To me, the number of people who weren’t very concerned with privacy was a bit of a surprise – and recent news events inspired me to follow that piece up with these 4,100 words on the topic of privacy in America.

Privacy: The Legal Tradition

A search in the Constitution for ‘privacy’ will leave you with 0 results (also, a search in the Amendments reveals no matches).

Some folks take that to mean there is no ‘right to privacy’ in the United States.  Not so – the Constitutional interpretation of the Supreme Court is the actual law of the land.  This particular right had been assumed for a quite a while, but it wasn’t until Griswold v. Connecticut in 1965 that the right was ever enumerated by the court.  “Penumbras” and “emanations” aside, concurring opinions spelled out that the right to peaceable association (part of the First), the Ninth Amendment (stating that enumerated rights do not make unstated rights invalid), and the due process clause in the Fourteenth Amendment are actually winking at a Right to Privacy.

That legal tradition, most famously, was a key part of the majority decision in the landmark abortion case, Roe v Wade.

As a line of legal reasoning, the genesis of the Privacy Movement can actually be traced back to a single paper, written by Samuel Warren and William Brandeis in 1890.  The Right to Privacy was an argument, in essence, of an individual’s right to be left alone; call it ‘freedom from harassment’.

The Right to Privacy isn’t the only legal construct dealing with privacy and privileged information, of course.  The Fifth Amendment, the right to keep self-incriminating information private, is probably the most well-known.  However, there are also other rights of relevance here (that we spelled out back in 2009!) – Priest-Penitent, Spousal Privilege, Attorney-Client Privilege, and Physician-Patient Confidentiality are all legal concepts in the United States.

It’s not just in criminal proceedings where privacy and confidentiality is important – Miranda warnings remind people well before criminal proceedings even begin that they don’t have to say anything without an attorney present, and State Secrets detail the classification of secrets by the government (“We’re on a need-to-know basis… and you don’t need to know!”).  Trade secrets detail ‘classified’ company information.  Traditions of an expectation of privacy detail where a reasonable person would expect they are not being observed (read that for an interesting legal diversion which spells out exactly what you can do in your ‘curtilage‘ versus what you can do in your back yard).

So, yes, the legal tradition of privacy is long… and the definition is anything but common sense.  The main takeaway here is that privacy is something our country has agonized about for hundreds of years, and an increased ability to observe is only going to make the entire subject more complex.

Why Would Someone Want Privacy?

“Where did you get that MP3?” – IRS

Okay, we’ve listed the “what”s and the “when”s and some of the “who”s, but how about a quick “why”?  The reasons for wanting privacy are numerous, but let’s detail a few reasons why people may want to keep certain aspects of their lives private:

1. Fear of Reprisal

The American tradition of protection from intimidation started even before America did.  Some of the most well known examples of pseudonyms in American literary tradition date back to pre-Revolutionary War days, and immediately after the Constitution’s ratification (see: Federalist and Anti-Federalist papers).

Why was there such a strong tradition of pseudonyms in such a violent time?  Well, the fear of hanging certainly inspired a few of those folks to keep their names private!  Great Britain didn’t appreciate all the fomenting of revolution going on, so keeping one’s identity private was a solid way to keep your head connected to your shoulders.

We live in a much safer country, nowadays, as ‘killing inconvenient speakers’ is at an all-time low.  There are other ways of intimidating people into shutting up – legal threats, blackmail, time-wasting, violence, financial repercussions, and counter-aggression (such as “making them look crazy”) all come to mind.  Witness the interesting crypto-currency Bitcoin’s pseudonymous creator Satoshi Nakamoto.  Fearing aggression from angry politicians in… well, every country in the world with a currency, he felt Bitcoins were best granted to the land by an pseudonymous benefactor.

Some explicitly dangerous speech is known as whistleblowing.  A whistleblower is a person with insider knowledge of a crime, problem, coverup, legal sidestep, or abuse of privilege who speaks out and tries to warn someone exterior to the situation.  Whistleblowers have great reasons to fear for their safety – physical or otherwise.  By definition, whistleblowing exposes an embarrassing or illegal situation that a stakeholder does not want to get out.

Whistleblowing has an incredibly dangerous history, which is why it’s very important for people to stay vigilant.  In the United States, government has a hate/hate relationship with whistleblowers – or, at least the Executive Branch does.  Deep Throat, Bradley Manning, and the mole at the center of the AP Phone tapping investigation are considered whistleblowers to some… traitors to others.  In the case of Manning and the AP Phone mole, they explicitly violated one of the legal privacy protections we spoke of above – state secrets.  The United States Government has to walk a particularly fine line here… politically, Governments want to appear safe to Whistleblowers, even if their interest demands they make it hard.  It’s hard to toe the line.

And why do they have to bother?  Sadly, because Governments in the past have been even more hostile to whistleblowers.  The ultimate sad example is the People’s Republic of China’s campaign to flush out dissenters – known in the West today as the “Hundred Flowers Campaign“.  In it, Communist Party Chairman Mao Zedong encouraged everyone with complaints about his policies to report their critiques.  The letters and dissents start pouring in, and soon (some would say, ‘predictably’ here) Zedong reversed the policy and imprisoned (or worse…) the dissidents.

Yes, I’d say that political philosophy and evidence of wrongdoing have historically been decent things to keep on the down-low, wouldn’t you?  Let’s delve a bit more into the legal aspect.

Legal Reprisal

This one deserves a special heading.  The very laws which ostensibly protect people from false speech can be used to chill permitted speech when the law itself becomes a threat.  It is said that “truth is the ultimate defense against a libel charge” (or slander)… but a large company can chill lots of defense by threatening lawsuits to every detractor.  The government can chill whistleblowers by aggressively pursuing leaks or by threatening journalists.  Truth is, not everyone wants to spend time and money defending themselves legally – even if they privately believe that what they said was correct.

And how that relates to the privacy topic?  You’ll note that the number of anonymous comments goes up on any controversial article, especially if people are stating something embarrassing to someone or some company (or government).  Closely related to whistleblowing defense, chilling effects are an incredibly important thing for people who care about civil liberties to keep an eye on.

And to those of you who doubt legal threats alone can cause chill activists and whistleblowers… one only has to go back to the ridiculous prosecutorial overreach in the tragic case of Aaron Schwartz.  Or, if you prefer, read arguments about tort reform.

2. Sensitive and Embarrassing Topics

It may seem like an obvious point, but if ‘privacy’ involves the right to be left alone, that should also mean people who don’t want certain things known about themselves can keep those private.  Let’s list a few (by no means are these the only ones).

Sexuality

Human sexuality truly runs the gamut of preferences, and no one can possibly know every sexual preference out there.

Consider the topic of fetishes.  Fetishism and partialism describe sexual arousal to objects, body parts, and situations.  Since that describes basically every preference out there, that means that every post-pubescent human has preferences fitting into one of those categories.  Even though no one is unique, these are also things people generally don’t want to share with many people… and this is a legitimate area of concern, because a number of people have revealed those preferences to private companies (want an example?  Google Search.)

Fetishes aren’t the only thing people want to keep confined to select company.  That company itself also might be something people want to keep quiet.  Until recently, anyone who wasn’t in a two-person heterosexual relationship was outside the perceived norm.  That is, of course, not the only form of relationship – Gay Marriage is the obvious counterpoint to that, and now is legal in many states (as of 5/18/2013 – 12 states).  It’s also historically been taboo to stay single past a certain age – but the decline in traditional marriage and the acceptance of different forms of relationships in general have eroded the stigmas.

The country has come a long way since our Puritan roots, but there are still some forms of relationships that are a bit outside of the mainstream.  In 2013, polygamy and polygyny come to mind, as do open relationships in general, swinging, and multiple partners as a category.  If someone is in a non-traditional relationship, they have, in my opinion, the right to share the details with only the people they choose.

Health

Health is also an extremely sensitive topic for many people.  The various conditions that people can have can be embarrassing, especially when those conditions are revealed to a new person.

This isn’t just conditions of a sexual nature, although there are a huge number of sexually-related health issues that are worthy of privacy.  Erectile dysfunction, infertility, and STD status aren’t generally things you want people to know without a reason.  Other sexual topics you might only want to reveal to specific people – rape, sexual harassment, pregnancy treatments and miscarriages come to mind.  The first “Right to Privacy” case listed above even dealt with condoms used by couples in Connecticut – it’s just none of the State’s business.  This might even apply to doctors!  Should a dentist know about rape?  Does an optometrist need to know about STDs?

There are plenty of potentially sensitive health conditions that deal with the other 95% of the human body, too – rashes, dandruff, and acne in various places… to name but a few.  There are even hundreds of chronic diseases where suffering might not be readily apparent to an observer.  Can you blame people for not wanting to reveal their Diabetes?  Would you want to explain your Sjögren’s Syndrome to someone without having planned the conversation yourself?

Finances

Hopefully it’s not controversial for me to say that finances are a particularly sensitive topic.

Let’s start with a problem you might want to have – more cash than the average!  Our friend Sam at Financial Samurai has the right idea – keeping your wealth and income low key is a good way to avoid contempt from others.  Consider movements like Occupy Wall Street.  They explicitly targeted people who make in the top 1% of income… even though the people in that bracket got there by following vastly different paths!

And it’s not just angry, anonymous mobs that people of higher-than-average means might want to avoid.  That’s right – I’m talking about friends and family.  It’s possible that exposing your net worth too widely might make you the target of unwelcome advances… or even unwelcome comments and attitude from those close to you.  You might think I’m going to toss an Ebenezer Scrooge quote in here… but I’m dead serious.  Unpaid loans between friends can cause massive amounts of resentment, and that situation will sometimes even end friendships.  And how many stories have we heard of “friends and family coming out of the woodwork” when someone wins the lottery?  Even worse, how many people have been burglarized when they report to the world they are going on vacation (perhaps months after discussing their gold or jewelry collections)?

Similar considerations apply to not having a lot of money, or (alternatively) having a lot of debt.  If you find yourself in that situation, you might fear people who know the truth avoiding you, thinking a certain way about you, or even making comments.  “Not a true friend”?  Maybe so, but family and co-workers also come to mind… it’s easier to drop a fake friend than to switch employers.

Truth is, there is a strong tradition in the United States of not revealing one’s income.  Now, some bloggers obviously discount everything I just wrote – they give us the financial equivalent of microscope slides on their finances… everything from income to debts to assets to earning potential.  Still, it’s safe to say that even amongst bloggers that mind-frame is a bit out of the mainstream.

Religion

The United States guarantees freedom of religion, and promises a separation between Church and State.  One of the ways they tried to guarantee that separation is to not sanction a state religion, à la Anglicanism in the Motherland.

Soft Cell (and a number of covering bands since!) sang, “And you think love is to pray.  But I’m sorry I don’t pray that way.”  Truth is, people subscribe to a ton of different religions in this country.  Some of us don’t… according to Pew, 10.3% of us are either Atheist, Agnostic, or ‘Unaffiliated and Secular’.  A further 5.8% of us are ‘Religious and Unaffiliated’ (I’ve heard some people in this category describe themselves as ‘spiritual’).  And 0.8% of us?  We either don’t know… or don’t want to tell Pew.

Let’s face it- even in a country with no stated official religions, there is still unease between some religions.  Some religions Americans aren’t as familiar with give people a bit of unease.

For better or worse, religion can be a private matter – and we should let people worship however they choose.  And, yes, we shouldn’t force them to explain why or how they do it.

3. Competitive Advantage

There are business and financial reasons for privacy too, most often because those strategies make it easy to make money.

We already covered the legal aspects of trade secrets, where companies will police secret information they use to make products or provide services… everything from manufacturing formulas to flavors in soda or baked beans.  Contrast this with patents, trademarks, and copyright (and, unfortunately… clones, knock-offs and counterfeits) where there are legal protections on something in the public domain.  Companies want privacy and don’t want to reveal secrets which would help their competitors catch up.

There are plenty of reasons individuals would want privacy as well.  One obvious example?  Day trading strategies.  Think about it – you often see people publish their strategy on how to trade… but just making information public can have consequences!  Like the infamous example of the Price to Sales ratio, once something is in the public domain it’s possible for any existing edge to be arbitraged away.  All of the details that go into a person or firm’s money making strategies are worthy of keeping private.  The SEC has even weighed in on the investment front – the public’s right to know trumps privacy once beneficial ownership passes 5% of a security.  Many market whales avoid acquiring more than 5% of firms to keep strategies secret.

I’m sure you can think of more examples in this category, but yes… I would not want a person or company to be forced to give up their competitive advantage due to a lack of privacy.

4. The Right to Be Left Alone

Those very words have come to summarize the entire battle for privacy… and even though I’m listing it last, don’t take that as a value judgement.

Remember the Do Not Call registry?  Yep – plucked straight from the pages of the privacy debates, especially the right to be free from harassment (although it is ironic you have to opt out of harassment, haha).  There are similar mechanisms to avoid credit card offers and direct mail… and in the internet age, software that blocks ads and services that block unwanted emails are ubiquitous.

Our increasingly technologically dictated lives have inspired a cottage industry of products which help us avoid detection and tracking.  We’ve got software which blocks cookies (used to track us on the internet), proxies which shield our locations and Internet Service Providers, software which can scramble our voices and images, places where we can register anonymously (and services to register for us!), software to encrypt chats and emails, and tons of other things too numerous to name.  And why?  It can feel like a violation when you are re-targeted for a search you made months earlier… possibly under the influence.

Sure, this category also is close to ‘fear of reprisal’.  Public servants in California can have public records related to their addresses removed due to fear of becoming targets of crimes.  And sometimes society has decided that the danger of making people targets is outweighed by the public good – consider that we publish the addresses of convicted sexual predators.

Really, though… wanting to be left alone is a pretty good reason for privacy, too.  Remember this guy?  Not all information wants to be free…

Where is Privacy Being Eroded?

“Sir, why do you brush your teeth in the shower?!?” (USAF)

And finally, we get to the ‘where’.

Topically, each of the three controversies in the news currently have elements of privacy in the story.  Benghazi?  You’ve got an undercover CIA mission, falling under State Secrets.  The AP Phone records subpoena?  You’ve got the freedom of the press and whistleblowers both in conflict with more State Secrets.  The IRS?  Take a look at the questionnaire the IRS (the Internal Revenue Service) sent some Tea Party groups.

Tax authorities asking about religion and the content of prayers?  Forcing a pro-life group to promise not to picket?  Asking for their website administration passwords?  Yep.  Absolutely disgusting.

However, even if it turns out that a few employees at a field office in Cincinatti ran wild for 4 years at the IRS (unknown to the rest of the IRS… a dubious claim).  So you’ve got whistleblowers being targeted and intrusions into religion.  How about some other Government-related examples?

• Allegedly, 15 agents at the IRS stole 60,000,000 personal health records (from 10 million Americans), according to a recently filed civil suit.  The complaint included a few of the sensitive topics we listed, “treatment for any kind of medical concern, including psychological counseling, gynecological counseling, sexual or drug treatment”.
• Again at the IRS, an internal memo (leaked in April) claims the IRS can access Facebook chats and emails without a warrant.
• The Department of Justice and the FBI also claimed email is fair game without a warrant.
• The Department of Justice avoided a warrant and moved to intercept a Fox News reporter’s private emails with only a subpoena.  The government argued the journalist was a co-conspirator!
• The recent SOPA/PIPA bills tied into privacy concerns – little seen entries about deep-packet inspection had major privacy implications.  (Those bills were eventually shelved after an unprecedented Internet protest).
• One aspect of CISPA, the Cyber Intelligence Sharing and Protection Act, was meant to encourage private companies to share user information, and to shield them from legal troubles related to improper sharing.  That bill was shelved, but reintroduced (!) 6 months later on 5/16/2013.
• The Journal News in New York State used a Freedom of Information request to obtain the addresses of weapon permit holders.  The Journal News then published that information in a map and released it to the public.
• The United States uses drones successfully overseas, but the planned roll-out of domestic drones introduces a ton of privacy concerns.  While the Supreme Court ruled well-back in Florida v. Riley that helicopter surveillance of a yard (at 400 feet) is constitutional, drones are capable of flying much closer to ground level.  Add to that the privacy concerns raised after the Boston Marathon bombings.  It’ll be an interesting few years!
• The Electronics Communications Privacy Act, in a hilariously ironic example of double-speak, eroded the need for a warrant for stored information older that 180 days… reducing the need to a Federal Subpoena (read it yourself).  Where did it come up?  There is conflicting information about how the emails in the General Petraeus scandal were discovered.  He’s not the most sympathetic victim (neither was Frank Vandersloot!), but eroding the need for warrants is an excuse for fishing expeditions.
• The Department of Homeland Security seized assets from Mt. Gox (a Bitcoin Exchange).  Some of the reasons (which are technical) include transmitting money without a license.  There is no enumerated right to transact money anonymously (which is a stated aim of Bitcoin), and a license in the US would require logging transaction details.
• Pretty much everything ever written about full body scanners at airports is about privacy.

By no means do I mean to imply that this is the only Administration in history which did questionable things with regards to privacy.  For a brief, Wikipedia driven tour of some privacy related incidents during the Bush Administration: Valerie Plame, Room 641A, Warrantless Wiretapping (in general), and, of course, the P.A.T.R.I.O.T Act.  Of course, don’t forget the scarecrow statement: “The only people against surveillance are those with something to hide.”  Right.

The Private Sector

This article isn’t meant to be an argument for anarchy and an accusation that only Governments invade privacy.  On the contrary, it’s just that listing the privacy concerns caused by private business practices would be impossible for any one man (if anyone wants to grace me with a stable of Graduate Assistants, you know where to find me!).  I believe that the Government has a key role to play in limiting the abuses of private companies in this regard – putting me far astray any Anarchists!

And where do most of the privacy concerns come from nowadays?  Social media, of course – whether it is companies logging into or monitoring personal social media accounts, or the social media companies themselves doing shady things with user data.  (Read: over-sharing with advertisers, publishing embarrassing things to friends.)

Advertising is an interesting one too, obviously.  Witness the rise of re-targeting and the sharing of search data – like I stated earlier, a search 2 months ago might affect the ads you see on other sites (yes, even on DQYDJ).  Convenient?  Maybe; but who hasn’t searched for ridiculous things after a news story or while holding a beer?

Again, the allegations of violations of privacy by private firms are so numerous, I’ve got to hand this one off.  Check out the Electronic Frontier Foundation as a watchdog for privacy rights in the digital age.

What Does it All Mean?

So, do I mean to imply that the surveillance of 1984 is already here?  Funnily enough, even though we have the capacity for all of the surveillance imagined in the book (except Thought Crimes… unless…), 1984 is still far off… and I’m way more optimistic than that book.

The Government has a key role to play in privacy rights for a new century.  Email’s unencrypted nature is similar to analog cell phones, which eventually had anti-snooping laws passed to protect privacy (well, and helped spawn more secure digital cell phones- and no, I can’t resist a USC reference).  Searches for information on the internet are similar to searches at the library, which were also protected (albeit the laws are at a state level).  Same goes for unencrypted Wi-Fi traffic.

And I truly believe that this story about privacy concerns is an optimistic one.

First, people are free to discuss the implications of privacy in a digital age – this dispassionate analysis itself would be impossible to write in many countries, even today.

Second, violations do inspire responses.  CISPA and SOPA/PIPA have all been shelved as a result of concerns.  There are overtures towards requiring warrants for reading private emails.  The AP Records case is inspiring a revisiting on journalist shield laws (no word on blogger protection, haha).  Even The Journal News removed their gun permit map after a gun safe in at least one mapped home was targeted.

Now, some perspective about the increasing Government “power to observe”.  In the recent Boston Bombing case, it was surveillance footage from a private company – Lord & Taylor – that helped identify the suspects.  It was a private citizen who provided the lead to find the second bomber.  We should resist the  idea that people who are interested in privacy automatically have something to hide (even if they once pirated some digital content or smelled some marijuana smoke in Vietnam) and trust other people to help keep us safe before giving up and instituting a total surveillance state.

If the price of freedom and privacy is eternal vigilance, the fact that these stories are still controversial is a bright light.

That’s great… you know, as long as that bright light isn’t trained on your private information.

Stacking Benjamins.

Here’s the link on iTunes.

As for my piece?  I’m scheduled to make my debut on the new show on Wednesday, so mark your calendars.  We’re releasing shows today, on Wednesday and Friday this week before going to a more normal schedule.

So, there will be no content today… (“but on your deathbed you will receive…“) but replace reading my stuff with listening to ours, won’t you?

Math! (Boring. Actually, I use OpenOffice)

Yesterday, Nate Silver posted an article as a ‘pre-buttal’ to the inevitable complaints of conservatives audited in the last few years (yes, many conservatives and liberals will be randomly chosen per year).  Turns out, a number of prominent conservative donors – some prominent only because they appeared in Democratic campaign material (in one example, directly from the President’s campaign!).  Coincidentally, or not, some of those conservatives ran into some major hassles from government agencies.

Let’s talk about one of those cases – the case of a large Mitt Romney donor, Frank VanderSloot.

VanderSloot donated $1,000,000 to Romney aligned groups, earning him the dubious honor of showing up in some late April 2012 campaign material from President Obama’s reelection campaign.  I’ll let Kim Strassel of the WSJ tell you the rest:

Twelve days later, a man working for a political opposition-research firm called an Idaho courthouse for Mr. VanderSloot’s divorce records. In June, the IRS informed Mr. VanderSloot and his wife of an audit of two years of their taxes. In July, the Department of Labor informed him of an audit of the guest workers on his Idaho cattle ranch. In September, the IRS informed him of a second audit, of one of his businesses.

Now, Nate Silver said we can’t be sure any conservatives were targeted by the IRS since the audit rate on people with incomes over $1,000,000 is 12% (let’s ignore the oppo research action – but yes, that’s messed up).  Great hand-wavey explanation, but unless you assume in Mr. VanderSloot’s case that all of these events were related the math is way different than Silver implies.  I think it’s a fair assumption that the IRS and the Department of Labor won’t coordinate too – a spokesman for the IRS even says it in this article about the case.

Here’s the math if these events were unrelated:

12% chance of a personal audit (from IRS data) x  17.8% chance of a large company audit (I’m assuming Malaeuca is the company targeted) x .39356%* = .0084% chance of VanderSloot’s woes, assuming everything is random.

How we describe our population is tricky… not all our $1,000,000 earners will have a large business with over $500,000,000 in revenues (although some will).  Let’s generously assume they all do – so 337,477 millionaire tax returns times a .0084064416% chance of the triple audit.  So that’s low – but I’m being generous here.

So, yes, using my quick math  – I estimate around 28.4 returns a year will have the triple threat of audits from the IRS, the IRS and the Department of Labor.

Now, these next factors had no bearing on a fair odds calculation – but they lend credence to a political motive… How many of those end up with no enforcement action (VanderSloot claims that the IRS owed him after the audits!)?  How many involve donors specifically called out by a Presidential candidate?

Look – I think it’s disgusting when public figures with immense power “punch down“, so to speak.   I don’t have time right now for a privacy dissertation, but I don’t think large donations to a politician should inspire the opposition to publicize names of donors… not public figures… to millions of followers.  Respond in kind – but yes, we know it’s easy to escalate if you’re a President or a Comedian or a Radio Host or a (insert person with followers here).

*My math on Department of Labor Enforcement: I’m being generous here since I’m including all actions to emulate audits (EBSA Plan Administration, OFCCP Evaluations, OFCCP Investigations, and WHD Cases – basically, I’m only un-checking inspections), but I count 39,356 enforcement actions in 2011-2012 on roughly 10 million employers covered.  Yeah, it’s not evenly distributed – you might have an audit with some follow up (resulting in multiple events), but it’s fair to say your odds of a single year audit from the DOL are around .4%

Links We Liked!

• Who knew?  Energy levels might dictate our 1 dimension of time and 3 dimensions of space.  In a few billion (trillion?) years we might have another space dimension to play with!
• How does a high earning female affect males?  Read the abstract (or the full study).  The effects are different if the female is in a relationship or is single.
• Are we in another bubble, in potentially all asset classes?  Bloomberg doesn’t know.  Burbed, on the other hand, has some more great evidence that the Bay Area is getting kinda frothy!
• Mr. Money Mustache had an interesting article on constant optimization – and a realization that many (most?) people just don’t want to change their finances.
• Cracked hits one out of the part (adult language) with 6 Reasons Good Bands Start to Suck.  I wan never a huge metal fan, but I can dig the argument…  Oh, and if you aren’t going to visit?  Just do it for the Bono art.
• Nelson at Financial Uproar runs a screen to find out which businesses are trading for less than cash… and is going to see if they ‘beat the market’, so to speak.  According to my co-writer, statistical rigor in the stock market will require around 40 years of trades… so he’s in it for the long haul!
• A $7,000 online Master’s Degree from a well-ranked college (Georgia Tech)?  Wow – if this takes off, I might add a few more pieces of paper to my wall!
• Evan at My Journey to Millions has become a nihilist!  (“Oh, that must be exhausting”).  Well, at least with money topics.  I hear you, my friend – it’s harder to talk about finance cold than to a receptive audience.
• Our pal Makin’ Sense Babe pulls the mic off a camera (read: it won’t work) for a hilarious interview with people on Muscle Beach about what “Don’t Fight the Fed” means.  Last time I was there I considered buying one of those Sweatshirts with cut-off arms – because, irony.

Links to Us!

• Carnival of Wealth
• Carnival of Financial Independence
• Yakezie Carnival
• Financial Uproar

Look! A sucker!

Ed: Whoops, forgot 5/5 with a missed Powerball in the subprizes.  Shows what I know about how the Powerball works, eh?  It’s still a bad idea.  Numbers Revised!

Hey everyone, it’s your favorite lottery killjoy PK!

I’m here to debunk a silly theory we’ve seen floating around the internet – that goes like this… The 5/18/2013 Powerball drawing will be $600,000,000, and odds to win are 1/175,000,000 – so each $2 ticket is worth $3.42!

Wrong.

And we’ll show you how using the somewhat simple math.  The people at Powerball are smart – smart enough they aren’t going to run a lottery expecting to lose money.

We previously discussed the expected value of the record shattering Mega Millions drawing (negative), then built a calculator so you can do the math on arbitrary drawings.  Recently we talked about how people have beat the lottery – but, not surprisingly, the proven cases generally came from smaller state level lotteries… not country-wide lotteries vetted by tons of auditors and actuaries.

Buying Powerball Tickets For This Drawing is Like Throwing Away at Least 50 Cents

We’ll get to our math in a second – but, sorry to say, there isn’t a positive expected value on Powerball tickets, no matter what news organizations are implying.

Long story short:

Your expected value is around $1.46.

Your ticket will cost $2.  That’s a negative expected value.

And, oh yeah – you’ll be taxed on your winnings – so that $1.46 might be $.80 or less!  Buy some S&P 500 Index Funds… trust me (here’s a historical calculator!).

Why is all the math wrong?  It all boils down to the number of people who will win.  If more than one person wins, the prize will be split equally amongst the winners.  However, the odds are actually much greater that either 0 or more than one person will win.  Here’s what we calculated:

Winners	Probability
0	18.0504%
1	30.9024%
2	26.4524%
3	15.0955%
4	6.4609%
5	2.2122%
6	0.6312%
7	0.1544%
8	0.0330%
9	0.0063%
10	0.0011%

The Boring Math Only 10% Of You Will Read

How did we get those?  We did it the same way as we did for the Powerball, but this time we’ll try to step through it quickly with our assumption of ticket sales.

The only jackpot approaching today’s $600 Million (actually, $376,900,000 Cash Prize – remember, it’s an annuity otherwise) was the 11/28/2012 drawing with the $587 Million nominal prize.  It sold 281,565,987 tickets.

Let’s assume 300,000,000 are sold.

Reproducing the distribution is easy, especially in a spreadsheet program!  Your Poisson number is 300,000,000 tickets sold * odds of winning (1/175223510), or 1.7121.  Now, simply take the odds of each (as shown above!), and multiply by what the jackpot would be in that situation for a single ticket.  So, 0 winners = $0, 1 winner = $376,900,000 * 30.9%, 2 winners = $188,450,000 * 26.5%, etc.  If you sum the expected prizes, you get $193,539,183.00… that’s the expected jackpot, folks.  That’s only $1.10 per ticket.

The smaller prizes are simple to calculate – they don’t split (and I’m not attempting to factor Power Play – this is my quick estimate folks; my sister is here, haha).  Just take straight odds, and you’ll get this table:

Add it up – around 17 cents of expected value.  Sum it up, and you’ve got $1.46 in expected value.

Sorry to Burst Your Bubble

Yeah, my bad.  Sorry to be such a curmudgeon… but if you all send me $2, I’m sure we could work out a deal where I send you each $1.46.  Bernie Madoff has nothing on me!

Does This System Have Predictive Value?

I’m going to go with… probably not.  Still, if a failed experiment about market predictions missed to the low side so often, perhaps you can use this data to your advantage?  Hear me out – let’s say that there is a trend here, and puts and calls tend to imply closing prices on the low side… that would mean you’ve got a chance there is underpricing for more optimistic trades.

Here’s what we’ve got this month:

And for puts…

Too Hard to Read?

Don’t worry, I’ve got you covered.  Here’s the above data in chart form (multiple by 10 to normalize the the S&P):

Good Luck!

Well, I’ll still be logging these predictions so I can eventually follow up on the predictions that I’ve derived from puts and calls… but I don’t look at this experiment as a reliable one for predicting market closes.  Nope… like I said above, I’m looking at it as a potential exploitable.

Let me know what you think… or if you can think of a way to scale or factor this data to improve predictive value… or, maybe, to predict where you can make money off the inefficiencies!

“First they came for the communists, and I didn’t speak out because I wasn’t a communist.

Then they came for the socialists, and I didn’t speak out because I wasn’t a socialist.

Then they came for the trade unionists, and I didn’t speak out because I wasn’t a trade unionist.

Then they came for me, and there was no one left to speak for me.”  -Martin Niemöller

Game, set, match… right?  Brevity is the key to good communication; you made your point, here’s a reference to Godwin’s Law?

Well, if it’s true that “The constitution stops where the Internal Revenue Code begins”, I think it’s worth examining why this is such an egregious violation of public trust.  So, with that in mind, let’s dive into why it’s so worrying that the IRS can (and will) target based on ideology… no matter where you fall on the political spectrum.

Let’s Back Up – What Did the IRS Do?

In a nutshell, the IRS recently issued an apology for unfairly targeting 501(c)(4) organizations which were formed with the words “Tea Party”, “Patriot” or “9/12″ in their names.  All of those phrases and words are overt or not-so-overt references to the Tea Party movement (generally a conservative movement) which gained prominence before the midterm elections in 2010.  Apparently all of this was directed by a field office in Cincinatti (As I went to press the story is changing… D.C. might have been involved).  Anyway, when the higher-ups got word, they apparently said to knock it off.

Did it stop?  Well, no – it got more sophisticated.  Instead of targeting groups based on words in their titles, they started targeting groups based on their objectives.  The objectives they targeted now were “political action type organizations involved in limiting/expanding Government, educating on the Constitution and Bill of Rights, social economic reform movement” (according to the soon to be released audit).  If you drew a Venn Diagram of groups wanting to limit Government growth and groups with ‘Tea Party’ in the title?  You’d have a circle.  That’s right – instead of knocking it off, they doubled down and made their targeting more sophisticated.

And why issue this apology now, more than 2 years after the policy started and 2 years after authorities at the IRS knew about it?  Well, because of the aforementioned audit.  Once it became obvious what the contents of the audit would be … well, an apology is better late than never.

The Political Response

Predictably, responses to the scandal have divided based on the source’s position on the right/left political spectrum.  From what I can seen, the major argument on the left is that 501(c)(4)s are being abused, so it’s too bad this will now hamper enforcement (see an example of the genre below).  It’s a nice dodge, but it doesn’t excuse the lack of targeting of groups associated with, say, Occupy Wall Street.  On the right?  Well, the IRS is being targeted, but also President Obama.  While IRS related scandals do smack of Nixon, and it’s true that Harry Truman established the buck stops at the President’s desk – I still think it’s premature and unfair.  The President was a little late in the news cycle with his outrage (Monday) at the IRS, but I won’t fault him for not commenting on a fluid situation until the weekend clarified things.  Another thing – the director of the IRS at the time, of course, was appointed by former President George Bush (43).  Hopefully (well, it’s a weird thing to hope for…) it stops at the field office in Cincinnati, but it’ll soon be borne out.

Sadly upshot of this scandal will be no scrutiny for anyone, rather than the across-the-board scrutiny c4s deserve.

Sadly upshot of this scandal will be no scrutiny for anyone, rather than the across-the-board scrutiny c4s deserve.

— Matt Yglesias (@mattyglesias) May 13, 2013

The political response is disappointing in a major way.  I sympathize with conservative complaints about being unfairly targeted – but I also have no doubt that if the parties were flipped, conservatives would be excusing the scrutiny in some way.  The biggest issue here is at the IRS, and the fact that low level agents in Cincinnati can make hugely disruptive policy changes to an organization as powerful as the IRS.

On Taxes and Discrimination

It’s funny, albeit in a sad way, to see people defending the policy on its face.  The aims of 501(c)(4) groups have certainly expanded a bit ever since Karl Rove (amongst others) started to form charitable groups with political aims a few years back.  However, targeting based on which politicians a group tends to help is crossing a bright line.

We already permit (and accept) IRS discrimination.  Think about it – the IRS disproportionately targets certain deductions like the home office deduction, and gives extra scrutiny to small business owners.  It pays special attention to people of great means who make many foreign transactions, especially with those who invest money overseas.  Why, because those people are more likely to cheat?  Well, no – not in reality.  Believe it or not, most tax cheating happens in a more modest part of the income spectrum – lower and middle income earners who deal with cash.  Think any tipped industry… the IRS claims that waiters and waitresses under-report their tips by a whopping 84%!

So why target people with home offices, small business owners and the like?  In the apocryphal words of Willie Sutton (on robbing banks), “that’s where the money is”.  Finding a few million unreported foreign earnings is worth a lot more than busting 50 waiters for pocketing tips.

So, yes – discrimination is great in an organization dedicated to collecting money when it is based on expected value, measured in money.  What isn’t okay is selective enforcement based upon the stated aims of a group following the same tax code as other groups.

Where to Go From Here

Well, (also predictably) conservatives asked for the IRS Commissioner at the time to step down.  The problem?  The IRS currently has no commissioner, as Douglas Shulman stepped down in November. Since there is no symbolic resignation that can happen now (other than the resignation of ‘low level field agents’), the IRS needs to make something clear:

• The Internal Revenue Service should only discriminate based on potential added revenue.  Just like with law enforcement and crime, it doesn’t take an 100% clearance rate to discourage tax cheating.
• The IRS shouldn’t discriminate based on political ideology (or for that matter, anything that doesn’t directly relate to revenue).  Nixon’s enemies list should have put an end to this, but recently IRS enforcement has been targeting conservatives.  (Here’s another example).
• The IRS is an enforced monopoly which obviously needs more checks and balances.  If low level field agents can wag the dog and enforce their biases and the organization only apologizes after an audit years later – well, in a phrase, “that’s not enough”.

The Most Likely Path

I’m more pessimistic than that.  This will probably just end up going down as a weird political story since the sides are mostly entrenched – a few more apologies, maybe some symbolic bills… then nothing for a while.

Remember, the IRS is the agency tasked with enforcing the details of the Patient Protection and Affordable Care act.  If the IRS is targeting politics today, will that be better or worse once they have access to medical data?  And it’s not just medical data – the bounds of IRS data collection are rapidly shrinking.

I’m hope I’m just a cynic – but when I run for president and a field agent leaks the details of my teenage acne treatment, and reveals my opponent’s long held prescription for Viagra… I’ll look prescient.

How would you change things?

]]> http://dqydj.net/why-everyone-should-care-about-the-irs-targeting-conservative-groups/feed/ 12 http://dqydj.net/why-everyone-should-care-about-the-irs-targeting-conservative-groups/ http://feedproxy.google.com/~r/DQYDJ/~3/zb0Iw7DRbQg/ http://dqydj.net/were-all-financial-professionals/#comments Mon, 13 May 2013 06:08:01 +0000 PK http://dqydj.net/?p=5023 Most personal finance sites (and DQYDJ is a personal finance site about 1/3 of the time!) have a disclaimer somewhere which states that we are not professionals when it comes to money and financial advisement.  It’s true – I have no formal qualifications that suggest that I have any special power or insight when it comes to increasing your net worth.

Taking an Active Look at Your Financial Picture

It’s funny, actually.

The only reason that you should listen to anything I (or Bryan – Cameron actually has an Econ degree) has to say is because of our track record.  Blogs and content driven web sites are perfect for this – consider that there is a public record of every time I made a forward looking statement and the result was completely different from my prediction.  A track record builds trust in a way a degree or a certificate or diploma hanging on a wall can’t in the digital age.

Back to the disclaimer…  It’s unfortunate that we look at finances as some esoteric subject inaccessible to the common man.  Truth is, money is a tool that all of us of sound mind have to deal with – it’s a tool we use in order to spend things we like or need, whether that spending happens now or in the future.  Here’s what I’m getting at – if the definition of ‘professional’ is ‘someone who makes money doing something’… well, then everyone has to be a “Financial Professional”.  You need to make money not using your own work… but using your money to make more money.

Stop Making Things Complicated

Canadian Pop Superstar! (Wikipedia)

“Why do you have to go and make things so complicated?” -Avril Lavinge Complicated

Avril’s right, you know.  The general public is altogether too disinterested in optimizing financial decisions, and the paucity of good advice makes it hard to find where to start down the road to (let’s call it) financial enlightenment.  This is why it’s difficult to talk shop to someone cold, and why it’s easier for sites to cater to repeat readers.  We try our best to not fall into this groove, so consider this piece, in part, an olive branch to anyone out there reading who just needs a little push to start getting their finances on track.

Truth is, personal finance is exactly as complicated as you make it.  When you come into the topic and instantly start wondering about the proper way to set a trailing stop loss, you’re doing it all wrong.  There is a set of fundamentals in finance – call it Personal Finance 101.  Once you’re through with those fundamentals, then you’re ready to start working your ways into the complexity of investing, lifestyle design, frugality, passive income, landlording, or managing your career.  Yes, there are many paths you can go on… but in the long run (as the song goes) there’s still time to change the road you’re on.  You know, just don’t skip ahead to a road you aren’t ready to travel.

So Start Today

We’ll soon write up our shot at a personal finance 101 back to basics type article.  We’ve heard people suggest making it a mandatory class in secondary school.  We think it’s actually too simple for that – and we’ll try to prove it by jamming doing it in a single article.  You see – we recognize that there is a “level one” of personal finance.  And you know what else?

It’s a very easy level to master.

]]> http://dqydj.net/were-all-financial-professionals/feed/ 6 http://dqydj.net/were-all-financial-professionals/ http://feedproxy.google.com/~r/DQYDJ/~3/M12sBmHd5Nk/ http://dqydj.net/the-dqydj-weekender-5112013/#comments Sat, 11 May 2013 16:53:26 +0000 PK http://dqydj.net/?p=5019

He’s going to be mad when I clean those up…

I don’t have a lawn right now – just a pile of leaves.  One member of the family doesn’t mind at all…

Links We Liked!

• Ironically, after engaging with our friends at Control your Cash and Hull Financial Planning about Timeshares (in the negative), we were followed on Twitter by a Timeshare company.  Kids, just say no!
• If only we had more resources (we’re jealous, you’ll see) we would have attempted something like this awesome map at How Money Walks about the income inflows and outflows (ie: migration between states and regions) as reported by the IRS.
• Nelson at Financial Uproar out frugals the frugal blogs with his list of top ten ways to be frugal.  For some reason, “steal things” didn’t make the list!
• Worried about Carbon Dioxide?  So was Russ George, but his team set out to pump excess CO2 into a ‘dead zone’ in an ocean eddy.  The result?  Massively increased biomass and a restored eddy.  Funny, those checks and balances, isn’t it?
• Mochimac at Save. Spend. Splurge. had a piece on the mindset of self-made millionaires.  She also commissioned (cost: free) us to make our millionaire calculator.  If you read our two sites, it won’t be long before you, too, join the millionaire ranks, eh?
• Want to burn the rest of your Saturday?  Check out this epic word-association map of music from Furia.  It’s awesome, believe me.
• On Monday, we posted about savings rates, and so did our friends at Boomer and Echo.  It’s true – great minds think alike.  However, our mind is little… so we aren’t referring to ourself here (although the minds at Boomer and Echo are certainly great!).
• As far as I know, Ironman at Political Calculations is one of the few still watching the embarrassingly slow recovery in the teen employment rate… which conveniently lines up with the last minimum wage increases.  Yes, we’re not fans of minimum wage (but we haven’t done our magnum opus negative income tax piece… yet), but this is a huge feather for the cap.

Links to Us

• The Carnival of Wealth
• The Carnival of Personal Finance
• The Carnival of Retirement
• The Yakezie Carnival
• The Yakezie Carnival
• Finance Carnival for Young Adults
• Financial Uproar
• Barbara Friedberg Personal Finance

]]> http://dqydj.net/the-dqydj-weekender-5112013/feed/ 8 http://dqydj.net/the-dqydj-weekender-5112013/ http://feedproxy.google.com/~r/DQYDJ/~3/CPeL1N9D1r0/ http://dqydj.net/may-8-2013-the-actual-all-time-closing-high-in-the-sp-500/#comments Thu, 09 May 2013 01:53:04 +0000 PK http://dqydj.net/?p=5012 Today was the all time high closing price for the dividend reinvested, inflation adjusted S&P 500.

I know that much of the financial world has been rambling about the continual new highs in the stock market.  You haven’t been, though… you read my post earlier this year (or read my Tweet this morning) where I originally pointed out the right adjustments to make, but this time it’s official:

The S&P 500, factoring in CPI-U seasonally adjusted inflation and reinvesting dividends just closed at a new peak.  The previous peak was on March 24, 2000.

Graphing this Century’s S&P 500 Roller Coaster

So, you bought some stock in the S&P 500 when your son or daughter was born, way back in March of 2000?  And you’re selling today?  Check out this crazy ride (both as reported, and inflation adjusted):

Too bad you didn’t buy the Dow, eh?

Methodology

I’m using OpenOffice to crunch all the numbers, but here’s the rough setup if you want to reproduce my work (pay attention, Harvard):

1. Take the CPI-U, Seasonally Adjusted from the St. Louis Fed’s awesome FRED site.
2. Find S&P 500 Total Return Data.  I grabbed this from Daily Finance.
3. Interpolate to find DAILY inflation numbers.  If you want a shortcut, I built a daily inflation calculator.
4. For the days since the last inflation report, extrapolate (again, the inflation calculator does this automatically, and updates itself once a month) to get the daily inflation numbers.  I’m using the last 3 months to figure out the slope for this month – this might later get revised away (yes, I recognize that – consider it accurate as of today!).
5. Adjust the closing prices.

For TODAY, 5/28/2013 I have a S&P 500 closing price of 2886.35.  On 3/24/2000, the S&P TR closed at 2107.277.  Respectively, I (using inter/extrapolate in OpenOffice) have daily inflation indices of 234.0343141982 and 170.9258064516.  Put them together and you get 2886.35 for today, and 2885.3169556953 for 3/24/2000.  There you go – that’s a pretty horrible return for 13 years, but at least it’s positive!

Too much work?  Well, if you’re okay with a lower resolution, we do have a great tool for that… the dividend reinvestment calculator for the S&P 500 is found on this very site!  Don’t you love us?

Taxes, Transaction Fees, and All That Jazz

Yeah, I know.  How far do you want me to take this analysis?

The irony, of course, is that income taxes are inflation adjusted, but capital gains are not.  So if you held on for 13 years and sold today, you’d owe taxes on a 36.97% gain, not the actual 0% gain in purchasing power you just recognized.

Plus you’d have to pay a transaction fee.  For shame!

Anyway, there you have it – this is a day that will live in infamy.

Meet the new inflation adjusted dividend reinvested closing price boss, same as the old inflation adjusted dividend reinvested closing price boss!

]]> http://dqydj.net/may-8-2013-the-actual-all-time-closing-high-in-the-sp-500/feed/ 3 http://dqydj.net/may-8-2013-the-actual-all-time-closing-high-in-the-sp-500/ http://feedproxy.google.com/~r/DQYDJ/~3/OHTjbXBtVgs/ http://dqydj.net/the-curse-of-successful-investing/#comments Wed, 08 May 2013 07:08:55 +0000 PK http://dqydj.net/?p=5007  

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” – Warren Buffett

Younger, cockier Buffett succinctly said what many others have tried to impress upon investors – your smaller size is an advantage in the markets.  Call it the curse of success or whatever you want (and this isn’t an article about mutual funds), but a little success in the markets can be a bad thing for a fund.  Consider this success spiral:

Yep, one egg basket. I’m so creative. (Morgue File)

1. Beat the market
2. Attract tons of new investor money
3. Fail to beat the market with the huge influx of cash
4. Cash leaves
5. Beat the market
6. Repeat!

Too Much Money, Not Enough Opportunity

The fact that most mutual funds do not beat a standard benchmark, like, say, the S&P 500, leads a lot of people to believe that beating the market is an impossible goal.  We, of course, are a bit more sympathetic to the idea – but we do feel this game is rigged.  Remember, when you invest your money, you face many less restrictions than a mutual fund manager.

That’s right – we hold our mutual fund managers up to a higher standard than ourselves.  Mutual fund managers have to:

1. Hold some money in reserve due to redemptions
2. Follow strict strategies laid out in a prospectus
3. Hue to specific asset allocations (again, in the prospectus)
4. Usually avoid purchasing controlling stakes
5. Keep performing quarter after quarter

Watch that Basket!

Andrew Carnegie (supposedly) said something like, “The way to get rich is to put all your eggs in one basket and watch that basket.”  That’s right – diversification might cushion your downside, but it also requires you to be correct more times in order to have the same upside.  I’m being charitable here – unless you make multiple good calls, you’re limiting your upside.  Most large fortunes have come from avoiding diversification – people staking their bets on one company, investing in one good stock, buying real estate in one city or region.

I’m not saying that the preponderance of evidence means you must become less diversified, I’m saying that if you feel that you have an edge, you won’t realize it by buying hundreds of stocks, or investing billions of dollars of Other People’s Money.  The reason that most people who read this article can theoretically beat a benchmark is because of their increased flexibility – you can buy small (and micro) capitalization stocks with most of your capital if you so choose, and you probably won’t be buying a controlling stake.  If a mutual fund with billions of dollars tried it?  Their purchase would require disclosure to the SEC, would move the market noticeably, and they would still (in the case of some stocks) need to buy other companies.  Neither the mutual fund nor you are in the business of running companies, just investing in promising ones… so you can see where that would be a problem.

Where This Information Suggests You Look…

Draw a bunch of arrows from this information, and what do you see?  Mutual funds pretty much define the market… even if they are trailing indices or making formulaic purchases in portfolios of 50+ stocks (which behave like an index anyway), they aren’t going to beat the market.  Remember, again, they have to both take out fees and keep money in reserve – so they will never even track an index perfectly.

What can you take from this?  Sure, it increases your risk – but to beat mutual funds (and, yes, the market if it is possible) the way to do it would be to employ strategies the mutual funds won’t touch.  Whether than means leverage, small cap stocks, deep value stocks, turnaround plays, merger acquisition, options and futures, commodities, or something else is your call – but you can’t beat them by joining them.  If you’re going to try to beat the market, assuming you think it’s possible – don’t do it by emulating large mutual funds.

Coming Full Circle

Buffett recently put a contrarian voice on the Berkshire Hathaway board to provide a counter-opinion to him and Charlie Munger.  The so-called perma-bear, Douglas Kass, recently asked if Berkshire was too big to employ it’s old strategy.  He used colorful language – an “index fund” fit for “widows and orphans”, where the company is so big it can only hunt elephants.

Buffett may be the exception to the rule, and might be the ultimate Big Game Hunter of the investment world.  Do you think you can compete?  If you don’t, you know where to look…

 

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