Perry Glasser

Posts Tagged ‘Investing’

CONSPIRACY THEORY

In Business, Economics, Economy, Finance, Political Economy, Politics, Wall Street on February 12, 2016 at 1:09 pm
Janet Yellen

Wizard-in-Chief

Dollar$, always eager to explain the inexplicable world of Finance, that realm in which Wall Street Wizards and Corporate Buccaneers run rampant in their never-ending struggle to own, pervert, master, and control Political Weasels, has developed a theory.

 

Why should Plain Money Talk  be any different from every other blog?

 FACTS

2015 saw:

  • unemployment drop to new lows,
  • minimum wage adjusted up,
  • auto sales rise to recent highs,
  • home sales rise to recent highs with no speculative bubble,
  • the cost of gasoline and heating oil sink to new lows,
  • the United States become an oil exporter.

The Fed is so concerned at all this good news that Janet Yellen has begun to tighte credit, a tactic employed to throttle growth and forestall inflation. Yes, the Wizard-in-Chief, Janet Yellen, is worried things are too good.

Some apologist is sure to point out that the second largest economy in the world, China, is hurting. Dollar$ will give that point of view some quick attention.

CHINA

China’s weakening economy should mean the cost of living in the US will drop, meaning you and I will have more money in our pockets to pay off debt or buy more stuff, everything from furniture to T-shirts at Wal-Mart. The US – China trade balance is heavily weighted toward China—the US imports far more goods from China than China imports from the US. If those good become less expensive, the American consumer benefits. This does NOT harm American business.  Maintaining profit margins at lower prices is easy to do. The cost of commodities the world over is dropping because of the slowdown in Chinese demand. Commodities are the stuff that comes out of the ground from tin to lumber and to gold, the stuff from which everything else is made. Everything should be getting cheaper. Every time Wizards predict that Apple will stop selling iPhones in Shanghai, Apple sells another few million units, but at a lesser price. With inexpensive gasoline, Citizens will be driving  to Disneyworld this year, and they will be able to afford the Mouse’s uptick in prices.

This phenomenon confounds the Wizards., who have learned that bad predictions are clickbait, and clicks drive revenues. No one watches CNN until the shit hits the fan and the shelter under the table grows crowded and cramped.

In the face of positive economic news, the US stock market should be soaring. Instead, the Dow-Jones average has stepped off a cliff in 2016, shedding 2,000 points in 8 weeks, more than a trillion dollars worth of value has been erased from the books.

THE CONSPIRACY

Cui bono?

For the past 30 years,  at every presidential election, commentators complained of the choice between Tweedledee and Tweedledum. But this year, it ain’t so.

weasel candidates in days of yore.

US Presidential Candidates Since 1964

 

This year, on the one hand, we have a wealthy, self-funded foul-mouthed injudicious narcissist celebrity never elected to anything anywhere who is much favored by people who have felt disenfranchised for a generation. On the other hand, we have a New York Jew now from Vermont who has never accepted a dime from Buccaneers or Wizards. An older man, his followers are youth because he demands payback from the banks and companies who were too big to fail and in the past 20 years have sucked the economy dry, indenturing students with education debt. On the third hand, we have a woman who is indebted to the old politics, and on the fourth hand, we have a clown car of interchangeable Republicans who lacking economic issues promise to disallow what your neighbors do in their bedrooms while coyly ignoring that for those promises to be fulfilled they will have to rollback several Supreme Court decisions by what by any account has been a conservative court.

Dollar$ sees the common threat. The two leading candidates are not in thrall to Wizard or Buccaneers. Should either get elected, the summer house in the Hamptons, the private jet, and the 10-room Manhattan  condo are all in jeopardy.

How to dissuade Citizens from voting for either?

Scare the piss out of them. Scare the piss out of them by manipulating stock prices downward. It’s only temporary, and it’s not as tricky as it sounds.

  • Claim good news is bad.
  • Threaten us with defunded pensions, evaporating college savings, and the elimination of savings toward the American Dream, a house.
  • Imply that unless Citizens vote the status quo and allow rapacious policies to continue, grass will grow on Main Street as economic activity collapses.

The stock markets should be soaring, but never forget that 90 percent of all trading is electronic and that computer algorithms engage in a global battle to take advantage of a quarter point’s worth of arbitrage. There is no longer any such thing as investor sentiment. As they now say in Wizard country, My algorithm can beat up your algorithm!

Fear is the most potent means of keeping the harridans out of the White House. Without the creation of synthetic Terror, Weasel Business As Usual will come to a halt.

O the horror!

 

DEFLATION, OIL PANIC, AND THE SKIDS #1

In Business, Economics, Economy, EDUCATION, Finance on January 7, 2015 at 12:59 pm

Ever aware that Dollar$ primary mission is to educate and only occasionally pontificate, let’s talk about prosperity, gloom, and deflation.

Economic activity is based on expectations. You buy your new car because you expect you will need it before the old jalopy breaks down completely; you buy health insurance because you expect you will someday, somehow, need it; you buy baseball tickets in January because you expect to go to  the game in April.

Balance means stable prices.

Balance means stable prices.

Prosperity

Shared expectations influence supply and demand, and therefore influence prices. If International Widget (IW) expects to sell many widgets in the forthcoming year, it will hasten to make more widgets, perhaps borrowing money to increase productivity. Under the expectation of prosperity, IW may hire more workers, and if long-term expectations are high, IW may even build a brand new, more efficient widget plant.  If widget demand increases even beyond IW’s ability to create supply, the widget shortage will drive the price of widgets higher. IW will respond by increasing volume and price, reap profits, pay dividends, employ yet more people, give key employees wage increases, and the Buccaneers who direct IW may pay themselves  bonuses that look like telephone numbers, including area codes. They will buy Caribbean islands or condos in Manhattan.  The spiral upward is called an inflationary spiral; rising prices are not terrifying if wages and employment keep pace.

Gloom

saupload_The-Deflationary-SpiralBut suppose IW’s best leadership expects the market for widgets is spiraling downward. Perhaps there are insurmountable problems in the supply chain. Perhaps bankers are unwilling to part with loan money for fear of never getting paid back. Rather than pay people for playing pinochle while their widget machines stand idle, 10 percent of the IW workforce is fired. The Manhattan condo market freezes, and the IW private jet makes fewer flights to the Caribbean. The price of widgets will plunge because the people who use widgets know that to meet the slowdown, IW will cut prices and hope to make up in volume what they are losing in price. The spiral down is called deflation; falling prices are not terrifying if they are gradual and do not continue for any great length of time.

The gloom and prosperity scenarios are the ordinary stuff of economic life, but Dollar$ readers only need to bear in mind that in both cases today’s economic decisions are made based on expectations of tomorrow’s conditions.

The Past

The general tone of American economic life for more than 20 years has been cautious optimism because the range of change in economic life has been modest, sure, and steady. Sure, there have been bubbles and crashes, but there is a reason that in 20 years the Dow Jones Industrial Average has risen 400 percent, from roughly 4,000 to today’s levels well above 16,000. Call it the Goldilocks Economy—it’s neither too hot nor too cold, but is just right.

Home invader and thief, but she knows what she likes.

Home invader and thief, but she knows what she likes.

But America has suffered an extended deflationary spiral, a decade’s worth in the 1930s called The Great Depression. Despite interest rates at virtual zero for most of a decade, from 1992 to 2000, Japan has been in a deflationary spiral.

Playing the expectations game, in an inflationary spiral you spend or invest your money as fast as you can. After all, everything will probably be more expensive tomorrow. It’s best to buy your house, car, 100 shares of IW, or personal jet today.

But in a deflationary spiral, the expectations game makes cash King. What fool would spend a dollar today when the cost of the item tomorrow will be $.90?  But wait… suppose it will drop to $.75? Or $.60?

Where’s my Magic 8-Ball when I need it?eight_ball

What Now?

Does the slide in the price of oil herald of worldwide deflation?

Dollar$ will weigh in soon.

FINANCE FOR THE CLUELESS: INVESTING –THE EIGHT DO’s

In Business, Economics, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance, Wall Street on April 23, 2014 at 12:17 pm

If you are unsure you should dip your trembling toe into investment waters, reread FINANCE FOR THE CLUELESS: INVESTING – THE DON’TS right here at Dollar$.

 CAUTION TO THE HARDHEADED 

If you are persuaded that the game is rigged and that age hates youth, deliberately having made money management and life-planning a cruel losing joke, consider that the bad guys will someday kick the bucket.  When they do, will you be among ageing schmucks still claiming injustice or do you want to position yourself to take your place as a leader?

The choice is yours.

If you are a twenty-something ready to grow up, or a thirty-something ready to take your share of the American Dream, you have  come to the right place.

Dollar$ will not equivocate. Here is what you must do to GET RICH SLOWLY.

Should you discover you need to get rich quickly, Dollar$ urges you to bet on race horses. At any racetrack, you will breathe fresh air, find friendly company, free parking, and can probably purchase a half-decent meal. You will quickly go broke, of course, but during the 1:12 it takes for a decent thoroughbred to run 6 furlongs you can scream yourself silly and dream of riches. Quarter horse racing is even faster!

OPEN AN ACCOUNT

Choose a brokerage like Schwab or Ameritrade, any organization that fits your digital lifestyle. Investigate apps or web sites; choose the brokerage that seems most navigable to you for research, purchasing, and tracking your holdings. You will want more as you learn more, but you need to be comfortable with an interface.

The Internet has leveled the cost of doing business, about $7.95 for any online stock trade, so in terms of costs brokerage firms are interchangeable.  At issue for you is service and minimums.

Most brokerages require a minimum amount to open an account: as this is written, Schwab is asking for a measly $500—perfect for the Clueless.

FEATURES

  1. Options. If you can get approved for Options trading, get it.  You will not use this until you have considerable wealth, but it costs nothing to check a box.
  2.  Margin.  Again, check it off and leave it the hell alone until you know what the hell you are doing, and even then think very, very, carefully about borrowing money from your broker to make an asset purchase—which is what Margin trading is about. Remember, your broker is not your partner. Your gains are your gains alone (W00t W00t!), but your losses are your losses alone. If you owe a margin debt, you will owe what you owe no matter what happens.
Margin accounts may have uses, but can be dangerous.

Margin accounts may have uses, but can be dangerous.

You know Tony down at the docks? The guy who lends money to people with no collateral? He is happiest when you pay him, but he does not care if your team lost, the deal went south, or your honey made off with your boodle—he only wants his money and interest back. When he does not get it, he becomes surly. He makes you sell your car, cash in in your kid’s college fund, and if necessary persuade you to these measures by realigning your knee caps with a baseball bat he keeps handy for just that purpose.

Think of your Margin account as Tony. Don’t let anyone get medieval on you.

3. Check Writing. Take it.  Add a measure of liquidity to your assets. You can write an emergency check if you need to—which you should not, but shit happens.

4. Reinvest Dividends. Absolutely. Dividends are how companies share profits with shareholders. Dividends are not interest, but in effect, reinvesting dividends is how your account will draw compound interest.

“He who understands compound interest , earns it ... he who doesn't ... pays it.” Einstein

“He who understands compound interest , earns it … he who doesn’t … pays it.”
Einstein

 

THE EIGHT DO’S AND WHY

1. Buy stock in at least 3 companies traded on either the New York Stock exchange or the OTC (Over the Counter) markets. Be sure these companies are in very different economic sectors. In other words, do not buy 3 media companies, or 3 retail companies, or 3 technology companies, but perhaps buy 1 of each.

You require a measure of diversity. You can buy diversity in a mutual fund, of course, a basket of stocks managed by professionals, but then you pay fees for professional management. Dollar$ cautions the clueless, who by definition are starting small, that the fees will bleed you white. Why start your financial life with a tapeworm?

Diversity is insurance against misfortune. While one sector of the economy may take a hit from unexpected circumstances—such as a change in a government regulatory posture or a political event in a faraway country— the only circumstance that will affect all 3 of your sectors are changes in the overall economic picture, such as a change in interest rates.  For the investor who wants to GET RICH SLOWLY, those dips can be shrugged off because unlike you and me, companies that sell goods and services can within limits raise their prices to recoup what was lost. The price of lumber goes up, the furniture business takes a hit, but next year the price of furniture rises. It’s not as though people will start sitting on the floor.

What constitutes a sector is very subjective. Is Walt Disney a service company or a media company?  Different online research will yield different sector guides. Here is one website that will allow you to bore down to Market Cap leaders by sector.

The final arbiter of what is what is you, Binky, so give special considerations to companies that are conglomerates. General Electric, the oldest company in the Dow Jones Industrial Average, founded by Thomas Edison, makes washing machines, jet engines, and runs an insurance business.  What sector is that?

2. Buy stock in companies that are at least 20 years old.

Ten-year-old companies have a modest track record of survival; twenty-year-olds are even better.

Yes, Dollar$ is aware that young companies are set to grow quickly, but they frequently are headed by untried management and are closer to going broke. Most corporations live little more than a person’s lifetime though the exceptions are remarkablebecause they embrace a culture of change and innovation. 3M Corporation was founded in 1902 to make sandpaper; now they make Post-It notes and Scotch Tape.

Young companies will also gather imitators, which mean ever-increasing competition will drive revenues, but not costs, downward. Someone is bound to improve on the original idea.  If the good Lord in 1985 had whispered in your ear, “Computers,” you may have chuckled at the Divine Wisdom that loaded your portfolio with Kaypro, Atari, Commodore, and Wang. Like last winter’s snow, those companies are now gone.

Avoid the bleeding edge.

3. Buy stock in at least two companies that are multinationals.

DSC_0230Doing business in places where general economic growth is not dependent on the value of US currency is simply prudent. Dollar$ would never bet against the financial muscle of the United States, but Dollar$ is aware that infrastructure build-out in the 3rd world is inevitably followed by consumer demand for a higher standard of living. You do not have to buy stock in a Chinese company to participate in the Chinese economy; you do not need to need to buy stock in a Chilean company to participate in the Chilean economy.  Logos and trademarks Americans see every day are all over the world: UPS, Disney, Starbucks, Pizza Hut… the list is endless.

If you have qualms about such things and think they are imperialistic, ask the folks in Red Square how they like burgers at McDonald’s, or ask Chinese citizens if the prefer iPhones to ‘Droids.

4. Buy stock in companies that pay dividends or, even better, have a history of raising regularly dividends.

Many companies do not share their profits with shareholders via dividends because managers hoard cash for future business investment. While Dollar$ respects the managerial strategy, Dollar$ notes such companies do not suit a strategy to get rich slowly. The Clueless want an opportunity to have their dividends accrue ever more stock.

Better yet, companies that pay dividends suffer less in a downturn because their dividends offer investors a yield, a cushion against losses.

5. Buy and Hold—even if it means going white-knuckled.

On September 16, 2008 the general stock market as measured by the Dow Jones Industrial Average crashed 10 percent in a single day. The Buccaneers who ran major financial institutions were competing to take greater risks for greater profits than any responsible bank should, fudging on what “banking” meant. On Sept 12, 2008 the DJIA was at 11,421.99.  By November 21, it was down to 8046.42 a breathtaking loss of 29 percent in 6 weeks.

Iceland went broke, Lehman Brothers went out of business, and for the first time ever, US citizens heard the phrase, “Too big to fail.”

Anyone who sold to defend his or her assets for fear of total ruin took themselves out of the game. They may have felt safer, but by doing so, they gave up any chance of recovery.

As Dollar$ writes, the DJIA stands above 16,000—which means sellers in 2008 have missed 100 percent gains measured from then, only six years. By selling into a panic, they gave up every opportunity to gain back all they lost and more.

True, if you owned stock in Lehman Brothers you took it in the neck, but if you had a diversified portfolio, over all, you survived and may have even made money.

A wise man once said, “You can’t go broke on a small profit.”

6. Buy shares and add to your portfolio regularly.

Ideally, you may be able to invest with a check-off system from your salary, an arrangement that will allow even those of us lacking personal discipline to take advantage of the maxim: Pay Yourself First.

Regular investing will allow you to take advantage of “dollar-cost averaging.” When stocks are up, you’ll buy fewer shares: when stocks are down, you’ll buy more shares. On average your cost will be somewhere in between. Free yourself from trying to guess if today or tomorrow are better days to buy; let time be your friend.

If your companies thrive and move steadily upwards, your average cost will always be below their current price level.  Over the long haul, stocks historically have gained 7-9 percent annually. Never try to time the market—just be a steady buyer and Get Rich Slowly.

7. Buy Mid and Large Cap companies.

“Cap” refers to capitalization, the sum total of the value of all the shares issued by a company.  Every company issues a different number of shares, so a company floating a million shares priced at $100 per share is worth $100 million dollars, but a company with 5 million shares priced at $50 per share is worth $250 million.  That’s right, the company trading at the lower price is worth more.

Large Cap companies are slow as battleships, but not likely to sink quickly; Mid Cap companies are more nimble and want nothing more than to grow to be Large Cap. They will take more risk, but have a record for taking risks and winning because they really were once Small Caps.

There are plenty of Small Cap companies, and investing in them is a respectable strategy, but Dollar$ does not recommend that to the Clueless: one needs a larger portfolio to overcome the inevitable losses small companies encounter. While a few Small Caps will experience spectacular growth, more will fail or stay stagnant. On average, an investor might do well, but only if the investor has a sufficiently diverse portfolio, unavailable to the Clueless without professional management—which must be paid for.

8. Sell when the reasons you bought a company change or the fundamentals of the business change.

You selected  XYZ company for your portfolio for reasons. Maybe you personally liked the product or the service; maybe liked the company’s competitive position; maybe you liked the company’s record for paying dividends; maybe you read and were persuaded by  the company’s strategic plans; ideally, you liked some combination of all of those.

But if those any of those change, why are you still holding the company? Never fall in love with a stock; review your portfolio regularly, at least every 3 years. Save your loyalty for a lover.

NOW WHAT

Discovering companies that fit the Dollar$ profile from the universe of thousands of companies is, in fact, easy.  You chose your broker because it offered digital tools for Research. Try the “screening” or “filtering” system—pick an economic sector, indicate your requirements in terms of dividends, choose from Large Cap or Mid Cap, etc.

  • Read about the company’s businesses. If you do not understand what they do, go no further. Invest only in what you understand.
  • Invest only in companies that sell services or products you would buy whether you were a business or a consumer.
  • Buy shares in companies that are ranked first or second in their industries.  
  • Be disciplined. Avoid trendy and hot stock tips, whether from your Uncle Fred or a TV pundit who is obliged to scream “news” at an audience every evening. Near term, they may be right: let someone else make that money while you sleep soundly.
  • Invest and relax—let your money work while you sleep and pay no attention to daily, monthly, or even annual trends. You are going for the long haul, and the long haul is steadily upward and has been for hundreds of years.

FINANCE FOR THE CLUELESS: INVESTING #2 – BURN YOUR PILLOW CASE

In Economics, Economy, EDUCATION, FINANCE FOR THE CLUELESS, Personal Finance, Wall Street on March 19, 2014 at 12:30 pm

“OK, Dollar$, I have a few bucks in the bank, I have no significant consumer debt, and I have steady cash flow from a secure job. I have measured my risk tolerance in terms of my age and psychology, and I am persuaded that I want to get rich slowly to meet specific long term goals, such as buying a house, putting as yet unborn children through college, preparing for my own old age.”

Congratulations, Bunky! You are a grown-up! Its time to take your money out of a pillowcase.

photo-92-e1319326132194Tell your broke-ass friends who insist that the rich own the system and that they know they cannot get ahead that you have decided to join the Dark Side. Dollar$ adored Occupy Wall Street for its goals–who can argue with Justice? but Dollar$ sadly notes the “movement” lasted less than a year. So why not become one of those degenerate rich? While your friends bitch and moan, lusting for the next video game unit, having succumbed to the Consumer Culture that pollutes the mind by implanting false needs, you have decided to take control, take responsibility ad will rise above that.

You will never spend money frivolously or self-indulgently—that’s what children do—but you have goals, you have ambitions, and like it or not, all of us live in the sea of financial life.

You can choose to drown, float, or construct a ship to set sail.

Dollar$ wants you to set sail.

First, you’ll need to build a ship.

Save or Invest?

If you meet the Dollar$ profile, it will be plain that simply saving will have you sink not far from the dock. You work hard, so should your money.

Money in the bank is not working hard; however, it is totally liquid. You need to have some there for ordinary bills and expenses.

Dollar$ Recommendation: a balance of at least 3 months for the young (under 40), and as much as 6 months for the not very young. The Book of Ecclesaistes tells us:

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.

Or, as Dollar$ interprets The Good Book: Shit happens.

So DO Insure and save against the ay you will have bad luck. Everyone does. Do not let time and chance happenth on your watch.

Say you are minding your own business at a stop light when you get your leg crushed by a cement truck with failed brakes. If you have a disability policy or disability rider on your auto policy that kicks in after 6 months, it is a LOT less expensive than a policy that kicks in after 6 weeks. No sweat for you if you have some liquid assets in the bank, but a disaster if you are living check to check.

If you believe you are trapped, read Dollar$ on how to save more.

The Name of the Game is Averages

If someone offer you Magic Beans and a quick rich scheme, run. But the simple fact is that stocks show an average return of near 10 percent per year over the long term.  In this chart, the red lines are averages: notice, however, that some years are awful, and others are terrific.

Now you know what AVERAGE means.

avg-mkt-rtns-1926-2008-600x409

Some years are dogs; some are stellar.

Compare that average to current bank account returns, which as Dollar$ writes are less than 1 percent. Taking on some risk to average 10 percent seems mandatory instead of accepting a pittance.

Since you are following the Dollars motto, Get Rich Slowly, year-to-year gains and losses are of mildly passing interest. If losses of 10, 20 or even 40 percent trouble you—reset your gauge of Risk Tolerance.

The Marathon

We do not quit running after 2 miles because of a leg cramp. Shooting for an AVERAGE of 8 percent each year is realistic, possible, and will make you rich—slowly.

Think not?

This chart from JP Morgan shows three investors compounding their investments over time. One of them, Susan, starts at 25 and quits at 35.  She still winds up with a mere $850,000, enough dough to rent a tennis pro or two.

Growth over time

 

Dollar$ RecommendationWHAT ARE YOU WATING FOR????

Reassuring the Nervous

Suppose you are 25 years old and are able to invest $2,000 each year, maybe in an IRA, maybe in stocks–just keep it out of that pillowcase.  And after five years, you look with pride at your tidy pot of money. You are now 30, but just then the stock market crashes. They are leaping out of buildings on Wall Street. It’s as bad as the Great Depression—maybe worse.  The Depression lasted 12 years; it was 15 years of investor misery.  What happens to your Dollar$ plan?

Well you are all of 45 years old, a good 20 years from a youngish retirement.  If you’ve maintained investor discipline, you’ve accrued 15 years of investments at bargain basement prices. When the stock market recovers–and it will, since the United States is not going bankrupt any time soon– you may be lucky enough to enjoy a year like 2013, a whopping 32 percent gain in a single year.

All those cheap investments you made for 15 years are paying off! Buy cheap; sell dear! as log as you are dedicated to Get Rich Slowly, down markets are a buying opportunity, Bunky!

The sissie who bailed in 2008-09 go screwed. Those were bad years, and those investors with short term vision took it in the neck. They ran for the exits and took permanent losses because they took the short term view.

Now before someone tells Dollar$ that they were protecting themselves and, perhaps, were too close to retirement, Dollar$ will remind readers that being 65 these days is not old. Folks who are retired should prepare for at least 20 years more of life and so accept judicious risk. Any investor was over 70 in 2008 and had a significant pot of cash at risk….why? What are you? Invulnerable?

For the Dollar$ reader, the Clueless who are not H0peless, the lesson is plain:  Buy and hold, and do not let the vagaries of the markets year to year bother you.

Take a lesson from Monty Python.

Never bury what ain’t dead yet.

Convinced?

Watch for Finance for the Clueless: Investing #3 – Nuts and Bolts

PERSONAL FINANCE FOR THE CLUELESS–INSURING

In Business, Economics, EDUCATION, Finance, FINANCE FOR THE CLUELESS, Personal Finance on March 12, 2014 at 2:32 pm

 

WIZARD OF FINANCE

WIZARD OF FINANCE

 

Four Financial Functions

Of the four personal financial functions, Saving, Insuring, Spending, and Investing, Insuring may be the least well understood.

Dollar$ broods on the why this is so. Insurance is not hard to understand, but Wizards who specialize in selling financial products lie awake at night dreaming up complicated products to befuddle the Clueless, which products more efficiently separate the Clueless from their dough.And so we come to the First Dollar$ Law for the Clueless.

NEVER BLEND FINANCIAL PURPOSES IN A SINGLE VEHICLE

Someday you will meet an Insurance Broker Wizard who will tell you that the best way to save for your retirement is with a life insurance policy. You may also meet his cousin, the Real Estate Broker Wizard, who tells you to purchase a house you cannot afford because it is an investment; you will meet another Credit Card Wizard who will happily point out that with this wonderful card that costs next to nothing, whenever you incur debt, you buy free airline miles, nights in a hotel, or tickets to see Bruce Springsteen while enjoying a free trip to the Poor House!

Do not work with these Wizards. They are sharpies presenting proposition bets, but as Marlon Brando explained to Frank Sinatra, do not take a proposition bet. Ever. You willhave a wet ear.

 

Wizards charge fees for a service, to which they are entitled, but a Wizard who sells additional services will want to collect MUST do so for a higher fee than you might pay for buying each of those products separately.

Over the life of a policy, which can be decades, even small fees mount up.  You are ALWAYS better off paying for pure products.

Rather than plagiarize, Dollar$ is happy to refer you to a short, lucid explanation from CNN talking about Universal vs. Term Life. CNN concludes, “The lesson: If you need life insurance, get term insurance. If you want to invest for retirement, invest in IRAs, 401(k)s or similar retirement plans.”

Smart folks at CNN.

The Industry

To understand what you should or should not personally do, you first have to understand the industry.

Dollar$ swears the explanation will be short.

Let’s say we live on a nice, tree-lined street. Beyond ordinary town services, our neighbors agree it is to everyone’s benefit to preserve the neighborhood’s good looks, so we form The Dollar$ Neighborhood Association. Everyone throws in a few bucks every year as a matter of civic duty. From time to time, you sponsor a block party, and the DNA buys a keg of beer.

One terrible day, a storm comes through town, and three of those trees are torn up. Luckily, no one is hurt, no homes are damaged. Town workers haul the downed trees away.

The DNA checks its accounts. If we skip the beer this year, we can afford to replace the 3 downed trees.

Property values are preserved. Our lives remain lovely.

  • The DNA is a very small scale mutual insurance company.
  • The stockholders are the people of the neighborhood.
  • The beer is the annual dividend paid to shareholders.

For Profit

A for-profit insurance company works the same way, but they charge larger fees, invest all the money they get, and need millions of clients to spread the risk.  After all, a tornado could wipe out the whole neighborhood. Better to make our community at least statewide.

Whatever a for-profit does not have to pay out, is profit that they keep.

Actuaries, skilled mathematicians, calculate rates by studying masses of data and crunching numbers. Do you know what percentage of women between the ages of 11 and 40 will break a leg next year?  Neither does Dollar$, but there are actuaries who do. They also know how much it takes to fix a busted leg, and they build all those data into health insurance rates for women between 11 and 40.

For-profits may pay dividends to shareholders (who may not be policyholders). It won’t be beer.

If a for-profit does not invest well, it may go bankrupt. Consider what might have happened to the DNA if 10 trees were destroyed. What happens if a hurricane hits New Jersey, the Mississippi overflows it banks, or an earthquake hits Manhattan? Lesson: Buy life insurance only from a well-established company that has been doing business at least 75 years. Anything else is an upstart liable to go belly-up the day you need them.

Action Items

Insurance protects the purchaser from man-made or natural accidents that have financial repercussions.

Dos and Don’ts for the Clueless

Insurance is not:

  • A guarantee that a loved one will live forever;
  • A bet that should things go wrong your heirs will become rich;
  • An investment;
  • It is never a gamble you win by losing. “Great news! I died and now my family is rich!’

The more people swim in the risk pool, the less expensive insurance is for everyone. The more neighbor in the DNP, the more trees can be replaced. The more low risk people buy health insurance, the happier Democrats will be because they will be paying in, but not taking as much out. If that sounds like a scam to you, you are probably younger than 35 and have never been sick.

Do not worry: you will be sick someday.

  • Never insure your children’s lives, unless your kid is Shirley Temple and so provides a revenue stream.
  • Term life insurance is a pure insurance product. In the event of disaster, it pays big bucks. At the end of the term, it pays bubkis. Buy it.
  • Take the difference saved by buying inexpensive insurance and invest or save it to provide wealth or revenue later.
  • Buy term life for as long as dependents will need to replace any income lost to death. That’s usually 20 years after the birth of the last newborn child in a family.
  • Buy enough life insurance so that survivors can continue their lives uninterrupted—do not underestimate this. If a spouse will need to pay for childcare, insure the spouse is cared for.
  • If you have no dependents or heirs, you need no life insurance; but you should consider disability insurance.
  • Disability insurance is more crucial than life insurance. It does not have to be your fault, but if your neck breaks in a car accident, you might survive for decades and need financial resources for all that time. Social Security will no pay what you want or need.
  • Mortgage insurance does NOT protect you: it protects the mortgage holder, not your heirs. You kick the bucket, the bank collects.
  • In America, health insurance has become mandatory. This is controversial, but is no different from mandatory auto insurance about which no one complains. Dollar$ suspects the Weasel mindset is at work here.
  • Insure revenue-producing property from fire and theft. Your auto provides you with  the means of getting to and from a job. Be sure your auto insurancee will be for a renter if you lose your car temporarily.
  • Insure your house from fire and flood. Flood insurance is tricky and varies from state to state. Do your homework.
  • Insure your possessions that would need to be replaced, and insure for replacement value. If your house burns down with a 10-year-ol refrigerator in it, will you be buying a 10-year old refrigerator, or will you need a new one?
  • Liability insurance makes sense if you own assets someone else can attach in the event of your negligence. Someone trips over your rug, takes a header down the stairs, and sues for financial assistance for a lifetime in a wheelchair. Will they go after your kid’s college savings account?  (Yes.) Will you want insurance against that personal liability (Double Yes). Should you put assets in places they cannot be attached? (Maybe—now you need an attorney, but if you have that much dough, why are you reading “For the Clueless?”)
  •  NEVER buy a warranty extension on an appliance. A defective product can be returned. If it breaks too late to be returned, take the money you saved buy not buying extended warranty protection and apply it toward the purchase of a new product.
    Carry as little personal liability on your car insurance as you can. Brokers are going to disagree, but in a world where health insurance is now a legal responsibility of every Citizen, why are you paying for someone else’s health insurance?

Arbitrage and Bookies

In Business, Economics, Economy, Finance, Personal Finance, Wall Street on June 7, 2010 at 9:17 am

Joe the Bookie, who was a friend of my father’s, explained to me when I was a naïve but ambitious lad that in the days before the official betting line was emanated from Las Vegas, every punter hoped to find a middle. It happened most often with sports bets, when home town fans addicted to sentiment so lopsided a book that the odds no longer reflected reality. “Say your Yanks are playing your Red Sox,” Joe explained. “In Beantown, taking the Sox to will earn you paying pennies because so many hometown heroes are betting with their hearts, so you take the Yanks at maybe two for one. Are you following me, kid? Now you hustle your ass to Manhattan where the same thing is true—but in reverse. In the Big Apple, you can get two to one, but on the Sox.”

“Yeah, So?”

He slapped my forehead.

“So you take both bets. Who the hell raised you?”

“I don’t get it. How does that help me?”

“Follow me carefully,” Joe said, folding his newspaper, The Racing Form. “You bet $100 in New York and $100 in Boston, right?  You put out a total of $200.”

“Right.”

You have to win one of those bets. At two for one, how much do you get paid off?”

“Two hundred,” I said.

“That’s your profit, kid. Don’t forget you get your wager back.”

“So I get $300.”

“Right. And how much did you risk?”

“Two hundred….oooooh, I see.”

“You had a middle. Doesn’t matter who wins or who loses, you are coming away $100 to the good.”

“Sounds great.”

“Naaah. It’s a nightmare, kid. How long before we’d have to close up if punters won every dime?”

My father sent his boys to public schools: Joe sent his kids to Yale.

Joe’s boys now performs arbitrage for international hedge funds. They’ve got computers that all day long look at bundled investment vehicles: mutual funds, index funds, ETFs, derivatives, whatever—and compare that to the actual prices of the underlying assets—vanilla stocks and bonds.  When the price of the bundle is out of whack with the underlying issues, they move a few billion dollars one way or the other, buying the bundle while selling the underlying issue, or vice-versa.

A few pennies times a few billions makes a nice day’s pay.

By the way, you can only play this game if you have proprietary software and a monster computer that is plugged into world markets 24/7.

When enough computers see a middle—or speculators create one—they mindlessly perform the trades and you get your Flash Crash.

In Joe’s day, anyone who disrupted the game that badly would be swimming with concrete overshoes.

Today, their shenanigans get rationalized in the Wall Street Journal.

Still Screwing With Us

In Business, Economics, Finance, Wall Street on May 11, 2010 at 9:21 am

Today’s Wall Street Journal insists on running “news” of  theories as to why and how last Thursday’s market plunge of 1,000 Dow points, and the 700 pt correction in 28  minutes can be explained. It seems the “fat finger” narrative is in disrepute, but now we are getting tales that again about “sentiment,” a perfect confluence of anxiety about Greece (an economy smaller than California), oil in the Gulf of Mexico, anxiety about the real estate market in Shanghai…the usual suspects.

The same article notes that 66 percent of all trading is conducted by hedge funds, machine to machine. No doubt, these giant Cray computers are taking digital Zoloft to get through their worst moments.

If you have a higher IQ than a carrot, you might wonder why these algorithms for profit are allowed to mess with your kid’s college savings, your retirement, and your hopes to buy a house.

I’ll explain.

The rest of us play by different rules. Your 401k, your 529, your Roth IRA, your IRA, and all the rest are probably in broadly diversified mutual funds.  That sounds stratgeically sound–until you remember that if you put in a buy  sell order at 9:01 am Eastern time, it is not executed by the Buccaneers who run your fund until 4:01 pm that same day.

Hedge funds run at light speed; you and I are breathless turtles.

During those long days, the hedge funds leverage assets against…our money. Since our assets are  locked up and immobile, they can be relied on for 24 hours–from close of business on one day, to close of business the next.  Even if you stared at your computer the entire trading day and wore a headpiece phone plugged into your private broker–you are screwed. You can’t buy cheap or sell dear during a 28 minute plunge and recovery, and if you awaken one morning to find your future has been liquidated while you slept..gee, that’s too bad.

They call this an open market. They are proud of the transparency. The ads are in USA Today, Forbes, Business Week, and come in the mail. “Give us your money. It’s the right thing to do. We will take care of it!”

Boy, do they ever.  Now you know why they  pay themselves bonuses that look like international telephone numbers.

The Wizards

In Business, Economics, Finance, Personal Finance on September 19, 2008 at 2:35 pm

Much of the reason we are in an economic pickle and entering dark times is that the financial community has a vested interest in keeping people ignorant of matters financial and economic.  The more mysterious and complex money matters seem, the more alleged “experts” can charge for financial advice. The more arcane the advice, the more customers will pay.
Call them the wizards.


The Wizards’ Game

Wizard at Work

Wizard at Work

Financial Wizards are neither great, wise, powerful, omniscient, nor benevolent. They are in fact petty, frightened men engaged in a grand deception. 
Many public schools offer driver’s education, sex education, and hygiene, yet far fewer schools offer education about credit management, how to balance a checkbook, or basic investing. There is a reason for that omission: a financially ignorant public is a far more lucrative customer base for the wizards.
Financial wizards create an air of mastery with invented rhetoric, jargon and biz-buzz that create fever in the wallet. Some of these rhetorical dodges become so overwhelming, that the wizards themselves start to believe them.


Good Sense

The only remedy to self-deceiving wizards who find profit in keeping us ignorant is for us to draw back the curtain. Ignorance leaves us in peril.

Dollar$ is about good sense.   

                                                                                                            — Perry Glasser