intent in the reporting of these numbers. No grand conspiracy is attempting to hide the truth. The number is even “corrected” months after it is first reported to include more data collected and tabulated after the fact. The Department of Labor statisticians are playing the game by the rules they have been given by our elected officials. As best as I can remember, the last time the definition of U-3 was changed was during the Clinton administration, so what you see in the news isn’t some kind of three shell con-game. However, it isn’t a number that is worth very much.

Trying to find your way in an investment world that includes commission salesmen, who are incentivized by their employer to sell their most profitable products to you, and out-right crooks like Ponzi scheme artist Bernie Madoff is even harder than dealing with an accurate reporting of useless information by government bureaucrats.

Although the average person will never have access to the same information as a billionaire full time investor, the Internet has certainly leveled the playing field. Just opening a brokerage account with a few hundred dollars will give you free access to professionally prepared reports written by experts who do not have a position in the market that would result in a conflict of interest. Websites containing a world of investment information such as the Motley Fool and Seeking Alpha are available to anyone with access to a computer, even if they don’t have a checking account. Visiting Macro-Economic websites, both liberal such as The Big Picture or Calculated Risk or conservative such as those run by David Stockman or Mish Shedlock will teach you what trends are important, how they are calculated, and what the graphs actually mean. It is amazing to me how much information can be obtained with an hour or two spent on line every day.

In the end, it doesn’t matter if you don’t have the time or inclination to dig into mysteries such as the reporting of the American unemployment rate. I have seen relatively uneducated, unsophisticated men and women achieve financial freedom by following a few simple rules.

1) Stay out of debt.
2) Spend less than you earn.
3) Invest what you save in something you understand.

If you can explain what you are doing with your money to a junior high school student, chances are you won’t get into a lot of trouble. If you don’t thoroughly understand an investment, follow my advice, run away.

Remember, you can’t predict the future. No one can. That doesn’t mean you can’t find a path to a better life.

And please, Let’s be careful out there!

Saturday, September 10, 2016

The Number 1 Secret of Money

There are times I don’t want to write a particular article that won’t let me alone until it is written. This is one of those times. I recently read a news article linked from Ramit Sethi’s I Will Teach You to be Rich blog site that packages the simple truth that as been annoying me for the last week or two for the Millennial Generation. A young couple retired at age 30 with more than a million dollars in investments. Their big secret?

If you want to be rich, If you want to find financial freedom, if you want to escape debt, if you just want more money than you currently have, there is only one way up and out of your current condition.

It is true for a twenty year old high school dropout earning $9.00 an hour.
It is true for a billionaire hedge fund manager.


They found financial freedom at a very early age and people hate them for doing it.

Wealthy Thirty Somethings Doling Out Financial Advice Breed Online Hate

No matter who you are, you can’t escape the money equation.

Money In = Money Stored + Money Spent

To make the Money Stored term of the equation large, this young couple worked their way through school rather than loading up on student loans. They earned degrees in a field that is actually hiring college graduates (generally speaking, that would be one of the STEM majors or something to do with computers). Then they lived like paupers on decent middle class salaries, putting every spare penny into their investment portfolio until they reached the level of financial freedom that allows them to live the life they want to live.

Important things are simple.
Simple things are hard.

The easiest way to start on the road to financial freedom is to make a promise to pay yourself first. Put a predetermined percentage of your take home pay in a specified account that is at least a little difficult to access. Do it with an automatic debit. Hey, chances are you pay at least some of your bills by auto-debit, why not provide the same service for yourself. Just about all the authors recommend placing 10% of any funds that cross your palm in a savings account or an investment portfolio depending on your particular situation. If you view 10% as an insurmountable mountain, start with 1% and increase it by 1% every time you get a raise or a change in your life, like paying off your credit cards, gives you a greater amount of free cash. In the last years before I retired, I was placing 14% of my pretax income into my version of a 401(k) and most months investing as much as 30% of my take home pay. Hey, it took me forty years to get there. It wasn’t easy. I made mistakes along the road of life, but I made it. You can too.

And while I am at it, let me remind you of the second big money secret, avoid debt like the plague.

From the Devil’s Dictionary by Ambrose Bierce

Debt, n. An ingenious substitute for the chain and whip of the slavedriver. Ambrose Bierce

Monday, September 5, 2016

Are Hallucinations Real?

Once an elderly woman asked me a serious question, “Are hallucinations real?” At that moment she was suffering from the earliest stages of dementia, electrolyte imbalances, and side effects from the numerous prescription drugs needed to keep her alive.

I told her, “I believe that your hallucinations are real to you.” Then to the best of my ability I explained how our perception of reality can be altered by chemical imbalances in our brains. I avoided the subject of dementia. I have learned that when people over 80 hear the word dementia, their imagination immediately transports them to a dirty unpleasant Medicaid lockdown ward where they are suffering the later stages of Alzheimer’s. It seems easier to start these conversations with the family doctor and the spouse than with the patient.

I have learned from my training in hypnotherapy that a perfectly healthy mind, unclouded by drugs or physical abnormalities can experience hallucinations that seem as real to the five senses or emotions as what we experience in the real world.

We can also suffer from self induced hallucinations or become deluded by believing the suggestions others. We all have our own metanarrative, the overarching story we tell ourselves about the world and our place in it. I have come to believe that most of this story exists in our subconscious, that part of our mind that allows us to make quick decisions without involving the time to engage the higher levels of our conscious mind in rational analysis. This is a survival mechanism. When our ancestor heard a noise in the bushes, she ran away instead of investigating to discover if it was a tiger or an antelope. She lived to pass her genes on to me. However, this rapid reaction mechanism can betray us, if we misapply it in a complex modern situation involving our interactions with the world.

When we are presented with facts, we don’t leave them alone. We have to create a story to fit these facts into our understanding of the universe, our metanarrative. If the facts don’t line up with our metanarative, we will typically ignore them or force fit them into our prejudices and preconceptions. We strive for internal consistency. Experiencing a disconnect between reality and our metanarrative results in a form of mental anguish termed cognitive dissonance. We tend to reduce our suffering by seeking explanations or excuses that will reinforce our existing belief system. This is why conservatives prefer FOX News and the Rush Limbaugh radio show, just as liberals prefer outlets like the Washington Post and NPR.

This tendency can be limiting or even self destructive. If an individual believes that he was unfairly fired because his employer didn’t like the way he looks, he may be correct if he is a corporate attorney who decided to get a purple Mohawk and a facial tattoo. However, if he worked for a carnival side show that plays at motorcycle rallies, he might have other problems beyond employer bias.

Because we like to feed our metanarrative, we typically find experiences and facts that reinforce our personal protective amour. One day, as I was out walking in the woods, I noticed a clump of large oddly shaped mushrooms growing by the side of the trail. I don’t know why, but for some reason this discovery excited me. I began to find different kinds of mushrooms growing all over the forest. The day before, I hadn’t noticed any mushrooms, but I am certain they were there. I just wasn’t looking for them. If you believe the world contains all sorts of opportunities, chances are you will find opportunities. If you believe the world contains all kinds of problems, chances are you will find problems. None of us have a metanarrative that is perfectly aligned with reality. Sometimes our metanarrative can help us survive and thrive, but on other occassions our metanarrative can limit our experience of life or even end it.

“In the abundance of water the fool is thirsty.”
Bob Marley

Sir John Templeton, considered one of the greatest investors in history, started on the road to becoming a billionaire during the depths of the Great Depression. With the little he had, augmented by some borrowed money, he bought 100 shares of every stock listed on the New York Stock Exchange that was selling for less than one dollar a share. When factory orders generated by World War II greatly increased the profitability of American industry, Templeton became one of the richest men in the world.

On occasion, as I interact with others in many different kinds of social settings, my mind returns to the old Indian story of the wish granting tree. I have learned wisdom literature that has been around for a couple of thousand years or more, generally has more than one level of application. This story is no exception.

Once upon a time, a man exhausted from a hard day on the road spotted a large tree in a nearby field. Thinking that this would be a good place to rest, he sat down under the tree. Speaking to himself, he said, “I am so thirsty, I wish I had something cool and refreshing to drink.”

Then a perfectly chilled goblet of his favorite white wine miraculously appeared at his feet.

Now, his appetite stimulated by the wine, the man then thought, “I am so hungry. I wish I had something good to eat.”

As before, a small table covered with covered dishes containing his favorite foods appeared out of nowhere.

After finishing his meal, the man sighed in contentment, “I am so tired. I wish I could take a nap on a comfortable bed.”

Suddenly he was lying on a large ornate bed covered with pillows that was fit for a king. In minutes he fell in to a deep restful sleep.

A few hours later, upon awaking, the man began to worry. He thought, “There is some kind of magic going on with this tree. Perhaps it contains a goblin that will jump out of the tree and eat me alive.”

Then a horrible goblin jumped out of the tree and ate him alive.

Saturday, August 27, 2016

Scarcity or Abundance?

If you truly believe that your source is infinite, how can you worry about taking more than your fair share?
Paraphrased from a motivational video, original source unknown.

This is one of those posts that might manage to annoy almost everyone. It has to do with your subconscious metanarrative, the overarching story you believe about reality and your place in the universe.

The prestigious Club of Rome using the most advanced statistical modeling predicted the world would run out of gold by 1981 and out of oil by 1992. Why they decided the world might run out of gold is beyond my comprehension. Gold isn’t consumed. Virtually all the gold ever mined since the beginning of time is still in circulation or storage—somewhere. Oil is a little easier to understand. Most of the byproducts of oil are gone once they are burned, but there are more known oil reserves in the world today than in 1972 when the Club of Rome published The Limits to Growth. I can’t buy a gallon of gas for $0.17 anymore, but there is plenty of 89 octane mid-grade available at my local station for $2.19 per gallon. At $4.00 per gallon the use of fracking technology in places like North Dakota becomes economically attractive. At somewhere over $10.00 per gallon, the technology exists to turn low grade bituminous coal into perfectly good unleaded gasoline. It has been estimated that the U.S. has enough coal to supply itself with gasoline for over 700 years.

That is only the beginning for one technology, the production of energy for the purpose of transportation. How about bio-diesel manufactured from recycled cooking oil? How about electric cars powered up by the energy from your local nuclear power station? How about natural gas; clean burning, all American prime rib energy at hamburger prices?

This line of reasoning brings up another abundant source of wealth beyond gold and oil, the human mind. When Steve Jobs and his design team developed the iPhone, did their efforts make the world poorer or did the creation of an entirely new undreamed of product make the world wealthier? Today, in village markets in Africa financial transactions are routinely handled using cell phone technology. These countries never even had a national land line system. They went from no phone lines, not even a telegraph system, to the 21st century in a single step.

Is the world’s wealth a finite fixed quantity? Then scarcity dictates that the world is a zero-sum game. Every dollar, house, car, or hamburger I own or consume is something that you can’t possess or consume. If on the other hand, the universe, by its very nature, contains abundance and alternatives that can be discovered or created by human ingenuity, then our self imposed limits are more a psychological problem than an actual physical boundary.

In the context of the motivation video, the producers were pitching their view of the abundance of the universe and the law of attraction. It is clear that I could misuse wealth. Money is power and power corrupts whether it is controlled by a 19th century robber baron or a 21st century governmental bureaucrat. But what if I could believe that my use of wealth could become a channel of blessing for myself and others? An Indian proverb notes that as the great river progresses from the mountains to sea, it never worries about running out of water as it blesses the plants, animals, and men that come to its banks to receive the gift of life.

Tuesday, August 23, 2016

What Can I Learn From Her?

“You hang out with nice people, you get nice friends, ya understand? You hang out with smart people, you get smart friends. You hang out with yo-yo's, you get yo-yo friends. You see, simple mathematics.”
Rocky Balboa

“Who you know is more important that what you know,” a principle that is sometimes reduced to this simple cynical statement is not only important in our everyday life, but at those crucial turning points that make us who we are. Sociologists, both liberal and conservative, studying the bifurcation of America have determined that the social connections of parents can be a crucial factor in the development of their children. The doctor, lawyer, or drug dealer serves not only as a role model or mentor, but can speak a word on behalf of a child that will result in acceptance at a prestigious university or membership in a criminal organization.

Let’s turn our focus from the systemic problems of our society to the mundane experiences of this retired engineer. Yesterday I walked 7.5 miles, a personal best. As a result, I am writing this blog article at a time that I would normally be hoofing it up and down the trail. One of the reasons I attempted this feat was an interchange with an older couple who walk farther than I can walk—Yet! Whenever we meet, they always encourage me to step up my game. In turn, I express my admiration for their accomplishments. If a woman who is training to walk a half marathon on her seventieth birthday can kick out 6 miles a day on a regular basis, what can I accomplish if I try? This is typical of interchanges on the Swamp Rabbit Trail, but it is more than words. When I walk with better athletes, I not only am inspired to walk farther, but I also walk faster. When I walk with people who haven’t reached my level, I walk the same distance, but I walk slower. I always try to be positive and encouraging in all these interactions. If I spent a similar amount of time with people who believe that life ends at 60, who are making no effort to improve their health, I would most likely return to my preferred natural state, a couch potato.

Competing with better players makes you a better player. When I practiced Tai Chi “push hands,” a form of controlled sparing, with my teacher or more advanced students, I had to get better or continue to get embarrassed. When I practiced with beginners, I had to lower my game to their level. After practicing with these people for an extended period of time, my teacher would point out that I had fallen into bad habits, as he gently took advantage of my carelessness.

One of the benefits I have in retirement is membership in Writeminds, a writers’ group that is an extension of our church into the community. I know I am pretty good, but some of our members are special. Really! Writeminds includes published authors who get money because real people buy their books. It even includes a member who has managed to sell the film rights to one of his novels. One of the younger members who hasn’t yet completed her first novel, sometimes just takes my breath away with her skill. Last week I shared one of my older blog posts in a private conversation. I remember at the time it was written I was pretty proud of the piece. When I read it again before sharing it, I instantaneously came up with about half-a-dozen different ways to improve it. I realized that I was a better writer because I was thinking in ways that I learned from hanging out with—better writers.

Now I am thinking about a woman I know who writes grant proposals that win. She writes these things for her clients, then they get money and she gets money.

What can I learn from her?

Thursday, August 11, 2016

Negative Net Worth

Bloomberg is reporting that 1 in 7 Americans have a negative net worth. The details are bad, but not as bad as the headline implies. Technically, I didn’t have a negative net worth at the time I bought our first house, since I made a 10% down payment. But it took $17,000 cash money to walk in the front door of that house and that was just about all I had. With less than a thousand dollars left in my checking account, I borrowed $3,000 from my father-in-law to have what I then called “working capital,” i.e. money to pay unexpected bills. Today I would call it money for the emergency fund. I paid my father-in-law $2,000 back within six months. When I gave him a second check for $1,000 the poor man looked totally flabbergasted. He told me to forget about the last $1,000. I don’t think he ever expected to see any of that money again. On two different occasions our net worth dropped below $1,000. That is as close to a negative net worth as I ever want to see.

Back during the slow motion train wreck that occurred between 2006 and the end of 2008, a lot of negative net worth was generated by folks who were upside down on their mortgages. During the subprime mortgage boom people borrowed money to buy homes they couldn’t afford. When the crash occurred, many of these unfortunates who lost their jobs were unable to sell their houses because the price had dropped below the amount they still owed. Since they couldn’t come up with the cash necessary to make up the difference, many of them ended up in foreclosure or personal bankruptcy. Even couples who held on to their jobs couldn’t sell their existing homes, leaving them unable to move to another city with better opportunities. Even the best debt, like the mortgage on your primary residence is dangerous.

Today the story is a lot better. Only 19% of the families with negative net worth own their own home. 75% of people who own their own home have a positive net worth. This is the way it ought to be. The equity in your home is a positive part of your net worth.

On credit cards the glass is half full. We are doing better. Fewer people are using credit cards than back in 2008 when 68% of Americans were carrying a credit card. Now that number is down to 61%. The total amount owed on credit cards is down 14% to $730 billion. Bloomberg also reports that delinquency rates are the best they have been since 1999. Still, the only acceptable balance to carry on your credit card is zero.

The really bad news is $1.2 trillion in student debt, a number that continues to grow at $2,726 a second. This is horrendous. Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, that made it nearly impossible to discharge student debt in bankruptcy many of our young people will be saddled with a negative net worth for a decade or more even if they dropped out of college. Of course, just because you managed to graduate from college doesn’t mean that you will be able to find a job that requires a college degree. However, the lender whether the Government or a private institution, doesn’t care if you ever find a job in your field.

The Bloomberg report notes that Americans with negative net worth can be divided into three equal groups. Those with debts of less than $12,500 are typically in credit card trouble. The third with a negative net worth who owe between $12,500 and $47,500 or the third that owe more than $47,500 have debt that is dominated by student loans.

I find it particularly disturbing that the average age of those with negative net worth is 43. After 20 or more years in the workforce, we should be doing better. Compare this with an average age of 51 for those with positive net worth.

It isn’t the end of the world if you are young and find yourself with a negative net worth. Conventional wisdom believes that you can safely carry an amount of student debt equal to your expected first year’s salary. That would be $33,574 for an English major or $93,500 for a petroleum engineer. Under no circumstances would I counsel a student to carry that kind of debt! If it takes longer than four years to get your degree without accruing any student loans you are better off than if you graduate on time with a boat load of debt. Look for scholarships, work study programs, and even consider taking a part time job. The power of compound interest can wreck your life if you don’t understand it.

If you can manage to avoid the student debt trap, pay cash for your cars (it can be done), and absolutely refuse to carry a balance on your credit cards, you are already well on the way to financial freedom. Just pay down your mortgage, keep on saving and investing for long term goals like retirement and your children’s education. Before you know it, I believe you with find that your net worth is a surprisingly large positive number.

Tuesday, August 9, 2016

When to Lower Your Standard?

A couple of months before I retired I became sufficiently unhappy about my weight and physical condition that I was ready to do something about it. If I wanted to do it right, I would have checked myself into a hospital for a couple of days so that the doctors could perform a complete physical. Even though there was no compelling reason for such a thorough examination, I remember my father had that done a couple of times back when he was somewhere around my current age of 65. I would then take the medical report to an experienced certified personal trainer who would study the results. He would then likely test me using a number of different kinds of exercises and weight machines to determine my current limitations. After developing an appropriate exercise and diet regime, he would then supervise my physical training and my food intake. I expect this would cost somewhere in the low to mid thousands for the doctors and maybe $50 an hour multiplied by 4 hours a week for the trainer.

Instead I put on a pair of walking shoes, opened the carport door, and walked twice around the block, a distance of 1.1 miles. Now over three and a half years later, I am walking 5.25 miles or 6.25 miles 4 to 6 times a week. I have lost about 35 pounds and I am in much better shape. There is no way I would have ever chosen to go with the best. Even if I won the lottery I doubt I have voluntarily gone into a hospital, but good enough is much better than nothing.

While running tests in the lab, I would sometimes work with a fitting room mechanic who was perhaps the most naturally funny human being I have ever met. I really don’t remember much about the quality of his work, but it was a pleasure to have him on my job because he was a source of constant entertainment. He was a divorced man in his early forties, who was always on the lookout for women. His philosophy was summed up on a bumper sticker found on the back of his truck, “When all else fails, lower your standards.”

He once told us, “No self respecting ten would ever have anything to do with me. I might get lucky with a seven every now and then, but if I settle for a four or a five they will go out with me every time.” His appraisal of his “dateability” was probably just about on target.

While different authors tend to focus on different aspects of the money equation, they all pretty much agree what kind of behaviors lead to financial freedom. However, if you are unwilling to put forth the level of effort needed to get dramatic results, please do something to take your first steps toward financial freedom. This isn’t rocket science. Just as there are only two ways to lose weight, exercise more or eat less, there are only two ways to improve your financial condition earn more money or spend less. Start looking for a better job. Volunteer for overtime. Quit making that morning stop at Starbucks for a $5.00 latte. Brown bag it at work instead of going out for lunch. For heaven’s sake, pay yourself first. It doesn’t matter what you are earning, every time money crosses your palm, put some of it into savings, ten percent right off the top of your take home pay is almost a universal recommendation, but if that seems overwhelming, commit to 5%. If your employer offers a 401(k) start contributing something to fund your retirement.

Sir Isaac Newton told us that a body at rest will remain at rest until acted upon by an outside force. Once in motion, a body will continue to move at a constant velocity in a straight line until an external force changes its velocity or direction. If you sit and do nothing, don’t expect anything to happen. Once you are in motion you are likely to stay in motion. Adding what I know about human psychology to Newtonian physics, I think I could say a body in motion that is heading towards a desired goal will tend to move faster as it grows closer to its goal.

Set a realistic financial objective for yourself, one you believe that you can obtain. Whether it is one lap around the block, asking the woman in the next cubicle out for dinner, or saving 5% of your take home pay, do something.

Do it today.

Monday, August 8, 2016

Plan it. Write it down. Make it happen.

I recently read an article that mentioned the results of an unnamed survey indicating that there was a close correlation between net worth and good health in older couples. After accounting for all other variables, the researchers discovered that individuals who are financially and physically healthy in their golden years are planners. They are far more likely to have developed and followed a plan for financial freedom, as well as an exercise and diet program during the course of their life.

Over the last two days, I have heard a somewhat odd idea from two different sources that you might consider as you develop and implement plans to better your condition. When Dave Ramsey speaks, he has two different speeds, that of a Southern Protestant minister preaching a sermon and a full bore over the top rant. While listening to a Dave Ramsey lecture I hadn’t heard before, he shifted into rant mode when discussing the formal zero sum budget. For those of you who don’t know Dave Ramsey, he insists that everyone, including multi-millionaires live on a formal zero sum budget every month for the rest of their lives. I was expecting this, but I was surprised when he took off after computer based budget apps. He wanted everything done on paper on purpose—really on paper!

I also listened to Rabbi Daniel Lapin pitching a book I haven’t read. At one point he was talking about the evolution of a business plan. He believes that your idea takes its first step into reality when you begin to discuss the possibility with others, but he believes that writing it down with pen on paper is an important psychological step that can’t be skipped before moving it to the word processor and spread sheet.

This isn’t the first time I have run into this idea. Years ago I read a somewhat over the top New Age sort of self help book entitled Write it Down. Make it Happen. I remember I found it quite well written and entertaining, but I don’t believe that just writing it down is going to guarantee that you will automatically achieve your wildest fantasies.

However, I believe both from personal experience and from my understanding of learning styles, there is likely some merit to this idea. My primary learning style is auditory. I pay attention with my ears. Because I attended school in late Twentieth Century America, I was forced to learn with my eyes—books and blackboards. With the exception of practicing Tai Chi as a martial art for a number of years, I have virtually no experience in kinesthetic learning. Or do I? When learning FORTRAN, I discovered that my programs were far more likely to run correctly on the first try if I wrote them out by hand before typing them into a card punch machine or a computer terminal. I have also found this to be true when developing project plans and various kinds of formal statements. There seems to be something about hand eye coordination that reinforces the learning process, even if kinesthetic learning is not your primary style.

I always ask the question, “What works?” There is no doubt that the formal zero sum budget is the gold standard, especially for people crippled with debt. However, it won’t do you any good if you don’t follow it. There are other less painful proven methods, such as the 80/20 plan that has been around for at least one hundred years. If you set aside 10% of your take home pay for savings and 10% for charity then force yourself to live on the remaining 80%, chances are you will do just fine. If you can sit down at a word processor and make magic happen without discussing your ideas or then writing them out by hand, more power to you. This blog article came straight out of hearing one lecture, and one interview, reading one article, and rehashing a few old memories during my planned morning walk. However, I did write down a tentative title for this post on paper with a pen before leaving the house.

Just something for you to think about.

Friday, August 5, 2016

Some Thoughts on the Stock Market

Over the past week, I have had meetings with one banker and two brokers representing different organizations. They were hard at work, sizing me up in hopes that I will choose to put more of my money and more of my father’s money to work with their organizations. I was hard at work sizing them up and attempting to understand both their motives and their underlying investment philosophies and how I could use that information to my advantage. It seems like a good time to organize some of my thoughts on investments and share them with you.

One author described the market as the sum total of the actions of millions of irrational pants-wearing simians. Even though these mad monkeys, believe themselves to be masters of the universe, they actually are in control of nothing. They live in a habitat in the zoo surrounded by a moat and a fence. When they see something on the other side of these barriers that they like, they all scream in excitement, jumping up and down while throwing their money into the air. Then they turn around and see something upsetting on the other end of their enclosure. Becoming frightened of the future, there is a mad scramble to pick up as much money as possible before it is all gone. Then these frightened apes sit on their personal pile of money in fear that another monkey may steal their loot.

You can’t control what is happening beyond the fence. You can choose not to participate in the insanity found in the monkey house. Instead act with restraint and reason, following the advice of Warren Buffett, “Be fearful when others are greedy and be greedy when others are fearful.”

I have used this quote from the opening of the X-Files on more than one occasion, “Trust no one,” well at least not until they have proven themselves trustworthy over an extended period of time. Unless you are paying a financial counselor willing to sign a fiduciary oath by the hour or a fixed fee to develop an appropriate financial plan for your family, you are dealing with a salesman. Even the best commission sales personnel who are working for you have mixed motives. The author of Freakonomics demonstrated that Real Estate Agents will take more time to sell their personal homes at a higher price than when working for clients. When working for themselves, the agent gets to keep all the extra money. They only get 7% ± of each addition dollar they put in your pocket, big difference.

If salesmen are working for a company that is trying to sell you their products, they will be motivated to offer the merchandise that pays them the highest commission whether or not it is in your interest to buy it. Money managers get to keep a set percentage of your money, every year, even if they lose all your money. Typically managed accounts charge 1% a year, but hedge funds can charge 2% per year on the balance and up to 20% per year on any profits. Whether dealing with a plain vanilla retail mutual fund or the most exotic international hedge fund, watch out, not only for sales commissions, but for all kinds of different fees from the wretched, inexcusable 12 B-1 fees found on “Class B” mutual fund shares to legal and accounting charges found in more sophisticated products.

People, listen to me! Just as no one is going to care more for children than their parents, don’t expect anyone to consider your money as important as their money. Whether you hire a fiduciary advisor or deal with a salesman of retail financial products working on straight commission, the responsibility for your money is ultimately—Your Responsibility.

Even though I am warning you to be careful when dealing with brokers and their kin, there are people out there who deserve your trust. One of my brokers has helped the family through some difficult situations, moving money that was needed immediately to pay funeral expenses and medical bills. This same gentleman also spent hours of his time dealing with an organization of incompetent bureaucrats that seemed intent on fouling up a situation that could result in serious tax consequences. He also worked with my attorney to straighten out some family trust related issues. I understand he needs to earn a living. While I am still responsible for my money and make the final decisions, I have given him a great deal more leeway than I have with any other financial representative. So far, he hasn’t disappointed me. Unfortunately, he is almost my age. That means he will be retiring before long. Then what?

The Bible tells us that in a multitude of counselors one can find wisdom. Consider something as trivial and unimportant as a football game that has been recorded for posterity by as many as 62 television cameras (2013 Super Bowl). Two different accounts of the same game written by different reporters working different organizations, might disagree on almost everything but the final score. However, even if you didn’t actually get to see the game, after reading a half a dozen articles on the subject, you will have a pretty clear picture of what actually happened.

Studying potential investments really isn’t any different. Talk to experts. Talk to your friends at work who might be a step or two ahead of you. Read the classics written by the masters. Read the free reports available on your broker’s web site. In time you will come to understand what investment philosophy will work best for you. Don’t be afraid to change your mind as you increase your knowledge. I learned early on that retail mutual funds sold by commission salesmen is about two steps away from flushing your money down a toilet. As a result, I decided to follow the path of the value investor, concluding it was foolish to pay someone else to loose my money. As my understanding of modern portfolio theory and the concept of an efficient frontier increased, I learned that low cost index funds and exchange traded funds offered by organizations like Vanguard are not only fine products, but the logical place for a novice investor to begin his journey to financial freedom. I always want to learn. The more tools I have in my kit, the more likely I will have the right tool for a particular situation.

There are only two ways that are likely to get you in big trouble when investing in the stock market. The first problem is termed, individual risk. If you have too much money in the shares of one company, you will get hammered if anything happens to that company. BP was a model of a well run company until there was an accident in the Gulf of Mexico. BP then lost about half its value in a matter of weeks. How much is too much? I would say if you have more than 10% of your portfolio in any one company, you are playing with fire. It gets even more complicated when considering companies in the same sector that move together. The major oil companies tend to move up and down with the price of oil. If you have shares in BP, Exxon, and Chevron that total 10% or more of your portfolio, you are still exposing yourself to individual risk. Understanding exactly what you have can be difficult. I own Chevron. The family trust owns Chevron and a number of my mutual funds also own Chevron. I couldn’t tell you how much Chevron I really own, but I do know it isn’t anywhere near the danger zone. Finally, some companies give their employees shares of the company stock. Again consider the risk of a large concentration in one company when you work for that company. If your employer gets in trouble, you could end up not only losing your job, but all of your retirement savings at the same time.

Investing too much money in the stock market at one time can cause problems. If you save and invest small amounts of money consistently over the course of your working life, you will buy fewer shares when the price is high and a greater number of shares with the same amount of money when the price is low. Over time, you can expect to receive that 7% predicted by Siegel’s Constant. There is no way to completely protect yourself from what is termed systemic risk, meaning the risk of a stock market crash, but whenever possible play with the house’s money. If, over good times and bad you have consistently bought a well diversified mix of investments, chances are you will survive the periodic downturns, as occurred in 2008. If you rebalance as the price of equities tanks, you will own a whole lot of shares when the market rebounds.

Maintain an age appropriate balance. Rather than considering your retirement portfolio, let’s look at a 529 college savings plan for your daughter’s education. When she is a new born, you open her account with $1,000. In the grand scheme of things $1,000 isn’t a lot of money and eighteen years will pass before she actually needs it. You can get a little wild and crazy, investing it all in stocks if you wish, with money in small cap stocks and foreign shares that would be well out of my comfort zone.

OK, you did good. After 17 years you have the $250,000 she will need to attend one of those exclusive private schools she is visiting. Now, we know that on average we can expect a 7% return on equities, but only 3.5% on bonds. However we also know that the world ends every ten or twelve years. Stocks can easily drop 40% or more in a given year. She needs the money next year. If you put it all in stocks, you can expect an extra $8,000 a year—on average. However, if you guess wrong you stand to lose $125,000. Then the little princess will be forced to attend that in-state public institution populated by beer drinking rednecks instead of the school of her choice. Is an extra $8,000 that you really don’t need to achieve your goal worth the risk?

Don’t need the market. If you don’t need the market to perform miracles on your behalf, you can choose the time you buy and sell shares. If you buy shares in a stock that hits a bad spell, you have options—if you don’t need the market. You can wait for a better time before selling the shares. If the company pays a righteous dividend waiting is not necessarily a bad thing. Your dividends are buying shares at a depressed price. If you don’t need the market, you can even buy more shares when the price is low, because you have free cash set aside for that purpose. If you decide the company isn’t coming back, you can choose the time to sell to maximize tax benefits, offsetting one of your gains with a loss. If you need the market, you might be forced to sell shares at the very bottom of a recession in order to pay your living expenses. This can be a very painful experience. During a crash, people can end up selling mutual funds at a loss only to be hit with a tax bill based on what happened earlier in the year, doubling the pain of a forced sale.

'Use money and love people. Don't love money and use people.'
Joseph Prince —

Remember the purpose of savings and investments. They are not an end in themselves. Money is just a tool. It can be used to bless your family and make the world a better place. It can also be wasted in a manner that will destroy your family and even take your life. You can’t take it with you, but on that day you will have to answer for the way you have managed money.

Now say it with me, “Let’s be careful out there.”

Wednesday, July 27, 2016

10,000 Hours Is Not Enough

Yesterday I joined up with another retired walker who played basketball at what was in his day, a Division 1 program. When we reached what turned out to be our mutual turn around point neither of us turned around. There was a moment when we looked at each other, waiting for someone to chicken out, but we continue down the trail. A quarter of a mile later, we discovered that both of us were going for a personal best. I walked 7.25 miles, a mile further than my previous best. My friend finished with 9.4 miles, improving his record by 0.2 miles.

Today, I am taking an unplanned day off. My legs and lower back are still sore.

In Outliers by Malcolm Gladwell, the author famously applies the discoveries found in a German psychological study of professional violinists to other fields of human endeavor. His conclusion, 10,000 hours of practice are required to achieve excellence. This is true no matter what your talent level or IQ score. This makes sense. The symphonies that Mozart wrote when he was eight years old weren’t as good as his later works.

There is more to the success equation than 10,000 hours, although that seems to be a necessary but not sufficient component. Angela Duckworth, author of Grit, a study of factors beyond talent and IQ that lead to success, observes that she runs every day, but her time hasn’t improved in years. She discussed this with an elite runner who asked her the following questions.

1) When you run do you have a goal? For example: Today I will run hills or run for time.
Answer: No, No, and No.

2) What do you do while you are running? For example: Focus on stride or breathing.
She distracts herself by listening to NPR.

3) How do you get feedback on your performance? For example: Do you measure speed or heart rate? Do you have a coach?
Answer: No, No, and No.

4) Are you going back every time you run, asking what can I refine here? What can I do to get better?
Answer: No and No.

Angela’s answers were even worse than mine which are pretty bad. I do set goals for and keep track of daily and weekly distance totals. Rarely, I try to increase my speed over a given distance, but that is about it. One of the discoveries in her studies is that success requires 10,000 hours of DELIBERATE PRACTICE which requires what she terms, grit.

Vince Lombardi put it this way, “Practice doesn’t make perfect. Perfect practice makes perfect.”

I think her findings apply to just about any facet of life. Goals are important. Although I reached my retirement goal at 62 instead of 55, I did reach my goal. Today, like Angela Duckworth, I don’t really have a clearly defined goal beyond trying to stay in good financial shape. I track my net worth, hoping to see it continue to grow even though I am retired. I consider it a personal affront when I need to dip into savings to pay property taxes or a big insurance bill. After three years, I have managed to stay below a 2% draw. Since 4% is considered safe, I guess I am doing OK. My fickle friend, the stock market, has helped me increase my net worth in retirement, but I know from experience, she might just choose to blow on another man’s dice.

Like Angela, I want to step up my game. Although I have read dozens of personal finance books, on most days I feel like I have read the same book 100 times. After spending over 20 years diligently working toward one of two major financial goals, it seems not having a Big Hairy Audacious Goal (BHAG) has left a hole in my life. If I want to improve this blog for my readers, I need to improve myself. Professional golfers have at least one coach. Some of them have more than one coach to work on different parts of their game. Athletes like Michael Jordan and Peyton Manning, who have forgotten more about their sports than most professional athletes will ever learn spent hours reviewing their performance and the performance of their adversaries on video tape.

Unlike professional athletes, our responsibilities to the sport of personal finance don’t end with retirement or even with our death. Although we can no longer do anything about it, we continue to be responsible for our spouse, our children, our grand children, and the charities or causes we believe to be important even though our bodies are in the grave.

There are still goals out there I haven’t even imagined. I can still step up my game.

What can you do to improve your performance?
What can you do today?
Just do it!

Friday, July 22, 2016

Life is What You're Doin'

“Research and Development are what you are doing when you don’t know what you are doing.”
Source Unknown

For 27 years I worked for the U.S. Navy’s ship research and development laboratory. The times when I was enjoying my job the most, I didn’t know what I was doing. The first time a strange new idea is tested in the real world, you can only hope that you designed an experiment that won’t cause too much damage to the facilities.

High ranking bureaucrats as well as the system lords of the Navy Yard and Pentagon fervently hope that research and development can be reduced to a set of instructions that if followed correctly will produce technical breakthroughs on a predictable basis. Every few years they attempt to implement one of these management fads. Usually, they pick the wrong system. Then they misapply it. After a few years, it will be discarded for the next management craze.

As one senior manager was fighting the last battle of his professional life, the one that ultimately led to his forced retirement, this wily old crocodile managed to implement ISO 9000 at our laboratory. Of course the entire story was more complex than one old man’s dream to control the way things were done in his empire from the grave, but as a result we were forced to develop process descriptions, check lists, new mandatory reports, auditing processes, and a host of other documents and requirements that added to the cost of our administrative burden.

ISO 9000 is a European quality control system that seems to work best in large factories that produce a limited number of products. For example, if you own 1,000 automatic screw machines that can be configured to produce a variety of screws and bolts, it really takes only one set of instructions and a rather simple set of checklists to make certain things are done the right way. The cost and complexity of auditing such a system is likewise relatively simple and inexpensive compared to the value of the output.

However, even in a midsized plant that produces semi-custom fabrications for a variety of industries, say vibratory feeders, the differences between machine designs, acceptable tolerances, materials, and even manufacturing processes can lead to massively complex and expensive documentation required to maintain ISO 9000 certification. The cost is simply not worth the benefit.

There is another problem with ISO 9000. It is process oriented, not results oriented. If one of your employees produces a truckload of defective parts, but has faithfully and correctly followed the documented procedures and filled out the required paperwork, he doesn’t have a problem. You have a problem. Now imagine what kind of excuses for failure ISO 9000 would offer recalcitrant government bureaucrats.

Needless to say, this system proved itself to be a large waste of time and money that really didn’t add any noticeable value to our products. After a few years, it joined quality circles, TQM, and TQL in the dustbin of forgotten management fads.

“Life is what you are doing when you don’t know what you are doing.”

Sorry, but I can’t reduce life, even something as simple as your personal financial life to as set of instructions that guarantee a predictable result. I can ask some questions and make a few suggestions that might help you design your own experiments, but neither you nor I can predict the outcome of the series of experiments we call life. Think about it. Did you marry the first person you dated?

While I am not dismissing the importance of sound practices, such as budgeting, don’t focus on the process to the exclusion of the results. Unlike dating, examining the results of your financial behavior is really pretty easy. I recommend that everyone at every stage of life do this simple inspection every month. I do it myself. Once a month calculate your net worth. Add up all your bank accounts, retirement accounts, the money in the cigar box hidden under the bed, and the equity in your home. Then add up all your debts, credit card debt, the balance on the car loan, and the amount required to pay off your house loan. OK twist my arm, I will let you include the value of your car as an asset, but please don’t include the value of furniture, electronics, and used clothing until they are sold. Subtract your debts from your assets. The result of this calculation is your net worth. Is the number getting larger? That is a good thing. Keep on doing what you are doing. Is the number getting smaller, or going more negative? That is a bad thing. Dig into the details. Discover the problem and change your behavior.

In one of the old classics, “Your Money of Your Life” by Joe Dominquez, the author even recommends graphing your net worth over the years until you reach your goal. I don’t think that is a bad idea, especially at the beginning of a drive to become debt free. Visual aids that show your progress can be inspiring. Maybe I should try that for weight loss? What if the graph shows that my weight is increasing with my consumption of beer and cheese crackers? Hmmm.

Tuesday, July 19, 2016

Keep a Knockin'

"Keep on asking, and you will receive what you ask for. Keep on seeking, and you will find. Keep on knocking, and the door will be opened to you.”
Matthew 7:7

While watching an interview featuring Tony Robbins and Joe Berlinger, a movie director who has recently produced a full length feature film documenting one of Robbins’ multi-day seminars, I was reminded of one of the key secrets to finding financial freedom. After pitching their movie, several people in the audience were given the opportunity to question Tony or Berlinger. In an answer to one of these questions Tony observed, “People over estimate what they can accomplish in a year, but they under estimate what they can accomplish in ten years.”

On numerous occasions, I have observed that the poor think week to week or even day to day. The middle class just wants to cover the monthly payments necessary to maintain their lifestyle. The rich are making plans that cover years. The very rich think in terms of decades.

For most of us, who do not win the lottery or have an indulgent rich sugar daddy, achieving financial freedom requires years of focused concentrated effort. Based on my personal experience, achieving a major financial goal will take about ten years of consistent work.

I paid off a thirty year mortgage in about 9 ½ years. I am afraid of debt. I wanted to get out of debt as quickly as possible. I was willing to make sacrifices in order to achieve this goal, but it was more than that. In my mind I was not a debtor. This was simply unacceptable. For eight years I drove a 1966 Volkswagen without air conditioning in order to make extra payments to principal. I maintained a spreadsheet detailing every payment that I made. As I made those payments, I watched months roll off the back side of that loan ultimately saving me well over $100,000. Every time I made an extra payment, I celebrated. When I made my last mortgage payment, I received the largest raise of my entire life. What could you do with an extra $1,000 every month?

About the time I turned 50, I started thinking about investing for retirement. Given that I was the totally debt free owner of a house and had some money in the bank and in my version of a 401(k) I was just about where Stanley and Danko, authors of The Millionaire Next Door would expect to find someone of my age and income. Then I went into savings overdrive. I gradually bumped up my contributions to the 401(k) to 14%, just below the recommended 15%. It was a mistake to reach that level so late in life, but I was suspicious after the Clinton administration “borrowed,” confiscated (?) all the G fund money in Government retirement accounts during one of the periodic Federal shutdowns. Of course Clinton returned my money, but after that, I never completely trusted that account. Instead, I went wild with my taxable investment account. On many months, my contributions to my taxable retirement nest egg were approaching 30% of my take home pay. It is amazing what can be accomplished if you don’t have a mortgage payment, a car payment, or carry a balance on a credit card. Over the course of ten years, I increased the liquid portion of my net worth by over 600%. At this point I was close to double the net worth expected for someone of my age and income.

I remember with some pleasure when during one of my annual performance evaluations my boss asked that silly question, “Where do you see yourself in five years?”

My answer, “Retired.”

You can do it. Set yourself a big goal. Then start to work. Record your progress. Celebrate your victories. Refuse to accept anything less than excellence in pursuing your dream. The day will come when other people will tell you that you are lucky. Just smile and agree with their evaluation of your success, reminding yourself that God does play a role in our lives.

Colossians 3:23
Whatever you do, work at it with all your heart, as working for the Lord, not for men.

Sunday, July 17, 2016

Simple Questions

It is hard to give simple answers to what I perceive as a complex question. Recently I was asked what sort of percentage of her take home pay should a recent college graduate budget for her rent. Of course I had a number in my head, but without knowing any other details any counsel I could give would likely be bad counsel. Instead, I offered advice I consider critical in all situations. Pay yourself first. Put 10% of you take home pay into savings before budgeting the first penny. Avoid debt like the plague. If you consistently spend less than you make over a long period of time, you will find financial freedom.

Dave Ramsey recommends 25% as a target allocation for rent. I would be willing to go higher, perhaps 30% or even 33% in some instances. But it all depends. If you are living in a high rent area, like San Francisco, you might not want to live in an apartment or even be able to find an apartment that only consumes 30% of your take home pay. In some rural settings, 25% might provide an excessively opulent house better suited for a family.

If your parents gave you a good car, you will have more money available to live in a better neighborhood. If you have a car payment that is consuming 25% of your take home pay, it is likely you won’t be able to afford 25% for rent.

If you are a young single woman, you might be more interested in a safe apartment complex than a young man with nothing worth stealing. This would be a greater concern in a city than in a small town or a rural setting, but it is something that should be considered before making a decision.

Your choice of rental property will also determine the time and cost of your commute. When I lived in the Washington D.C. area, the cheapest acceptable apartment was about 18 miles away from my place of work. At the height of rush hour, it could take close to an hour to cover that miserably short distance. Using Metro and the bus took even longer.

There are other small concerns. Does the cost of rent include any utilities? Almost all apartments include the cost of water. If the complex provides an exercise room and a pool, how much is that worth to your quality of life?

Your budget will also reflect your values and your tastes. When I was young and single, my clothing expense was zero during most months. On the other hand, most young women would likely want to budget a percentage of their take home pay for clothing.

In the end, creating a budget seems much like squeezing a water balloon. What goes out of one end of the balloon will inflate the other end of the balloon. As long as don’t try to put $2,600 dollars worth of monthly expenses into a $2,500 balloon you will be OK. Your goal is to spend less than you take home after budgeting for all regular monthly expenses and allowing for all irregular expenses, such as insurance and taxes.

Monday, July 11, 2016

As For Me And My House!

Recently I listened to one of Rabbi Daniel Lapin’s podcasts. While I strongly recommend his book, Thou Shall Prosper, a study of personal finance from a traditional Jewish viewpoint, I seldom listen to his radio show as he tends to ramble and head down rabbit paths that have nothing to do with the topic of the discussion. During this broadcast, he noted that in his experience, the single most important variable that leads to wealth is membership in a family that has enjoyed reasonably healthy intact marriages for three generations. As I think about the people I have met over the course of my life, I can’t disagree with the good Rabbi. In my experience, people who talk about their grandparents and parents with respect, who retell family legends, myths, and stories that support financially responsible behavior tend to enjoy better outcomes in life.

A child born out of wedlock is 5 times more likely to grow up in poverty than a child raised in an intact family. Such a child is also more likely to do poorly in school, engage in criminal behavior, become a substance abuser, and have children out of wedlock. While there are exceptions, such as Doctor Ben Carson, the statistics are simply overwhelming. It is pretty clear that children that grow up in a traditional family enjoy a huge advantage.

While my family was not perfect, I was blessed with a third generation terror of debt. My grandparents were one of only two families in their section of Yankton County, SD that managed to hold on to their farm throughout the Great Depression. Terrified of debt, my grandmother insisted that my grandfather pay down the mortgage on the farm before buying any more land during the boom years of the twenties. My grandfather managed to give each of his four children a farm before he died. He believed that if they owned a farm, free and clear of debt, they could care for their families no matter what happened. As a child, I was told these sorts of stories over and over again. Back in the early sixties, credit card companies would send unsolicited cards to prospective customers. When my parents received one of these things in the mail, I was given a pair of scissors along with instructions to destroy that evil dangerous object. I didn’t get a credit card until I was 35 years old. By that time living without a credit card in the Washington, DC area was simply impossible.

Should it surprise anyone that I frequently write rants denouncing the evils of debt? It just never occurred to me to borrow money to buy a car or even pay for tuition for my second degree. Only in the last ten years or so have I learned that Warren Buffett teaches young people that the most important single thing they can do to reach financial freedom is avoid debt, particularly at an early age.

In many ways we become who we believe we will become; who we are told we will become. While Davy Crockett did not kill 200 Mexicans with the butt end of his rifle during the battle for the Alamo, believing that this is so will make a young Texan a braver solider and a better man. If you have the benefit of a stable supportive family that is a wonderful blessing, but if you don’t this very day you can take a stand. Sonya Carson made such a decision. She worked two or three jobs to support her family. Her faith gave her the wisdom and strength to change her family tree. In spite of growing up in a single parent home in the inner city, Doctor Carson turned out OK. I also expect his mother’s gift to her family tree will continue to provide blessings to our country for many generations to come.

Joshua 24:14-15King James Version (KJV)

14 Now therefore fear the LORD, and serve him in sincerity and in truth: and put away the gods which your fathers served on the other side of the flood, and in Egypt; and serve ye the LORD.
15 And if it seem evil unto you to serve the LORD, choose you this day whom ye will serve; whether the gods which your fathers served that were on the other side of the flood, or the gods of the Amorites, in whose land ye dwell: but as for me and my house, we will serve the LORD.

Friday, July 8, 2016

What do You Really Want?

What do you want? What do you really want, not just stuff and adventures, but what do you really want out of life? At times, I have been so disappointed with my life that I really didn’t know what I wanted beyond a few material possessions, for example a new car. During one of these times I was tired of paying to repair my collection of old rust buckets. More than anything else while living through these unhappy chapters, I just wanted someone to end the suffering. Suffering is something we all experience as humans in a fallen world.

When I began writing this article I went searching for a life list I wrote many years ago. It isn’t too bad especially considering what was going on in my life at the time. Some of my dreams have sort-of-kind-of came to pass. I wanted to retire in 2008 with a certain income. I managed to retire five years after the target date with pretty close to the desired amount of money. I wanted to get in better shape. Specifically I wanted to lose a little over 100 pounds. In fact I have lost about 35 pounds and I am in much better shape. I wanted to write. Guess I got my wish on that one. I am closing in on 800 blog articles. That seems kind of amazing to me. I didn’t know I had it in me. I am still working on some of these goals even though I forgot they were on the list. Really, the only one I have completely ditched is living in Hawaii. The taxes and cost of living is too high for the benefits. Although, I still want to spend time in Hawaii on at least a semi-regular basis.

Like engineering design, life is a trade off. As Steven Wright observed, “You can’t have everything. Where would you put it?”

When designing a speaker an engineer can’t have small size, high efficiency, and solid bass. To get a good bass sound out of a small speaker it must consume an enormous amount of power. Highly efficient speakers with a good lower range come in large boxes. Today, home theater systems use half a dozen or so little speakers with a large separate subwoofer camouflaged to look like a piece of furniture.

When the Japanese Zero was introduced in 1940, it quickly became the terror of the Pacific. Nothing could out dogfight a Zero, but its high performance and extremely long range came at a cost. The design engineers sacrificed armor, self sealing gas tanks, and even radios for everyone but command pilots to keep the weigh of the aircraft low. The Americans discovered that it didn’t take too many incendiary rounds to turn a Zero into a flaming ball of shrapnel.

Your life isn’t any different. If you want to live off the grid on a self sufficient organic farm, you won’t need a lot of income after paying for the land. However, you won’t be riding in your limousine to the opening of new season at the Metropolitan Opera. On the other hand, if your dream is to live in Trump Tower and work in a corner office at Goldman Sachs, your career will start with 12 hour workdays—minimum. After 20 years, you just might be able to reserve a box at the Met for the entire season.

Are your goals realistic? Are they realistic to you? If the answer is, “No,” to either of these questions, lower them or raise your opinion of your own abilities. If I wanted to become a 250 pound, 65 year old ballet dancer, I would hope my wife and friends would gently guide me in a new direction. However, I can become a better writer and maybe someday actually get paid by my readers. Losing another 15 pounds over the next six months is entirely realistic, as is a long stay in Hawaii.

A word about friends: In motivational literature the example of crabs in a bucket appears from time to time. It is said that it isn’t necessary for a fisherman to put a lid on a bucket of crabs. All the crabs will bite onto each other allowing no one to escape. Are your friends like crabs that are biting you, holding you down, and preventing you from escaping the cook’s bucket to find freedom? If this is the case, find some new friends—fast. Look for friends who will give you wise counsel and support you as you explore your lifetime and lifestyle goals. They will help you. In turn, someday it is quite likely you will have the opportunity to return the favor.

If you want to be a responsible adult, God and common sense requires you to work for a living to support your family and give something from your surplus to the community. Pay your bills, keep your promises, do your best not to become a burden to others. The rest of it is pretty much up to you and your spouse. There are a lot of ways to live a good life or even find your way to a better life—even at 65.

You can do it!