Wednesday, September 27, 2017

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Electric Power Authority filed for bankruptcy on July 2, reporting it would need more than $4 billion to upgrade its outdated power plants that rely on imported oil (Washington Post).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.

Monday, September 25, 2017

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 na├»ve 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.

Sunday, September 17, 2017

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.

Thursday, September 14, 2017

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….

Friday, August 25, 2017

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.

Tuesday, August 22, 2017

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.

Saturday, August 19, 2017

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.

Thursday, August 3, 2017

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.

Saturday, July 8, 2017

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.

Sunday, July 2, 2017

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.

Friday, June 16, 2017

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.

Thursday, June 15, 2017

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?

Wednesday, June 7, 2017

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?

Wednesday, May 31, 2017

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.

Saturday, May 27, 2017

The Rest of My Life

The realization came to me in a two step process. One morning last week, I was listening to a pretty good compilation of bits and pieces from various motivational speeches as I drank my morning coffee. One of the speakers was berating his audience for wasting time, your most precious resource. Warren Buffet may have $74 billion more than me, but we both have exactly the same number of hours in a day.

What do I choose to do with my 24 hours? What does Warren Buffet do with his 24 hours?

After my morning exercise routine, I frequently engage in a little channel surfing while lounging on the sofa for 30 minutes or more, before fixing something for lunch. On that fateful day, I found the movie, Van Helsing, on an obscure cable channel. As I watched the hero take down a monstrous Mr. Hyde whilst simultaneously trashing the Notre Dame Cathedral, I heard the words of the speaker, “Are you lying there watching the same bad movie for the fourth time?”

“Well, yes and no, sort of,” I confessed to the universe that, while I never watched the entire movie, I have certainly seen parts of it four times or more. Shortly after this epiphany, it occurred to me that I currently have a rare opportunity, a chance to decide what to do with the rest of my life. As we become adults, the answer to the question, “What do I want to be when I grow up?” begins to answer itself as we choose a college, a career, a job, and a spouse.

Responsible or irresponsible, adults live with the consequences of their decisions.

Once in a while we are given an ultimatum by the universe, “Change directions. Now!” The last such chance presented itself after I lost my job in the recession of 1982. I decided I didn’t want to spend the rest of my life on a factory floor, so I went back to school and earned a degree in mechanical engineering. Of course, once we make one of those momentous life decisions, we have the option of veering this way or that along our chosen path, as opportunities present themselves or disappear in a puff of disappointment.

As planned, I made it to retirement. I moved to a new location where it is warmer, less expensive, and more relaxed than Washington D.C. I made it through the family emergency—and now—I get to answer the question, “What do you want to do with the rest of your life?”

It seems that health and fitness have already become an important part of my post-retirement life. I am still writing, although not every day. I need to do better. Now that I no longer have a full time job, I guess I am an investor, for real. We are planning our next big vacation. I could go on, but….

Although I don’t feel called to a delayed vocation as a vampire hunter, there is more.

For me, for you, there is more, there is so much more.

Thursday, May 25, 2017

Breakfast at the Ritz

There are different kinds of property. First of all, there are things you own that don’t generate any income. For the sake of this discussion, let’s assume that you don’t owe any money on the pots and pans in your kitchen. When you aren’t using them, they just sit there. It doesn’t cost you anything to own them and they aren’t producing any income. Cars and cell phones are another kind of possession. Again, assuming you paid cash (Ha!) you own them, but they are taking money out of your pocket on a regular basis. Unless they are an unavoidable business expense, they don’t contribute to your wealth. On the other hand, you can buy something that pays you to own it. For most Americans, this would be stocks and bonds or rental properties.

Banks make money by loaning out more money than they have on deposit at higher interest rates than they pay their depositors. They want you to borrow money to buy things you don’t need with money you don’t have to impress people you don’t know. Corporations that produce cell phones, televisions, cars, or houses want to separate you from your money. Bayerische Motoren Werke AG wants your money more than it wants that 540i sitting on the showroom floor at your local dealership. If the BMW dealer can get you to borrow money to buy the 540i, or better yet, convince you to take out a lease that generates a constant income stream and ultimately leaves him with a low mileage late model car to sell to someone else, he has discovered the goose that lays golden eggs. All corporate media outlets, marketing organizations, and advertising agencies become wealthy by stealing your time from productive endeavors, lulling you into a pleasant stupor of inactivity sponsored by financial institutions and corporations who want your money. Politicians want to keep you in a state of constant agitation and continued ignorance, so they can control your behavior, limit your freedom, and take your money.

The World System, The Big Green Machine, doesn’t exist to protect you or promote your interests. Every time you make a financial decision, you are heading in one of two directions. You are either on you way to becoming an owner, someone who owns things that generate an income or increase in value, or you are becoming—someone’s property. You are either on the road to freedom or to slavery. Think about it. If you don’t own your own labor, you are not free. If a creditor has a prior claim on the fruits of your labor, you don’t own your own labor.

The Bible says, “The rich rule over the poor and debtor is slave to the lender.”

You have a choice to make. The power is in your hands.

As I thought about writing this post, I remembered back to the first time I ever bought shares in an individual corporation, Exxon. I don’t remember the exact numbers, but at the time we didn’t own a house or have any debts. We may have had something like $4,000 in the bank and another $500 in a crappy mutual fund. At the time I didn’t know that $4,000 was our emergency fund. I plucked down maybe $1,000 or a bit more to get into the game. I remember the feeling I had every time a quarterly dividend check arrived in the mail. It was enough to make me fantasize about reading the Wall Street Journal while smoking a big cigar and drinking a fine cup of coffee after enjoying breakfast at the Ritz.

Ultimately Exxon helped put me through engineering school. That money is long gone. I have never subscribed to the Wall Street Journal. I don’t smoke cigars, but once we got a real good deal on a Hawaiian vacation package that included breakfast at the Ritz Carlton Kapalua Bay. By the way, that five star resort serves an excellent breakfast.

If your employer offers a 401(k) you can start out on the road to becoming an owner before you have a spare $1,000 to open your first brokerage account. The sooner you convince yourself that it is better to buy assets that grow and pay you to own them than it is to own depreciating assets that drain money from your pockets, the sooner you will find financial freedom.

Wednesday, May 17, 2017

It's Your Nest Egg

Something is happening out there. When I see an unusual editorial position in the financial press twice in two days from two different sources, I have to ask, “Why?” I don’t have an answer to that question, but I do want to bring it to your attention.

For those of you who are new to the blog, let me tell you about the 4% rule, an almost universally accepted method of spending down your nest egg in retirement.

Here is how it works. Add up all your savings and investments. Multiply that number by 4% for the first year of retirement. Then adjust it for inflation every year thereafter. If your nest egg consists of 50% bonds and 50% stocks, there is a 98% chance you will not outlive your money, assuming that you live for 30 years after the date of your retirement.

Example: You have a total of $1,000,000 in your 401(k), Roth IRA, bank accounts, and taxable brokerage account.

In the first year of retirement, you can withdraw and spend $1,000,000 X 0.04 which equals $40,000.

Let’s say inflation for that year was 3%. That means in year two you can withdraw $40,000 X 1.03 which equals $41,200.

This calculation, backed by numerous peer reviewed studies, approaches an article of religious faith in the personal finance community.

Yet yesterday, Bloomberg reports that “Rich Retirees are Hoarding Cash out of Fear.”

Well, since I no longer have a job to replace any savings I spend on an E Class Mercedes or lose in a market crash, I would think I need to be a bit cautious. If the market continues to go up as I grow older, obviously I will have more money to spend in less time, but what if the market goes down as fast as the cost of living increases? Then what? This is exactly what happened in the 1970s.

The author, Ben Steveman, tries to make the case that the money the Baby Boom saved for retirement is somehow preventing younger Americans from saving any money.

Huh?

He goes on to encourage me to buy a second home and an expensive car. I do plan on buying a reasonably expensive car when it is time to retire my 2010 Acura TSX, but given the way I buy a car, that isn’t going to happen anytime soon. He believes that after a lifetime of thrift, someone needs to train me how to spend more on luxuries. He would be happy to learn that my wife and I are planning a Mediterranean cruise, but how that is going to put more money in the retirement accounts of the thirty somethings is beyond my comprehension.

For today’s entertainment Charles Schwab offers an article entitled “Beyond the 4% Rule: How Much Can You Safely Spend in Retirement” by Cooper Howard and Rob Williams. The authors go through all the assumptions that underlie the 4% rule that have been reported ad nauseam in this blog and innumerable other publications, assuring us they are just assumptions. What if your life doesn’t end up fitting the assumptions? Then what? You could have taken more risk with your money.

Then your next car might be an S Class Mercedes instead of some trifling $60,000 midsized sedan.

The authors offer a tool to help you guess the date of your appointment with our Lord, in the hope that you can convince yourself to spend more money and take greater risks with your investments.

Check it out!

Actuaries Longevity Illustrator

The authors believe that a 98% confidence level is too high. They think a 75% to 90% confidence level is more appropriate. They conclude that, “75% provides a reasonable confidence level between overspending and underspending.”

If I come up snake eyes at age 85, will the authors support me at my then current spending level for the rest of my life, or will I become totally dependent on the taxes of those young people mentioned earlier in Bloomberg article?

Personally, I would prefer to underspend and leave the balance to my heirs and favorite charities rather than becoming a burden on society.

The questions remain, “Why would the financial press suddenly change direction after hectoring us Baby Boomers to save more money over the last two decades or more? What’s in it for them?”

If you are unfamiliar with the 4% Rule, the Schwab article does provide a pretty good introduction to the assumptions contained in this method of estimating a safe spending rate in retirement. While I think a 75% confidence level is way too low, their suggested allocations and withdrawal rate chart is really not all that out of line with my opinions.

Beyond the 4% Rule

Friday, April 28, 2017

Diversified? Yes or No?

In the April edition of a newsletter written by Mathew Young, the author brings up an interesting point about achieving diversification through the use of low cost index funds, as championed by proponents of Modern Portfolio Theory (MPT) such as John Bogle, founder of Vanguard funds. While this method is undoubtedly the best way for the average investor to put their retirement savings on automatic pilot, it contains hidden dangers.

In previous articles, I have discussed the criticisms of Benoit Mandelbrot and Nassim Taleb, who have pointed out that MPT makes the assumption that market performance can be described as a normal distribution when, in fact, the actual data produces thicker tails than are found in a Gaussian distribution. This means the market is a more dangerous place than explained by MPT.

From my understanding, the problem comes down to what data to include and what data to exclude. This question can cause violent disagreements between rational engineers. If all the other 200 data points on a graph lie along a nice straight line, what caused the one point that is way off by itself? If a sleepy junior engineer working the night shift forgot to take his zeroes before making a run, the point should be discarded, but if the cause is unknown, it might be an actual system instability that appears under rare conditions that we don’t understand. In this case, not only should the point be included, but additional testing will be recommended to the sponsoring organization.

When this question occurred in financial decision making, hedge fund programmers using accepted statistical methodology made assumptions that, while mathematically correct, made no sense outside of academia. While an occurrence can be calculated as a once in 2,000 year event based on 50 years of data, trusting this result with real money in the real world is just the kind of madness that led to the crash of 2008. This story is examined in exhaustive and exhausting detail in The Plight of the Fortune Tellers by Riccardo Rebonato, an outstanding though difficult read.

Young notes that many investors choose to buy shares in an S&P 500 index fund that mimics the value of the 500 largest corporations on the New York Stock Exchange or NASDAQ. Sounds good? Well, Young points out that market value weighting factors used in the S&P 500 put 22% of your money in technology stocks, one of the most unstable sectors in the economy. Also technology stocks are notorious for paying small dividends. Over the course of many years, you can expect about ½ of the growth of your investments to come from the compounding power of dividends. Do you really want 22% of your money in one sector that doesn’t pay a good dividend? Young points out that Apple accounts for 3.65% of the S&P 500, an amount equal to the 100 smallest constituents in the index.

Remember what happened in the Dotcom bust in 2000. Companies such as the FANG stocks (Facebook, Apple, Netflix, and Google) that went up very fast in 2015, can also come down just as fast. The average price earnings ratio for the S&P 500 over the last 130 odd years is 16. Currently the FANG stocks have a price earnings ratio of 61.

Even if you are buying mutual funds rather than shares in individual stocks, it is still worth your effort to know what you are buying. Normally a quick Internet search will list at least the top 10 positions in a mutual fund. For example Vanguard Wellington, (VWELX) a managed fund that I have purchased for my own portfolio, lists the top ten positions as Microsoft, JP Morgan Chase, Chevron, Intel Corp, Wells Fargo, Alphabet Inc, Bank of America, Comcast, Chubb, and Merck. If this was my only holding, I would be worried about an overexposure to money center banks.

Wellington, my TSP-C Fund, as well as my personal holdings, all feature Chevron.

So, “Am I diversified?” is not always an easy question to answer.

An example of the holdings of a Vanguard Target Fund appropriate for someone around the age of 40:

Vanguard Total Stock Market Index Fund Investor Shares51.9%
Vanguard Total International Stock Index Fund Investor Shares35.0%
Vanguard Total Bond Market II Index Fund Investor Shares9.2%
Vanguard Total International Bond Index Fund Investor Shares3.9%

Thursday, April 27, 2017

Qui Cum Canibus Concumbunt Cum Pulicibus Surgent

In attempting to help others find their own path to financial freedom, I was surprised to learn just how important the company you keep is to the outcome of your life. Are the people in your life inspiring you, encouraging you, pushing you in a better direction or are they holding you down, keeping you trapped in a place where they are comfortable?

Walking the Swamp Rabbit Trail I have met a lot of people, who like me, are attempting to become a healthier person through regular exercise. These three examples all happened in just the last couple of weeks. I was cheered on by three members of the Furman women’s track team. A man in his late twenties with a body of chiseled steel told me that he found my presence on the trail in all kinds of weather an inspiration. A middle aged woman training for a half marathon slowed down long enough to get to know me better and encourage to keep fighting the good fight.

There are times when I am inclined to believe that anything moving slower than me is probably a rock, but even this old man with his arthritic knees has had the opportunity to encourage other retirees who are just starting an exercise program or are walking to recover from surgery or some kind of physical malady.

Any time you make a serious effort to better your life, some of your companions will become uncomfortable. They will tell you all the reasons you shouldn’t try and all the reasons your efforts will surely fail. The truth is they don’t want you succeed, because if you do, they will feel inferior.

When I first became serious about investing for retirement, a number of people told me the game was rigged against the little guy. They told me I would lose all my money. The fact is they were unwilling to make the effort to learn how to transform their above average salaries into an above average net worth. Some of these people slowly faded out of my life. Over time I met coworkers who knew more than I knew about the stock market and I started reading books by the masters. I began to share what I was learning with others. The more experienced encouraged me while trying to steer me away from potential mistakes. Eventually, I found that some folks were seeking out my counsel in an attempt to get far enough up the learning curve to feel comfortable taking some calculated risks with their money.

Like losing weight, increasing net worth is hard work. I have lost about 40 pounds over the last four years, but that required a lot of hours spent hoofing it up and down the Swamp Rabbit Trail. The stretch run to retirement took me about 10 years of concentrated, focused effort, but in that time I increased my liquid (excluding my house) net worth by something in the neighborhood of 700%. During that time I was slammed by the crash of 2008, just like everyone else. The fact is that in good times and especially in bad times, I need the support, encouragement, and yes, even the occasional kick in the pants from others to keep on keeping on.

Look at the people in your life. If you need someone to help you move up, I firmly believe in the old Chinese adage, “When the student is ready, the teacher shall appear.” Then your hard work can become smart work. It won’t happen automatically, but a chance encounter here and there with the right person at the right time led me to a better life. I am nothing special. If it worked for me, it can work for you.

P.S. In this post I have focused on positive possibilities that can change your life for the better, but remember:
"He that lieth down with dogs shall rise up with fleas"
Source unknown

Monday, April 24, 2017

The TED Talk Test

The other day in a private conversation, I was annoyed to realize that I was enjoying retirement so much that, to be honest, I was unwilling to make the big investment of time and energy necessary to move this blog from a part time ministry to a full time commercial product. I am certainly more knowledgeable than when I started the Silver Eagle Experiment and my writing skills have improved over the last nine years. I don’t expect any change in those trends, but when will I ready to try and jump to another level? Leaping into the unknown is always pretty scary unless a hungry bear is getting close to your leg. I felt that way when I left the saw chain factory for engineering school.

I jumped and never looked back.

While considering this conundrum, I came up with an interesting thought experiment. Let’s say you are given the opportunity to present a TED Talk. If you spend much time on the Internet, you have probably listened to at least one of these lectures. TED started as a conference presenting 18 minute lectures by people with amazing, inspired new ideas in the fields of Technology, Entertainment, and Design to an audience of movers and shakers. The presenters were not only given an opportunity to share their life’s work, but also a chance to begin to build a network of well positioned patrons and allies who could provide fuel for their passions.

Here is the deal.

You will be given the opportunity to present an eighteen minute lecture on any subject you consider important to an audience of 200 or 300 men and women of your choosing. They could be venture capitalists with hundreds of millions of dollars looking to invest in new products or services. They could be the managers and owners of publishing houses or broadcasting companies looking for new books to publish, movie scripts to produce, or ideas for TV shows. They could be powerful politicians and the donors who fund their campaigns. Your choice, but you only get one shot at the big time.

There is another bonus if you are successful. The best TED talks get millions of hits on YouTube and other services. You will not only have instant name recognition, but your dream will be granted Internet legitimacy.

Eighteen minutes is somewhere between 2,500 and 3,000 words depending on how fast you talk. I don’t even know what I would say that would differentiate what I am trying to do from a hundred others, some household names who have sold books and courses in the hundreds of thousands and others, who are anonymous bloggers just like me. Let’s say that at some point I have the words. Then I would have to practice in private until I had the speech just about memorized. After that I would have to experiment with live audiences to perfect timing and delivery. If I had spent years learning the art of public speaking, it wouldn’t take as long, but it would still represent a major effort for anyone.

David didn’t hit Goliath with the first stone he ever placed in a sling. From having been a small boy who owned a sling, I expect that David’s major source of entertainment out in the sheep field was learning how to throw stones with that weapon. Unlike me, I expect he was also learning how to sing psalms and play the psaltery to avoid going mad with boredom. I could hurl a rock an enormous distance with my sling, but where it would land was anybody’s guess. A champion slinger could hit a target the size of Goliath’s head, at least most of the time. I saw this demonstrated on cable TV. I believe God put the rock between Goliath’s eyes, but I also believe that David’s skill is what landed that rock on the Giant’s head.

What would it take me or you to care about something so passionately that we would make the kind of effort it takes to jump whatever you are dreaming about to the next level? What kind of things would we do that others might find a bit crazy, because we cared so much we couldn’t help ourselves from trying just a little harder?

I heard a successful televangelist talk about the first days of his ministry. Once he rented a room and no one came to hear him speak. He went ahead and delivered his sermon to the empty room, in the belief that God had told him to do it and if no one else was listening, at least God heard it. I might question this man’s theology, but who can gainsay his determination?

Will I be ready to deliver my TED Talk when the opportunity presents itself? If I haven’t delivered it to a lot of empty rooms and at least 20 or so small audiences, I would expect the answer would be, “No.”

Sunday, April 23, 2017

Add Some Passion to Your Dream

Something rather unusual happened the other day. For the first time since I retired, I had the opportunity to throw some “new money” into the market.

Since I retired a little over four years ago, during most months we have lived on our renewable income and the mortgage payment we receive from the owner financed sale of our house in Maryland. In our case, renewable would be my wife’s early Social Security and my FERS pension. This has been enough to cover everything but extraordinary expenses such as repairs to the old house before the sale, the cost of moving to the new house, certain large tax bills, and that first-class vacation to Hawaii. On those occasions we dipped into our savings. After all, that is why we saved for retirement.

As an aside, let me add that when and how to take Social Security is a rather complicated question that requires an individual analysis before rolling the dice. First of all, you will have to guess how long you will live. If you take early Social Security at age 62 and die before roughly age 78, you win. If you wait until full retirement age, in my case 66, and die before 78, you lose. If you can wait until age 70, you can collect your maximum benefit. If you have longevity in your family, you might want to wait.

Or not!

The rules change all the time. In our case, we were able to flip my wife’s individual benefit to a higher spousal benefit at the time I started my Social Security at full retirement age. I had planned this maneuver with the understanding the rules might change before I reached 66. Then there is the question of necessity. If you are 62 and are unemployed, you might want to go ahead and take Social Security even if you believe you will live to 90.

After receiving my first three Social Security payments, I realized that my checkbook balance was higher than expected, as we were still living on renewable income and that monthly mortgage check. For the first time in more than four years, I had some new money. It reminded me of the years spent in the stretch run to retirement. I wanted to retire at the earliest possible date. Baring a winning lottery ticket, that would be the day after my 62nd birthday, the first day I could retire without a pension penalty. I remember how exciting it was to watch my version of a 401(k) growing with every paycheck. I was even more passionate about my self directed, after tax investments. When the balance went up in the checkbook, I would move some of that money up to our money market fund. I would tell myself stories about money that only moved in one direction—up, first from checkbook to savings, then from savings to investments in the stock market. This was almost always true except when we needed to buy a new car. Then money would move down from savings into the checkbook and off to the car dealer.

I was emotionally involved in my dream. I wanted to achieve my goal of early retirement so badly I could taste it. Think about times in your life when you were able to fuel a fantasy with your emotions. I expect this happened somewhere along the way to your wedding. It also happened to me when I was in engineering school. After nine years, I so wanted to get off the factory floor, that my academic efforts were fueled with passion.

Revisiting the memory of that feeling for even just a moment, as I purchased a small amount of a somewhat speculative stock, reminded me of how important passion can be in helping us to achieve our goals, but how to turn it on when we need it?

It seems like others are better able to hit our happy buttons for their benefit than we are able to tap into our emotional reserves for our own benefit. Last week I received a “private invitation” to experience a test drive in the new Alfa Romeo Giulia or Giulia Quadrifoglio, just the kind of car I would like to own some day. My wife had fun teasing me about this advertisement as she knows that although I am a logical researcher who reads Consumer Reports, a little passion will help in separating me from our money when visiting a car dealer.

If advertisers, marketers, politicians, and preachers know how to ignite a fire under our inertia, why can’t we learn to do it to ourselves? Tony Robbins correctly differentiates between the musts and shoulds in our lives. If it must get done, it will get done. Sometimes a should will get done, but often we find an excuse to avoid doing what we really know, in our hearts, SHOULD be done. The musts tend to be fueled with passion.

You Gotta Want It!