Ask Uncle Bill

IF YOU AGREE WITH A CONTRARIAN, ARE YOU A CONFORMIST?

2009-11-04T07:27:59-08:00

Not sure what that means but it is a thought that goes through my head when I attend semi-annual seminars put on by a specific financial adviser. The fact that I agree with 99% of the stuff his group puts out makes me question his, and my, contrarian credentials.

But they are calling for a pretty strong market this year and here are the highlights.

First, why not? Financial collapses come about for the following reasons-

Monetary Policy Error

Fiscal Policy Error

Geopolitical Instability

Trade Policy Errors

Increases in Regulations

Euphoric Sentiment

Hmmm...Don't see much of a problem there. Geopolitical instability, you might say but the market looks and doesn't see much to worry about. Euphoric sentiment--not like the late 90's and the dot.com mess. People are still pretty cautious. Congress basically can't get anything done so no trade or regulatory action and the new Fed chief, after a few stumbles, seems to be doing pretty good. So no current recipe for a bear market.

Another factor damping down any euphoric sentiment is the FACT that people think the market is riskier than bonds. So do I. It is part of our DNA. Every time the market goes up I want to grab the money and stash it under the mattress. But if I did that I would be broke so I 'climb the wall of worry' and invest. Not all but a pretty good percentage because being OUT of the market is riskier than being in bonds. Mentioned this the other day but bears repeating as bonds since 1926 have returned 1.4% annually after taxes and inflation. The S&P 500, with the same assumptions, has returned 6.2%. Now, here is one place I have to worry more than you do because if you are just starting out and contributing to to a 401k you can ride out any ups and downs because you have 40 years to go. I have to start thinking about timing the market, you don't.

House Flipping In The Real World-Part 6-Fixing Things

2009-10-23T05:45:00-07:00

When we last left the smashed up house, Cynthia was working away, scraping and painting the inside of the house. Alice was having tests for liver cancer and things weren't looking good. I was reduced pretty much to buying supplies and staying out of Cynthia's way.

I got a few calls generated by the dyslexic 'For Sale' sign in the front yard. Two separate individuals wanted to see the house, set up appointments and neither showed. Then two Sunday afternoons ago I got two calls. One from my realtor handling another house (I have three) saying we had an offer and then a call from Marion. Marion sounded like 'Mame' and wanted to see the house that Cynthia was working on. Made an appointment and they showed up--three generations of Mame. Marion, her daughter Patricia, and Patricia's daughter.

In the real estate business, you indulge in some rental profiling and can size up your customer pretty fast. Given my track record, I wasn't very good at it but learning fast. Marion, late 50's, loud, no ring, no husband, Toyota, pretty well dressed but not my style. May have a few dollars laying around. Patricia, blond, young, 23-25, four year old daughter, no ring. She was a nanny. Not exactly Bill Gates but then I figured out I didn't really need to care because I was not going to carry the credit risk. No more playing banker for me. If they didn't get financing, no sale.

I stood outside and let the trio take a look around after I told Marion the price. They came out and I told them about everything that had been done within the last three years--new electrical service, basically new plumbing, heating and air conditioning (originally the house had space heaters--stay away from those), new paint in and out, and all new windows. Marion indicated they had seen every house in the neighborhood and the price was right and they took it, full price. Patricia wrote a check for $500 as earnest money and we agreed to sign some document later.

Patricia called three days later and we met. She had a document that basically said everything would be working in the house when she took possession. I xed out a few things and signed. Patricia looked concerned but signed it. Sue assured Patricia that the house would be in order.

Later I told Sue that I think I gave away the store to Patricia. Sue said, "She's just a nervous kid that knows nothing about houses or buying a house. You were pretty nervous when we bought our first house." I said I had a lot of reasons to be nervous.

So that's were we stand. I have a check for $500, a one page contract, and Patricia is working with her lender. The good news is that the lender called yesterday to discuss the closing. We traded messages. So if the whole thing goes through, great. If not, not really out anything since Cynthia is still working. As for the $500 I'll just give it back if the deal falls through--I'm not that big a jerk.

Actually, didn't have to. To my surprise and astonishment the deal went through.

Tomorrow, we'll figure out the financial return.

House Flipping in the Real World--part 5

2009-10-20T05:37:56-07:00

Randy summed it up pretty well-it was a mess. Too much for me to contemplate so told everybody I would be back Monday to start the renovation.

Wasn't there twenty minutes on Monday when Alice and Cynthia came over. I had started hauling stuff in the yard toward the center to make a pile to do something with later. Bumpers, trash bags full of stuff and a bunch of broken up, cheap stereo cabinets along with the bed of the truck. Alice said, "We can put all this junk on a truck and haul it away, cheap." The cheap part caught my attention. I asked for details. "50 bucks. Everything but the truck. We know somebody that will want that--no charge." Things that sound too good to be true, usually are but this was worth a try. I said see you tomorrow and left. Came back the next day and everything was gone, except the truck. Alice was looking a little sheepish, saying her friend said they needed a title to take it. Obviously, I had no title and we all stood around thinking how to get rid of two 400 pound inert pieces of steel. Alice finally said, "I got it...but I'll need 30 bucks for gas." I thought, ok, here's the scam. (After dealing with Freddy, I was a little down on humanity.) But the truck was a problem that had to go so went to the bank, got thirty bucks and left Alice and Cynthia to do their work.

Back the next day and the truck was gone, where I have no idea, but it was gone. Cynthia came over indicating that Alice didn't feel too hot after the two had spent most of the day dragging the truck around--it seems sliding the truck parts around wasn't too hard but getting them up into another truck to be hauled away was a bitch, quoting Cynthia. "Need anymore help?" I have no illusions about my ability to patch drywall holes. I can do it, they just look like patched holes. We reviewed the holes. "How much? "Thirty bucks." Deal. And so on and so on.

Freddy had really screwed up the wiring so Cynthia had to call in a consultant, Randy, who did the job for $25. Then Cynthia offered that the inside really needed painting, the peanut butter brown made the rooms look small. Seems Cynthia has a bit of the interior decorator in her. How much for the paint job? $150. Ok.

At that point my curiousity was greater than my greed and I blurted out "Why are you guys so cheap?" Cynthia didn't even blink. "We're on parole." Oh, great. Parole and cheap, how do these go together? Cynthia gave me a short tutorial on the American criminal justice system. "See when you go to see your parole officer every week they ask what you have been up to and the more jobs you got, the better. So I have a lawn service, I fix up rentals for Mr. Barlow and now I'm contracting for you. Like I said, the more the better." The cheap part was due to the fact that it is hard to find the jobs because most people don't want ex-cons hanging around the house. Made sense to me. Finally, Cynthia enjoyed the work. At least she said she did.

Went home and said to Sue, "Hey, you won't believe this..." as an intro to asking her if I should not take any risks and dump Cynthia and Alice as having ex-cons as your work force may have some liability attached. Sue came back that I had so much bad luck with tenants and Freddy that maybe it was my time for some good luck. I said, "Or maybe they are more bad luck." She retorted, "Maybe they are your guardian angels." Maybe but I was still a bit nervous.

House Flipping In The Real World--Part 3-Fast Freddy

2009-10-16T07:30:00-07:00

(This blog is turning into another mini-series, this one on the joys(?) and perils of real estate investing. I repeat, that anyone can make money at real estate BUT it is not painless and not easy. To go to the beginning, scroll down.)

Went to the closing, signed a bunch of forms, and wrote very large checks to the realtor and for last years taxes. But told myself I had followed the rules--fixed the house, interviewed realtors, put the house on the market, found a qualified(?) buyer, and paid a bunch of money at closing. And was helping a young couple get a start in life. As a friend put it, let no good deed go unpunished.

But I was feeling pretty good about myself and sat back and waited for that first payment...and waited. One problem surfaced immediately--Freddy and Celia didn't have a phone, or at least not one they told me about. Called the realtor. He would try Freddy's dad. Gave me the number as well and the number for Celia's parents. Called both and got Spanish only speakers or so they said. (Phone tricks are something I've dealt with for years. I was in international finance and we had a controller in Brazil that often got phone problems when asked difficult questions. It was only after we had become friends that he admitted to crumbling typing paper next to the phone when things got too hot for him. Try it, it sounds exactly like a cell phone breaking up.) Celia finally called and said could I come by and they would have the money for the first payment. Didn't like it but ok.

This happened a couple of times and finally said, no more nice guy, mail the money order. Worked a couple of times, then more phone calls, then nothing, then a summons from the city to clean up the backyard. Called the city, said I didn't own the property but, just out of curiousity, what was in the backyard? A junkyard, the city said. Oh, great.

Then payments on schedule for a couple of months and then nothing. I started to dread the first of the month--would they or wouldn't they? Called the realtor and he called around and found out that Freddy was having cash flow problems because Freddy was in jail. Wonderful. Seems Freddy was having a mid-life crisis early, brought down by the burden of the wive and two kids. Fooling around with some buddies he got busted for something and discovered it's hard to paint houses when you are locked up.

By now about a year has gone by and I'm getting a little curious about whether they had paid property taxes. Stupid me, of course not. And they were in arrears and incurring late charges of about $100 a month. Note: The city is not a friendly creditor, don't get late on your tax payments.

I hit the ceiling and then cooled off and then did the smart thing--I abdicated. Called a lawyer I knew casually, how much to foreclose? $400 plus fees of around $100. Go for it. He said the process would take about three months. What? That's the way it goes. Ok, get cutting.

And I thought of Bill Smithburg. Smithburg was chairman and CEO of the Quaker Oats Company when I worked there early in my career. Bill was a hero for having the 'vision' to buy Gatorade and turn it into a powerhouse. A few years later he was vilified and canned for buying a tea company that I can't even remember the name of right now.

I remember Bill for sending out a memo to finance saying, roughly, don't bring me small projects or acquisitions. Bill figured out that you spend the same amount of time on a little project as a big project, sometimes more. I finally figured out that Freddy and Celia were a small problem that was taking up way too much management time and effort so I flipped it to the lawyer and said, call me when this mess is over.

Sound cruel? Perhaps. But I would soon find out that Freddy was really a nasty little person.

House Flipping In The Real World-Part 4-Back In The Hood

2009-10-15T05:16:00-07:00

The fourth part in the sad, sad story. See previous posts to get up to date.

My lawyer called on the first Tuesday in December and said the foreclosure was final, or almost. Freddy and Celia had 24 hours to get out or we called the sheriff and he threw their stuff out on the street. Pretty harsh but my patience was pretty thin. The lawyer had sold the house on the courthouse steps and I, since I held the note, was the buyer. There is much made in real estate flipping books about buying houses on the courthouse steps. Unless I am really missing something, don't waste your time. What happens is this--the mortgage company sends notes to the owners saying they will be foreclosed on unless they pay, the owner can't or won't pay, the house is sold on the steps and the highest bidder will be, in 99 out of 100 times, the mortgage company because the mortgage company holds the note. Now, if you want to outbid the mortgage company, feel free as the mortgage company will be ecstatic since they will get paid when you buy the house because they have the mortgage but you won't get much of a deal. A bit complicated but makes sense if you think about it. The bottom line is don't waste your time hanging around the courthouse steps.

I gave Freddy and Celia 48 hours and showed up on Thursday. Since I hadn't been in the neighborhood for awhile we had a bit of a reunion. Mercedes and Hector were home for lunch and waved. The couple up the street, an elderly brother and sister team, came over as well as the two women living across the street, Cynthia and Alice. Carolyn, who lived on the other side and was never out of her robe and cigarette, came over as well. Carolyn's mother, Jennifer, was my first and best tenant and I asked about her. Got a laundry list of medical problems and doctor opinions. Told Carolyn to give Jennifer my best.

Finally it was time to go inside. We all huddled on the back porch, leaning forward, trying to peek inside. I put in the key, pushed and heard the tinkling of broken tile. A groan went up from the crowd. I got a look saying Push Harder and gave the door more shoulder and heard a sound that indicated the need for a new door in the near future. We all pushed our way inside half expecting to find a dead body or a live body with a gun but all we found was a really messed up house. The tile in the kitchen and bath was shot, it looked like somebody had rolled refrigerators back and forth. There were holes in the ceiling in the kitchen, bath, one bedroom and the living room. Seems Freddy fancied himself an amateur electrician but couldn't hook anything together that worked. An attempt at interior decorating failed as they painted the whole inside peanut butter brown. Three kitchen cabinet doors were off their hinges. And there were no doors. There were no doors left to any of the rooms, including the bathroom. Carolyn asked the obvious, "Why the hell did they do that?" Nobody had a clue.

Carolyn turned and said softly, "You poor man." which made me a feel a bit better. Actually I have seen houses in a lot worse shape and said so. Carolyn said, "You poor man" again.

We went out of the house and into the garage which contained the front end of a truck with no wheels. The bed of the truck, also with no wheels, was in the backyard. Randy, Carolyn's husband who worked at a convenience store, had now joined us and said Freddy had been running a chop shop. Carolyn had thought Freddy was building choppers and had to be brought up to speed on the difference between choppers and a chop shop. "That explains a lot." she said.

Carolyn also said softly, "He beat her." Cynthia chimed in "And she just took it. Should've thrown the bastard out but she alway let him back in." Freddy was exposed. And I hoped Celia had enough sense to finally leave the guy and go home to Mom and Dad but I doubt it.

A moment of silence and then Randy broke the ice. "What a f**king mess."

HOUSE FLIPPING IN THE REAL WORLD--PART 3

2009-10-14T07:50:46-07:00

Actually, didn't have to. To my surprise and astonishment the deal went through.

Tomorrow, we'll figure out the financial return.

HOUSE FLIPPING IN THE REAL WORLD LINK

2009-10-12T11:48:48-07:00

http://www.associatedcontent.com/article/2262139/house_flipping_in_the_real_world.html?cat=3

A Reasonable Health Care Plan

2009-10-01T12:46:21-07:00

A REASONABLE HEALTH CARE PLAN
If you want something done right, do it yourself. Nobody cares about you as much as you.
http://www.associatedcontent.comarticle/2238249/a_reasonable_health_care_plan.html

House Flipping In The Real World-Part 7-Doing The Numbers

2009-09-03T04:42:00-07:00

As they say at NPR, when we do the numbers we find that, well, it depends on how you do the numbers. Analysis is in the eye of the beholder. Just ask any finance guy told to justify the corporate jet. I prefer, with a few twists, to do the cash in, cash out method so here goes.

The HUD asking price was $39,900. I got it for $27,000 after some long negotiations. Dealing with HUD is tricky so a realtor that specializes in this is important. HUD picks the realtor and the realtor cannot opine on a bid but they will do so in code. "They may have an issue with this" means too low. "Perhaps in the ballpark" means you got it. Anyway, as I said before, you make money when you buy the house, not when you sell it.

Here are the cash flows (Sorry about the numbers going all over the place, programming ignorance):

Money out

Purchase Price $27,000

Maintenance/Repair 3,400

Property Taxes 3 Years 3,600

Insurance 600

Freddy and Celia Closing Costs 3,500

Foreclosure Legal Fees 750

Back Taxes and Penalties 3,000

Patricia Sale Closing Costs 500

Total Out 42,350

Money In

Rent $16,275

Freddy/Celia Mortgage Payments 7,920

Patricia Sale Proceeds 49,000

Total In 73,195

ROI = Cash In minus Cash Out divided by Cash Out=$73,195-$42,350=$30,845 divided by $42,350=72.8%. Not too shabby, at first glance. I held the property for 4.5 years so the annual return is 72.8% divided by 4.5 years equals 16.2%.

At this point, any analyst out there worth anything should be shouting "Wrong, wrong." And they would be right. You can't divide 72.8% by 4.5 years because it ignores the time value of money and a few other things but that's my story and I'm sticking to it.

There is a more glaring error. There is no expense in there for me but let's not quibble.

Let's do look at what is in there--The cost to renovate the house was only $3,400 because I did most of the work myself. It was a controllable variable. Uncontrollable variables are property taxes and penalties ($7,600), insurance ($600), closing costs ($4,000) and legal fees ($750). Actually, closing costs can be reduced significantly by avoiding real estate agents as I did with Patricia but it ain't a done deal yet so an agent still may be necessary.

What ate up a large amount of cash was FEES and you cannot avoid them but most people forget about them. If you invest in real estate, don't forget them.

BUT we still haven't come up with the most GLARING error in the analysis. The Donald and Co. would say "Don't do it this way. Use OTHER PEOPLE'S MONEY." Let's try that. You put 20% down and borrow the rest for repairs and everything else at 10%. So that is $5,400 for the downpayment and $15,350 for everything else and 4.5 years of interest payments=$31,899 plus the interest not paid you for the downpayment but let's not split hairs. Income of $73,195 minus expenses of $31,899 generates a return of $41,296 divided by $31,899 for a return of 129%, or an annual return of 29% doing it my way.

Not bad. In fact, great. The Donald is vindicated except for the fact that OPM is based on the assumption the OP are either idiots or charities because...

Who is going to lend you this money? Not HUD. Oh, there may be a government program out there that will lend you the money but I don't know about it and I wouldn't qualify. Maybe you would but I doubt it. Will a bank lend it? Lend $31,899 for a property worth currently, maybe $27,000? Remember OPM assumes you can borrow just about everything. I don't think so. Maybe Mom and Dad will lend it. Give it a try. Or private individuals may lend it but they will charge a lot more interest and take a lot more of the profits.

Please feel free to take a whack at the analysis or come up with a better one. I'm going to send this to a friend that is much better at finance than me so we will see what he has to say. For now my head is spinning and I probably made some major mistake BUT no matter how you do it you will come up with the same conclusion--yes, you can make money in real estate but it isn't as easy or painless as the guys on TV would have you believe.

It's Not Easy Being Green--continued

2009-07-07T11:18:47-07:00

As I said last time about solar power, I was a bit shocked. Let’s push some numbers. We invest $10,000 for ten panels that take up most of my roof and really upsets the homeowners association. For that my electricity bill goes down by 13%. Assuming a $200 monthly bill, the bill would go down by $26 for an annual savings of $312. Using the old payback formula, the solar investment would pay for itself in; let’s see here, $10,000 divided by the annual savings of $312 results in a payback of…. 32 years. I won’t be around in 32 years, I don’t think, so why bother?

But I soldiered on. There has to be something changing to make being green make sense. I then asked the salesman, “But, of course, the price for panels has to be coming down with all the investments and awareness of solar? Right?” His answer, “Wrong, the price is going up.” Seems that there is so much demand that the price is going up because demand is outstripping supply.

Ok, how about tax breaks? I keep hearing about what Congress is going to do, certainly they are on top of this. Yep, said the salesman, you get a 30% credit. A credit, not a deduction, which means my taxes go down by 30% of $10,000 for a cut in the price of $3,000. Now, we’re talking. Not so fast says the salesman. The 30% credit is good up to $2,000. That is the end of that.

Now, I’m getting frustrated. If the credit is only good up to $2,000, who is buying these things besides movie stars? The short answer—Businesses. Businesses who go solar get the 30% tax break but it is unlimited so if the panels needed to run a plant cost $200,000 they get a tax credit of $60,000. An added bonus—they can depreciate the whole investment in five years. Next time you buy a pair of boots, think solar—the Nocona boot company just switched over and got the credit.

I never give up. How about wind power? That really makes sense in Texas, just ask Boone Pickens. Yep, says the salesman, for the same investment as solar you would pick up a lot more energy plus the added bonus of a 30 to 100 foot tower sitting in my backyard. Try explaining that to the homeowners association. They won’t go for it.

I shot back at the salesman, “You guys have a unit on your web site that doesn’t stick up over the roof and is attached to the house. I could go for that.” He looked a little blank, then tells me he thought that was taken off the site. Why? Seems it doesn’t work. Darn. Finally something I could get really excited about and it doesn’t work. Just my luck.

I almost gave up. One final question—what about a whole attic fan? His response—noisy. Well, not really, I found out. Seems there has been a lot of work on this and I’m looking into an insulated, quiet fan that mounts in the ceiling, draws air up through the house, costs about $600 and projected to cut air conditioning costs by 30%. Requirements are wind and air at night that is cooler than the inside air. I got both.

This may turn out to be another dead end but at least it doesn’t have a 32-year payback period. Will let you know how it turns out. It’s not easy being green.

It's Not Easy Being Green

2009-05-31T10:59:35-07:00

When we built this new house we did everything within reason to make it energy efficient. Within reason means not paying so much up front you never get your money back but buying highly rated stuff like windows, doors, efficient water heaters and heating and air conditioning. Add blown in cellulose insulation and I thought we did pretty well. Which we did except the electric rates keep going up and all the savings seem to be going to the utility company.

So, I thought, how do I get rid of the electric company? How do I make the meter run backwards? Go solar, go renewable which is the answer for everything coming out of Washington these days. We can’t drill in Alaska or off the coast but we can “harness” the power of the sun. “Harness” appears in just about every article and sound bite related to energy suggesting the sun is just some wild colt running around the corral waiting to be broken and turned into a useful member of society.

So I went into the corral of the Internet and Googled “solar electric power.” The first thing that comes up is about ten web sites for government agencies that explain what solar is and how it works but doesn’t tell you how to actually go about putting in a system or who to call or who is good and who is bad. About the only thing the government sites tell you is that solar energy comes from the sun. I already knew that but what really gripes me is that our tax dollars are paying for this drivel.

Putting this aside I scroll down until I finally find some commercial web sites almost as bad as the government web sites with similar explanations but better pictures. Pricing is mostly absent so I fill in an email request for information and get a call from a lady in Houston who asks about my income and house size. Seems she wants to weed out the tire kickers so I act pretty enthusiastic about solar sounding more like Leo Dicaprio than a former finance guy.

I’m in luck because they just opened a Dallas office and a rep will call me which he does and we set up an appointment. I am a bit suspicious because solar, oil and gas and just about everything regarding energy has a lot of ex-shoe salesmen as front men and frauds are a fact of life. Having just been the general contractor on this house, I interviewed a lot of subcontractors and you figure out pretty fast if a guy knows what he is talking about. I gave the guy a 7 on a scale of 10, which is not bad.

He looked at the house, at the garage that faces south and the garage roof that would support the panels. He figured they could get ten panels on the roof then run a bunch of wires down into the attic into the storage room into an inverter which converts the direct current from the panels into alternating current (or is it the other way around?) into the fuse box with the power “harnessed” from the sun going directly into the house to run all our gadgets.

Did I say “all?” Not really. But first the cost—figure $1,000 a panel installed. That is, let’s see, about $10,000. A pretty big upfront investment but maybe worth it for total independence from TXU. Wait a minute, not so fast. Any guesses how much electricity ten big panels sitting on your roof will provide? Well, I was, no pun intended, shocked. 13%.

Details next time.

Longer Than You Think

2009-05-28T08:12:41-07:00

One nice thing about writing a column is putting it off, at least for a while but they don’t call it a deadline for nothing. So sitting here at 11am with a noon deadline, I have to do what I do best—steal something. Here’s the gist—most people go conservative in their investments when they retire which makes sense now with the market in the dumpster but won’t look so smart, or profitable, when the market recovers. Alternatives are outlined in the Wall Street article by Ian MacDonald titled “In the Long Term, Assume You will be spending.

First, because of medical advancements and, hopefully, a healthy gene pool, you may live a long time, like maybe to a hundred. If you do, let’s see how differing investments hold up over time, a long time.

A real popular investment(?) right now is something called an immediate annuity. Here is what McDonald says about this scheme—“ An immediate annuity is an insurance product (not investment product) in which the buyer relinquishes ownership of his (or her) hard-earned assets in return for a guaranteed income stream. Sounds great, right? Guaranteed! Guarantees are fun. Nothing’s ever guaranteed with investing! But buying an immediate annuity pretty much guarantees inflation will kill you.

We all know you should assume a longer time horizon (and it can’t hurt to err on the side of longer vs. shorter). So let’s say you have a 30-year time horizon (or longer!). If you need $50,000 a year to maintain your lifestyle—in 30 years you’ll likely need $125,000 because of inflation! Said another way: If you buy an immediate annuity, start thinking about how to explain to your spouse that in 30 years, you’ll be living on 60% less. And, you surrender ownership of the assets. If you get hit by a bus the day after buying the annuity—too bad, so sad—the insurance company gets your money, not your spouse or kids.” Ouch, nothing to like their, either in the short term or the long term.

Bonds, anyone? Here is Ian’s take on those—“If you have a long time horizon, stocks, or at least a hefty allocation of stocks, are probably most appropriate for you. Since 1926 there have been 62 rolling 20-year periods. In all but one (98% of the time), stocks beat bonds handily—and by an average margin of 3.8 to 1 margin. Some Gloomy Gus might say, “Yeah, but there was that one period. I’ll take the inferior returns in exchange for less day-to-day volatility.” Be our guest, but the margin for that one 20-year period when bonds beat stocks was a less impressive 1.4 to 1. Big whoop. In our view, hardly worth the odds. Plus, that one period required buying at the peak in 1929 and riding down the Great Depression into World War II—a pretty unique period.”

McDonald wraps it up this way—“Assuming a longer time horizon is the first step, but you can still get slaughtered if you don’t craft your strategy with enough growth. If you don’t relish living on much less later in retirement, bonds can actually be far riskier than stocks. As for the immediate annuity—we’ll assume you don’t hate your spouse enough to make that mistake.”

I guess I would try to simplify it a bit—annuities and bonds are stable, you know exactly what you are going to get. Unfortunately, you don’t know what you are going to get from inflation and there is the problem. Annuities and bonds are fixed, stocks are not which in the long run, and we are in this for the long run, is good. Stocks are not fixed because they represent companies run by people; people who want to succeed and get wealthy. You, as the investor with a long time horizon, should go along for the ride.

An Alternative Investment--The USO

2009-05-20T09:19:17-07:00

I have a personal interest in the military that I won’t go into here but when a friend suggested I check out the DFW USO, I arranged a visit. Most people know what the USO is—think Bob Hope and donuts—but the DFW USO is special.

When I arrived about 10:30am at Terminal B, Gate 18 there were a few soldiers playing pool, others lounging around. I ended up in a tiny, crowded office with Sheri and Lynne. Sheri is the director with a son in the Marines. Lynne is married to a Marine lieutenant colonel and they explained why the DFW USO is unique. A combat tour in Iraq lasts 12 or 15 months. At the halfway point a soldier gets two weeks leave and, depending on where they live, they fly from Iraq to either Atlanta or Dallas. When they go back they leave from the same. So each morning at DFW there is a flight coming in and one going out in the afternoon. A DFW USO volunteer is the first thing a soldier sees when he or she arrives and the last thing they see when they deploy.

It was now about 11:30 and Sheri took me on a tour starting out going through the terminal now filled with about 300 soldiers who had to report by noon. A lot of people comment on how young these soldiers look. I guess I’m used to that. I’m more impressed with how young they are and how professional they are. Maybe, professional isn’t the right word, try organized. Walking through this group, I heard laptops snap, Velcro ripped, Ipods stowed, backpacks loaded. All with an efficiency that amazes me. When I was their age I considered getting out of bed by noon to be an act of engineering genius. It’s amazing to see a huge group of teenagers that isn’t drunk. I tend to check out patches and saw AirCav, 82^nd and 101^st Airborne, Rangers, some Air Force and Navy, even NCIS.

Security is easy when you are with the USO and got inside the terminal. First, you should know that the USO relies totally on volunteer gifts and hats off to Continental Airlines. When they shut down their operation at DFW after giving up to American, they donated their equivalent of their Admirals Club to the USO. Here the troops have Internet access, TV, movies, sleeping quarters, a children’s playroom and free food. The place was packed. Hats off here to Pepsico, Starbucks, and Verizon for providing the food and communication, again all free to the troops.

The DFW USO recently started a program that is expanding to all USO locations called United Through Reading where a soldier goes into a studio, reads a story or plays a song for his/her kid and the event is video recorded. The USO prepares a DVD and FedEx’s it to the family. The USO used to pay FedEx till the driver figured out what was going on and now the company delivers for free.

Finally, the USO organizes the meet and greet for the troops coming in and Operation Send Off for those going out. If you are interested in participating, call 972-574-0392 after 8pm the night before you want to go.

Like any volunteer organization, the USO is always short on money and short on donations of goods, so forget personal gain for a minute and cough it up for these troops. It is money well spent. If you want to see this in action, plan a trip to Terminal B at DFW. Gas is expensive but it will be the best investment you have ever made.

The IRA-Don't Let It Get Away

2009-05-12T10:17:57-07:00

This is an article I wrote for a newspaper which helps explain why newspapers are in trouble--you have to dumb things down a bunch. But maybe somebody will find it a help. A small help but maybe a help.

I’m usually not a big fan of the New York Times but they had a pretty good article by Alex Tarquino about the often-overlooked IRA.

First, what is it? IRA stands for Individual Retirement Account, which most people know but most people don’t use. Ninety percent of annual IRA money is money, including mine, rolled over from 401k and 403b accounts when people leave their jobs. Nothing wrong with that but here is what is wrong—only fourteen percent of people eligible to contribute to IRAs do so.

Why? First of all, basic laziness. Wealth building requires action and most people are financial couch potatoes. Cumbersome paperwork, risk of loss, tying up money for twenty plus years and a deep seated distrust of financial institutions make us all wary and willing to put it off to tomorrow, or the day after that, and so on.

If that wasn’t bad enough, throw in the Congress and the Internal Revenue Service that have made the rules complex, if not totally incomprehensible. If you want to check out the rules, go to the web page of the Investment Company Institute. But be warned—the rules for IRA’s cover 108 pages. Too much for me.

So let’s make things a bit less complex. First, if you have a 401k or 403b, you can probably forget about an IRA. At least, until you quit. You want to max out your company’s retirement plan because they will usually do a match—you contribute and they contribute. An IRA is your money only.

But if you don’t have a company retirement plan, check out an IRA. There are two kinds—traditional and Roth. Here things are a bit simpler. A traditional IRA reduces your taxable income by the amount of the contribution. A Roth IRA contribution is made with after tax money but the earnings accumulate tax-free. My general rule is that if you are young and just getting started, go with the Roth.

Another simple rule—if you are single and do not have a retirement plan at work you can contribute the max to a traditional IRA regardless of your income level. The max this year is $5,000. $6,000 if you are over 60.

Here’s where Congress made things a lot more complex. If you are single but ELIGIBLE for a retirement plan at work you can still max out an IRA but only if you make less than $53,000. If you make over $63,000, you cannot contribute anything. If you are married, both work and both are eligible for a company retirement plan; you qualify for an IRA only if you have an adjusted gross income less than $85,000.

A Roth IRA is less complex as you can be eligible for a company retirement plan and still contribute but you have to make less than $101,000.

Why all the complexity? Congress. They wanted to stop those rich people from moving their money around tax-free.

Got a headache? I sure do but one final statistic and then a plan for taking the complexity out of retirement planning.

Here is the final statistic. Don’t feel too bad if you haven’t done the IRA because most people don’t even maximize their 401k plan. The important statistic is this—while 75% of employees eligible for a 401k do participate, only ten percent contribute the maximum.

So you have a lot of company if you don’t have an IRA or max out your 401k. But that is no reason to feel good. In this day and age, the traditional pension is pretty well shot so you are the only one responsible for your retirement and that means you have to get on it.

How? Make somebody else do the work. Go to your Human Resources department and make them fill in the paperwork. They will do it. That is their job.

If you want to contribute to an IRA and don’t know the rules, go to the people that do. Those people are bankers and mutual funds companies. I try not to name names but removing any obstacle to wealth is worth it so I recommend Fidelity Investments and Vanguard for making things easier, if not easy. Call them up and ask them do the paperwork and they will.

I Wrote This on May 22, 2008--A Year Ago

2009-05-06T08:02:25-07:00

The Great Predictor

The stock market has been called the Great Predictor, and the Great Humiliator, by financial pundits for years. But right now the Great Predictor is having some problems. But first here is how the market works—somehow the market figures out what is going to happen in about six months and acts on that knowledge which is why past knowledge doesn’t help much in timing the market in the short term. It does in the long term but not the short term.

So what is the market saying about the next six months? Right now, going way up one day and seemingly farther down the next, the market is saying, “I don’t know.” The market is confused. Why? What happens in the next six months? The Presidential election, of course.

One thing the market really doesn’t like is political change. The market does best when the political scene is in gridlock. The market seems to like a Republican president and a Democratic congress--a pretty good recipe for gridlock. When one side gets too much power and starts really changing things, the market gets spooked.

John McCain admits he doesn’t know much about economics and Barack Obama proves it with his total lack of an economic plan except tax the rich. So the market, in the short term, is pretty wary.

But let’s look at the long term. And the market will probably repeat itself because it has except for two exceptions since 1925. The last two years of a presidential term are usually bullish meaning the market goes up. In the first year of a presidential term, the market goes up if a Republican is elected. It usually goes down in the second year of the term. If a Democrat is elected the market usually goes down in the first year of the term and up in the second. This happens because the market thinks a Republican will be better for the economy so the market goes up in the first year but down in the second as the miracle doesn’t happen. A Democratic president is usually feared by Wall Street so the market goes down until it figures out the president can not do much to impact the economy, disaster is averted and the market recovers. A pretty simplistic way to forecast the market and like most things simple, it works.

Only twice in modern history has the market gone down in both the first two years of a presidential term—the Great Depression years of 1929 and 1930 and the two first years of Nixon’s second term. Pretty wild times.

Could it happen again? Well, these are pretty wild times as well so who knows but history is against it.

Bargain Shopping

2009-05-04T11:51:47-07:00

I just read that 90% of the population believes the recession will last at least one year...or more. More importantly, 60% of people have begun to pay down debt, 68% have decided not to make a major purchase and 41% have begun to increase their savings.

On top of that housing prices have fallen three percent to thirty percent depending on where you live.

Add to that the fact that April vehicle sales numbers showed more sales of passenger cars than truck, SUV’s and vans sales—combined. This for the first time in twenty years. Toss on top of that the fact that four cylinder cars outsold six cylinder cars.

So what? Well, this all may be bad news especially if you bought a house six months ago or that Hummer is still in the garage. But it is good news if you have some cash or you are a young couple looking for a house or you need some furniture.

Opportunity knocks because it is a basic economic rule that when demand decreases, prices fall. Everybody knows that but most people will not act upon it. Why? Because it takes a lot of guts to buy when everybody is selling.

So let’s take a quick look at some moves that might look risky now but may pay off big. Take a truck. A fact of life is that trucks don’t get good mileage. Another fact of life is that if you need a truck, you need a truck. You can’t haul a horse trailer with a Prius. Well, you can but not far. And trucks traditionally carry a premium in Texas. But maybe not right now so now is a good time to buy because “If you are turning in a large SUV or pickup, be prepared for a shock when you go to the dealership” according to Edmunds.com, a leading online resource for automotive consumer information.

Risky? Maybe but this columnist puts his money where his mouth is. I bought a SUV. Why? Because we need one as our old one had in excess of 200,000 miles plus it was a good deal--like $5,500 less than they wanted for a similar model at a dealership. Bought it from a lady who just got a company car so she needed to unload this one. I bought it for the amount she needed to pay off the loan. Not a great deal for her but pretty good for us.

How about stocks? Pretty risky? Stocks are always ‘risky’ unless you look at the long-term track record. And people, out of fear, usually sell them as they go down, not as they go up. Warren Buffett noted that stocks are one thing that most people don’t buy when they go on sale. Buffett does which is why he is the richest man on the planet.

How about a house? Pretty risky as prices may go down even more. They may also go back up when the inventory level works itself out. Which it will. Seen much new construction lately? No, which means the supply and demand equation is working. Maybe it is a bit early right now to buy but never too early to start looking for bargains.

I wouldn’t advise people to go overboard on this stuff but bargains don’t come along all the time so keep your eyes open and put that cash to work.

Ten Traits of the Rich and Famous

2009-05-01T08:36:14-07:00

(Note: Not sure why this type is screwed up but I will try and fix it later. It is the thought that counts.)

Found a column by Jeffrey Strain of Street.com who stole the list from the authors of The Millionaire Next Door so I don’t feel too bad about stealing it from Jeffrey. First some original thoughts from me on the rich—most people think rich people get that way for a limited number of reasons such as inheriting it, inventing something like Bill Gates and Microsoft or getting lucky. Or stealing.

If you inherit money that is a fact but most people don’t. Also, most people that are rich don’t invent anything. Take Bill Gates. Bill Gates didn’t invent anything. He bought an operating system from IBM that IBM didn’t want and built it into Microsoft. As far as getting lucky, I haven’t met many lucky millionaires. I did meet one who owned a dairy farm that happened to be sitting on a couple of million barrels of oil but besides him, no.

Getting lucky? How do you turn luck into millions except by winning the lottery? You don’t. Gary Player, the world famous golfer, said, “The harder I work, the luckier I get.” Or maybe that was Jack Nicklaus but you get the point. Stealing? Works for some people but too high risk for me.

So what are the traits of famous people that don’t inherit it, invent it, or steal it?

Number 1-Patience. Like buying a three-year old car rather than a brand new one that depreciates as soon as you hit the highway.

Number 2-Satisfaction. People think ‘things’ will bring them satisfaction. And ‘things’ cost money. Thinking a $3,000 plasma TV will bring you satisfaction may work for you but not for me.

Number 3-Organization. Knowing where everything is and things getting paid on time can keep you out of a bunch of financial trouble.

Number 4-Discipline. Like paying yourself first by socking money into your retirement account before you hit the mall.

Number 5-Reflectiveness. My spell check says this isn’t even a word and I agree. I think they mean look before you leap like asking, “Do I really need this thing I’m about to buy?”

Number 6-Creativity. Doing things like thinking ahead and saving for emergencies or taking advantages of real bargains or adding a skill to make you more marketable to make you more money.

Number 7-Curiosity. Curious people investigate and explore. They aren’t planted on the couch every night. And the more you explore, the more you learn and the more you know, the richer you will get.

Number 8-Risk Taking. As in calculated risks. People that have all their money in CD’s and money markets are feeling pretty good right now but, in the longer run, they will be losing out on the historical 11% average return of the stock market.

Number 9-Goal Oriented. Ha, probably the most important trait of all. If you define a goal, you have to come up with a plan to get there and you have to work and work hard. But if you don’t, you drift. Drifting can be fun for a while but it too gets boring and certainly won’t make you rich. The terms Drifter and Millionaire are rarely heard in the same conversation.

Number 10-Hard and Smart Working. Somebody always has to put a damper on things. I don’t necessarily agree. I would put Smart Working way ahead of Hard Working. You can work hard and get nowhere. Or you can work smart and make a mint. I’ve noticed in building this house that the really good contractors work smart. Their product—painting, plumbing, electric, HVAC--isn’t any different than anybody else but the really good ones are organized, fast and efficient. Their crews do it once, they have the parts and they have the skills. Smart work will top hard work every time.

The problem with getting rich is that everybody (including every finance show on TV) thinks there is an easy way to do it. As with most things in life, there is not. But if you start out applying some of the ten traits you just might get surprised. It won’t happen over night but it will happen. As one star put, “Becoming an overnight success takes a lot of time.”

Bit and Pieces

2009-03-01T12:20:40-08:00

One interesting tidbit from Forbes magazine about credit card companies. (I think Forbes is the best business magazine around. They champion free enterprise but go after shifty practices…and they name names.

Seems the banks that brought us the sub-prime mess are trying to make up those losses by getting tough on credit card borrowers. Forbes put it this way, “Bank of America told thousands of its cardholders in recent weeks--even those with good payment histories--that they faced a rate hike from 9% to as high as 28% if they didn't pay off their balances at the old rate and stop using their cards. The bank, the largest credit card issuer, since its 2006 acquisition of MBNA, says it's all part of its "periodic" review of customer credit risk.”

You may think the key here is the rate hike from 9% to 28%. Actually the key is the “periodic review of customer credit risk.” I have known many bankers in my life and liked some of them so I won’t badmouth them. I’ll let Mark Twain do that. Mark said that a banker is someone who will give you his umbrella when it’s not raining.

Put another way--because the banks are losing their shirts the cry has come down from executive row to conduct credit reviews and whack anybody that is out of line. And it ain’t just Bank of America. Watch out for Chase and Citibank and everybody else. Make it go away by reading the fine print, avoid ‘deals’, and pay off the credit cards. If you don’t owe them anything, they can’t do anything to you.

On the investment front—There is a financial radio talk show host in this area that is beating his chest declaring he took his customers out of the market before the recent decline. Great, more power to him. But getting out of the market is only half the equation. The other half being when do you get back in? Nobody rings a bell. Timing the market is tough, if not flat out impossible. If you are still accumulating assets in your retirement accounts on a regular basis, stay in because you are picking up cheap shares when the market goes down. If you don’t like the market at all, get out and stay out. But remember that the market has averaged about an 11% gain per year versus 6% for bonds versus 3% for cash over the last 100 years--a pretty good track record.

Here is another reason for not cashing out of your IRA retirement accounts. If you are under the age of 59 and a half, you will pay ordinary income taxes on the money cashed out plus a 10% penalty. Ouch. Don’t cash out but do review your portfolio and adjust your asset allocation if not to your liking. Do this on a regular basis, like annually, not just when the market is a bit volatile.

Finally from an article in US News and World report on the five things to do to sell a house in a slow market—

Number 1-Make necessary repairs to the house. (Not exactly rocket science here.)

Number 2-Price to the current market. In other words, if the market is down, don’t expect to get what you might have gotten last year.

Number 3-Be flexible. Keep the house clean and be ready to get out of the house at a moment’s notice if a potential buyer wants to get in.

Number 4-Don’t ignore a low-ball offer. I would say don’t ignore any offer but be careful with the counteroffer.

Number 5-Know your agent.

Having sold a house last year, Number 5 is the most important. We interviewed three agents. Number One was a rookie that valued the house at $275,000. Number two was a 20-year veteran who valued it at $295,000. The third valued the house at $350,000 and we sold the house in five weeks for $342,500. The third realtor has been in the business for ten years and was the top producer in the county for five years. Winners are winners for a reason.

Do It Yourself Millionaires

2009-02-23T07:23:02-08:00

I have to admit I am a sucker for those home improvement shows where some good looking woman drops into a wreck of a house and renovates the thing in one thirty minute episode. Having renovated a few homes and done more than my share of “projects” I know nothing gets done in thirty minutes and nothing gets done right the first time. And the only good looking woman that helps me out is my wife. But I watch the shows anyway out of envy and do pick up a tip once in awhile.

I also look for financial DIY tips and Fidelity came up with ten regarding millionaires. Actually they are not tips but characteristics. Some I agree with and some I don’t. And they don’t relate only to millionaires, they relate to anybody that is making it or, more importantly, wants to make it. Here are the ones I agree with. If you want to see the other ones, call Fidelity.

First, the rich don’t think they are rich. Most act like the wolf is still at the door and shop accordingly. They do so because the vast majority came from middle class backgrounds. Watching your spending at all times is the key to financial success.

Secondly, they took risks and borrowed money to do so. I don’t dislike debt. I dislike what people do with it. I consider debt to be great for 1) buying a car to get to a job where you make money to pay off the car, 2) buying a house but a house you can afford to pay for out of your cash flow and 3) starting a business. If you can convince somebody to lend you money to start or buy a business, you probably have a pretty good shot at success.

Thirdly, rich people know how to work the tax system. Not through fraud but by owning their own business. Half the millionaires in this country own their own business. And they deduct everything because they are taking a lot of risk and the tax code rewards risk. See that cup of coffee you are drinking? Deductible, if you own your own business. And you can get the breaks even if you start out part time while keeping your day job. Of course, there are limits but that is why you hire a good tax accountant to keep you out of trouble.

Fourth, most successful people were B students. At best. Boy, was I glad to read that one.

Fifth, and most important, successful people are happier. Depression and mental illness for wealthy people is way below the norm. The same goes for physical health. Being broke is not good for your health and it is hard to have a bright outlook on life if you’re carrying around $30,000 worth of credit card debt at 25%. One analyst put it this way—“It’s the freedom that money buys.”

Or as Albert Einstein put it, “The lack of money is the root of all evil.”

It Can't Always Be Great--A Not So Good Article On Retiring Rich

2008-01-09T06:36:13-08:00

Pretty much the same old stuff from this article about retiring rich--your expenses will stay about the same in retirement, inflation eats away at your money, Medicare doesn't cover all medical expenses, and so on. But read it anyway, mainly for the last sentence.

Retire Rich: Learn From Someone Who Did

by Walter Updegrave/Money Magazine

When Henry "Bud" Hebeler was winding down his career at Boeing nearly 20 years ago, he was appalled at the advice he got from retirement planning software.

"The assumptions about returns, inflation, longevity and expenses were highly simplistic," says the 74-year-old Hebeler. With his engineering degrees from MIT and his experience - first as Boeing's chief forecaster and planner and later as president of Boeing Aerospace - Hebeler figured he could do better.

He has. His Web site, AnalyzeNow.com, is a compendium of advice and tools (mostly free) that can help you tackle topics ranging from how to create a retirement budget to whether to buy an annuity.

What distinguishes Hebeler from the typical retirement "expert" is that he combines a strong quantitative background with real-life retirement experience - his own and that of fellow retirees.

Hebeler took time out from his hectic schedule of skiing, golf, travel and running a site to share his thoughts.

Q. What's the most popular misconception about retirement planning?

A. That your spending will drop as you age and you become less active. My father played golf until he was 95. My wife and I are in our seventies and we ski the expert slopes at Park City, Utah.

My friends who have reduced their spending didn't do so because of lack of energy or physical ability. It doesn't take much effort to get into a taxi and go to the theater. They're cutting back because they know they're going to live longer than they thought they would. They spent too much too early and now they're worried about running out.

Q. So what can you do to assure that your money will last?

A. If you have enough savings to live on, consider delaying taking Social Security until full retirement age or even later. Holding off can be especially worthwhile if you have a spouse who didn't work or had a low income, since the higher payment you get by waiting can be passed on to your spouse when you die.

I also think retirees should consider putting some, but not all, of their money in an immediate annuity. Look at inflation-adjusted immediate annuities, since they provide a lifetime income that, like Social Security, goes up with inflation.

Q. How did your work at Boeing influence the advice you give?

A. It made me more conservative. In business you see how often things don't work out as you planned. Projects cost more to complete than you estimated.

The same is true of retirement, but retirement plans seldom call for setting aside reserves for unforeseen events. There are a lot of surprises, usually more bad ones than good.

Q. What kinds of surprises?

A. For one thing, your expenses are likely to be very different in retirement than during your career. Things that were probably covered by your company insurance - dental work, vision care, a variety of medical tests - typically aren't paid for by Medicare. My hearing aids alone cost $6,000, which wasn't covered at all.

People also don't anticipate the impact of inflation. In the first 10 years of my retirement, the purchasing power of my company pension declined by 30%. And then there are obligations people rarely plan for, such as having to help parents or adult children who are struggling financially.

Q. If you could advise people to do just one thing to improve their retirement prospects, what would it be?

A. People who aren't retired need to know how much to save. My father used to tell me that you should always save at least 10% of your income.

That's more like 15% to 20% today because you're less likely to have a pension.

Writing Off 2008 Already

2008-01-08T05:44:18-08:00

The new year has a rough start. Will it continue? Who knows but historically the beginning of the new year has little impact on what happens for the rest of the year as shown in the following article from Marketminder.com.

January Ineffect
1/7/2008

Story notes:

January’s rough start has many investors invoking the old saying, “So goes January, goes the year.
Statistically, this belief isn’t supported. History shows negative starts can be followed by positive years and vice versa.
Market volatility is normal, no matter when it happens, and doesn’t mean a prolonged downturn is at hand.

_________________________________________________________________________

January has commenced with gray weather, record snows, fierce storms, already broken New Year’s resolutions (stupid leftover pumpkin pie), and the usual post-holiday gloom—not to mention a continuance of December’s volatility. Most major market indexes are negative so far this year, leading many investors to invoke the old saw “so goes January, goes the year.” Already, we’re seeing stories highlighting the long and widely held belief that a rough start to January portends trouble ahead.

The Stress Is Just Beginning
By Tomoeh Murakami Tse, Washington Post
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/05/AR2008010500149.html

This article states, “If the first three trading days of the year are any indication, 2008 is bound to test the nerves of even the most poised investors.” Fair enough—volatility always “tests nerves.” Except the first three trading days are never an indication of what’s ahead. Not ever. Three days of any month, no matter the calendrical significance, tell you nothing. Investors wouldn’t make a stock forecast based on the Ides of March—there’s nothing about any one day or group of days’ returns that tells you anything about what to expect looking forward.

Statistically, this is easy to disprove by checking historical data to see what happened each January and the annual results. Throughout history, negative starts to January have been followed by all sorts of combinations of positive and negative returns. Positive start, negative January, positive year. Negative start, positive January, negative year. On and on. Looking at the six worst first 10 days for the S&P 500, you see US stocks ended positively four of those times—one year up a big 42%! Another up 26%! What does that tell you? Nothing—beyond stocks are positive more than negative. And the third best start ever ended the year down 15%. Not so great.

Fundamentally, this makes even less sense. What do a few days in January tell us about investor demand for securities? Markets don’t obey a calendar. There’s nothing magical about January’s start suggesting markets must suddenly begin “behaving” themselves. Markets are volatile. They can be volatile in January, July, on Tuesday, the day after the Fourth of July—pretty much any time. Markets don’t have neat steps-and-stairs increases, and if they did, you wouldn’t be happy with the return you got. If you want that kind of steady appreciation, you’re going to have to be satisfied with what you can get by buying US Treasuries and holding them to maturity (i.e., not much).

We call the market “The Great Humiliator” (TGH for short) around here for a reason. Its sole purpose is to humiliate as many people as it can for as long as it can for as much money as it can. Scaring investors out of superior long-term returns with a bumpy start to the year is one way the market robs otherwise rational people of their senses.

We remain confident the world is altogether too dour. Don’t let TGH humiliate you out of the market with a bumpy start to the year—that’s just what that filthy trickster wants

How Much Is Enough To Retire? Finally Some Reasonable Answers

2008-01-07T06:00:08-08:00

When I see something I like, I steal it. Or at least borrow it. The financial world is full of worthless calculators. Here is something by Jon Clements of the Wall Street Journal that makes sense.

It's halftime. What's the score?

Today, I turn 45. (Don't feel bad; only my mother ever remembers.) By my reckoning, that puts me halfway through my working career and hence halfway to retirement.

How big a nest egg should a 45-year-old have? Here's a look at who faces a midlife financial crisis -- and who might be able to retire early.

Taking stock. Start with the accompanying table, which shows what percentage of pre-tax income you need to sock away over the next two decades, depending on how much you currently have saved.

Suppose you have a $240,000 portfolio, equal to three times your $80,000 annual income. To retire in comfort, you ought to save a manageable 12% of income every year for the next 20 years, calculates Charles Farrell, a financial adviser with Denver's Northstar Investment Advisors.

That savings rate -- which would include any employer contribution to your 401(k) -- will give you a retirement stash equal to 12 times income at age 65, or $960,000 in today's dollars. If you then use a 5% initial annual withdrawal rate, your savings will kick off $48,000, or 60% of your old salary. Add in Social Security and you might be hauling in a respectable 80% of pre-retirement income.

All this assumes you can clock an after-inflation investment return of five percentage points a year during the next two decades. To hit that target, keep a healthy sum in stocks and a tight lid on investment costs. (If you don't have precisely 20 years to retirement and want a sense of whether you're on track, try the retirement planner at www.dinkytown.com.)

Quitting early. What if you have savings of four or even five times income? As you can see from the table, amassing enough for retirement should be a breeze. In fact, if you have savings of five times income today and you never saved another dime, you would hit 12 times income at age 63.

But if you have already amassed a hefty nest egg at 45, you're probably a diligent saver, and you might look to retire early. Let's say you salt away 20% a year.

At that rate, if your portfolio today is equal to four times income, you will hit 12 times income at age 59, Mr. Farrell calculates. Similarly, if you currently have five times income saved, you should be set by age 56.

True, that means retiring before you're eligible for Social Security. But if you are a diligent saver used to living on a small portion of your income, that shouldn't be a big sacrifice.

Catching up. On the other hand, maybe you haven't been so thrifty. As the table indicates, the annual savings rate required to amass 12 times income by age 65 is 20% if you currently have two times income saved -- and a whopping 27% if your nest egg today is merely equal to your annual income.

Can't do it? Instead, you could scale back your retirement goals, delay retirement or both. Suppose you have savings equal to twice your income. If you sock away 12% of income per year, you could retire at age 69 with 12 times income.

Alternatively, you could call it quits with 10 times income at age 66. Again, imagine you earn $80,000 a year. If you retire with 10 times income, or $800,000, and use a 5% withdrawal rate, you will have $40,000 a year from your portfolio, equal to 50% of your old salary.

Meanwhile, if you have a nest egg of just one times income and you can't see cranking up your savings rate to 20% or more, you will likely have to curtail your spending fairly sharply in retirement, unless you work well past 65. For instance, to retire with 10 times income, you would need to salt away 12% of your pretax income every year until age 71.

One warning: All of the above presumes your income rises at the inflation rate between now and retirement. What if your income rises much faster? Ironically, that could make it tougher to retire.

"Let's say you get a big raise at age 50," Mr. Farrell says. "It's probably not feasible to replicate that lifestyle in retirement. The majority of that money should probably be committed to additional savings." If you do that, your nest egg will grow faster, and you won't have to throttle back your spending quite so much when you retire.

Copyrighted, Dow Jones & Company

Oil At $100 A Barrel--Maybe Not So Bad This Time

2008-01-04T06:42:08-08:00

I see no reason that oil is so expensive but it is. And that is a fact, for now. But, as screwed up as some people think the world is right now, it could be worse. It could be the 1970's when the whole engine fell off the track. Here is an article from the London Times that gives some insight as to why now is different.

Gerard Baker

It's human nature to imbue inert numbers with profound significance. We celebrate 18th birthdays and 25th anniversaries as though doing so might pause, even for a moment, the merciless ticking away of life's clock. We build buildings without 13th floors. In Asia they will go to extreme lengths to avoid any contact with the number 4. The Bible can be read like an extended number puzzle: twelve tribes, ten commandments, seven plagues, four horsemen.

In financial markets this tendency has fascinated economists. A certain number in an index or a price for a traded instrument is said to be “psychologically important”. It is believed that traders behave differently when they near or cross some round number - a $2 pound, 10,000 on the Dow Jones industrial average.

It seems implausible at first sight that hard-bitten capitalists would be victim to such unreason. Yet the idea that particular numbers matter persists in the minds of some people in the markets, which is enough to make it a kind of reality, I suppose. Sometimes, it seems, like an old horse that whinnies and retreats from some unseen spectral object, markets really do think a particular number might be haunted.

One of those magic numbers is $100 for a barrel of oil. On Wednesday, for the first time, contracts for future delivery on the New York Mercantile Exchange finally recorded that figure.

I beg to differ. There are good reasons not to fear $100 oil and even a case for mild celebration. That might not make much sense as you stand shivering this morning spending half a day's wages to fill up your petrol tank. And it might appear to sit oddly with our last experiment with rapidly rising oil prices - those halcyon economic days of the 1970s - but it's true.

The oil shock of the 1970s did help to bring the world that ugly pantomime horse called stagflation - stagnation with inflation. The quadrupling of prices in the 1970s to a price that, in inflation-adjusted terms, was just about the same as this week's was one of the primary factors behind the worst decade for the global economy since the Great Depression.

But while it's obviously true that today's higher oil prices represent both an inflationary risk and, at the same time, a recessionary one, as a kind of additional tax on our disposable income, there are lots of good reasons to think the effect this time should be much smaller than it was 30 years ago.

The first is that, back then, a sluggish global economy was hit hard by the deliberately restrictive policies of the oil-producing nations. It was, in the economist's jargon, a supply shock, as oil output was restrained by the producers from keeping pace with demand.

This time the principal reason for rising prices is less to do with supply than with demand. For all the talk of imminent global recession, 2007 was another bumper year. The continuing advance of China and emerging markets, solid growth in the US and a sprightly performance by those old laggards Europe and Japan meant that available oil production could not keep pace with demand. Now, of course, the rising price is the mechanism by which that demand will be restrained a little - but that is no reason to think a slump is on the cards.

The second big difference concerns the other end of the stagflation horse - inflation. A good reason for mild optimism today is simply that our policymakers have already lived through the experience of the 1970s and know what to do to avoid repeating it.

Back then, the oil shock came on top of a decade of steadily rising inflation, which nobody seemed to mind much. In the 1960s and early 1970s respectable economists thought there was a trade-off, that a bit more inflation was a price worth paying to keep growth going and unemployment down. So they “accommodated” the oil shock with easier monetary policy.

We learnt the hard way there is no such trade-off. If central banks accommodate higher oil prices with easier monetary policy, the almost immediate consequence will be rapid inflation, which will kill off growth.

Of course, today's economic climate poses threats. The continuing global credit crisis means that central banks might not be able to be as tough with rising inflation as they would like. But current easy monetary conditions are a temporary, emergency measure to tide us over this immediate crisis, not a permanent feature of the economic landscape.

The third good reason for suppressing our misery at $100 oil is that we are much less dependent on that baleful commodity than we were. Manufacturing - with a high energy-intensity - takes up barely half the share of our economies that it did in the 1960s. Thanks to improved production techniques and more efficient combustion engines, it has been estimated that today each unit of the West's economic output requires about a quarter of the energy input that it did 40 years ago.

Which leads us to the case for gentle euphoria at world record oil prices. A large part of the reason we are more energy efficient than we were 40 years ago is precisely because oil prices went so high in the 1970s, forcing us to use fuel more effectively.

Whether or not you believe that climate change is the world's biggest medium-term economic challenge and whether or not you believe that attempts to reduce our consumption of fossil fuels will make a bit of difference to it, you cannot seriously think that going on consuming oil at current rates is healthy.

Our continuing dependence on oil is wasteful, it messes up our environment, and it maintains our ruinous obligations to some of the most unpleasant regimes in the world - from Saudi Arabia to Venezuela via Russia and Iran.

If $100 doesn't wean us off the petroleum fix, perhaps we should start cheering for $200.

Hit It Where They Ain't

2007-12-19T06:55:53-08:00

The stock market likes to go against conventional wisdom. This article from Marketminder.com explains why the 'experts' are most often wrong in their predictions.

Groundhog Day 2008

12/18/2007

The close of each year stirs an instinctual phenomenon in the professional finance world. Like premature Punxsutawney Phils, investment institutions scramble forth from the warmth of their Bloomberg machines to forecast the climate of the upcoming calendar year.

This barrage of forecasts each year end is explained by behaviorism’s theory of order preference – an insistence on certain things in a certain order for little purpose other than societal convention. Why not forecast every 24 months instead of 12? Or each April instead of December?

In truth, a calendar year’s end means little to stocks. Markets go on—milestones like months and years are delineations of the mind and little more. But still, most investors engage in the prognostic ritual each December. In the next weeks you’ll hear many big-name gurus squawk (or should that be squeak?) their forecasts.

Of course, forecasting is a necessary thing for successful investing. If you don’t have some idea about where markets are headed, then beating the market is significantly tougher (if not near impossible.)

Most forecasters—even the gurus—fall wide of the mark. That’s because the factors driving most forecasts are usually derived from widely available information, are already broadly known, and therefore priced into the market. If there’s one thing we know is true, it’s that you have to know something others don’t to beat the market.

Still, paying close attention to what the gurus forecast is important. Why? Because a lot of folks look at them! So that means what they’re predicting becomes widely known—the antithesis of information that can beat the markets. So you’ve got to know what others are pricing in today to even have a shot at beating the market later.

As always, we advise critical thinking on these matters and to eschew herd behavior. After all, it’s been proven time and again that most stock market gurus with verifiable track records are wrong more than they’re right—making them about on par with good ol’ Punxsutawney Phil, who’s shadow detection technique of discerning spring’s arrival is right well less than 50% of the time.

How To Flub A Job Interview--Follow This Advice

2007-11-16T07:31:20-08:00

Personal finance columns drive me up a wall. Here is a doozy of bad advice. We'll take it point by point.

Five Ways to Flub a Job Interview

by Penelope Trunk

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Posted on Wednesday, November 7, 2007, 12:00AM

We spend so much of our careers doing good work, meeting interesting people, and learning new skills. But it really all starts with one moment: the interview.

Once you get there, you need to be able to package everything together for a nice, neat presentation that's memorable in exactly the right way.

Here are five mistakes a lot of people make -- even people who are great at doing interviews:

1. Not preparing for a phone interview.

Most hiring managers screen candidates on the phone before they bring the candidate in for an interview. This is to make sure there aren't any glaring problems.

A phone interview saves time. If you can't get the answers to basic questions right on the phone, there's no point in interviewers watching you botch those questions in person. Also, the hiring manager is looking for you to make a mistake that would rule you out. For example, not knowing that you shouldn't take a call with a screaming baby in the background.

So instead of thinking of the phone interview as a precursor to the real thing, think of it as something you can prepare for. Learn the rules.

MY INTERJECTION HERE--IF YOU DON'T PREPARE FOR AN INTERVIEW, THIS ARTICLE IS NOT GOING TO HELP YOU. YOU ARE ALREADY TOO STUPID TO GET A JOB.

2. Misunderstanding the point of a face-to-face interview.

Hiring managers today have a lot of tools at their disposal to figure out if you're qualified for a job. The Internet reveals your history, and often the content and quality of your work; LinkedIn can provide a plethora of references from people who have worked with you, whether you actually provide them to the employer yourself or not. And a phone screen can give a sense of your verbal abilities.

So what's left? Whether or not you click with them -- whether they like you. Remember that intangible thing that happens on a date when you decide if you like the person or not? The same thing happens with hiring.

This is what the face-to-face interview is all about. So make a great first impression, and focus on making sure the interviewer likes you.

SEE POINT 1. YOU DON'T KNOW THE POINT OF A FACE TO FACE INTERVIEW? IF YOU DON'T, DON'T WORRY, YOU ARE PROBABLY INCAPABLE OF FINDING THE OFFICE FOR THE INTERVIEW.

3. Neglecting talking points.

When President Bush walks into a press conference, he doesn't worry what journalists are going to ask him because he already has the answers he's going to provide -- no matter what the questions are. Such answers are called talking points.

Politicians want to frame an issue, so they listen to a question and then decide which of their talking points they'll use to answer that question. In this way, each question they're asked is an opportunity to get their own points across.

I once had a media trainer teach me how to stick to talking points, and it works for a wide range of situations -- including job interviews.

You control what five topics you want to discuss, so you should pick five things about yourself that you want to get across in an interview, and each point should come with some sort of story or example. You listen to each question and then figure out which point fits in well for a particular question.

You're not George W. Bush, though, so you can't totally ignore questions that don't have pat answers. But you'd be surprised how often you can answer an interview question with one of the five answers about yourself that you've prepared. This is a way to control an interview and make sure the focus is on your strengths.

A great resource for helping you understand how to frame your answer for any question is the "The Complete Q & A Job Interview Book" by Jeffrey Allen.

YOU CONTROL THE INTERVIEW? SORRY, NOT TRUE. SURE THERE ARE SOME POINTS YOU WANT TO GET ACROSS BUT IF YOU START TAKING OVER THE STAGE, YOU ARE GOING TO LOSE. THE MAIN PURPOSE OF AN INTERVIEW FOR THE HIRING MANAGER IS TO SEE IF THIS PERSON IS GOING TO FIT IN. BE YOURSELF. IF THEY DON'T LIKE YOU, TOO BAD. IF THEY DON'T YOU ARE PROBABLY BETTER OFF NOT WORKING THERE ANYWAY.

4. Thinking the job description is set in stone.

When you start an interview, find out what you're interviewing for. Typically, the person who writes and publishes a job description is not the person making the hiring decision. Ask the hiring manager what the goals are for the position, and ask who the new hire will work most closely with so you know who'll have the biggest say in whether or not you get hired.

And, if you get the job, remember that it could change all over again. Immediately. So don't ever assume you know what your job is until you investigate. The only constant about your job description is that you must be invaluable to your boss in order to succeed.

DOES THIS PERSON UNDERSTAND ANYTHING ABOUT CORPORATIONS? I DON'T THINK SO. THE PERSON DOING THE HIRING PROBABLY DID WRITE THE JOB DESCRIPTION OR GIVE THE INPUT TO HR SO THEY CAN PUT IT INTO THEIR PET FORMAT, SO PAY ATTENTION TO WHAT THE HIRING MANAGER IS SAYING. THE ONLY THING THAT MAKES ANY SENSE IN THIS ARTICLE--BE INVALUABLE TO YOUR BOSS!

5. Failing to close.

A job interview is a sales call, and all good salespeople know that you don't have a deal until you close it. An almost-deal is not a deal, in the same way that a good interview is not a job.

So toward the end of the interview, if you think things are going well, say, "Do you have any reservations about hiring me?" Most hiring managers will answer this question truthfully, and it'll give you a chance to assuage their fears.

This is a hard question to ask, because you'll be faced with your weaknesses right there in the midst of the interview. But if you don't take the time to explain how you'll overcome those weaknesses it won't come up, and you're much less likely to get the job.

THIS IS SO DUMB--DO YOU HAVE ANY RESERVATIONS ABOUT HIRING ME? WHY, SHOULD I? IF SOMEBODY ASKED ME THAT QUESTION, I WOULD ASK FOR PSYCHOLOGICAL TESTING. IF YOU ARE INTERESTED IN THE JOB, SAY SO AND THEN TELL THEM WHY YOU CAN DO IT. JEEZ, THIS IS SO STUPID.

SORRY BUT THIS KIND OF STUFF WILL KEEP YOU UNEMPLOYED FOR A LONG, LONG TIME.

Need Job Fulfillment? Read this--

2007-11-14T06:31:08-08:00

I love Ben Stein. Really like the first part of this, not too crazy about the middle part and back on track for the last part. Go, Ben, go.

Arm Yourself for Job Fulfillment and Retirement Bliss

by Ben Stein

Now for some decidedly non-PC thoughts.

I hear a lot of bragging from my pals about how their daughter got into Brown or their son is being courted by Goldman Sachs or their grandchild just got into a fancy prep school.

Worth Bragging About

What I never hear is bragging from parents who say, "My son just got into the Army Special Forces and is risking his life to keep your son and you alive." I never hear parents saying that their kids got into the 82nd Airborne and are now fighting in Afghanistan to give people there a decent life and keep Al-Qaeda tied down so they don't come here to attack us.

Now, you may say, "All well and good, and it's great that these military families are so modest. But what does this have to do with me?"

It has everything to do with you, my friend.

Why It Matters

First, the military people on the ground -- and those in the ground in Section 60 of Arlington National Cemetery -- are the ones who keep your family alive. They're the ones who comprise the wall around America so that we can play and make money for our retirement and enjoy our children. They, whether in training or in traction, are the ones who keep America humming and keep the noblest dream of freedom alive in our hearts.

Again, you may say, "I agree and honor them, but what does this have to do with a column about money, careers, and finance?" Again, everything.

Day after day I get letters from readers who complain about their jobs and their lives. They have dead-end careers. They have bosses who disrespect them. They have colleagues who are strangers. I know that world. I've been in it.

Real Job Satisfaction

But I also get letters aplenty from men and women in the military. They love their jobs. They do exciting work. Dangerous, of course, but exciting. They have immense responsibilities. They get challenged on a scale they would never have dreamed conceivable. They bring more out of themselves than they knew they had.

Yes, they don't get paid as much as they should. But their pay isn't terrible, and they get extraordinary benefits. More than that, they wake up each morning feeling that they matter. They never have to worry if they're making a difference in the world, because they know there would be no civilized world without them. Their colleagues on the battlefield not only treat them with respect, they would give up their lives for them. They have each other's backs in the real sense of the phrase. (Please, someone at a Wall Street firm, tell me if your colleagues feel the same way about you.)

In short, dear reader, you might want to consider a career in the military. The world needs you, and it just might make you feel like you're doing something very worthwhile with your life.

Light at the End of the Tunnel

Second, I want you to think about retirement in a serious, truthful way. This will tell you that while you're going to be fairly vigorous and sprightly for the first part of your golden years, you possibly won't be for all of them. You'll get a bit weak, often more than a bit confused, and generally not totally "there" for your duties and responsibilities.

This is one of the many reasons I love and recommend variable annuities, which you then convert into a lifetime annuity. Once you've set the annuity on autopilot and start adding to it (always with an eye on fees), it compounds month after month free from tax.

True, when you start withdrawing from it, you have to pay income tax on the amount of gains in the account. But for most Americans, that rate is now extremely low. And you get that check from the insurance company or financial house as regularly as clockwork. It mounts up and up during your contributing years, and then you get the money through the mail.

You don't have to study the market. You don't have to worry about ups and downs. The money just comes in every month or every quarter and you live on it. And it's guaranteed to be there until you die, or for some specified number of years thereafter.

Old age, especially the part of old age that involves loss of powers, is frightening enough for anyone. Old age that involves fear of financial insecurity is truly horrifying. Annuities are a safe, easily accessible, low-cost (if you keep an eye on fees) way out of that desolate valley. Keep them in mind, even if others mock them. They work.

Hardly Working

Finally, I have a correspondent who endlessly asks me if I know ways to get rich that don't involve much work so she won't miss her pedicures. She also wants to work only with nice people who are also smart.

I hate to break this to her and to everyone in her situation, but there's no such job. Making money takes hard work. The people who do it well make it look easy, but it isn't. It's hard work. Get used to it. And the people you work with aren't always nice, either.

There's no royal road to quick wealth. Hard work and disciplined, sensible savings will get you there. Not pedicures.

Taxes--Higher In The Future?

2007-11-13T08:16:17-08:00

Not sure I buy all this but an interesting article on politics and taxes (or tax increases) as a result of the election cycle.

THE BASIC RULE REMAINS--BE IN THE MARKET OVER TIME AND YOU WILL GET RICH.

A Capital Gainsay

11/12/2007

Story Highlights

Media headlines are already warning of higher tax rates after the 2008 elections.
It’s far too early to know what the outcome of the elections will be, or what the incoming administration’s agenda will be.
There’s currently little benefit to trying to maneuver around potentially higher capital gains rates.

________________________________________________________

Though our political pals have already been campaigning for, seemingly, an eternity, we’re now entering the official campaign season. Hoorah! And the most popular agenda item, after ensuring the survival of blood-thirsty, man-eating Arctic carnivores, seems to be whether to extend or end the “Bush tax cuts.”

The market doesn’t care if the president’s Democrat or Republican, and we don’t either. At MarketMinder, we’re vigorously politically agnostic, preferring no political action to any political agenda—left, right, or center. But should the Dems sweep the White House and Congress in 2009, are tax hikes guaranteed? And does that mean you should sell now to take advantage of today’s lower capital gains rates? No and no.

First, the Dems are by no means guaranteed the White House. It’s way too early to handicap the race. Recall Howard Dean seemed unstoppable before his barbaric yawp in Iowa. A million things could happen between now and November ‘08. Governors Romney or Richardson could make a surge. A major candidate could drop out of the race. Senator McCain could seize the lead from Mayor Giuliani, switch parties, and convince Stephen Colbert to be his running mate. Senator Obama could be discovered to have been Hillary Clinton’s commodities broker! Voters could realize Hillary Clinton is Hillary Clinton!

If that provides no comfort, consider this: Would it shock you if the next president is a Democrat, and would it shock you if he or she raised the capital gains rate? Did you answer “no” to both? The next president won’t take office for 13 months, yet we’re already seeing headlines like these:

Wall Street Braces for Higher Tax Rates
By Jeanne Sahadi, CNNMoney.com
http://money.cnn.com/2007/11/07/pf/taxes/investment_rate_change_effect/index.htm?postversion=2007110815

The market doesn’t move on what’s widely expected—it moves on economic fundamentals that are unexpected. By the time President Whoever enacts their stupid tax agenda, the market will have had a very long time to price in the ill effects. That doesn’t mean we think tax hikes are no big deal—it means you needn’t worry about what pretty much everyone is already worried about. There’s not much market moving power in the wholly expected.

But let’s suppose you know exactly who’ll win and exactly what’s in their black little heart—raising the capital gains rates to 25%. Or higher! What can you do with that information?

Some might say, “Sell! Sell! Sell!” to take advantage of today’s lower capital gains rate. Fine . . . then what? Sit with your proceeds in cash? Even assuming a tax hike, equities have a far superior long-term average than bonds or cash. Selling now to avoid a higher rate later isn’t cutting off your nose to spite your face—it’s full frontal lobotomy!

Another straw man might say, “Well, I’ll sell now to pay the lower rate, then reinvest. That’d be smart, right?” Nope—if you assume stocks generally rise over time (as we do), the best place for your dough usually is in stocks. Trying to time the market, no matter what your reason, is fraught with peril.

Plus, it’s not guaranteed you’d be better off by gaming the lower rate now. The magic of compounding means it’s generally better to leave money working in the market for as long as possible. Why pay taxes now if you don’t have to? Yes, your rate might be higher later, but it’s a higher rate on conceivably a much bigger pool of assets—meaning if you give the market time, you can still end up with more, net-of-taxes, than if you do a tax hokey-pokey now. Isn’t the goal to end up with more money? We’re not fond of handing our money to the government either, but we wouldn’t purposely deprive ourselves of greater returns just to make a point. We’re principled, but we’re not crazy.

We can’t know how the elections will turn out, and there’s no telling what the incoming administration’s tax policy will be. Anything can happen—we can even envision a situation where a Democratic sweep of both Congress and the White House still wouldn’t yield higher taxes! Given those uncertainties, and the undeniable benefit of compounding interest, the best course of action is to deny the government tax revenue today in return for the likelihood of greater returns for yourself in the future. It’s the American way.

UFOs? NO, ETFs

2007-10-30T07:02:49-07:00

Well, leave tomorrow for six days in a U-Haul so I have lots to do to get ready. Not a lot of time for this stuff but if you want to learn up on ETFs go for it. Me, I would just read category 12 and do that. Easy for me to say, I wrote it. Category 12 I mean, not the following which came from MarketMinder.com.

THE ADVISOR'S CORNER

Exchange Traded Funds

8/30/2007 |

The Advisor’s Corner tackles a common situation or issue facing financial advisors and their clients.

Over the past decade, exchange traded funds (ETFs) have exploded in popularity. Originally designed to track a broad market index at a relatively low cost, ETFs now come in all shapes, sizes, and levels of specificity. Most every segment of the market now has an ETF to track it. In this column, we’ll take a closer look at exchange traded funds and discuss ways these tools can be useful in building a diversified portfolio.

Client: What’s an exchange traded fund? Who were they created for?

Advisor: Exchange traded funds, or ETFs, are securities tracking a specified index or basket of assets in a fashion similar to an index fund. However, unlike an index fund, an ETF trades like a stock on a major exchange and the price fluctuates throughout the day. ETFs were originally designed to provide investors with a relatively low-cost method of investing in a particular index or segment of the market. ETFs provide instant diversification and allow investors to sell the index short, buy on margin, and purchase a smaller number of shares. (Most index funds have a minimum buy-in.)

Over the past several years, ETFs have gained in popularity with investors who believe there is no value to trying to outperform a market index or benchmark. ETFs allow investors to essentially perform like the market at a lower cost relative to most other actively managed mutual funds.

Client: That approach sounds pretty appealing. What are the drawbacks?

Advisor: On the surface, it seems an appealing alternative to other investing techniques. If you can spend minimal time achieving market-like returns, what’s not to like? But, like almost everything market-related, it’s not that easy.

Many “indexers” purchase ETFs planning to just let them “do what they do” over the next twenty years. Unfortunately, though this is a noble goal, you see very few able to stick to it. Why? Part of the reason most investors underperform the market is their (very natural and understandable) propensity to allow emotions to overwhelm objectivity. Many investors become spooked by even small short-term losses in their portfolio. It can be difficult to recognize short-term losses are likely temporary in the bigger picture. When market indices and the funds tracking them have double-digit declines, many investors panic and fail to stay the course. That panic can lead investors to sell out at the wrong time—making it likely they miss the opportunity for the positive returns they seek.

Really, buying a fund for the long-term and actually sticking with it are two totally separate things.

Client: Is there a better way to use ETFs?

Advisor: In my opinion, yes. There are certain instances when utilizing ETFs to gain exposure to narrow sectors of the market makes sense, from a transaction cost and diversification standpoint. For example, if I want an approximately 3% portfolio weight in Japanese stocks, I can more cost-effectively gain exposure and diversification with an ETF.

But if I purchased individual positions instead, I would have a few challenges. First, I would have to purchase multiple individual stocks, maybe 10 or more, to properly diversify in that narrow category. However, allocating only 3% of my portfolio to 10 or more positions can lead to big transaction costs. Since most brokerages charge minimum commissions for trades, buying 5 or 10 shares of a stock becomes much more expensive relatively than buying 100 or more shares. Second, even with 10 or so positions, I still wouldn’t have achieved the diversification available with a single ETF that might track several hundred positions.

Client: So, why create a portfolio using anything but ETFs?

Advisor: First, even though it is not nearly as important as proper asset and sub-asset allocation, stock picking can still add value to your portfolio’s return. Studies have shown nearly 10% of a portfolio’s return is attributable to stock selection. If you have the time and ability to pick good stocks, you can likely add return.

Second, if you build an ETF-only portfolio, you still have many decisions to make. Do you use only broad index ETFs? Or do you use sector, country or size-specific ETFs? How much do you put in each one? When do you rebalance? How do you ensure the underlying positions in each fund don’t overlap? Essentially, using ETFs this way requires active management—something an ETF user may be trying to avoid. Part of the ETF allure is their passive attributes and there’s nothing passive about this type of approach.

How To Make A Million--The Easy Way

2007-10-29T06:52:51-07:00

Stealing articles again because I have a lot to do--1,500 miles to go in a UHaul takes your mind off money. And you should take your mind off money too by making investing a habit, not a gamble. See below--pretty dry but makes a lot of sense. An article called Taking A Gamble On Ignorance by Kebin Bailey, an Aussie.

A FRIEND of mine recently told me with great confidence that investing in shares was gambling.

I took offence and assured him that if you use a scientific approach you can wash out most of the speculative risk and be left with ownership of good quality businesses that produce good earnings year after year.

His opinion about the market is not unique -- and is borne out of an ignorance of the evidence that backs up sound portfolio theory.

He has only experienced the hype of stock tips and timing calls of when to get in and when to get out of the market. In a word, his only experience of shares was speculating.

Empirical research has shown that stock selection and market timing techniques contribute virtually nothing to the total return of a broadly based investment portfolio over time and in many cases detract from the overall portfolio performance.

Research conducted by Brinson, Hood and Beebower in several well documented studies showed that over 94 per cent of the long-term return of broadly based investment portfolios were attributable to the asset allocation decision.

Only the remaining 6 per cent was attributable to stock picking and market timing.

However, stock picking and market timing (sometimes called tactical asset allocation) are the very areas that generate the bulk of the revenue for the investment industry.

Many shareholders have failed to match the market return, despite taking far greater concentration risk by picking a relatively small number of shares that they think will be winners.

They tend to blame their broker for poor stock selection without realising the futility of the exercise in the first place.

Most of us rarely compare the total performance of our portfolio relative to the market as a whole and we are often unaware of our poor relative performance.

Some of us are like the gambler who only remembers the wins at the track but conveniently forgets the losers. During a rising or "bull" market when a "rising tide lifts all ships", share clubs spring up and there is a sense that investment is easy and fun.

Interest begins to flag when losses start to accumulate during a prolonged downturn. Nothing substantial is learned about the nature of investment markets and a belief is usually formed that share investment is speculative and dangerous.

The famous author Benjamin Graham used a precise formula to differentiate between investment and speculation. His description has stood the test of time.

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."

Often, the unsuspecting public is led into purchases that they think are investments when they are in effect, speculations.

The evidence of how to achieve better results is available but ignored by the majority of participants in the advice industry for commercial reasons.

Prior to the advent of the computer, work was already being done on the efficiency of markets.

Some of this research dates back to the work of French mathematician Louis Bachelier, who presented his dissertation in 1900 on "The Theory of Speculation" for his degree of Doctor of Mathematical Sciences at the Sorbonne in Paris.

In this paper he stated that "the mathematical expectation of the speculator is zero." He described this condition as a "fair game".

Bachelier arrived at his conclusion because "it seems that the market, the aggregate of speculators, at a given instant can believe in neither a market rise nor a market fall, since, for each quoted price, there are as many buyers as sellers."

The logic is irrefutable: "Clearly, the price considered most likely by the market is the true current price: if the market judged otherwise, it would quote not this price, but another price higher or lower."

Over time, of course, prices will move in either direction, when the market as a group changes its mind about "what the price considered most likely" is going to be.

My friend who thought investing was about second guessing the market should read Bachelier. He should ignore short term fluctuations, diversify as broadly as possible and focus on the long-term dividend producing potential of every purchase.

And you should read Category 12--All You Need To Know

Death Of A Salesman

2007-10-26T09:09:06-07:00

Why go to the work of thinking up stuff when you can steal it? Did I say steal it? Sorry, borrow it.

The job of salesman (salesperson?) has always fascinated me because I'm not very good at it. Wish I was because it is a job you can take anywhere. I was in international finance and the smart money said you had to live in New York, London, or at worst, Chicago to make a living. I proved that wrong but the career category is not very portable.

Sales is. If you're good you can live anywhere. The guy building the million dollar house next to ours is a salesman for IBM working out of his house. And he builds houses in his spare time. What a life.

So think about it but read this by Ben Stein first.

Ten Ways to Blow a Sale

by Ben Stein

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Posted on Friday, October 12, 2007, 12:00AM

In 1900, the most common job in the United States was farm laborer. That was backbreaking, dangerous work. Now the most commonly occurring job is salesperson.

That's not as difficult. Usually, such jobs are performed in air conditioned settings. The most painful parts of it are dealing with rude customers and having to stand for long hours.

It's Yours to Lose

There are all kinds of sales jobs, of course, from selling gum and cigarettes at convenience stores to selling giant office buildings, airplanes, or immense blocks of stocks or bonds. Or even selling entire companies.

But whether you're a salesperson at 7-Eleven or Goldman Sachs, you've probably heard and read advice on how to make a sale. I'd like to change gears and come at it from another angle. As a companion piece to my column from last year, "The Art of (Killing) the Deal," how about some further advice on how to lose a sale?

The Terrible Ten

If you find yourself doing the following acts or omissions on a regular basis, you might want to reconsider your steps:

1. Don't listen to your customer. Instead, only tell him or her what you feel like saying.

Don't hear what's important to the customer about a house or a car or a pair of shoes or an investment. Only talk about what's interesting and important to you.

2. Show disrespect to your customers. After all, you never know if the guy is serious or not. So make fun of him and belittle him until -- and maybe even after -- you actually see the color of his money.

Don't hesitate to be sarcastic and mock or criticize his choices and opinions. After all, it's your store, your dealership, your brokerage. You're the expert, not him or her. Besides, customers like being taken down a few pegs. They don't want to just be sucked up to -- they want to be treated badly. It makes them much more likely to buy.

3. Don't be accommodating on big purchases. If you're selling something as expensive as a home or large boat or resort condo, and if the buyers have any hesitation because of unsettled market conditions, don't cut them any slack. Just show them the standard contract, and make it as one-sided as you can.

Make sure you tell them it's your way or the highway. Yes, it might be a million-dollar sale, and maybe you haven't had any other customers in a few weeks (or months). But still be totally unbending about your terms even if what the buyer wants doesn't really cost you much money.

You have to show that ratty little buyer who's boss. Flexibility is for losers, and you're not a loser.

4. Put your personal life ahead of your customers. Get right off the phone with your clients if your girlfriend calls. If you have a manicure and pedicure appointment, do that before you even consider staying a minute late to get the sale closed.

After all, there are always more clients coming through the door -- your nails are sacred. You have to respect yourself and not become a slave to your job.

5. Don't know your product. If your customer asks about your product, the best answer is "whatever," preferably said in the most dismissive tone possible.

If you don't know something your client asks about, tell him it's not important and that if he really wants to find out about it, he should look it up online. You have other things to do, like that manicure and pedicure.

6. Don't bother closing the deal. Or rather, make it really hard for the customer to close the sale.

Don't have the paperwork ready. Gossip with the finance manager instead of getting your papers ready. Forget to fill out parts of the contracts. Then tell the buyer he'll have to cool his heels while you get it done -- and then just leave and make him wait until tomorrow! It'll teach the customer a much-needed lesson in humility.

7. Lie to your customers about the product. Tell them it's safer, or more reliable, or guaranteed for longer than it is.

After all, they'll never catch on. And if they do, there'll be plenty more customers coming. Besides, you'll be gone and in another state by the time they catch on. If they sue, that's your boss' problem, not yours. Little lies help you, and they don't really hurt anyone.

8. Look like a total slob. Have bad breath. Don't wear clean clothes. You're a poet, an artist -- you don't have to look like you're someone's butler or maid.

You can look any old way you want and smell any way you want. Your charming personality will come through anyway. If it doesn't, tough. There are 300 million people in this country, and any one of them is a customer. So worry about the next one, not this one.

9. Don't bother to close the deal. Just explain a little bit, then walk away and let the customer stew. Don't come back to him -- let him come crawling to you.

Don't explain things, then ask how he wants to pay for it and any other question that will lead to closing.

10. If you're selling big-ticket items, don't bother to qualify your customers.

Don't find out if they can actually afford that plane or that car or that home. Just do your standard pitch and assume the guy or gal in front of you has the money to do the deal. That really works beautifully. Then, if they don't qualify, yell at them for being deadbeats.

Salesman, Heal Thyself

Oh, there are a lot more. But if you find yourself doing any of these little things, pause, take a few steps back, and ask yourself, "Do I really want to sell this thing?" If the answer is yes, then take a step back and start again with selling in mind.

(I'm greatly indebted to my master-salesman pal and fellow author Barron Thomas for many of these tips.)