Take Someone From the 1% Out to Lunch

Lately I have spent a lot of time and effort thinking about first principles. So often people do not believe they can take the next step or even first step. It is so hard for me to understand why people do not take the next logical step towards financial freedom. I see it right there under their nose, but more importantly I know that step is eminently possible.

There are two likely explanations for this behavior. I certainly have seen both in my own life. The first problem is belief. If we do not believe that an action is possible for us, we will not undertake that task. The second problem is ignorance. There is an old saying used by factory supervisors, “Ignorance can be fixed. Stupid is forever.” This is true.

I am trying to be a lifetime learner. If someone knows something that might help me in some area of my life finances; relationships; health, I want to learn, unless he would remind me I could lose more weight if I give up my evening beer.

It seems pretty obvious, if you want to change some aspect of your life, find somebody who is getting the results in their life that you want to see in your life. Then learn what they are doing that is different from what you are doing. This is a process. You not only need to learn in the conventional rote memorization and regurgitation method used in most of our classrooms, you need to unpack what you have learned into its components then experimentally learn how to apply those pieces to your life.

Children do this naturally. Not all children are blessed the physical assets and talent of a LeBron James, but that doesn’t stop them from watching the best basketball player of his generation perform his art. Then they imitate what they have seen to the best of their ability. Sometimes they tell their friend, “Watch this. I’m LeBron James.” Before they attempt some shot on their driveway basketball court.

The most obvious way to interact with the 1% in any area is read their books. However, chances are you already interact with the 1%. If a football stadium can seat 100,000 people 1,000 of them would be in the 1%. Given the price of tickets and the quality of their graduates, I would expect that the home stands at a Georgia Tech game might contain two or three times the expected number of one percenters (is that a word).

It takes about $300,000 a year to make the 1%. If you know a successful small businessman or a doctor who owns a practice, the chances are pretty good you’re looking at a member of the 1%.

Why don’t you offer to take one of these people out to lunch?

Let them know how much you admire what they have accomplished. Don’t worry about asking questions. People like to be considered a fount of wisdom. The fact that you are paying attention to them is a sincere form of flattery.

I am not talking about bank presidents who through unchecked greed wrecked an institution that took over a hundred years to build. I am not interested in skimmers or scammers whether they are rich or poor. I don’t have time for welfare cheats or stock market cheats. I am talking about people who have provided a valuable service to their community, who have exchanged value for value over the course of many years. That is how most of the 1% became rich.

If you don’t like your life, find someone in the 1% that you want to emulate. Somewhere out there somebody overcame the same obstacles you face. This isn’t limited to finance. If you don’t like being a miserably depressed bitter divorcee, find someone who got up off the floor after a terrible painful divorce and found happiness in a new life and new relationships. If you want to get in better shape find someone who lost 60 pounds and kept it off. Find out what they are doing that you are not doing.

I think if we are honest, most of time in our heart we really know what we need to do, but like me and the evening beer, I am not ready to pay the price. I know a successful small businessman. For many years he ran a deli/wine and beer store. Now he is retired. He still owns the business and the building, but someone else now runs the store. The secret to his success? He provided his community with very high quality deli-sandwiches and the cheapest beer in town-value for value, a win-win exchange. Do this for about 70 hours a week over more than 30 years. There is a pretty high probability this will make you rich, maybe not the 1% rich, but almost certainly a multi-millionaire.

Maybe it is time for me to read the Intelligent Investor by Benjamin Graham one more time. Then before I make my next trade I could tell my wife, “Watch this! I’m Warren Buffet.” I guess it couldn’t hurt.

Excuses Excuses (Part II)

Ramit Sethi, author of I Will Teach You to Be Rich (a good read) is into personal fitness. In his own mind he was born a skinny Indian geek. He wanted muscles. He wanted to “normal” whatever that meant in his mind. He achieved his goal through a serious exercise program complete with personal trainers. Once a woman who wanted to improve her physical condition told him, “I can’t go to a gym three times a week.”

Ramit’s answer shocked her, “Can you go one time a week?”

I am trying to change the way I talk to myself. When I find myself stating what I can’t do or is more common in my case what doesn’t make good sense to try. I try to stop myself by saying, “I don’t care what you can’t do. What can you do?”

You have enough talent, enough friends, and enough resources to do something that will bring you closer to who you want to be; to the life you want to live. I am 62 years old, still overweight (I’m making progress), still have arthritic knees, and a lower back problem that limits what I can do. I am not going to be running in the Iron Man Triathlon any time soon.

I can walk. In fact I can walk 5 miles. That distance is just about it, but it is something I can do. Not every day, but last week I walked 16 miles; not bad for an old man. 25 years ago, road shock from my bicycle to an injured lower back ended that phase of my life. However, I am looking at the trail I currently walk. It is much smoother than a normal road. Could I ride a bike limited distances on a smooth surface? Could strengthening my midsection help protect my back? I am doing sit ups. We shall see. When I feel ready, I can rent a bike from one of the shops along the trail. In my new home swimming is a simple financial decision. Will I use a pool often enough to justify a membership at the local Y or the Furman University Spa? (It is really a lot more than a gym). Right now I am still distracted by the commotion of the move. Once things settle down a bit, maybe I could add swimming or cycling to my repertoire.

For a number of years I really enjoyed watching the Sopranos. That show became my soap opera. I found the character of Carmella Soprano to be particularly interesting. She was a shallow, materialistic, social climber. My wife thought this was forgivable because Carmella knew she was a shallow, materialistic, social climber and she felt guilty about it. However, just about the time you were ready to write her off as a twit, she would redeem herself. When the chips were down she proved herself to be “a stand up guy.” Over the course of the series the viewer comes to realize that even though she is an inexcusably venal hypocrite, she is also the only thing holding her insane family together.

Carmella Soprano, like all us is a complex collection of strengths, weaknesses, and contradictions. She really enjoys the prestige and the perks associated with being the wife of a mob boss. People fall all over each other in a race to provide her with the most beautiful home furnishings; other mob wives (and their husbands) treat her with deference and respect; bishops and college presidents tell her she is a kind and generous human being as she buys their praise with her charity. She seeks absolution for her sins from the Catholic Church and from psychiatry.

Usually people tell her what she wants to hear. They forgive her sins without asking that she change her life. One time she goes to an elderly Jewish psychologist who will not take her money because it is blood money. He looks her straight in the eye and tells her the unvarnished truth. He gives her and her children a clear path to freedom. But the task is too great. She remains a guilt stricken unhappy, rich pampered mob wife wallowing in her excuses.

My excuses change nothing. Taking action changes my life.

Here is the scene from the Sopranos. I hope it speaks to some corner of your heart. I hope it speaks to some corner of my heart.

Carmella Soprano Receives a Second Opinion

Excuses Excuses

I am trying to learn how to answer doubts and excuses not only in the lives of my readers but also in my own life. Believe me I have plenty of excuses in many areas of my life. I have found that if I look deeply into what I am saying it is sometimes easy to unravel the problem.

Consider the statement, “I don’t have time to read this book.” I have heard many people make this statement when I suggest that the answer to their particular questions might be found in this book or that book. Sometimes I say it to myself when I think about visiting the library or the bookstore.

Let us assume that you can read at 500 words a minute and that a page in a paperback book contains 500 words. This is a reasonable assumption for a thought experiment. That means you can read 1 page per minute. If a book has 300 pages you can read the book in one month, if you devote only 10 minutes a day to the project as you drink your first cup of coffee in the morning. I would contend that you can easily find 10 minutes a day to do something you really want to do. If you could find 30 minutes a day, you could complete the task in 10 days. Even when I was working I wasted much more than 30 minutes a day just surfing the Internet.

We tell ourselves little white lies to excuse our behavior. This particular example does not really involve any risk of failure. Clearly, if reading a particular book is a sufficiently high priority it would be pretty easy to find the time to read the book.

Let’s take it a step further, to an example that contains a certain amount of risk. Let us imagine an individual who enjoys working on the cars he races at the local drag strip or collecting knives or stamps or even repairing handguns. He would love to find a way to spend more time working with and learning about his passion. One day he wonders if there is something he could do to find enough money to at least support his habit. After all, if his hobby was paying its own way then his wife couldn’t complain so much. Perhaps one of friends at work mentions he is looking to buy his daughter a used car. His friend can’t afford very much, maybe for the sake of argument $4,000 for something that is reasonably reliable and inexpensive to operate. Of course there are lots of car dealers in the city. How could one man compete with all those established businesses? He could say to his buddy, give me a week or so to look around. I’ll see what I can find. Let’s say our budding car dealer finds something reasonable that can be repaired for $3,000. He could go to his buddy and say, “Look, this car needs some work, but give me $200 for parts plus $300 for my labor will give your daughter a car that is worth at least $5,000. If his friend takes the deal, he is on the hook to make it good. If he guesses right he picks up $300 and a reputation for finding good deals and for repairing old cars. If he guesses wrong and makes it good, he might lose a few bucks and some time, but he is still building a reputation. I know a man who works on cars when he needs a little extra money. He is very good, inexpensive, and honest. He has no shortage of extra work when he needs it.

It really boils down to your priorities. I know a woman who has five children. All of them have graduated from college. Both this woman and her husband have jobs but neither of them earn a lot of money. To successfully put five children through school would be a formidable challenge for even wealthy parents. Not every child is college material. Not every child is mature enough to make through college. Not every child even wants an education. These parents made education a family priority. The mother worked her way through school as an adult. The parents worked and saved to put their children through school. They managed to transmit these values to five children who also found jobs and drove around in old used cars so they could apply their money to help pay for their education. These children did not escape without any scars. They are carrying reasonably small amounts of student debt. One of them went to school on a ROTC scholarship, so he owes Uncle Sam 8 years. His mother thinks he will make it his career. One of them is completing a PhD in microbiology.

If you make reading a book a priority you can find the time to read it.

If you want to turn a hobby into a part time job you can make it happen. I have seen more than one person succeed at paying for their own particular hobby.

If you want to change your family tree, you can do it.

It all begins with intention.

The Cost of Higher Education

This morning after my walk on the Swamp Rabbit Trail, I decided to try and find a set of scales I could use on the Furman University campus. I don’t want a set of scales in my own house for the same reason I don’t check the value of my stock holdings on a daily basis.

I thought a logical place to start this process would be the gym; at least it used to be the gym. Even though there are more parking spaces and the same number of students, there are fewer useable parking places. I also note there are a great many more buildings on campus than there were 40 years ago, but let me reiterate, the number of students has remained more or less constant. I had to park more than ¼ mile from the building only to be turned away by a woman behind a glass enclosure who informed me the gym is now the Sports Medicine Center. No one without a pass or an appointment can use their scales. She told me the general public was allowed in the new gym and, gave me a rather useless map I couldn’t decipher, and sent me on my way.

On the way back to the parking lot, I asked a maintenance man how to get to the new gym. He started to explain, and then thought better of it. He let me ride in his electric cart back to my car, and then guided me to a hidden legal parking lot near the new building. May he be blessed.

Inside, I was once again confronted with officials and gates that required an electronic pass card. It isn’t exactly open to the general public. I was given an application for membership. It isn’t cheap even for seniors or alumni (I’m both). However, given the hundreds of thousands of dollars worth of new state of the art exercise equipment housed in this magnificent edifice, I expect the price is more than reasonable.

Back in the day, the gym was a pretty Spartan affair. We had a weight machine, chinning bars, and gymnastic equipment, but that was about it. There were no guards, pass cards, or fees. As I recall there were a set of scales in the Men’s restroom/locker room. Anytime I was in the mood, I or anyone else could just walk over and use them. No more.

I guess all those new parking spaces are for administrative personnel, since the number of students and the class size hasn’t changed very much over the last 40 years. I have seen studies that indicate the number of administrative personnel per student at universities has roughly doubled over the last 30 years. Somebody has to pay those salaries. Do students need a palatial health club to further the quest for an education? One of my friends so enjoyed his free visitors’ pass to the health club at his son’s college, he informed all his coworkers that he never wanted to leave the place. I think he particularly enjoyed sharing the hot tub with the coeds. Unfortunately, his son had the same attitude about this school. A line had to be drawn in the sand before the lad turned his attention away from beer and women, to return to his studies.

We ask why the cost of higher education has increased by 5 times the rate of inflation. I think I now know at least a few of the reasons my first alma mater now costs $54,448 a year.

$217,792 for a BA in English Literature?

My friend mentioned above was fond of saying when presented with such absurdities, “And they ask me why I drink.”

Water Water Everywhere

As I have mentioned in previous posts, I am looking for yield (income) with a minimum of risk. This isn’t easy. Bonds pay almost nothing. Stocks seem overvalued, given the actual condition of the economy. Utilities have traditionally offered save havens to frightened retirees (such as myself). I am particularly interested in water utilities. I do not currently have any of these shares in my portfolio, so I might get some safe yield with the bonus of additional diversification.

Unfortunately Schwab rates the entire water utility subsector an F. The analysts at my broker are not too fond of any utilities.

Electric Utilities D
Gas Utilities D
Independent Power F
Multi-Utilities D
Water Utilities F

Schwab follows 12 water utilities. They rate six as C (hold), 2 as D (sell), and 2 as F (dump this dog--today).

This is not uncharacteristic. I have noted that Schwab rates one of my solid reliable singles Piedmont Natural Gas (PNY) as either a D or an F year after year even as it pays a steadily increasing dividend. The price of the stock tends to drift upwards over time. Nothing to write home about, but steady up is good.

Why would Schwab be so harsh on an entire sector? I think they are looking for growth. Regulated utilities do not grow very fast. Dependent on the kindness of state regulators, they tend to putter along paying whatever is considered a fair return on my investment. The good news is the return tends to be fair, at least most of the time.

Let’s look at Aqua America (WTR), a stock I have owned in the past.

Schwab rates WTR – F
Ned Davis rates WTR – Neutral
Argus rates WTR – Buy
S&P rates WTR -- ****
Reuters rates WTR – Outperform
Market Edge rates WTR – Avoid

Six different reports by dispassionate experts produce very different results. It is wise to remember every time a share of stock is bought and sold, someone on each side of the trade thinks they are going to make money. Forbes reports, “Aqua America Inc (NYSE: WTR) made the “Dividend Channel S.A.F.E. 25″ list because of these qualities: S. Solid return — hefty yield and strong DividendRank characteristics; A. Accelerating amount — consistent dividend increases over time; F. Flawless history — never a missed or lowered dividend; E. Enduring — at least two decades of dividend payments.”

That sounds more like a **** rating than like an F to me, but I can’t predict the future.

I am also thinking about Middlesex Water Company (MSEX) and Connecticut Water Services (CTWS), two smaller water service companies that do not have the size or geographic diversity of Aqua America. Just for grins, let’s rack and stack the basic numbers and the Schwab ratings.

MSEX –
Rating C
Beta 0.45
PE Ratio 19.6
Yield 3.75%

CTWS –
Rating D
Beta 0.46
PE Ratio 20.88
Yield 3.21%

WTR –
Rating F
Beta 0.19
PE Ratio 20.44
Yield 2.49%

“If you don’t understand it, don’t buy it,” is the prime directive of investment. I understand water. People drink it. They take baths in it. They flush toilets. They spray it on their lawns. I have just about convinced myself to buy shares in some regulated water company, maybe more than one company? We shall see.

Don’t forget: Let’s be careful out there today.

A Little Introduction

As I have studied personal finance literature it dawned on me that every unhappy story about money had one thing in common, denial. People get themselves into very serious trouble one step at a time. When the experts pointed out what is obvious in these examples, the victims continued to deny the reality of their situation. It wasn’t really a guilty defensive of their behavior, it was denial.

If we are unable to confront the simple facts of our condition, it is a certainty things will not get any better. Can you, can I, be comfortable with the reality of a situation? Start right now. Look at the following equation.

Money In = Money Stored + Money Out

Pretty simple isn’t it? This equation integrated over a lifetime is all the mathematics there are to the story of your money. Most of our money in will be in the form of our take home salary, but there are other sources, interest, dividends, gifts, inheritances, and pensions.

Money stored includes both cash in bank accounts, credit unions, and money market funds and investments. Investments include the equity in your home, stocks, bonds, gold doubloons, and your collection of autographed footballs. Money stored can grow over time or it can suddenly shrink as happens in stock market crashes.

Money out is the sum of the real money you spend every month. Watch this equation with unblinking eyes. As long as money in exceeds money out, there is nothing to worry about, money, properly stored, will increase over any sufficiently long period of time. If money out, for whatever reason, exceeds money in, it is important to examine the facts with unblinking eyes.

If you are looking for easy answers, you will not find them here. If you are looking for someone who will tell you how to live your life, it won’t be me. Your abilities, your life are a unique gift from God. Your financial situation is the sum and total of how you have applied these gifts to the particular situation of your life. If you want to change your life, you will need to make the commitment; you will need to make the decisions; you will need to find your own path. I can present time proven principles that have helped others find financial freedom. How you choose to apply them in your own life is your personal responsibility.

One person may choose to work overtime or take a part time job to increase the left hand side of the money equation. Another may change jobs from one that pays a predictable hourly rate to a job in sales or even starting their own small business, jobs that are totally dependent on their skills and efforts. A third may go to night school for five years while working full time and caring for a family in order to earn a degree in financially lucrative field.

Another person may focus almost entirely on stretching every dollar as far as possible. Learning to artfully lead a simple life can be a blessing in itself. I have seen people who have learned how to grow and process much of their own food, producing better health at a lower cost than can be achieved in a supermarket. They are also severing the chains that hold them in bondage to world’s financial system.

Some choose to focus on managing the money they have in storage. They constantly monitor there investments, learning to move money with the ebb and flow of the markets. They study different opinions and methods, especially the methods of the money masters. While not many will become billionaires, 40 years of consistent effort in this area coupled with a reasonable rate of savings is very likely to lift a household net worth past $1,000,000.

The Cautious Investor

"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."
Warren Buffet

If you could only pick 20 different investments over the course of an entire lifetime, what would they be? How would you pick them? How do you make any purchase that is important to you; a car; a house; a stereo system? We look for the highest quality at the lowest cost. Generally speaking, quality increases pretty fast with price until some certain point. Then quality increases more slowly relative to cost. A $6,000 car is going to be a lot better than a $3,000 car. How much better is a $43,000 car when compared to a $40,000 car? Differences in dealer pricing for the same vehicle could be $3,000 in such a case. The same could be said for individual stocks as you study the differences in price earning ratio, dividend payout ratios, and price earnings growth ratio (price earnings ratio÷annual growth). By the way, look for price earnings growth ratios of less than 0.5.

What is quality? Here is the definition presented by Sir John Templeton, the genius of his generation.

“Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high-profit-margin consumer product.”

One of his rules for investors is, “When buying stocks, search for bargains among quality stocks.”

Another rule given by Sir John is similar, “Buy value, not market trends or the economic outlook.”

Do your homework. How do you make a decision when buying a car? I read reports from sources like Consumers Union and Edmunds.com. I talk to people who have owned the same model I am investigating. I take it for a test drive to determine how it feels. If I were still buying used cars, I would pay a trustworthy mechanic to give the car the once over. Don’t be afraid to pay dispassionate experts who aren’t on commission for their advice. My Certified Public Accountant is a most valuable and trusted resource when making difficult decisions. I pay to buy books by the masters and sometimes for a newsletter to give me some new ideas to investigate. If you have an account with a brokerage firm, you have access to numerous free reports from reputable sources that review most any possible stock purchase or sale from a variety of viewpoints.

Just for my own personal interest, I counted up the number of cars owned by my wife and I over the 39 years of our marriage. The answer is 9.

I think it interesting that Sir John, one of the greatest investors in history, ends his list with the following advice.

Begin With a Prayer:

If you begin with a prayer, you can think more clearly and make fewer mistakes.