The Values Gap (Part III)

Thrift (noun) 1.the quality of using money and other resources carefully and not wastefully.

Thrift is a virtue, a value that can practiced by anyone. Not everyone has the ability to earn large sums of money. Even with a degree in engineering, I only managed to barely broach the top quintile late in my career. The Apostle Paul observed, “I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.” I don’t know if I ever will discover the secret of being content in any and every situation, but with the exception of buying our first home, I have managed to live on less than I earned. That is my definition of thrift. If you practice this virtue with patience and perseverance over the course of a lifetime, it is highly probable that you will find financial freedom.

But, freedom is never free. We live in an immediate gratification society that constantly tells us we can have everything our minds can possibly desire without effort. We are told, credit is easy, without the Biblical reminder that the borrower is slave to the lender. As long as you are spending your money, chances are, you are going to be OK. It is when you start spending other people’s money that you are likely to get yourself into trouble. What are you willing to give up? Your mind is full of screaming little demons demanding that you fulfill their every desire regardless of the cost. When do you say, “No!”

How can you tell if one of your desires is in keeping with your highest values?

If your spending patterns are truly aligning with your highest values, it is likely that you are on the path to financial freedom. If you are working to satisfy the agendas of all the two year old brats living in your subconscious mind, you are on the road to a lifetime of financial slavery. How does that work out in 21st century America? Let’s consider a hypothetical two income family. Both husband and wife earn $30,000 a year, putting them right at the current median household income of, $57,617. Remembering that rules of thumb are rules that work thumb of the time, let’s, let’s apply a few financial rules of thumb to this couple.

Rule of Thumb: Your house should not cost more than 3 times your annual income. The median selling price of a home is $225,262. Strike one! Unless they are lucky enough to be living in a low cost area of the country, it looks like our hypothetical couple is house poor.

Rule of Thumb: Your car should not cost more than 1/3 of your annual income. Since they both have jobs, it is likely that we are looking at a two income family, so we shouldn’t expect them to buy a car that costs over $10,000. The average price for new car is $34,968, so they can forget about buying a new car. Given that the average cost of a used car is running at $19,227, the chances are good that our family is spending too much on a depreciating asset that only generates costs.

Rule of Thumb: If you graduate with student debt that exceeds your projected first year salary, you have too much student debt. The average student loan debt burden for a 2016 graduate would be $37,172. Strike three! You’re out!

No one is asking you to wear a loin cloth and live in a cave, just spend less than you earn. If you value gourmet meals, go ahead, drop $250 on a steak and a bottle of wine. If you want to shoot targets in your spare time, a CZ-75 can be found for less than $1,000. If you want a BMW 540I, it will likely run you somewhere around $65,000. If you have the cash and it won’t damage your higher values, like feeding your family, providing for your retirement, or sending your kids to the college of their choice, go ahead, you’ve earned it.

This brings us back to the 80/10/10 rule, a simple rule of thumb for budgeting your income. Live on 80% of your income. Give 10% to the charities that line up with your highest values, the ones that you believe will follow you into eternity. Put 10% in savings. What that last number will mean is that, sooner or later, you will have enough in savings to buy assets that generate income. As those assets begin to pile up the income that they generate will buy more assets that generate income. You have now have the miracle of compound interest working for you instead of working for another person’s financial freedom.

Before you make that next purchase, that next financial decision that could possibly be at a crossroad in your life, stop, look at what you are about to do, and above all take the time to listen to your heart. If you do this on a regular basis, with patience and perseverance, over the course of a lifetime, I believe you will find your way to financial freedom.

The Values Gap (Part II)

The Zen master, Thich Nhat Hanh once observed that anyone wanting to understand the Buddhist concept of the Hungry Ghost need only visit Las Vegas. The Hungry Ghosts are souls tortured in a specific hell realm for particularly evil deeds driven by desire, greed, anger, or ignorance. Hungry Ghosts are pictured as having gigantic bloated stomachs with necks that are too thin to swallow food. Attempting to eat is extremely painful, as is the insatiable desire to feed a hunger that can never be appeased.

Steve Wynn, the owner of several hotel casinos in Las Vegas and Macau, the new Chinese Las Vegas, revolutionized the business. Before Wynn started building large spectacularly luxurious casinos, most of the hotels in Vegas were little more than glorified motels attached to casinos, show rooms, and famously inexpensive restaurants. Everything was subsidized to bring players into the casino. Gambling paid for the hotel, restaurants, and the shows. Wynn changed the rules. He decided that every aspect of the business should generate a profit. He built hotels that were an order of magnitude more expensive than anything seen before. He charged an appropriate price for that kind of room. The occupancy rate for this new kind of hotel proved that Wynn’s business model was sound. No more free food! Wynn opened world class restaurants with world class prices. They made money. He once observed, “There are people who rather have a bottle of wine than $1,000 in their pocket. I want to be certain that I am the one who provides that special bottle of wine to my customer.” Steve Wynn correctly guessed that people are willing to pay—a lot—for the things they really value whether that would be the adrenalin rush of high stakes roulette or the gourmet who wants to eat a meal prepared by a celebrity chef in a five star restaurant.

The reality TV show, Pawn Stars is set in Las Vegas. The owners of the pawn shop are willing to buy anything that they can resell for a profit. The entertainment value comes from watching people try to sell their prize possessions, guessing the value (if any) of bizarre items like a WWII hand grenade signed by general George Patton (OK, I made that one up). An expert is consulted to authenticate the signature and the bomb. If it is the real deal, the owner and the pawn broker argue over the price until an agreement is reached, or the disappointed seller walks sadly away from the store. The visitors always tell the camera why they are willing to part with their treasure. The reason given tells a lot about the values of the seller. Since this is Las Vegas, many of the Pawn Stars customers are raising money for the slots, the opportunity to take their wife to an expensive restaurant, or upgrade their hotel room. Others are raising money for their wedding or their grandchildren’s college educations. Some are collectors, selling one antique firearm to get the money to buy the next antique firearm. They are making enough money to feed their habit without infuriating the wife. The owners of the pawn shop value money. Typically, they are looking for 100% profit before taxes and overhead. If it is something they know they can flip with a phone call to an existing customer, they will take less, as they understand the time value of money.

This morning, I listened to another video explaining that almost half of American families could not cover a $400 emergency without hitting the credit card or selling something of value. The author, who lives in one of the most expensive zip codes in America, admits that frequently he is one of those Americans, even though he has earned significant amounts of money. He values an address in the Hamptons and expensive private schools for his daughters more than he values $400 in the bank. I simply can’t understand people who can live without any contingency plans. When I was earning little more than minimum wage bagging cloth in a textile mill, I would volunteer to work overtime to make certain I had money in the bank. I was willing to scrimp on food, drive an aging rust bucket, and share a small apartment with a roommate, but if my bank balance dropped below $1,000 (which it did) I took immediate, radical action to rectify the situation.

It’s all a question of your values. If you value getting high, you will be willing to risk your freedom or even your life to satisfy that desire. If you value your child’s education, you will live in a small house, drive old cars, or take a part time job to cover the tuition to the best private school in town. If you show me your credit card records and your checkbook register, I will have a pretty clear picture of what you really value.

But America is Las Vegas.

I once heard Doyle Brunson, a superstar poker player, interviewed on the radio. He told the hosts of the show that while he had earned millions at the poker table he lost it all gambling on sporting events. In a voice that was both sad and wise, he assured the audience that no matter what your weakness, whether it was alcohol, drugs, gambling, or women, Las Vegas would take you down. Where else in the world would you find a luxury car dealership in or right next to a hotel?

The Values Gap

Recently, I have been listening to Ray Dalio, creator of the world’s largest hedge fund, opine about lessons he has learned from life, investment strategies, and our current economic situation. He believes that our economic stability faces two major threats the wealth gap and a values gap. The wealth gap has been discussed endlessly over the last ten years. Basically, the current economy works well for the top 20%, but not so well for the bottom 40%. In addition, the middle is being squeezed out of existence by the deindustrialization of America, free trade, and other macroeconomic forces that are beyond the control of any single individual. My ears perked up when I heard the term, “values gap.” How was he going to define that term? I couldn’t imagine a deeply analytical investment cyborg, like Ray Dalio, launching into a Dave Ramsey rant about debt, thrift, and hard work. He went on to explain that 50 years ago, almost all Americans basically shared the same Judeo-Christian understanding of morality. Today, as in the book of Judges when Israel had no king, all the people are doing what seems right in their own eyes. Dalio believes that a culture that is so deeply divided on a fundamental understanding of good and evil will be fundamentally—unstable.

While I understand and agree with Dalio’s “values gap,” there is another values gap at work in the economy that correlates strongly with individual outcome. Our personal financial values drive our behaviors. Our behaviors become habits. Our habits eventually define the outcome of our lives. Of course, there are exceptions. Winos win the lottery. Hardworking honest families can be wiped out by war, illness, or even by something like a factory closing. We live in what is basically, a cause and effect universe that has been corrupted by the fall. Given there are limits to free will, the question becomes, what kind of values based actions that are within the control of an individual can lead to financial freedom?

Family is most fundamental value that leads to financial freedom. The dice are loaded against a child born into a single parent home. A Stanford study discovered that children from single parent homes are 5 times more likely to grow up in poverty than children with intact families featuring both a father and a mother. The absence of a father also correlates with drug addiction, teenaged pregnancy, and criminal behavior. Beyond the nuclear family, our culture has forgotten about the importance of the extended family. Although grandparents are still sources of high quality, free day care, it is unusual for multiple generations to live in the same house or work in the same business. There are exceptions to this rule. Asian immigrant families frequently live in multi-generational households. One of the main reasons Asian unemployment tracks below that of other ethnic groups are family owned businesses. When junior losses his job that required a college degree, he can always come back to work at his parents’ convenience store until the economy turns. Strong family connections are one of the reasons I have seen first generation Asian immigrants move from poverty to the upper middle class in less than a generation. There are some groups that have a history of extending the definition of family to those who share their belief system. Mormons are well known for supporting church members who have fallen on hard times, not only by bringing over a casserole when the news hits the church email chain, but by providing them with employment in some business owned by a fellow member of the Church of Latter Day Saints. Jewish Americans refer their customers to other businessmen in their community. I guess that any group that has faced so much persecution understands the concept of, “We are all in this together.” Would that all churches understand the importance of supporting one another’s financial wellbeing as well as worrying about correcting our brother’s understanding of theological minutiae.

I am privileged to know a young man who is always hustling work, no matter what the current economic condition. If he cannot find work he invents it. As far as I know he has walked dogs, been a house sitter, worked, installed, and maintained sound boards for various organizations and events, installed car stereos, and even driven my wife’s car to our new home in SC. A killer work ethic is almost enough all by itself to raise someone out of poverty. I am frequently amazed at the number of ways excellence can find to generate wealth. Yesterday, I watched a reality TV show about a man who makes his living rebuilding and flipping cars. In this particular episode, he paid the best car detailer in his city $3,500 to clean a 1938 Aston Martin that had been sitting in a barn for over forty years. That was all it needed to net the car guy a handsome profit. Imagine paying someone $50.00 an hour to wash your car and believing that the price was a bargain.

Solomon observed, “Do you see someone skilled in their work? They will serve before kings; they will not serve before officials of low rank.” Traditionally, this trait has been called the Protestant Work Ethic. It includes the ability to defer gratification, a critical component in staying out of debt and finding your way to financial freedom. Now the name of this value is changing to the Confucian work ethic. Asian American have highest median household income of any racial group in our country. They are simply outworking other Americans.

Although I left the workforce for a few years to get an engineering degree, my work life has been limited because I never really learned how to take a calculated risk. There is a very famous story about the owner of the largest chain of truck junkyards in the Southern United States. After graduation with a MBA, he found employment in a fast track program for young executives with a major manufacturing company. His first assignment was at a dealership. There was a wrecked truck in the dealership’s lot. His boss told him to sell it to a local junkyard. He received $600 for the truck. Two weeks later his boss sent him to the same junkyard to buy a used part to repair a similar truck. The junkman went to the same truck sold to him two weeks earlier, removed the part, and sold it to the young man for (you guessed it) $600. The young man found the love of his life. After buying his first wrecked truck for $2,000 he quit his job and never looked back. I was raised and trained to be a cog in a great corporate or governmental machine. I never learned how to take the kind of risks that make a successful entrepreneur. I think in the future, this skill will become more and more valuable.

Education is no longer a guarantee of a good job, but the love of and respect for education and educators seems to be a common thread in the lives of people who are generally employed. I won’t waste your time with stories about overeducated failures I have met. I am sure you have seen plenty of these unfortunate stories in your life. However, communities that traditionally placed a high value on education (Jewish and Asian come to mind) have lower unemployment rates than the general population.

Keith Cameron Smith discovered one of the significant differences between the rich and the poor is their sense of time. We all plan, but our timescales are different. Smith makes the following observations concerning different groups.

“The very poor think day to day.” At the extreme end of the scale drug addicts have a time horizon limited to the distance to the next fix, but many of the world’s poor are forced by circumstance to think on a day to day basis. If they are unable to obtain food today, they will die. Making it to sundown is an accomplishment in this world.

“Poor people think week to week.” I have seen this in the factories of South Carolina during the 1970s, people literally living paycheck to paycheck. If they had money they spent it, sometimes irresponsibly and extravagantly. The idea of deferred gratification only appeared when Christmas was drawing near. Starting sometime around November 1 everyone, especially the moms, wanted overtime. Their time horizon jumped from a week to a couple of months.

“The middle class thinks month to month.” Smith believes the middle class focus is on comfort. What can they buy today to make their life comfortable? If they think they can make the monthly payments, “It’s all good, bruda.”

“The rich think year to year.” Smith believes one of the key strengths of the rich is an ability to defer gratification in order to achieve freedom. This long term thinking gives them an edge over time.

“The very rich (like Ray Dalio) think decade to decade.”

Sometimes, one wise decision is all that it takes to escape poverty. If you live in sinkhole of poverty in rural West Virginia, moving over the mountains to a city with jobs can change a life in a few hours. Sometimes, a single minded commitment to changing your family tree can move a man, like my grandfather, from extreme poverty to more than enough wealth to provide all his children with their own farms. He achieved this goal over the course of a couple of decades. The math, as well as numerous examples, demonstrate that a two income family can reasonably expect to achieve millionaire status over the course of a working lifetime. Holding the right financial values and acting upon them can change not only the destiny of an individual or a family, but an entire nation. Ray Dalio notes that in a single generation, Lee Kuan Yew turned Singapore from an impoverished city with serious drug and crime problems into one of the Asian Tigers, a center of global commerce, finance, and transportation, known as the most technologically ready country in the world. All of these considerable achievements required some combination of a stable family, a strong work ethic, the ability to take a calculated risk, a love of and respect for education, and a willingness to change your sense of time.

Look around, then ask yourself the questions, “What is working? What doesn’t work?” Sometimes, you might find the answers surprisingly obvious and simple.

Cash, Cash, and Near Cash

Cash is trash. Cash is king. Which of these two common statements are correct? What do they mean? What is cash? How much do we really need?

Holding cash is a liability in the current environment. Government policy guarantees that the cash you hold today will lose its value over time. Economists are pleased to call this phenomenon, inflation. Politicians call it, monetizing the debt. I call it theft. Cash (money) is a spiritual commodity. Gold, paper, or bitcoin, it only has value because buyer, seller, and holder all believe it has worth both as a medium for exchange and a store of value. To intentionally debase a currency is at best theft. At worst, it is sin.

There is nothing more fungible than cash. It can be transformed into a mutually accepted amount of just about anything. If you want to buy from the corner drug dealer, you better bring cash. When the bottom falls out of the market, those who have cash reserves can buy the future profits of great corporations for pennies on the dollar. Those who do not have cash, sell to those who do have cash at the very time when they should be buying everything in sight. Closer to the life of the average American, cash means that a flat tire or a trip to the dentist won’t result in a credit card bill that will hang around for 36 months at a 12% to 20% interest rate.

The most basic form of cash—is—cash, greenbacks, federal reserve notes, pieces of paper featuring the portraits of dead noteworthy (a joke) Americans. I think just about everyone should have at least $20.00 or so in their wallet and some change in their purse or pocket. Using plastic for fast food, vending machines, and things like football pools and office charity drives seems silly or downright impossible. Beyond what is called, “walkin’ around money,” I think it wise to have a few hundred dollars hidden in a drawer or a closet somewhere in the house, both as a convenient in-home ATM and for contingencies, like pizza delivery or a neighborhood handyman who works on a cash only basis.

The next form of cash, is found in checking accounts, money market funds, and the old fashioned FDIC insured savings account. Conventional wisdom dictates that a family should have 3 to 6 months’ worth of expenses in an emergency fund that can be tapped more or less immediately, but isn’t too easy to grab when handling “emergencies” like the afore mentioned pizza delivery man. Sometime following the crash of 2006-2008, Suze Orman bumped her recommendation to 8 months reserve, due to the dramatic increase in the length of time required to find a new job during what has come to be known as the Great Recession. To me, three months seems like a high priority goal. Six months is desirable, but reaching that goal can be discouraging for a young family when there are so many competing needs for money.

The use of a little common sense can help. If you have ten years of seniority in a government job, you might focus more on paying down your student loans and less on building your reserves past the six month level. If they just eliminated all overtime and shut down the night shift at your factory, you might want to buckle down on building that emergency fund and start filling out some job applications.

Retirement is a little different. Hopefully, your Social Security, and an inflation adjusted four percent per year draw from a lifetime of savings is providing you with a comfortable lifestyle. How much of that nest egg should be in cash? While there doesn’t seem to be any general agreement among the “experts,” I have seen the number, two years’ expenses in cash, bandied about. I think that sounds about right. Two years’ in cash or maybe something like 10% of your net worth sounds good to me. Remember, you are no longer receiving a regular paycheck. You don’t want to “need the market,” meaning you don’t want to be forced to sell when the market crashes. In fact, you want to be able to buy at the bottom. If you are retired and have investments, even a 401(k) that only offers a handful of mutual funds, you want to be able to shift your holdings to undervalued assets when the opportunity presents itself.

Finally, a word about “near cash” assets. These are investment vehicles like Certificates of Deposit, Treasury Notes, and bond funds, such as my Ginnie Maes that are “full faith and credit” guaranteed by you, the American tax payer. These assets go up and down—a little bit—with changes in the prevailing interest rates, but they are highly liquid, meaning they can be converted to cash in your money market fund in a day or less with only the possibility of minimal loss. It is very handy to have a goodly percentage of your net worth in such boring assets when facing a major stock market crash, something that happens every twelve years or so.

Ask the Rabbi

“The story is told of Zusha, the great Chassidic master, who lay crying on his deathbed. His students asked him, "Rebbe, why are you so sad? After all the mitzvahs and good deeds you have done, you will surely get a great reward in heaven!"
"I'm afraid!" said Zusha. "Because when I get to heaven, I know God's not going to ask me 'Why weren't you more like Moses?' or 'Why weren't you more like King David?' But I'm afraid that God will ask 'Zusha, why weren't you more like Zusha?' And then what will I say?!"
Quoted from the Ask the Rabbi website

Somewhere on the inside, you have a pretty good picture of what you are and who you want to become. All by itself, how you handle money would be an important part of that picture, but money is funny stuff. How you earn it and how you handle what passes through your hands are inextricably intertwined with who you will become, in this world and in eternity.

We all want financial freedom, the point at which money is no longer a concern that consumes an unhealthy amount of our time and emotional energy. As the French say, “Money makes a good servant, but a bad master.” Rich or poor, money can be your servant or your master. The tests you will face are different on every unique rung on the ladder of your life.

How you define financial freedom is a reflection of your experiences, your unique God given ability, and the meaning that you choose to inculcate into that mixture we call life.

Is your behavior congruent with your vision of yourself? In retirement, I have chosen to spend more time and energy on my health than I did during my working years. The desired image of my physical self has changed over the last five years. Is eating another fast food grease bomb for breakfast or drinking my mandatory evening beer congruent with that new vision of myself?

Apply that kind of reasoning whenever you are faced with choice concerning your money. If you want to become a hedge fund manager who can write a $100 million check to endow a university hospital with a new research facility, how will you live your life—today. Carl Icahn started life as a kid in a tough working class neighborhood. To hear him tell the story, half of his boyhood friends ended up in reform school, but that wasn’t the end of the story. Icahn managed to put himself through Princeton with proceeds from playing poker with the members of a club where he had a part time job, pretty good training for his future life on Wall Street.

That isn’t your dream? OK. How would a successful businessman who wants to run a small, off the grid, organic farm chose to bless his neighbors and the world?

It isn’t about what you have. It’s about how you use what you have.

In the parable of the shrewd manager, Jesus observes, “Whoever is faithful with very little will also be faithful with much, and whoever is dishonest with very little will also be dishonest with much.”

Then he asks, “If then, you have not been faithful with worldly wealth, who will entrust you with true riches? And if you have not been faithful with the belongings of another, who will give you belongings of your own?”

Maybe, today you will face a decision point that will help define your future. Do I loan that friend enough money to help with the power bill? Not an easy question. Why can’t your friend cover his power bill? Would it be better to offer him a job, if that is in your power? When would it be correct to just say no?

This job or that job? Which career path is congruent with my vision of myself? Perhaps, becoming a husband who is willing to lay down his life for his family is more important than reaching self actualization as an artist. Perhaps in laying down his life for his family, he will reach a higher level, both in this world and the world to come than he could dream would be possible.

It’s your life. Large or small, you have been given a canvas, some brushes, and a selection of different colors. What you choose to paint, well that is your decision.

Hebrews 12:11

“No discipline seems pleasant at the time, but painful. Later on, however, it produces a harvest of righteousness and peace for those who have been trained by it.”

Yesterday morning, I over did it. From time to time, I press my luck with the weight machines or distance on the trail. Sometimes I pay the price with sore muscles and joints for a day or two. I once heard a preacher say that he wished he could become physically fit by hiring a high school student at minimum wage to perform his exercises. This morning, I think that is an excellent idea.

Unfortunately, the world doesn’t work that way. Even if you hire a personal trainer or a financial advisor, you are the only one who can find financial freedom for yourself. It is primarily your effort and decisions that will ultimately create the outcome of your life. Dave Ramsey is fond of comparing our financial journey to a small boy riding a one speed bicycle up a long hill. Sometimes, he has to ride at an angle, back and forth across the street, because the hill is too steep for a direct frontal assault. Sometimes, he just has to get off the bike and walk it up the hill. If he persists, the time will come when he can coast down the hill, enjoying the fruits of his labor. This is a pretty good analogy, but the reality is both better and worse than the story. With a little luck, your one speed bicycle will someday become a motorcycle that generates its own fuel. If you try to ride down the hill, before starting up the hill, student loans, car notes, and credit cards will condemn you to years of debt slavery before you can break even.

Not everyone is born with the body of a Michael Jordan, but nobody, whatever their talent level outworked Michael Jordan, a man who said, “If you do the work, you get rewarded. There are no shortcuts in life.”

I remember listening to the story of a retired man who once worked in the same textile mill where I started my career. He never earned that much more than minimum wage, but he provided for his family, supported himself and his wife in retirement, and left a small legacy to his children. My own grandfather, a dustbowl farmer that just barely held on to his land during the depression, managed to leave a farm without a mortgage to each of his four children before his death. You don’t need the brain of a Warren Buffet to find financial freedom.

Money is funny stuff. Even if you are storing your money in Mason Jars and burying them in the Wooly Swamp, it is increasing or decreasing in value. Inflation, deflation, dividends, and interest are constantly changing the value of your stash. Albert Einstein stated that compound interest was the strongest force in the universe. While I expect this oft quoted statement was delivered with tongue firmly in cheek, nuclear fission and financial freedom both require a critical mass, enough money or fissionable material to produce a self-sustaining reaction.

“A critical mass is the smallest amount of fissile material needed for a sustained nuclear chain reaction. The critical mass of a fissionable material depends upon its nuclear properties (specifically, the nuclear fission cross-section), its density, its shape, its enrichment, its purity, its temperature, and its surroundings. The concept is important in nuclear weapon design.” Wiki

Like money, the nature of a nuclear reaction is defined by equations. Unfortunately, it is hard to quantify the effects of irrational human behavior on the price of objects of value until after the fact.

Even given our inability to predict the future of the economy,

Money In = Money Stored + Money Out

Mastering that equation is the work of a lifetime, but unlike physical exercise, the benefits of years of financial discipline won’t end with your death. The wise use of your money can not only provide blessings for yourself, your family, and others while you are alive, but those funds can continue to be a source of blessing for generations yet unborn.

When Disaster Strikes

It is the nature of large complex systems. When they fail, they fail catastrophically. Consider the old fashioned electro-mechanical switch that connected your phone to the network. If it failed, you lost service, but everyone else remained unaffected. Sometime around 1990 I remember a computer based switch failed. Long distance phone service for the entire east coast was knocked out for about twelve hours. The computer switch was cheaper and faster than the switches located in that little brick building without windows located somewhere in your home town, but when it failed, it was Katie bar the door.

The same can be said for major metropolitan areas. People have been living in cities for a long time because it is more efficient than roaming about the countryside in tribal groups of hunter gathers. However, when disaster, like a recent hurricane, hits a metropolis like Houston, millions of people are affected. I am confident Houston is going to recover. The south Texas area has a dynamic financial base and a lot of equally dynamic people. I have met some of them on business trips. Moreover, after the hurricane, damage control teams from neighboring states can move in to help.

Puerto Rico, isn’t so lucky. Federal law allowed Puerto Rico to issue municipal bonds with triple tax exemptions. Like Greece, this territory used access to cheap money to fund their social welfare system. This is very much like an unemployed person maintaining his family’s life style with credit cards. It will end and it will end badly. For Puerto Rico, the end came earlier this year. They defaulted on their bonds and are now in a condition of quasi-bankruptcy. The financial press noted sometime before the recent hurricane devastated the island, that the island’s infrastructure was in bad shape. Writers predicted that the next hurricane, and everybody knew there would be a next hurricane, would produce catastrophic results. The Puerto Rico Electric Power Authority filed for bankruptcy on July 2, reporting it would need more than $4 billion to upgrade its outdated power plants that rely on imported oil (Washington Post). By the way, the Jones Act which requires all shipping between American ports to be conducted by American flagged vessels, greatly increases the cost of everything in Puerto Rico including all that imported oil that is refined in the U.S. and shipped from American ports.

Unlike Texas, Puerto Rico is so broke (in all meanings of the word) it can’t possibly fix itself. The American taxpayer is going to foot this bill. Puerto Ricans are Puerto Rican citizens, but they are also American citizens without restrictions and they need our help. End of story. It isn’t going to be easy or cheap. Puerto Rico, unlike Houston, is an island. The power company in Ohio cannot send its emergency crews in their bucket trucks down the Interstate to San Juan. With 12% unemployment and no large scale wealth producing activities on the island, the financial infrastructure to fund the recovery doesn’t exist. I have also learned that a majority of the residents of that unhappy territory don’t have property insurance for a variety of historical reasons. The problem is compounded by an exodus of young productive ambitious Puerto Ricans seeking employment on the mainland. The island’s population is disproportionally old. Retired folks, like me, are not all that useful in rebuilding an island’s infrastructure and we draw Social Security.

So how about me as an individual? What can I do to prepare for an emergency? When hurricane Irma was targeting the upstate of South Carolina, I didn’t expect any problems other than a power outage. They seem to happen more often in SC than they did in MD. I had gas in my cars, shotgun shells in my closet, and plenty of flashlight batteries. I wasn’t worried about drinking water, but if I was concerned, I would have filled our rather large bathtub. Since we have a natural gas stove and a supply of matches, I could purify the water and cook canned goods. We routinely stock enough soup, chili, canned vegetables, and such to last a week or so. I wouldn’t expect a power outage to last longer than that.

I also have house insurance. During the storm (which barely touched us), a dead tree fell out of my neighbor’s yard and trashed a section of my fence before coming to rest in my yard, a foot of so short of our deck. I discovered that my deductible had been increased without my knowledge and that in the case of trees falling in one’s yard, a double deductible applied (one for the fence and one for chopping up the tree). My insurance wouldn’t have paid a penny. Fortunately, SC law states that while your neighbor’s live tree falling in your yard is your insurance company’s responsibility, dead trees are the neighbor’s responsibility. My neighbor graciously took care of everything. It could have been much worse. I am grateful. When I get a chance, I need to talk with my insurance agent. Evidently, I don’t know what is in my policy.

But what if we were facing what Puerto Rico is facing? Only 5% of their hospitals still have power. Fuel supplies for emergency generators are running low, machinery is failing, and it looks like it might be months before power is completely restored. Half the island is still without drinking water. Gasoline is pretty much unavailable. To prepare for such situations, Mormons are expected to maintain a three to twelve month supply of emergency food and drinking water. Where could a faithful member of the Church of Latter Day Saints store so many provisions in an efficiency apartment in a city like San Francisco? If all this stuff is in a nearby storage unit, how does the owner drive there without gasoline, or open the computer controlled security system to gain access to his locker? In places like the rural Midwest or the mountains of Appalachia, it seems the chances of survival would be much better. More people know how to live off the land, own animals that can be eaten, or know how to hunt. Also, more of these people are likely to belong to churches and know their neighbors’ name than is the case in suburban Washington, DC.

Perhaps, that is the big takeaway from this article. Know your neighbors, love your family, belong to something like a church that is likely to be there for you when things fall apart. Perhaps, in the end, we are not all that different from those bands of hunter gathers roaming around the grasslands of eastern Africa, looking for something better, moving on, confident that their clansmen have their backs.

They Live!

I recently discovered the existence of They Live, a science fiction movie that is considered a cult classic. The star, played by Roddy Piper, steals a pair of magic sunglasses that allow him to see only the subliminal messages hidden in every bit of outdoor advertising, printed material, and electronic media in black and white, rather what normal people would see in color. These glasses also allow him to see our space alien rulers as they are, rather than as normal human beings. The secret messages tell us to consume, reproduce, watch TV, remain asleep, and to never ever ask any questions. Gee! All these years I thought I was the only one with a pair of these sunglasses.

They Live Sunglasses

Am I just kidding?

Sadly, the actual members of the nomenclature and their well paid apparatchiks aren’t space aliens. THEY are just normal humans, like you and me, pursuing their rational self-interest using well understood, legal means, rather than advanced mind control technology from outer space. Well, maybe not. The big green machine that wants you to remain a docile tax donkey and debt slave is pretty sophisticated. THEY want you to comfortably numb, watching TV, consuming, and never asking any questions about the assumptions underlying an economic system based on ever increasing levels of debt fueled consumption.

Who benefits?

Who benefits, when a naïve eighteen-year-old amasses $50,000 in student loan debt while pursuing a worthless degree in a subject like, art history? Who benefits, when a young couple who have problems paying their rent lease a car that they don’t need and can’t afford? Who benefits, when I pay $125 for a pair of shoes assembled in a third world sweat shop? Look at your cellphone. How much do you think it cost to manufacture that thing? Who made it? What were they paid? How much are you paying for that two year phone contract? Who is getting all that money?

As a share holder in both AT&T and Version, I’m getting to dip my beak a little. How about you?

The real space aliens in this story understand that money is about freedom. Typically, they are looking to accumulate more than I need or really more than I want, but that is a personal decision. If all you need to be free is enough money to run an off-the-grid organic farm, that is all you need. But to achieve that goal, or any other financial goal, you need to be awake. You need to ask questions. You need to swim against powerful cultural currents generated by politicians, banks, advertising agencies, marketing experts, computer programs that track your purchases and your preferences. Every time you log onto Facebook, realize you are the only product they have to sell. You are the Soylent Green of the electronic age.

Before you sign on the line that is dotted, before you pull the plastic out of your wallet, ask yourself, “Who benefits?”

If you want to know the truth, follow the money.

Stewardship, a Different Definition

Stewardship is a Christian word. When was the last time you heard that word used outside of a Christian context, or the Lord of the Rings? Christian cringe whenever they hear the word because they know that the preacher is about to put his hand in their pocket while calling them brother. Recently, I listened to a sermon by Wayne Cordeiro, pastor of a Hawaiian megachurch. He put a totally different spin on the word. He defined stewardship as the faithful use of everything you possess in the present moment.

Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.  So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?  And if you have not been trustworthy with someone else’s property, who will give you property of your own?

We have all heard the verse about a choice we make, whether to serve God or Mammon. Even secular wisdom observes that money makes an excellent servant, but a poor master. Instead of listening to another sermon on “stewardship,” let’s spend a few minutes considering the three verses that proceed that famous verse, the one that is often used as a rationalization for irresponsible behavior.

One of my neighbors had a son who worked part time for McDonalds while in high school. He enjoyed his job. When he graduated from high school he continued working for McDonalds, but now as a full-time employee. He also started earning a two year degree in business at the local community college. After a while, he was promoted to assistant manager at our local fast food provider. When we left the area, the powers that be were so impressed with his performance as an assistant manager that they promised him his own store as soon as there was an opening in the district. First, he was trusted with little. After proving himself, he was trusted with much. That’s the way it works in heaven’s economy and that is the way it works on the earth.

Whatever your beliefs tell you, God, the universe, or chance has given you your life. That wasn’t your idea. It was a gift. What are you doing with it? Right now? You can’t rewrite yesterday. You don’t know what tomorrow will bring. All you have is right now, this present moment. You may not have much going for you, or you might possess every possible advantage. Doesn’t matter, the standard is the same. If you want financial freedom, wisdom, physical fitness, more faith, or better relationships, the process begins with the wise and faithful use of what you have been given in this present moment. Don’t try to run a confidence game on the universe, “Sooner or later,” as the song says, “God’ll cut you down.”

“Whoever is dishonest with very little will also be dishonest with much.”

Do you want true riches? Heavenly riches? It would seem that the first test on the road to eternity concerns how we handle worldly wealth. Isn’t that interesting? I wouldn’t limit that verse to dollars in the bank, real estate, or shares in Exxon. Your worldly wealth includes your intelligence, your talents, your interests, your ambitions, your body, as well as your cultural background and environment. If you could float outside of your body, watching your performance as the manager of your own life, would you give yourself a promotion, or the pink slip? Are you stealing office supplies for your children to use in school, or are you giving the company a few extra minutes at the beginning or end of your shift?

“There is nothing concealed that will not be disclosed, or hidden that will not be made known.” 

I believe that it all works out in the end. Usually it works out in this world, always in the world to come. I started my post-college career packing rolls of cloth into burlap bags for a few cents more than minimum wage, but that was not the end of the story. Twice, over the course of 45 years, I was unfairly stabbed in the back by a rat bastard. It happens, but twice someone or something spoke Joseph into my life. “They meant it for evil, but God meant it for good.” In the first case, I returned to school. Earning a degree in engineering, worked out pretty well. In the second case, I decided it was time to learn about investing. I learned enough to retire early.

There is another principle at work in the definition of stewardship, “From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.” Moses didn’t make it into the promise land because he misrepresented the nature of God to the people of Israel when he struck a rock rather than speaking a word to the rock. That seems pretty harsh, after all Moses did for the Lord, but consider how much God gave him. Don’t worry about Moses. His body was taken into Heaven. He is called, “the friend of God.” He counseled Jesus on the mount of the Transfiguration. Moses is doing OK, but one sin prevented him from taking his people into the promise land after more than forty years of hard work.

May God have mercy on my soul.

Bitcoins, Tulips, and The Barrel of a Gun

Since everyone else is talking about it, I might as well throw in my two cents on the subject. Jamie Dimon, CEO of J.P. Morgan Chase, largest of the big four American banks, announced that bitcoins are a fraud and that the governments of the world are going to put an end to cryptocurrencies very soon. It wouldn’t surprise me if that happens. Jamie Dimon, a former governor of the Federal Reserve Bank, is privy to sources of information not available to retired engineers. He also has a hand on one of the levers or power that could put an end to the world’s latest version of tulip bulb mania.

This morning the price of a bitcoin dropped on the news that the Chinese are closing it down at the end of this month.

Money ultimately has value because you and I believe it has value. It could be seashells, gold coins, big rocks, or pieces of paper imprinted with pictures of dead presidents. If it serves as a medium of exchange and a store of value, it is money. The ability to create money, as opposed to the ability to create wealth or the desire to trade collectibles for a profit has always been a monopoly controlled by governments. Jamie is probably correct. If the bitcoin is perceived as a threat to that monopoly power, the bitcoin exchanges will be reminded that political power grows from the barrel of a gun, another area where the world’s governments hold at least something close to a monopoly.

Jamie and the Chinese government certainly haven’t helped things for the bitcoin. It has dropped from a high near $5,000 to today’s price of $3,500, but I wonder if this wouldn’t have happened anyway. The increase in the bitcoin value was beginning to look like a hockey stick. That kind of rapid increase in value is not sustainable. These events usually end in a catastrophic collapse, like the Dutch tulip mania of 1637.

Jamie Dimon also said, “Markets have always been wrong.” He got that one right. If markets aren’t always wrong, there wouldn’t be any need for a market. Every time a share is bought or sold on an exchange, someone believes that it is going to go up in value and someone believes it is going to go down in value. They both can’t be right. Should the market capitalization of Tesla exceed that of General Motors? In 2016, Tesla lost $773 million producing 76,000 cars. GM produced over 10 million cars while earning $9.43 billion.

It is at moments like this that it is important to have an agreement with yourself to direct your investments. My prime directive is, “If I don’t understand it, I am not going to buy it.” The truth is, I don’t understand why one cell phone is sexy and another cell phone isn’t when they look pretty much the same to me. I don’t understand why a normal person would buy an electric car until you can charge the batteries in less than 5 minutes at a cost of less than $30.00 (today’s price) and then drive over 300 miles at 60 mph or better. Taxpayer subsidies can only sell a finite number of automobiles. Unless I was someone looking to move money without the possibility of discovery by my government, I don’t understand the ultimate value of cryptocurrencies. I do understand that traders can make a lot of money buying and selling anything from baseball cards to antique Christmas tree stands, but I am not a trader.

What I do understand are companies that have been around for a while that have a track record of paying a dividend that is trending in an upward direction over a long period of time. This is not a get rich quick scheme and I am vulnerable to value traps that occur when things look good on the surface, but the inside of the company is starting to rot away, but it works. It worked for a genius like Warren Buffet and it has worked for an overly cautious retired engineer, like me. Johnson & Johnson has a long history of selling high quality medical products. Chevron sells the gasoline and oil that goes into my cars. Coca Cola turns fizzy sugar water into money. Aqua America provides water for important functions like flushing toilets in cities across America. These are all examples of things that I understand.

As an investor, I am content with who I am.

Now, if I could just come up with contracts with myself for the other dimensions of a healthy, fulfilling life….

The Chain and Whip of the Modern Slave-Driver

Don’t kid yourself. It’ a battle for your mind. The headline (CNBC) reads, “Most Americans live paycheck to paycheck,” The two “grabbers” below the headline certainly got my attention. “Nearly 10% of those making $100,000 or more say they can’t make ends meet.” “Overall, most workers said they are in debt and many believe they always will be.” That last sentence is key. What you believe is possible will lead to your decisions. Decisions lead to actions. Actions lead to habits and your habits, for better or worse, will define your life and your life will continue to echo in the lives of your children and those who look to you for guidance. The forces arrayed against you are formidable. The higher education cartel, the major money center banks, the automobile industry, major retailers, the credit card companies and THE MEDIA that they control through advertising revenue and access to underwriting equity financing, all want you to become a willing debt slave. They do not want to deal with men and women who, through swimming against powerful cultural currents, have found both intellectual and financial freedom. In the Devil’s Dictionary, Ambrose Bierce defines debt as, “An ingenious substitute for the chain and whip of the slave-driver.” The article reports that 78% of Americans live paycheck to paycheck and that 71% of Americans report that they are in debt. I would love to know to what extent those two sets overlap. I do know where these numbers will lead. I saw the 2006-2009 train wreck live and in person while living in the Washington, DC area. Two income families earning more than $250,000 a year, living in $1,000,000 McMansions, driving leased luxury cars, and carrying too much credit card debt lost everything in a matter of months when one of the bread winners lost their job. When those houses were actually selling for less than $600,000 their owners were too far underwater to get out. Even in my own modest neighborhood where house prices topped out at $400,000 there were foreclosures and short sales. Since then, as a nation, we have added nearly a trillion dollars in student loans to this wretched mixture. At some point, there will be another crash. Historically they happen every twelve years or so. Then, as Warren Buffet observed, “Only when the tide goes out do you discover who has been swimming naked.” It doesn’t have to be you. You can change your life, but you have to change how your relationship with money. Start by believing that debt is a curse and that the ability to loan money to others is a blessing. Stay out of debt unless absolutely necessary. If you are in debt, pay off your debts as rapidly as possible. Don’t use a Credit Card unless you can pay it off every month. Start an emergency fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month. When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate. Start thinking about retirement when you are young. Take advantage of anything offered by your employer. Barring some catastrophe, like an uninsured medical emergency, how much you earn isn’t the problem. The problem is you, the decisions that you have made, the decisions that you are making, how you choose to live your life. When I was first living out on my own, I was earning only slightly more than minimum wage, yet I managed to spend less than I earned. If that practice becomes a habit, you will be amazed at how far you will have travelled by the time you reach retirement. You don’t have to be in debt for the rest of your life, but to be free, you will have to live a different kind of life than the one “THEY” want you to live. The decision is up to you.

Step by Step. Inch by Inch

I apologize for writing the same article again and again, but it is so important to take that first step to financial freedom. According to multiple surveys, 69% of Americans have less than $1,000 in total savings. 34% report that they have no savings at all. Let us assume that someone with no savings at all, needs to replace the tires on their car to pass state inspection. What are their options if they can’t tap a family member for a loan? A high interest credit card? A title loan? A payday loan? A lack of an emergency fund is a disaster just waiting to happen.

Pay yourself first. The consensus of experts recommends skimming ten percent right off the top of your take home pay, before you spend a penny. Put that money in savings. That is pretty ambitious for someone overwhelmed with credit card debt and student loans, but don’t tell yourself what you can’t do. That won’t solve your problems. Tell yourself what you can do. Can you throw a dollar or two in a jar every night? $1.50 X 365 = $547.50, more than enough to buy a new set of tires for an average midsized car.

Automation is easier. Set up a savings account or a money market account connected to your checking account. Weekly or monthly, every time you are paid, auto debit a predetermined amount into that emergency fund. Let’s say you take home $600 a week. Chances are you could afford to pay yourself 5% and not miss that money—at least not most weeks. $600 X 0.05 = $30, dinner out for two at a typical mid-priced family restaurant with nonalcoholic beverages. You can afford it. $30 X 52 = $1,560. Add that to the money you threw in the jar in the first example and your emergency fund would be $2,107.50 after a year.

Slowly I turned. Step by step. Inch by inch.

I don’t remember with certainty when I passed the six months’ living expenses in cash mark, but it was sometime after ten years of marriage, but before the fifteen-year mark. Hey! Life happens! My wife went to grad school. I went back to get my engineering degree. Twice, during those early years, we dropped below or close to $1,000. Even back then, when $1,000 would equal $3,700 in today’s money, I considered having less than $1,000 an emergency. When it happened, we cut expenses to the bone until we recovered. Fortunately, I was raised with a third generation terror of debt. Borrowing money to buy a car or go to school simply never occurred to me. I was about 35 years old before we finally got our first credit card. By then, living without a credit card was just too difficult and debit cards didn’t even exist back in those days.

As the savings habit becomes an ingrained part of your life, you will find that your definition of an emergency will change. Recently, I bought a new set of tires for our older car. They cost $300. There was a time when such an expense would have caused me considerable pain, requiring a significant reordering of our priorities, and the probability of an argument with my wife. As time passes, you will find that you have factored such “known unknowns” into the size of your checking account balance. In those days, I would grumble, annoyed that my balance was below the preferred number, even though I knew my checking account would be healed by next month. Finally, the day will come when a new set of tires, barely merits a shrug of the shoulders.

It won’t happen overnight. Don’t beat yourself up. Just put something aside every month. Little by little. Step by step. Inch by inch. You will get there. May it happen sooner than you believe possible.

God Chance Effort

It’s just a number and a number can be changed. It doesn’t matter how that number came into your life. Whatever it means to you, it’s just a number.

When I look at a weight machine I see the number that belongs to the last user. If it is a low number, I think, “That number belongs to a woman or a feeble old man—like me.” If the number is higher than my number, I think, “That number belongs to someone with superior genetic gifts, or some kind of fitness freak.”

But, it’s just a number. It isn’t even a real weight, as the machines are a compilation of levers, pulleys, and gears. My number on the Torso Arm Machine that works my muscles like a pullup is 320. I only weigh 240 pounds. If I was pulling 320 pounds, I would lift myself up off the seat.

It’s just a number and a number can be changed.

There are a lot of ways to increase any number you find in your life, or decrease it in the case of my weight, but they all involve some sort of effort. I have increased my numbers in the gym over the last six months because I do my little ritual three times a week, even when my 66-year-old body whines in protest. That young Hercules over there lifting real weights has the advantage of youth, but he has also been working harder than me for six or more years rather than a paltry six months. Although I am still hoping that the bite of a radioactive spider will give me the strength to lift an entire weight machine, I am not counting on a comic book miracle to change my life. If I keep going to the gym, I expect my anemic numbers will still continue to crawl in an upward direction.

Calculate your net worth. Just add up all your debts and all your liquid assets. Don’t count the value of your car or furniture until you sell it. You need those depreciating assets for life. I doubt you are going to sell your existing bed in order to sleep on the floor. You got that number? It might be negative, but that too is just a number. Carl Icahn’s number might be $35 billion. Your number might be $3.50. Don’t worry, it’s just a number and a number can be changed. At one point Donald Trump’s number was a negative $800 million.

The outcome of our life is dependent on at least three elements God, chance, and human effort. Your numbers, large or small, are the result of the decisions you have made, the will of God, and the luck of the draw (nature and nurture). While we can’t ultimately control any of these forces, it seems logical to focus on our effort, the only one where we have, at least, some control. We live in what is basically a cause and effect universe that has been corrupted by the fall. Our thoughts lead to our actions. Our actions produce immediate results, long term results, and establish habits that help us to improve our lives or habits that could ultimately lead to death. Whatever free will, we do or do not possess, I believe that the best results will be obtained if we accept 100% responsibility for the decisions we make and the actions that we take. I have found that blaming or problems on others, even when true, ultimately leads to failure.

Back to Basics--Again!

Every once in a while, it is good to get back to the basics. Finding our way to financial freedom is important. The rules of the game are simple, but nobody other than a late-night infomercial huckster babbling about real estate millions on an obscure cable station is going to tell you it will be easy.

Here is the money equation. This equation and a little bit of grade school arithmetic are all the head knowledge you need to get started.

Money In = Money Stored + Money Spent

There are only two ways to move Money Stored in a positive direction; earn more money or spend less of the money you earn.

There are no silver bullets. Most big lottery winners end up in bankruptcy court and few family fortunes last past the second generation after their creation.

First on your to-do list. Stay out of debt. Starting your adult life with a large negative balance in the Money Stored column is a recipe for a lifetime of debt slavery. Carrying $100,000 in student loans for a degree with a starting salary of $35,000 a year will steal at least two decades out of your life. In essence, you have a mortgage without a house. That first car loan will become a monthly car payment for the rest of a middle-class American’s life. Don’t bite the hook. Pay cash. Drive that clunker until you can afford something better. If you are making that car payment to yourself instead of the bank, you will be amazed at how soon the day will come when you can pay cash for new or at least low mileage, late model cars. Credit cards? That’s easy. Never, ever carry a balance. Never, ever pay a late fee.

If you are unfortunate enough to find yourself in debt, pay off your debts as rapidly as possible. Pay off the debt with the highest interest rate first and the debt with the lowest interest rate last. This is called the Debt Avalanche. It works. Or, pay off the debt starting with the smallest account and then work your way to up to the largest balance, probably your mortgage, last. This is called the Debt Snowball. It works.

Start an emergency fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month. If you have less than $1,000 in your emergency fund, consider that an emergency.

Live on a budget. We have never had a budget except the one in my head. That worked pretty well for us, because I was born with a third generation fear of debt in a family that boasted that we could squeeze a nickel so hard that the buffalo would bellow. If you are having problems making it to the end of the month, don’t mess around. Sit down with your spouse on the first day of every month and negotiate a zero-based formal budget. Then live on it. Forms and instructions are free on the Internet.

No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them. Having a pink and blue account for husband and wife to spend without explanation will help avoid arguments, but what goes into those accounts is a part of the monthly negotiation process.

When you have a little extra cash beyond the six months fund or maybe even as a part of the six months fund, begin to experiment on a small basis with stocks, bonds, mutual funds, or even real estate.

Start thinking about retirement when you are young. Take advantage of anything offered by your employer. 401(k) matching money will give you an instantaneous 100% tax deferred return on your investment. How can you beat that? This was not a problem or an issue 50 years ago. If you are under 40, your retirement picture is positively scary. This is likely to be a very low priority with so many other demands at this time in your life but don’t forget retirement is sitting out there if you are lucky enough to live that long.

Investment isn’t rocket science. The key is to keep doing it; month after month, year after year, here a little and there a little until you are free. If you don’t want to think or learn, all you need to know is four words Vanguard Target-Date Funds. These funds will automatically provide you with an age appropriate mix of stocks and bonds at a minimal cost. As you learn, don’t be afraid to start buying a mix of conservative dividend paying stocks. Look up Dividend Aristocrats on Google for some ideas.

Don’t forget. Give something to God without expectation of return. It is good for your heart.

That’s all folks. No matter where you are in the process, there is something you can do to improve your situation.
Don’t wait. Start today.

Twelve

After throwing out my lower back—Again!—last February, I decided to supplement walking with weight machines and a Yoga class for a more balanced exercise program. In the months since, I have discovered that of the eight weight machines that I was instructed to use, two of them just plain don’t like me. Most of the machines tolerate my presence without many comments. One of them likes me so much that I am looking forward to maxing out the contraption. I suspect there is more than a little ego in this dream, but dreams are the first step on the road to reality.

This past Monday, I was waiting for a young body builder to finish his reps on the Triceps Press machine, one of the two machines that have it in for me. When he finished, I asked him why he was using the seatbelt. He replied that since he could press more than his body weight, the seat belt prevented him from lifting his body off the machine. I laughed, replying that certainly wasn’t my problem.

After this brief conversation, I set up the machine for my lifts. I thought I pegged the weights at eleven. I have been stuck at eleven for so long, I forget the last time I was able to increase the weight on this machine. I noticed I was having a difficult time performing this exercise in a correct manner, but I managed to complete the required ten repetitions, although some of them shouldn’t have been counted as complete and proper. Then I noticed that I had the machine pinned at twelve. Suddenly, instead of wondering why I was having more trouble than usual, I was surprised that I was able to do any reps at that weight. Just for grins, after finishing my circuit, I returned to try the Triceps Press machine at twelve a second time to see what would happen. I managed to perform eight more substandard lifts.

On my next visit to the gym, I returned the setting to eleven, but this time I was able to complete fourteen acceptable repetitions, enough to increase the setting to twelve. Yesterday, I managed a ten count at the highest setting, a personal record.

A Yoga master once observed, “For a committed man, there is no such thing as failure.” For me, the commitment to finding financial freedom seemed a fairly natural extension of the values I had internalized from my parents and later from those around me whom I respected. While paying off my mortgage, I maintained a spread sheet that calculated the amount of money I was saving every time I made an extra payment to principal. During the stretch run to retirement, I tracked the increase in my account balances until 2008. Then I made additional efforts to pour more money into my declining accounts. Ultimately, I achieved my goal.

I wasn’t raised to value physical exercise. In fact, if there was any risk involved in an activity, I was ordered to avoid it. Now, at age 66, I am discovering that the same methods that worked for me in saving and investing for long term goals are working in the area of physical fitness. I keep track of my weekly mileage (in my head) and my activities with the weigh machines (on paper). The numbers are increasing slowly on two of the machines and rapidly on one of the machines, but they are increasing on all of the machines.

Yes, you can hit a hard stop in your checkbook or in the gym. A few days ago, I spoke with a man of my age. I learned he was there rehabilitating from knee replacement surgery. Talk about a hard stop, but for the committed man there is no such thing as failure. Losing your job or suffering a major health problem without insurance certainly are examples of hard stops, but even after such disasters, I have seen men get up off the ground and try even harder to find their way to financial freedom.

Keep trying, maybe someday, even though you don’t believe it is possible, you might discover you can lift a twelve.

K.I.S.S.

This morning I scanned a stock report I receive every two months. I didn’t spend a lot of time reading it, as it is long and says very little that would cause me to change my behavior in any substantive way. During the last two years, the time I have been on their email list, I can summarize twenty four reports, each coincidently of 24 pages with one sentence. Everything is overvalued but some sectors are more overvalued than others.

Mark Twain famously observed, “OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.”

There is always some reason not to invest in the market unless the Shiller Price Earnings Ratio is at or near a historic low. Barring massive actions by the world’s central banks, as has happened over the last decade, one of these opportunities will appear every twelve years or so. It pleases us to call such events recessions or depressions.

Repeat after me, “I can’t predict the future.”

I can look at facts, such as the growth of debt in the private and public sector, and make the reasonable assumption that this will not end well, but I can’t say with certainty when or how it will end. Puerto Rico just went bankrupt. In the next few days, Illinois may become the first state to see its credit rating lowered to junk bond status. What happens when the world’s markets lose confidence in the Federal Reserve Bank, the European Central Bank, or the People’s Bank of China?

As I read a report that simultaneously said yes and no to every possible option, I was reminded that investing is really pretty simple if you have made a contract with yourself.

In my case, it would look something like this:

1)The Prime Directive If I don’t understand it, I am not going to buy it.

2) I will maintain a roughly 50%/50% balance between equities and high quality income producing assets (this 50% includes about 10% in highly liquid positions like money market funds), through good times and bad.

3) I believe that dividends will create about ½ of the growth produced by my stock portfolio. Therefore, “Why should I buy this if it doesn’t pay a dividend?” is a serious question. Also, “Is this dividend sustainable?” becomes an important issue.

4) I don’t sell individual bonds or bond funds, unless I need to rebalance my portfolio. I will ride them to maturity and then reinvest as appropriate.

5) I will have a clear reason for making any investment, since this action will make me an owner of this company. The factors involved could include the size of the moat around the company’s business model, quality of management, record of increasing dividends, or a big story. I recently took a somewhat speculative (for me) position in Zimmer Biomet. I thought it an attractively priced opportunity to get into the business of selling artificial joints to aging Baby Boomers. That would be an example of a big story.

Those are the most important clauses in my contract with myself. This has worked out pretty well for me, but these guidelines are certainly not the only possible rules for investment. Your age, your net worth, your fixed expenses and income, your personality, level of risk tolerance, and the amount of time you are willing to spend performing research will all contribute to the final contract you sign with yourself.

Keep It Simple Stupid is always good advice.

Treat your contract with yourself as seriously as you would any legal document that requires your signature.

Start investing today, because there will be a tomorrow, if not for you, there will be a tomorrow for someone you love.

Excuses Excuses Excuses

Occasionally on my morning walks, I cross paths with an English lady out walking her dog. We enjoy chatting with one another about various random topics, so if we are heading in the same direction, we walk together for a few minutes. On this particular morning, she was quizzing me about the semester I spent in the United Kingdom as an undergraduate. I answered all her questions and told her my stories, reliving one of the more enjoyable experiences of my youth.

Then she asked a follow up question, “Do you think you will ever go back to England?”

My answer was a bit complex, but honest. My wife and I do want to return to the United Kingdom and the Republic of Ireland, but planning such an adventure seems a bit more complex than it did 45 years ago. I don’t really enjoy driving all that much anymore. I would be up for a high end package tour offering a bus to carry me from a three or four star hotel to castles, cathedrals, or concerts and back again, but my wife doesn’t enjoy living on a schedule. She rather sleep, eat, and tour when and where the spirit moves her.

Then I had one of those moments of realization. I told my walking companion, “When we are young our excuse is, “I don’t have enough money.” When we are middle aged we say, “I don’t have the time.” When we are old, we tell ourselves that, “I don’t have the health or the energy to live out my dreams.” She was in total agreement with my observation.

Writing this post is hard as it is causing me to relive a variety of failures, disappointments, and regrets. Take a trivial example. I always want to ride a motorcycle. While my parents had control of my life, this was absolutely forbidden with an irrational level of hysteria. Well, to be fair, I was an only child and my father lost a friend in a motorcycle accident. When I was first out on my own, I didn’t have enough discretionary income to buy a motorcycle. A couple of years later, taking on the responsibilities of marriage certainly did not increase my financial flexibility. There was a point in time when I could easily afford to buy a late model used motorcycle, but I really didn’t have the time or an opportunity to learn this kind of skill. I was working full time, going to night school, attending church, practicing Tai Chi, and I was still married. It didn’t happen. Now at age 66, I question my vision, reflexes, and what my injured lower back might think about a motorcycle saddle. Now all I have is a regret, not a serious regret, but when I watch my neighbors riding off on Sunday mornings on their Harleys and their Hondas, I sigh.

There are times when it is better to listen to your dreams instead of your excuses. Balancing duty and obligations to others with your dreams of self actualization isn’t always easy, but then who ever said becoming an adult would be easy.

Even when you do it right, it won’t be perfect, but don’t fail to give life your best shot.

I didn’t have the time to go back to engineering school, so I made time. I dropped out of the workforce for the better part of three years. We had savings. My wife had a job. After the dean saw that I was a serious student, he saw to it that I had a partial scholarship and later, a work study grant. I never had to borrow a dime. While earning my MS in night school, my employer paid for everything but the books. It seems that if you are heading in the right direction, the universe will sometimes decide to help you along.

The universe never helped me buy a motorcycle or teach me how to ride, but then I never made the commitment to learn even at the cost of a collision with a Buick. I wasn’t raised to take physical risks. I was also raised to worship at the altar of higher education. Maybe it was never meant to be, but then the results of my life, given my programming, seem, at least somewhat predictable.

Be honest with yourself. What excuses are stopping you from taking the next step towards a better life? Can you find a way to maintain your personal integrity, fulfilling your oaths and obligations to others, while stepping out into a future that could be better than anything you could even imagine?

Take a baby step toward your dream. See if the universe answers. Do it today.

A Little Ditty About Expectation and Reality

Happiness has been defined as the ratio of reality divided by your expectations. If life turns out better than you expected, you are happier than if your life proved to be a disappointment.

Consider: If a young man grows up in some sinkhole of rural poverty where none of his relatives ever held a permanent full time job, his expectations and those of his family would be pretty low. If this individual opens and operates a successful motorcycle repair and customizing shop in a nearby city, not only would he be excited by his success, but his family would likely consider him a jewel. If a young man who was the son of a famous New York City heart surgeon, dropped out of high school to learn how to paint skulls on motorcycle fuel tanks, his mother would most likely require years of psychiatric counseling and he certainly wouldn’t be welcome at family events.

It’s tricky this interplay between expectation and reality. If we set our expectations too low, it is pretty much a certainty we will never achieve all that we could become. If we have unrealistic expectations, we are setting ourselves up for unhappiness and disappointment. Although this is a personal finance blog, this problem appears in every aspect of life.

People who believe they can never get ahead of the repo-man are likely to remain in poverty, because they will be unwilling to take actions necessary to break out of the debt trap. The problem is complicated by not only their expectations, but the expectations of their friends and family.

I suspect that one of the reasons that 78% of all professional football players are bankrupt or in financial distress within two years of retirement is a deep seated unconscious belief that they can’t become rich or they don’t deserve to be rich. The average NFL player earns $1.9 million a year. If this player has a five year career about $10 million might pass through his hands. If he could manage to hold onto $5 million, an unimaginative group of index funds could assure his family of a $200,000 a year income for decades if not in perpetuity! While that salary won’t put you in the 1%, it will put you in the top 5%, not too shabby, especially in an area of the country with a low cost of living.

We all seem to have some spot in our lives where we limit our own ability to succeed or enjoy happiness by self limiting beliefs, fear of what others will say about us, or simple self sabotage to avoid the effort and risk involved in any attempt at self improvement.

What if I fail?

All too frequently, I hear highly intelligent, sophisticated individuals with two or three college degrees tell me they can’t learn the basics of investing their money. Usually these statements of personal inadequacy are accompanied with rapid negative shakes of the hands and head. “I just can’t think that way.”

Really, not much thought is required. Automatic deposits to a target date fund appropriate for your age will put you so far ahead of most of your peers, that at age 65 you won’t even be able to see them in your rearview mirror.

However if you believe money is evil, your subconscious or even your conscious mind might decide it doesn’t want to bring evil into your life.

If you believe that getting ahead is a form of treason to your family and friends, chances are you won’t go back and get your GED.

What’s holding you back? No matter where we are in life, we can do better in some dimension of what it means to be a self actualized human being. Listen to the words you are telling yourself when you start to dream about something better. If you hear words of discouragement and fear, perhaps there is a problem that can be addressed by a change in your expectations.

Could a little rise in your expectations change your behavior?

Could a change in your behavior change your reality?

The Rehab Song

“They tried to make me go to rehab,
I said, no, no, no.”
Amy Winehouse,

I consider Amy Winehouse the greatest female jazz singer of her generation, a talent that deserves to be mentioned in the same breath with the likes of Ella Fitzgerald and Billie Holiday. If Amy went to rehab, the world would be richer happier place, but I don’t want to talk about that kind of rehab.

First, let’s talk about physical and occupational rehab. It is painful, difficult and unfair. Having observed our parents growing old, I have noted that both physical and occupational rehab therapists tend to be young, strong, and healthy, yet they are allowed to torture helpless old people. Does that seem fair? My mother-in-law didn’t think so. Once, while complaining about the sadist who was making her life miserable, I introduced her to Amy’s rehab song. My mother-in-law loved it and sang it every time the doctors sent her from the hospital to the rehab facility. But when the doctor prescribes physical and occupational therapy, someone has to ask the question, “Do I want to spend the rest of my life in a wheelchair or do I want to be able to walk?”

Over the years, I have noticed a frequent criticism leveled against personal finance authors falls under the category that I would describe as the, “Easy for you to say,” critique. Yes, even humble writers of anonymous personal finance blogs have probably reached financial freedom or are well on their way to that goal. Some of the celebrities in the field are rich by any standard. Dave Ramsey has a net worth of $55 million. Suze Orman rings the bell at $35 million. Is it fair for these people to tell the poor they have to do a better job living on a budget? But when Dave Ramsey offers a listener a free pass to attend one of his classes, someone has to ask the question, “Do I want to spend the rest of my life in the projects, or do I want to at least try to find financial freedom?”

In retirement, I am making an attempt to lose weight, become stronger, and live a healthier lifestyle. It isn’t easy. I am 66 years old and still overweight after four years of walking on an almost daily basis. I still have a heart arrhythmia and arthritis in both my knees. I also have an old back injury that I have discovered limits me to walking 5 days a week, max. In the past when I reached a wall in some kind of physical activity, I quit. This time, I consulted with a health science professor who suggested a change in direction. He still wants me to walk, but I have added working out on weight machines three times a week and attending a Yoga for old people class once a week. He also recommended swimming, but my first attempts were halted by water that I couldn’t get out of my ears. I purchased some ear plugs and a bottle of Instant Ear Dry, but they remain unused.

I realized that for the first time, I was applying the same kind of strategy to physical fitness that I instinctively used in a different kind of fiscal therapy and occupation therapy, rehab that involves money. When I discovered we were spending more than we were earning, we changed our fiscal behavior. When I decided I wanted to earn more money, I went back to school—twice. Finally, when it was apparent that I wasn’t going any higher in my choose profession, I started learning about investments. Every time I hit the wall, I changed directions. I didn’t give up.

Driving a 1966 VW bug without air conditioning in Washington D.C. summers for eight years wasn’t any fun, but it did allow me to pay off a 30 year mortgage in 9.5 years. I haven’t lost any weight since I started pumping iron four months ago. I don’t think I look any better, but I can see the numbers are going up, both the amount I am lifting and the total number of lifts per practice session.

If you are in need of fiscal or occupational therapy, go to the library or the Internet, find a professional who will suggest an exercise program for your bank account. Don’t expect it to be easy or fun. It will likely be painful. It will likely take some time before you start seeing any results. But if you persist in doing the right thing, your situation will improve.

You’re already in fiscal pain, at least make that pain meaningful.

Just one more set of ten lifts of that monthly budget!

Do you think that insurance companies would pay for physical therapy or occupational therapy if it didn’t work?

Please, Don't Do That!

Rich Duprey of the Motley Fool is concerned that you might lose all your money in the stock market. That is possible, but unlikely unless you make a series of really bad mistakes. I thought it might be worthwhile to reflect upon and expand on the scope of his article.

He starts with day trading, a really bad idea. Anything that provides its victim with a random periodic reward is a surefire setup to waste time and/or money until it is all gone. Casino slot machines are programmed using data from psychological experiments to keep you sitting there for hours until you are broke. You give me a dollar. I give you 90 cents; repeat process until all your dollars are gone. Facebook wastes your time using the same principle. You post something, then you check back 100 times over the next seven or eight hours hoping that someone likes or even loves your post. Facebook has only one product, you. Their goal is to keep your eyes on the page long enough that you will be tempted to click on an advertisement or a page from one of their real customers who are paying them money to study you and then to trap you.

There is a way to become a trader. It isn’t for me, but there are people who do a very good job making a living using the statistical science called technical analysis. If you have ice water flowing through your veins, the mind of a computer, and a heart of stone, this might be your game. Think about poker. It is a game of skill. Even a master can’t win without the cards, but I’m sure you have noticed the same faces have a habit of reappearing around the final table come championship time. One of my young former coworkers is a very skilled poker player. He understands statistics and probability. He has studied the game and maintained a journal detailing every game he plays. He records what he did, why he did it, and the results. Trading stocks or betting on cards based on your intuition or emotions of the moment is a very bad idea.

Next Duprey mentions penny stocks, one of those schemes that are so idiotic I forget that they even exist. Penny stocks are shares in worthless little companies. Think about it. If the market values shares in a company’s stock at 5 cents, more than likely there is a reason. These shares go up and down very quickly. After all, a 5 cent move could double your money—or leave you broke. Most of these wild little stories return to their true value—zero. Even established stocks with a wild story, like a Canadian gold mining stock I purchased before the price of gold went on a rampage, have a habit of falling back to earth with a thud. After a wild ride, I lost money, but it was a real company so I didn’t lose all that much money.

While I don’t believe in the efficient market hypothesis as proposed by Modern Portfolio Theory is correct at any and every moment in time, it is certainly true over time. Consider, the market had a pretty high opinion of Enron, until the facts came out. Then the market changed its mind. However, once the market gets the facts, it will become pretty efficient, pretty quickly, pricing those facts into the selling price of the stock. Do you think you are in possession of some secret insider information that people like Carl Icon or Warren Buffett can’t ferret out using an army of research assistants with Harvard MBA degrees? Good luck with that.

Finally, the author denounces margin. Yes, borrowing money to bet on the stock market can make a lot of money in a short time, but if the trade goes wrong, the margin call can clean out your account, leaving you with nothing. At least using margin is better than gambling with Tony Soprano’s money. You won’t need to worry about his leg breakers visiting you in the night.

Here are some more thoughts on ways to lose a substantial amount of money in the market that I believe are more common occurrences than the three horribles reviewed by Rich Duprey.

In my experience, everyone is hoping that they can find that one hot tip that will buy them a beachside condo in Maui where they can live happily ever after, soaking in a hot tub in paradise whilst sipping a Mai Tai. If someone you know is privy to that kind of information, why is he living in a mortgaged home and driving a car that carries a note, just like you. If you happen to be a waitress at a high end restaurant on Wall Street, keep your ears open, but don’t expect anyone to share that kind of information with a waitress. If your unemployed bother in law is convinced he has the inside track on the next big thing, thank him for sharing the opportunity, but don’t give any of your money.

A story that I hear way too often concerns the enthusiastic employee who loves his company. Often rapidly growing young companies contribute shares in the company rather than dollars to their employee 401(k) accounts. Over time, these shares can grow until they constitute a very large percentage of the employee’s total net worth. If the unthinkable happens, one bad day can wipe out 15 years of savings. When this happens, layoffs are sure to follow. An employee can lose most of their money and their job in a matter of months. Diversify. Even 10% of your net worth in a single company can prove dangerous.

I love the energy sector and I have made money investing in that kind of company. I have also lost money in that sector when I had too much in gas, oil, coal, regulated utilities and pipelines when the market for commodities went south. Overall I have done well even in bad times, but I need to pay attention to my portfolio. When the price of oil drops, so did the value of shares I hold in an oil exploration company, one of my unhappy stories. The entire nation if not the entire world suffered from an overexposure to technology stocks during the dotcom crash of 2000-2002. I remember one of my coworkers, a successful investor, who helped me when I was first learning about the market, telling me, “This time it is different.” He had way too much invested in NASDAQ companies. If he had 10% or even 20% of his net worth in dotcom companies, he would have been hurt, but his life wouldn’t have been affected all that much. Instead he took a bad beat down. I don’t know if he ever recovered. Don’t put too much money in one sector. Buying shares in Exxon, Chevron, and Royal Dutch Shell does not constitute a diversified portfolio.

P.S. Later I learned that, “This time it is different,” are the five most dangerous words an investor can hear. The next time, and there will be a next time, someone speaks those words, run away.

I don’t personally know anyone who got in trouble putting too much money into the market at one time, but systemic risk is real. If you happen to get an inheritance or win the lottery someday, don’t invest it all at one time. It might be October 1929. Most normal people are de facto dollar cost averaging investors, putting a fixed amount or percentage of their income into their 401(k) every month or small regular investments into their taxable accounts over decades. This is safer. It is hard to predict when the business cycle will turn, but be assured bust will follow boom as surely as boom will follow bust.

The most serious and frequent mistake I have seen, is getting out at the bottom. In 2008 I saw way too many highly intelligent successful men sell out at the bottom, locking in their losses—forever. If they had a balanced portfolio containing stocks, bonds, and cash, they could have bought more shares at the bottom in early 2009, a time when a blind monkey with a handful of darts could make money by throwing them at names of companies listed on a dartboard. There is a flipside to this mistake, getting in at the top. That happened in 1999 when the dotcoms and the technology stocks went wild.

I believe that all these mistakes have something in common. They all involve some combination of greed, fear, and delusion. Any time you find yourself riding one of those horses, stop before making a decision. Take a deep breath. Clear your mind. Try to become a dispassionate objective observer of your own life. If you were watching a movie or a TV show how would a wise man or woman proceed?

Keep It Simple Stupid (KISS) is frequently good advice. If you are a doctor earning $315,000 a year, you are in the 1%. Congratulations, you are most likely the smartest woman in the room, but that doesn’t mean you know anything about investments. If you believe you can find a magic shortcut to riches that has never occurred to the rest of the market, you are delusional. Start with target date funds, an age appropriate mix of low cost index funds. If you have spent some time studying the classics and some trustworthy web sites, don’t be afraid to buy small amounts of reasonably safe stocks that have a long track record of paying dividends. From time to time, when the price is right, Warren Buffett buys shares in Coca Cola. He never sells Coke.

KISS is also good advice for the rich and the famous who believe they are bulletproof. Tony Dorsett, Heisman Trophy winner, rookie of the year, frequent all pro and, a hall of fame running back, decided he could play the game of oil futures with the likes of J.R. Ewing. This nefarious TV wheeler dealer was actually a composite of real Texas oilmen. Tony almost went bankrupt.

Greed and fear are sneaky emotions. I have discovered that the poor can become greedier than the rich and that the rich man can become more fearful than the poor man. Don’t believe for a minute that your judgment can’t be clouded by these emotions. They are always there, inside all of us, waiting. I have seen fear cause the rich to live as though they were poor, becoming servants to their money rather than the master of their money. Too often greed fueled by envy lead the poor into actions that will end in prison or death. Look at the list of mistakes enumerated in this article. How many of them involve either fear or greed?

Hear some all purpose advice from King Solomon, the wisest man in the Scriptures.

Proverbs 28:20-22
A faithful man shall abound with blessings: but he that maketh haste to be rich shall not be innocent.

Proverbs 14:31
Whoever oppresses the poor shows contempt for their Maker, but whoever is kind to the needy honors God.

Proverbs 6:6-8
Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler,yet it stores its provisions in summer and gathers its food at harvest.

Proverbs 30:8-9
Remove far from me falsehood and lying; give me neither poverty nor riches; feed me with the food that is needful for me, lest I be full and deny you and say, “Who is the LORD?” or lest I be poor and steal and profane the name of my God.

Proverbs 23:4-5
Do not wear yourself out to get rich; do not trust your own cleverness. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle.