Friday, January 13, 2017

Problems in Paradise

I left Maui on Monday October 16, 2006. It was easy for me to determine the date as we were scheduled to leave on Sunday, but the airport was shutdown by the 2006 earthquake that occurred under the ocean about 90 miles from our little rental house. We were fated not to return until December 5, 2016. Back then, I was entering the stretch drive to retirement. Most of our subsequent vacations were used to find a location that had a lower cost of living, less traffic, lower taxes, and better climate than suburban Washington D.C. Also, renting cabins in the mountains of North and South Carolina is a good bit cheaper than vacationing in paradise. This helps out during those stretch drives that seem to be necessary at various critical points in our financial lives.

We discovered that much had changed over the course of ten years. The big news during our recent visit was the end of the sugar industry in Hawaii. The pineapple business was dying as early as our first trip to the islands back in the late 90s. At the end of this season, the last sugar mill in the state will close. The Hawaiian economy is now a two legged stool. Large scale commercial agriculture is dead. Only tourism and the enormous military presence on Oahu will be left to provide employment for significant numbers of Hawaiians.

After the sugar cane harvest, random volunteer stalks of cane pop up in the empty fields. In the past this didn’t symbolize anything but the end of another growing season, but now these empty fields seem kind of disturbing as they indicate the end of an era. The county hopes that these lands will be divided up into small scale farms. Given the value of land on Maui, I find that this hope is unlikely to materialize, at least not for very long. I see more and more condo developments until a limit, probably water, becomes an issue.

Speaking of development, the last ten years have been good for that industry. It seems that there are significantly more buildings—everywhere. We stayed in Kihei, one of the fastest growing towns in the nation. When we last stayed there over twelve years ago it had the flavor of a family beach resort. Now it is more developed, more expensive, and a lot more crowded. Risking a car trip down the main drag is now something that requires a little thought and planning. It didn’t use to be that way.

Tourism seems to be bifurcating. There are a lot more upscale stores and restaurants that cater to the rich. Lahaina, the local tourist trap, once had a large variety of knick knack shops, stands, and kiosks selling a wide range of junk to middle class tourists as well as stores for the upper crust. Now about the only thing left along the waterfront are expensive restaurants, high end jewelry stores and art galleries. The demise of Hilo Hattie’s, the quintessential Hawaiian gift store for everyone, tells a sad story. They have gone into bankruptcy court twice. It doesn’t look like they are going to make it. The low end gift trade now belongs to the big name stores, like Walmart. The national chains are now just about everywhere and really there isn’t much difference between the Barnes and Noble located in Greenville, SC and its sister store near Lahaina. Wailea is a wealthy enclave just South of Hihei. Here you can buy a condo for a million dollars. Beach front houses seem to start somewhere above five million and go up and up and up. The local mall, The Shops at Wailea, charges $25 for parking! If you spend more than $25 in a single store, you get a voucher allowing you to park for free. Otherwise, be ready to fork over $25 for the privilege of visiting their mall. Obviously, they don’t want locals or people like me soiling their pavement with our presence.

Even though the traffic is much worse everywhere, there are still enclaves that are more or less as I remember. Up on the mountain, it is still peaceful, quiet, and cool. Makawao and Paia still have a counter culture, hippie, kind of flavor. Although, the aging hippies from the mainland had better have some limit left on their credit cards if they plan on spending much time in those gift shops or restaurants.

If you think a two week vacation in paradise is a financial stressor, imagine living on that island. Many residents of Maui County need two or more jobs to make ends meet. Good paying jobs for average people are in short supply. The cost of living is extremely high. Even renting a single room can push $1,000 a month. However, there are people who are beating the odds. A woman we met on our last visit was the store manager for a famous photographer by day and hotel concierge by night. Eventually, that store shut down. She began to sell her own artworks, first in the local weekly flea market while tending to two children still in diapers. Eventually, she saved enough money to rent a shop in a low cost section of the island. Her husband was able to quit his job at one of the famous hotels and join his wife in the family business. Now, she sells paintings, prints, photographs, and even wearable art she has created. Recently, she made her first step into a larger world, hotel d├ęcor. One of the hotels on the island is going to put her artwork in every room in the building. She insisted on doing this without using a professional hotel decoration company as a middleman. She gets to keep all the money generated by her talent.

How cool is that!

Thursday, January 12, 2017

Know Thyself

An article entitled “What is Your Biggest Investing Challenge?” appeared in a recent issue of Charles Schwab OnInvesting. I would like to comment and expand on some of the author’s worthwhile observations. Knowing yourself, your limitations, your weaknesses, your biases, is an essential component to self mastery as well as finding the road to financial freedom.

Not playing the game is the most frequent and the most serious mistake made by most Americans. There are really only two ways to build up significant net worth. The oldest is real estate. Unfortunately, playing that game requires a lot of money. For most of us that means borrowed money. As 2006 demonstrated nothing, including real estate, goes up forever. Leverage is a dangerous friend. When the market goes south it is pretty easy to lose more than your total investment. Losing 100% of all your money is bad. Losing more than 100% is totally unacceptable. When you are far enough along to pay cash for income generating rental properties, you probably don’t need to invest in real estate except for the purpose of diversification. That means the stock market for all but a few who really understand real estate and have the resources to play in that arena. The best place to start is your 401(k), 403(b), traditional or Roth IRA depending on your particular situation. Small automatic deposits taken directly from your pretax income won’t be missed, but when these funds are stashed away in a tax sheltered vehicle over the course of a working lifetime, the results can be astonishing. This kind of investing doesn’t even require more than the initial decision to start the journey. Life cycle funds sometimes called target date funds will maintain an age appropriate balance of foreign and domestic holdings in both stocks and bonds at a very low cost.

The flip side to staying out of the game due to under confidence is overconfidence. This investment sin can take many forms. The most obvious is gambling too much money in a single high risk/high reward investment—such as lottery tickets. Just joking, but I think you get the idea. Perhaps the most frequent manifestation of this mistake is holding more than 10% of your liquid net worth in shares of your company, the one who gives you a regular paycheck. Many employees have nearly all their holdings in shares of their company. If that stock tanks, not only will you lose a substantial portion of your nest egg, but you might even lose your job at the same time. However, overconfidence is something that can affect anyone, such as me, who has enjoyed some success in the market. It is easy for me to think, “I know what I am doing,” when I am riding a bull market or maybe just got a little lucky on a couple of investments. I have to remind myself from time to time that I will never outgrow the need for wise counsel and research even when investing in the most conservative funds. If I don’t remind myself, believe me, at some point the market will remind me of my limitations.

The article calls out “Status Quo” as a common investment mistake. Sometimes doing nothing is the best investment decision. Sometimes it isn’t. I am a buy and hold kind of guy. This is a very good strategy for most investors. When combined with DRIP (Dividend Reinvestment Plan) that plows dividends back into new shares of stock, doing nothing can put the power of compound interest to work in some remarkable ways. A stock that pays a good dividend, like AT&T can double its value in less than ten years even if the price per share doesn’t move very much. However, sometimes things change. The recent increase in the Fed rates caused a quick drop in the bond market. A complete reliance of bond funds would have hurt a portfolio that was out of balance. I should have been warned when I heard the words, “ability to borrow money at lower rates,” but Kinder Morgan Partners had been a star in my crown for quite a long time. When the parent corporation bought out the limited partnership, I let 90% of my position in the partnership roll into Kinder Morgan. Shortly after this decision, the news came out that Kinder Morgan was carrying too much debt. I lost half my money in a very short time. I comfort myself that I lost “the house’s money” rather than any of my initial investment, but that is just my feeble attempt at dealing with cognitive dissonance.

Regret aversion is the next mistake mentioned in the article. Simply put, “The burned child fears the fire.” Don’t worry. If you invest in the market you will lose money—some of the time—in something. However, Siegel’s constant tells us that over the last two hundred years, American equities have delivered a remarkably steady 7% return over any reasonably long period of time. Just hang on and scream. If you maintain that well diversified, age appropriate balance through good times and bad, you will be buying stocks when they are cheap and selling them when they grow expensive, unlike most of your neighbors who will be selling when the market tanks and chasing stars when they are at their most over valued. By the way, chasing hot returns is the last investment mistake mentioned in the article.

Now take a good look at the person in the mirror. What are you doing with your money? Do you have a plan? Are you following your plan or changing it on a daily basis? Do you know your own comfort level? I have tried “trading” using technical analysis on two occasions, one was pretty successful, but I realized I am simply not wired to be a trader. I have also discovered I should stay away from individual tech stocks. As an engineer, I tend to fall in love with technology rather than with the business underlying the technology. This is a big mistake. I limit my technology holdings to mutual funds or a managed account. Finally, I love fossil fuels. Chevron has been a consistent money machine since the beginning but I can talk myself in carrying too much in energy shares. I have been bitten a couple of times by this predilection, but I hope I am growing wiser in old age.

Now! For Heaven’s Sake! Let’s be careful out there!

Wednesday, January 4, 2017

No Answer

The question comes up again and again, starting when we first ask a child, “What do you want to be when you grow up?” Now, I find, as I am closing in on 66 and Social Security, I am still asking myself the same question. I think that can be healthy as long as I remember it is unlikely that God or the universe is going to give me the answer.

I hope that my Calvinist brethren extend me some grace on this subject, but I come down pretty hard on the free will side of that dichotomy. While I am open to the possibility of miracles, I don’t believe that God is generally in the business of telling people where to attend school, what major to choose, who to marry, where to find employment, or the best investments for retirement. Answering those questions? That is our job.

Unfortunately, we all want the “right” answer to those important questions because we know that we are not omniscient, either about the present or the future. The world is a fabulously complex interconnected system. In the present moment, we are an amalgam of everything in our past, our parents, our environment, our experiences, and our beliefs about the nature of the universe and our place in it. Given all those prejudices and short-comings that make me who I am, I have to make decisions to move forward in my life in a universe that I can not possibly understand.

Even if I had a perfect understanding of the present and natural law, I still have no guarantee of finding the “right” answer. Edward Lorenz coined the term, butterfly effect, in his study of chaos theory to describe how a minute change in initial conditions can produce an enormously nonlinear output in complex systems. As the poet says, the best laid plans of mice and men often go astray. Most outcomes in scientific as well as sociological experiments are not either/or, but probabilistic in nature requiring the use of statistical analysis to describe and understand the answer.

We make decisions based on our understanding, our metanarrative, the stories we tell ourselves. Then we take action based on those beliefs. Then we get results. Did I get the results I desired, the results I expected? Were my actions wise actions, unwise actions, or sin? I don’t always have enough information to answer those questions. A wise decision can produce undesirable results.

Even if the answer is no answer, there is hope. We can learn from our own experience and the experience of others. We can discern what kinds of actions are likely to produce what kind of results. We can seek out counsel from those who are more experienced, knowledgeable, and successful in some particular area of interest. We can plant and nourish a network of trustworthy friends and family members who will help us in time of need. Then after “talking through” all of the possible options from beginning to the desired outcome, I have to make a decision.

Relax. Don’t be so hard on yourself. Be courageous. If you couldn’t possibly know enough to make to make these kinds of life decisions, there wouldn’t be 7 billion of us humans running around on God’s green earth.

I also believe in a God who is there, who wants to bless me and be a part of my life, who will run toward me with open arms if I choose to move even a step in his direction. If this wasn’t so, why would my Savior freely choose to suffer death on a cross for my benefit?