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.”